Georgia: A Blow to U.S. Energy

The plans of the U.S. and Western oil companies for expanded pipelines
in the Caspian region may well be a casualty of Russia's attack

by
Steve LeVine

The sudden war in the Caucasus brought Georgia to heel, reasserted
Russia's claim as the dominant force in the region, and dealt a blow to
U.S. prestige. But in this part of the world, diplomacy and war are
about oil and gas as much as they are about hegemony and the tragic
loss of human life. Victory in Georgia now gives Russia the edge in the
struggle over access to the Caspian's 35 billion barrels of oil and
trillions of cubic feet of gas. The probable losers: the U.S. and those
Western oil companies that have bet heavily on the Caspian as one of
the few regions where they could still operate with relative freedom.

At the core of the struggle is a vast network of actual and planned
pipelines for shipping Caspian Sea oil to the world market from
countries that were once part of the Soviet empire. American
policymakers working with a BP-led consortium had already helped build
oil and natural gas pipelines across Georgia to the Turkish coast. Next
on the drawing board: another pipeline through Georgia to carry natural
gas from the eastern shore of the Caspian Sea to Austria�offering an
alternate supply to Western Europe, which now depends on Russia for a
third of its energy.

But after the mauling Georgia got, "any chance of a new non-Russian
pipeline out of Central Asia and into Europe is pretty much dead," says
Chris Ruppel, an energy analyst at Execution, a brokerage in Greenwich,
Conn. The risk of building a pipeline through countries vulnerable to
the wrath of Russia is just too high.

The Russia-Georgia war thus may have dealt a blow to 15 years of
American economic diplomacy. Back in the mid-1990s, Clinton
Administration officials looking at a map of the recently dismantled
Soviet Union grasped a singular fact about its southern perimeter: The
newly independent countries there were overflowing with oil and natural
gas but had to ship it via Russia to reach customers. Without pipelines
of their own, the Caspian states would never fully develop their energy
industries, or be politically independent of Russia. The lack of
pipelines also curbed the export potential of companies like Chevron,
which owns half of Tengiz, the giant Kazakhstan oilfield. After first
resisting, BP (BP) and Chevron (CVX) backed the American pipeline strategy.

Moscow's Anger

Georgia was a key transit point for any line to the West. John Wolf, a
former U.S. ambassador and now head of the Eisenhower Fellowship
program in Philadelphia, was in the thick of the bargaining and
arm-twisting that created the so-called East-West Energy Corridor. Wolf
recalls powwowing with the leaders of Azerbaijan, Georgia, and Turkey
on the construction of what would become the 1,000-mile-long
Baku-Ceyhan, the Caspian's first independent oil export pipeline. These
leaders knew they risked provoking Russia's wrath but figured the
gamble was worth it, Wolf says. Now almost 1 million barrels a day
normally course through the pipeline. For Georgia, it's not the fees it
collects from pipeline transit�about $60 million annually�that are
important. Instead, the pipeline's presence signaled Georgia's
stability and encouraged a flood of foreign investment.

That stability, of course, has proved illusory. Yet the Russians
won't interfere with the Baku-Ceyhan pipeline directly, analysts say.
Moscow's strategy depends on not spooking the Europeans, who might then
be encouraged to back the construction of other non-Russian energy
pipelines. Since there have been no confirmed attacks on the pipelines
running through Georgia, no European leader has called for a
reconsideration of energy policy.

Besides, the Russians may not need to shut down the Baku-Ceyhan line
to win the advantage in the energy wars. "There's no doubt that what's
happening has increased the investment risk within the region," says
Nick Butler, a former senior executive at BP who directs the Cambridge
Centre for Energy Studies at the University of Cambridge's Judge
Business School. Already, on Aug. 12, BP shut down a secondary oil
pipeline that ends at Georgia's Black Sea port of Supsa, saying there
could be a risk of attack on the line.

Russia's Pipeline Plans

Both Chevron and ExxonMobil (XOM)
had also planned to ship hundreds of thousands of additional barrels a
day along the route traversing Georgia. Now that may be subject to
change. "Do you want to put more eggs in the South Caucasus basket?"
asks Edward C. Chow, a former Chevron executive and now a senior fellow
at the Center for Strategic & International Studies in
Washington."And if you do, are there certain accommodations that need
to be made with the Russians to protect them?"

What about the White House's plans for a pipeline to ship natural
gas to Europe? The proposed pipeline's success depends on Turkmenistan,
which has the fourth-largest natural gas reserves on the planet, an
estimated 3 trillion cubic meters. The Turkmen are cautious: Under
former President Saparmurat Niyazov, they refused to defy the Russians
and support the construction of the Baku-Ceyhan pipeline. "[Niyazov]
thought about it and probably decided he didn't want to wake up dead,"
says former U.S. diplomat Wolf.

The assault on Georgia may make the Turkmen even more wary of the
new pipeline. Instead, they may end up cutting a deal with the
Russians, who are vigorously pursuing new gas pipelines of their own in
a bid to dominate energy in the region. "A new Iron Curtain," says
analyst Ruppel, "is descending around the periphery of Russia."

With Jack Ewing in Frankfurt

http://www.business

week.com/magazine/content/08_34/b4097000700662.htm?chan=top+news_top+news+index_news+%2B+analysis

Comments:

The western leaders match arrogance with stupidity. "These
leaders knew they risked provoking Russia's wrath but figured the
gamble was worth it, Wolf says. Now almost 1 million barrels a day
normally course through the pipeline."
The Russkis can turn off the spigot until customers fork over 100 Euros per barrel. The Brits pay $8 per gallon with $30,000 median annual income. Surely, the Americans can afford $12 at the pump. Still, they get a bargain because dollars are worthless paper.YPiR