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.
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."