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Georgia - Oil & Gas Politics

Development of Caspian oil and gas resources and export routes has been slowed by regional conflict, political instability, and lack of regional cooperation. Many of the proposed export routes pass through areas where conflicts remain unresolved. Most of these are in the Transcaucasus part of the Caspian region, where conflicts in Georgia, the Chechnya portion of Russia, and between Armenia and Azerbaijan, hinder the development of export routes westward from the Caspian.

The future of the Caucasus region could be determined by the pipelines running through it. Each country in the region and several outside it have their own views on how oil and gas should reach the rest of the world. The western route for early oil from Azerbaijan goes from Baku to the Georgian port of Supsa on the Black Sea, and several other proposed pipeline routes also pass through Georgia. Pipeline construction on the western route was suspended briefly in October 1998 because of the fighting between government forces and those led by Akaki Eliava.

The 1999 natural gas discovery of Azerbaijan's Shah Deniz field appears to have boosted the region's natural gas export prospects. The Shah Deniz field, thought to be the largest natural gas discovery worldwide since 1978, already was being developed for export to Turkey, and the infrastructure that will be built to deliver this natural gas helped to renew international interest in the region's natural gas. Prior to 1997, the only option for exporting Caspian region natural gas was via the Russian natural gas pipeline system.

The proposed pipeline routes pass near several regions of Georgia that have been the site of separatist struggles, such as Abkhazia and Ossetia. Georgia had expressed a willingness to grant Abkhazia some autonomy, and talks to resolve the standoff have included proposals to route future oil pipelines across the rebel region, on the premise that economic cooperation could help bring peace to the region. The port of Supsa, the terminus of the western route for "early oil" from the AIOC, is 12 miles from a buffer zone between Abkhazia and Georgia.

On March 8, 1996, Georgian President Eduard Shevardnadze and Azerbaijani President Heydar Aliyev signed a 30-year agreement whereby a portion of the Azerbaijan International Operating Company (AIOC)'s "early oil" would be pumped via Georgia. Specifically, oil would flow to Georgia's Black Sea ports of Supsa and Batumi located 25 miles apart from each other. The Georgian International Oil Company, a subsidiary of the AIOC, made substantial upgrades to the existing 515-mile pipeline along this route and built the $565-million Supsa terminal on the Black Sea.

The so-called "western route," for AIOC "early oil", which became operational in April 1999, had an original design capacity of 100,000 bbl/d. But recent upgrades have raised capacity, and throughput capacity is now around 220,000 bbl/d at Supsa. The Baku-Supsa route, however, was designed to carry only the early oil from the AIOC's development of the Azeri-Chirag-Gunashli fields, and although there had been discussion of increasing the pipeline's capacity to 300,000 bbl/d or even 600,000 bbl/d, AIOC was planning to export its future production via BTC, once it became operational. Exports via Baku-Supsa represented roughly 40 percent of AIOC's total exports from Azerbaijan in 2005.

During June 2005, ExxonMobil announced it would begin sending oil by rail from its Azeri fields to the Black Sea port of Batumi . Since then, oil and refined product shipments increased to 190,000 bbl/d in 2005 compared to levels of 134,000 bbl/d in 2004. In March 2006, the Batumi port owner announced it would raise capacity at the port to around 260,000 bbl/d.

In September 2001, Georgia and Azerbaijan cleared a major hurdle for implementation of their gas pipeline plan by signing a transit agreement. The Azeri parliament ratified the transit agreement in October 2001, followed by the Georgian parliament in December 2001. In January 2002, Georgia announced it would build two, 88.3-Bcf-capacity underground natural gas storage facilities in the east and southwest of the country as part of the pipeline project. Construction of the Baku-Erzurum pipeline was scheduled to begin in late 2002, with the pipeline operational by the end of 2004.

As oil production from the Caspian Sea region increased, the Caucasus region became an integral export route for oil and natural gas. Previously, the only way for Caspian energy to reach European consumers was via the Russian pipeline system. The United States has supported the principle of multiple export options for Caspian exporters, and three of the largest projects to these ends cross through Georgia (Baku-Tbilisi-Ceyhan, South Caucasus Pipeline, and Baku-Supsa, a.k.a the "Western Early Oil Route")--none of these passed through Armenia. Small oil resources exist in the region, and the new infrastructure will allow these smaller projects (i.e. refineries and smaller oil fields) to tie in to the pipeline and become economically viable.

Roughly 150 miles of the pipeline corridor extending from Baku, Azerbaijan to Turkey will pass through Georgia. This corridor includes the $3.9 billion Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which began linefill in May 2005 and opened 13 July 2006, and the $1 billion South Caucasus Pipeline (SCP) natural gas pipeline, completed in late 2006. Regional governments and international investors expect these pipelines to become two of the primary conduits for Caspian Sea region oil and natural gas exports over the next decade. Georgia is paid transit tariffs by the pipeline's operators, and will be allotted a small percentage of fuel passing through the Republic.

The success of these projects would end an almost century-old Russian stranglehold on the oil and gas resources of the Caspian.An international campaign was waged questioning the benefits of BP's Baku-Tbilisi-Ceyhan pipeline in an effort to avoid a "zone of sacrifice" there. The new pipelines are clearly is meant to weaken the influence of Russia in the region and therefore are regarded as hostile by the Russian Government. Moscow might choose to cause more trouble in the Caucasus. It has fomented rebellions in the past and can do so again. Georgia, through which the new pipeline would pass, is particularly vulnerable. It blamed Moscow for backing the secession of Abkhazia and South Ossetia.

Russia is using its position as the primary supplier for many countries in Central and Eastern Europe to influence political and economic developments. Five countries in the region depend on Russia for their entire natural gas imports, while six others depend on Russia for over 60 percent of imported supplies. In January 2006, Russia's state-owned natural gas monopoly, Gazprom, halted sales to Ukraine in a price dispute and began reducing pressure in transmission lines that also carry substantial supplies to Western Europe. Gazprom had given Ukraine a deadline of January 1 to agree to pay quadruple the amount it previously paid for Russian gas, more closely reflecting market prices for the gas.

Azerbaijan holds vast oil and gas reserves in the Caspian Sea, which it exports to neighboring Georgia, Turkey, and Europe through three pipelines - the Baku-Tbilisi-Ceyhan via Georgia to Turkey, Baku-Novorossiisk and the Baku-Supsa to Georgia. The State Oil Company of Azerbaijan [SOCAR] exports oil by the main export pipeline Baku-Tbilisi-Ceyhan named after Heydar Aliyev. SOCAR's export in this direction made 24,600,000 tons in 2009, while in 2008 SOCAR exported 20,500,000 tons of oil, three times the volume of oil export for 2007 - 6,500,000 tons. Shipments via the Black Sea Batumi terminal have steadily decreased after Baku-Tbilisi-Ceyhan (BTC) oil pipeline was launched in 2006.

The European Union [EU] imports 50% of the energy it consumes, of which about 45% of imported gas comes from Russia (16% from Norway and 15% from Algeria; the rest comes from Central Asia, Libya and Nigeria). The 2008 Russia-Georgia conflict affected the traffic of the Baku-Tbilisi-Ceyhan (BTC) pipeline, though the South Caucasus pipeline, Baku-Tbilisi-Erzurum (BTE), which runs from Azerbaijan through Georgia, still sends very limited quantities of gas to Europe. The reluctance of the private sector to finance the Nabucco project, and the August 2008 conflict between Georgia and Russia, created a funding problem for Nabucco large enough to make the future of the project doubtful as of early 2010. In September 2012 Italy, Albania and Greece signed an agreement supporting the construction of the Trans-Adriatic Pipeline (TAP) to deliver gas from Azerbaijan. The deal improves TAP's chances against Nabucco West, the other remaining contender in the race to become the first pipeline to deliver Azeri gas to Europe.

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Page last modified: 30-09-2012 18:06:52 ZULU