On January 14, 2004 The Nixon Center’s International Security and Energy Program held a half-day workshop on “Developing a New Black Sea Security Agenda: Oil, Pipelines and Regional Security.” Speakers included Ambassadors from Turkey, Bulgaria, Georgia, Romania and Armenia, deputy chiefs of missions from Ukraine and Greece and senior level representatives from Embassies of Azerbaijan, Russia and Kazakhstan. With respect to commercial and security issues, representatives from Lockheed Martin, Albania-Macedonia-Bulgaria pipeline project (AMBO) and US-Azerbaijan Chamber of Commerce delivered remarks at this off-the-record session.
The purpose and timing of this meeting was to focus Washington's attention on the greater Black Sea “region” as the Administration is preparing for the June 2004 NATO Summit which will be held in Istanbul, Turkey. This will be the first NATO Summit attended by three Black Sea littoral member countries—Bulgaria, Romania and Turkey.
Below is the program summary.
For many decades the geopolitical map was focused on the Iron Curtain and the Middle East, then attention shifted to the Balkans and now the Black Sea-Caspian Sea region is emerging as a strategic area of concern for the Euro-Atlantic alliance. Historically, the Black Sea region was a zone of commerce and thus an integrating factor under the Greek and Ottoman Empires. It was also the frontline of confrontation between the Russian and Ottoman Empires, and later the Soviet Union and the NATO alliance. Since the 1990s the Black Sea region has become a transmission belt both for problems and energy resources. Consequently, this region is increasingly entering the agenda of NATO and the EU.
The US has yet to develop a single approach to the Black Sea region. However, some creative thinking has started along the lines of President George W. Bush’s vision to expand democracy in the greater Middle East and to build long-term stability in the region that stretches from the traditional Middle East and North Africa, all the way to Afghanistan, with the Caucasus and Central Asia on the borderlands.
The South Caucasus countries consider the Black Sea region as their gateway to becoming part of the European and transatlantic structures. Following the recent changes, Georgia can now be pulled by Romania, Greece and Bulgaria closer to Europe. In turn, Georgia can pull the rest of the greater Middle East closer to the Black Sea region.
While this vision is powerful for some of the Black Sea countries, there lacks political and economic homogeneity in the region. Countries are at different degrees of transformation and there are historic tensions among the states.
Turkey as the Pivotal Black Sea Country
Turkey was the first country that considered the Black Sea as a region and in 1992 established the Black Sea Economic Council (BSEC) that brought together all the littoral states, as well as Greece, Armenia and Azerbaijan under this umbrella to promote regional energy, transportation and communication projects. With its headquarters in Istanbul and its bank in Thessalonica, BSEC is the leading regional entity, albeit with few significant achievements to date.
The global context for oil markets changed significantly after September 11, 2001 and now with the US trying to diversify from its reliance on Saudi Arabian and Gulf oil, non-OPEC Russian and Caspian oil developments have become more important. In this context the integration of the Caucasus/Caspian region into the broader European economic environment is important for the EU’s new energy security strategy as well. Moreover, if properly invested, the oil revenues can become a real engine for development in these emerging states.
One way to turn the theoretical idea of regional cooperation into practical reality has been via oil and gas pipelines from the Caspian Sea region. Turkey is located at the crossroads of the oil and gas-rich Caspian Sea Region, Russia and Middle East as well as European and US markets that need these energy resources. Turkey will play a huge role in the region’s pipeline developments, with the Baku-Tbilisi-Ceyhan (BTC) oil pipeline at the backbone of cooperation. BTC will be completed in 2005 and carry Azerbaijani (and eventually Kazakhstani) oil via Georgia to its Mediterranean port of Ceyhan and from there to world markets. For the Caspian producers and shippers that want to avoid bottlenecks, BTC is a great option.
Turkey’s second priority project is the South Caucasus gas pipeline that will transport Azerbaijani gas via Georgia and Turkey and also onwards to European markets. Greece and Turkey already signed an agreement, and as an EU member, Greece can secure funding for the project, which enjoys strong political support at the highest levels in both governments as well as in the US.
The Straits Chokepoint
With increasing amounts of Russian and Caspian Sea oil expected to flow into the Black Sea in the coming years, the Turkish Straits of Istanbul (Bosporus) and Canakkale will inevitably become a chokepoint. Traffic in and out of the Black Sea is already stalled because of increased tanker volume. Moreover, due to weather conditions, there are already huge delays (up to 20-25 days) in oil transportation, which leads to oil companies slowing down their production. This is only the beginning—when Russian oil companies are fully engaged and when the Caspian Pipeline Consortium (CPC) starts transporting oil from Kazakhstan to the Black Sea in full capacity, traffic will simply become paralyzed.
Even worse, a terrorist attack on a tanker in the narrow Bosporus Straits would have catastrophic impact not only for Turkey, but for all the Black Sea countries that rely on these Straits for transportation of their goods and commodities. Istanbul was already hit twice by terrorists in November 2003 and is a front-line state in the war on terror.
If a major oil spill occurs, the Straits could be shut down for a very long time. Today there are 2.8 million barrels of oil that transit the Straits on a daily basis, which is too high given the security risks. There are many factors that need to be considered in assessing adequate safety, such as size and characteristics of waterway (700 meters in Bosporus); currents (8 knots); type of traffic (oil, dangerous cargo, etc); other users (2 million people cross Bosporus daily); and weather (fog, etc). While speed and efficiency of commerce are important, they need to be kept within requirements of safety.
While this past fall Turkey made operational its Vessel Traffic and Management Systems (VTMS) and Coastal Surveillance Systems that assist in safe passage and observe the waterways between the Aegean and Black Seas, this navigation system cannot prevent a serious accident due to the above-mentioned characteristics of the Straits.
The Black Sea has a peculiar geological structure; most of it is covered with hydrogen sulfur, and therefore, has no life. Only a few hundred meters of water near the surface supports life and any major environmental incident would destroy the whole system. The fresh water provided by Bosporus is like an air passage for the Black Sea’s survival. In fact, Bosporus in Turkish literally means the “throat” of a human body. Any collision or terrorist incident in the Bosporus may result in huge catastrophe.
Therefore, it is important to get the commitment of everyone involved—governments, shippers, operators and support industries—despite the Montreux agreement of 1936 that still rules the Straits. Signed at a time when the number of ships passing through the Straits was under 20 per day, contrasted to more than 2,000 per day today, this agreement is insufficient to deal with today’s challenges. Already there have been more than 400 collisions in which hundreds of lives have been lost and huge environmental and ecological impacts have occurred. The cost of a single oil spill would be huge. Channels could be shut down for months.
All the Black Sea countries share Turkey’s concern over the security and environmental safety of the Straits. Considering the cost caused by long delays in the Straits, it may be more economical to construct new pipelines out of the Black Sea. In fact, Russian oil company, Lukoil, has announced the Murmansk project as a new bypass to help reduce the pressure on the Straits.
Though not accepted by Turkey, there have been economically-based suggestions to improve security of the Straits. One suggestion is to consolidate ships into large tankers rather than have many small ships operating in the Straits (to reduce queuing, demurrage, etc). A second idea is put a toll on the tankers that pass through the Straits and let the market decide. After all, congestion is a function of price, and as long as no one has to pay to pass, the Straits will remain the most attractive option for oil companies. As oil is fluid, it can be transported in other ways, but other goods, including perishable foods, have no other options. Pricing might be introduced if Montreux is reopened, but the Turks are adamantly opposed to it.
Bypass Options: Turkey, Ukraine, Bulgaria, Romania
Turkey has proposed two pipeline projects as potential bypass options. First is the Samsun-Ceyhan pipeline starting at the Black Sea port in Samsun and ending at the Mediterranean port in Ceyhan. Second, is a much-shorter pipeline via Thrace, connecting the Black Sea to the Aegean. But given Turkey’s legal obligation not to promote another pipeline that would compete with its major BTC project, at this point these projects merely exist on paper.
One existing bypass option is the Odessa-Brody pipeline that was built to take Russian and Caspian oil at Ukraine’s Odessa port, and via pipelines, transport it to European markets. Even though the pipeline has already been constructed for 45 million tons per year (mta), it has not been able to attract throughput so far. Consequently, Ukraine recently signed an intergovernmental agreement to extend the pipeline to Poland (Gdansk) and thus serve the refineries there, which would make the project commercially more attractive. The throughput could possibly come from ChevronTexaco’s fields in Kazakhstan and via this line reach European markets, but ChevronTexaco has not made any decisions yet.
The Ukrainian government is also considering reversal of the pipeline for Russian oil from the TNK-BP consortium to flow into the Black Sea, and thereby, begin earning a return on investment. If the Odessa-Brody oil pipeline in Ukraine is reversed, however, there will be an additional 20 mta flowing through the Straits.
Bulgaria is also promoting two other oil bypass options. The first one is the Bourgas-Alexandropolis pipeline, which started at the political level with an agreement between Bulgaria-Greece-Russia. Greece is strongly backing the project, its only oil pipeline option. The second Bulgarian pipeline option is the Bourgas-Macedonia-Albania (AMBO) project, which started at the commercial level, and thus, made much more progress to date. Recently a declaration of intent supporting AMBO was signed among the governments of Bulgaria, Albania and Macedonia.
With 70% dependence on Russian imports and the energy sector comprising 1/3 of GDP, diversification of energy sources is an important concern for Bulgaria. It is eager to participate in the so-called Pan-European Transport Corridor 8 that is linking Western Europe with Asia. In addition to the oil pipelines, Bulgaria is also supportive of electricity and gas interconnectedness and the Caspian/Middle Eastern gas to be transported via Turkey to Europe.
The proposed route of neighboring Romania, the Constanta-Pancevo-Omnisalj-Trieste Pipeline (CPOTP), would carry oil from the Black Sea to the Adriatic Sea. Romania is the only country with oil reserves in the Balkans and Central Eastern Europe and also has a highly developed network of oil transport and distribution. The CPOTP can therefore be considered as a “small highway,” connecting Caspian oil to Central and North European networks. It is also supported by the EU’s Inogate initiative as a complementary pipeline to BTC along the east-west energy corridor.
The CPOTP is the second pipeline studied by US TDA, which finished its report in September 2003. The $900 million project would go through a route that is shorter than the one studied in 2000. This pipeline has a capacity of 50 mta and would be connected to the Adriatic pipeline. Additionally it would provide direct access to Serbian and Croatian refineries and also have access to Omnisalj port and further to Trieste and the TAL pipeline. The tariffs would be competitive and given that there are no major technical problems along the way, construction costs would be relatively low. Moreover, one third of the pipeline on the Romanian territory is already in place.
Criteria to Pick a Bypass Pipeline
Oil companies do not want to become embroiled in the politics of the Black Sea bypass pipelines, but rather want to focus on the economics. Having learned from its experience pulling together the BTC project, BP is now starting to brainstorm about a checklist of criteria to evaluate whether a pipeline is feasible or not. Some of the points include:
1. Timeframe—will the amount required to complete the pipeline correspond to companies’ production schedules?
2. Does the proposed pipeline terminate at a deep-sea ocean terminal? (or is it simply a dedicated supply line to inland refineries)
3. Will assurance of transit governments to support unrestricted transit be easy to obtain?
4. Is creation of treaty-level, inter-government agreements with investor and government-backed shipper protection agreements for upstream developers and shippers possible?
5. Can an identifiable aligned sponsor group be formed?
6. Does the route avoid existing socially tense, environmentally and archeologically sensitive areas?
7. Does the route avoid environmental and social “icons”?
8. Does route avoid areas where NGOs may have legitimate interests?
9. Have transit countries done such a project before?
10. Does the feasibility study indicate it is commercial?
11. Does the ocean terminal have VLCC capacity?
AMBO, which is at this point the most advanced of all the bypass pipeline projects, seems to have followed these criteria. Vlore is a deepwater port where large tankers (VLCC) can load, making the overall cost of oil transport to the port in Rotterdam or the United States cheaper than that via the Straits. It can also hold Caspian oil, and therefore, avoid the need to mix.
AMBO has stayed out of politics and focused on attracting shippers and raising funds from the international financial institutions, such as OPIC and US EXIM, as well as private investors. AMBO is based on a “take and pay” structure and asks for 10% minimum equity holding to join. It is in talks with ExxonMobil and has secured verbal commitments from four other major shippers.
The MOU for a “Tripartite Agreement” is based on the BTC model and when it is signed, will appoint AMBO as the developer. The route will be chosen after careful consideration of political, social and environmental conditions (avoiding Lake Ohrid), and final agreements are expected to be completed by end of June 2004. Construction is scheduled to start in 2005 and the first oil shipment targeted for 2008.
Connecting Eastern Black Sea to Europe
On the eastern part of the Black Sea, the east-west energy corridor will remain a priority for Georgia and Azerbaijan. For Georgia, while they will not immediately solve all the problems, the oil and gas pipelines are “the only hope” for its economy and politics to stabilize. As it is the main entry point to the energy corridor tying the Black Sea region to the Caspian Sea and Central Asia, Georgia is also the most vulnerable country along this route.
Georgia just underwent a “Revolution of Roses” which was the peaceful rejection of its citizens to continue to live under a weak, corrupt government that deteriorated relations with international institutions, left the country vulnerable financially, economically and with a violated territorial integrity. The new Georgian leadership enjoys great support of the international community and will systematically tackle the challenges.
While there is tension between Russia and Ukraine and Moldova, it is mainly the Georgian-Russian relations that prevent a broad, strategic dialogue with Russia on the future of the Black Sea region. Russia’s energy companies have exploited Georgia’s corrupt, weak system and taken over key assets, leaving Georgia completely dependent on Russian energy, with long-term implications too early to tell. Georgia has cleansed its Pankisi Gorge from the terrorist and criminal groups, but political tension with Russia is continuing due to the frozen conflicts of Abkhazia and South Ossetia and the stalled negotiations on the withdrawal of the Russian forces from Georgian bases.
At the same time, there are some positive signs that the Russian and new Georgian governments will establish a close cooperation. How Russia deals with Georgia will to a large degree determine whether emerging Russia will become an integral part of the West (by recognizing that its interests are best served by a prosperous, stable Georgia) or a prisoner of its past.
Azerbaijan considers BTC essential for its stability and for the implementation of large-scale energy and transportation projects to attract western interests into the region. It is also important to have direct and stable access to international markets without depending on neighboring competing producers. Current Azerbaijani crude production is 16.5 mta with growth expected to reach 64 mta in 5-7 years. It has one pipeline going to Russia (Baku-Novorossisk), one via Georgia to the Black Sea (Baku-Supsa) and in 2005 will also have the BTC pipeline, thereby fully diversifying its outlets and its energy security.
The BTC project already increased regional cooperation, especially on security and law enforcement. Azerbaijani, Georgian and Turkish governments and operators work closely to fulfill the high standards spelled out in the Intergovernmental Agreements. The Host Government Agreements give each country the responsibility to protect the security of the pipeline going through its territory, and consequently all three established special units and are closely coordinating their law enforcement activities.
Azerbaijan and Georgia, along with the oil producers have experience operating the Baku-Novorossiik and Baku-Sups pipelines, both of which require heavy monitoring. The instability in Chechnya caused delays and stops in the Baku-Novorossisk pipeline, which was resolved in 2000 when Azerbaijan and Russia cooperated closely and Transneft built a bypass. Baku-Supsa had a small incident in May 2002, which led to stoppage for three days. BTC will additionally benefit from US cooperation on protection of the oil fields and the transportation corridor, including military training against terrorist attacks and support for the coast guard in Azerbaijan.
Despite being landlocked, Armenia could also play an essential role in the Black Sea region’s economic cooperation, albeit only after its relations stabilize with Azerbaijan and Turkey. Even though transit through ArmeniaThe Nixon Center