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21/08/2009

Niko Mchedlishvili and Matt Robinson

Energy

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TAGS: GEORGIA
| RUSSIAN | RUSSIA

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Tipping point

Tipping point

More
than 800,000 barrels of high-quality Caspian crude oil flow daily to the
Mediterranean beneath a Georgian village, 42km from breakaway South Ossetia

Bashkoi
marks the closest point at which the BP-led Baku-Tbilisi-Ceyhan (BTC) pipeline –
one of several criss-crossing the region – skirts the Russian-backed territory,
underscoring the risks to investors with stakes in Georgia as an energy corridor
to the West.

Last August's five-day war over South Ossetia rattled
nerves over the flow of oil and gas. Analysts cite current plans to expand BTC
as evidence the worst fears were misplaced. But a year on, with the sides facing
off over tense boundaries and no sign of a peace process, the risk of renewed
hostilities remains high.

That threat could impact future projects,
notably the US- and European Union-backed Nabucco gas pipeline plan, a 3,300 km
transit route to bring gas to Europe from the Caspian and Middle East by 2014 .

Villagers in Bashkoi, a bumpy 110-km drive (68 miles) west of the
Georgian capital, recall seeing jets and Russian Mi-24 helicopter gunships
during the war, and people fleeing the fighting. “We still think about the
possibility of another war with Russia,” said 45-year-old school librarian
Ketino Devdariani. “Do you think war will start?” she asked a visiting reporter.

Devdariani said she hoped Nabucco would be built nearby, providing a
much-needed boost to the impoverished rural area, where some homes stand
abandoned by villagers who left looking for work elsewhere. Nabucco's rationale
is to reduce Europe's energy dependence on Russia, but it has long been beset by
problems over supply and financing.

A July 13th breakthrough transit
deal between EU countries and Turkey “indicates confidence in Georgia as a
transport corridor,” said Kate Hardin, head of Russian and Caspian Research at
US-based Cambridge Energy Research Associates.

A new war, however, would
renew doubts about the viability of Nabucco, which has yet to secure gas
supplies from Azerbaijan. Instability in Georgia has already played into Azeri
thinking about where to sell its gas, with Baku now looking to Russia as an
attractive alternative. “We still have no map for the pipeline and as a result
there is no discussion yet about Georgia being a transit nation,” said Ana
Jelenkovic, research associate at consulting firm Eurasia Group.

“If
Azeri supplies are secured by the Nabucco consortium and pipeline construction
discussions begin in earnest, then Georgia would be discussed as a potential
transit nation,” Jelenkovic told Reuters. “I think at that point you might have
that issue (instability in Georgia) raised.”

Georgia hosts major
pipelines feeding oil and gas to Europe from the Caspian Sea, including BTC and
gas counterpart Baku-Tbilisi-Erzurum. It also has three major Black Sea ports –
Batumi, Poti and Supsa – handling oil products and crude.
The war shattered
progress made since Georgia's 2003 “Rose Revolution” to attract investment to
the former Soviet republic under pro-Western President Mikheil Saakashvili.
Russia crushed a Georgian assault on South Ossetia, which like the rebel Black
Sea region of Abkhazia threw off Tbilisi's rule in the early 1990s after the
collapse of the Soviet Union. Poti was briefly held by Russian troops, and
thousands of Russian soldiers remain in Abkhazia and South Ossetia, some 50km
from Tbilisi at their nearest point.

BTC was closed for two weeks at the
time of last year's war due to an unrelated explosion in Turkey, and it was not
damaged in the conflict. But bombs did fall within 15 metres (50 feet) of the
Baku-Supsa pipeline, which BP was then in the process of reopening, two years
after it had been closed for maintenance.

Russian troops seized the main
East-West highway, and explosions hit the key railway also used to export Azeri
oil. But the immediate impact of the war  “was more like a hiccup in terms
of  export disruptions – oil and gas exports were interrupted/redirected
only briefly, and the long-term impact on transportation has been less than it
could have been,” Hardin said in an e-mailed response to questions.

Azerbaijan re-routed some oil through Russia. Then in July, it agreed to
sell Russia a modest 500 million cubic metres of gas beginning in 2010. Russian
state-run gas giant Gazprom said it had secured priority in buying gas from the
second phase of Azerbaijan's Shah Deniz deposit – Europe's main hope for
supplying Nabucco.

Analysts say Azerbaijan, faced with an unstable
Georgia and trying to balance political interests between East and West, wants
to diversify export options.  Underscoring the interplay between energy
interests and territorial disputes in the Caucasus, Baku is also looking for
Moscow's backing in its dispute with Russian ally Armenia over the
Armenian-backed rebel region of Nagorno-Karabakh.

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