Azerbaijan's Squabbles Are Spooking Big Oil

These days, the young women in the hard-currency bars in the basement of Baku's old Intourist hotel are dancing with each other. Most of their usual partners--roughnecks from Western oil companies--have fled Azerbaijan's capital, following a warning from the U.S. State Dept.

For five years, Azerbaijan has been locked in a bloody dispute with neighboring Armenia over the territory of Nagorno Karabakh. With Armenian nationalists controlling nearly all of Nagorno Karabakh and some 15% of Azerbaijan, the shock waves from the conflict are spilling over into Azerbaijan itself.

HIDING OUT. Azerbaijan's military has grown increasingly discontented with the losing war effort. When the government tried to disarm a mutinous garrison in Ganje, the second-largest city, in early June, a nationwide revolt broke out. After just three weeks, the rebels' 34-year-old leader, Surat Husseinov, has gained control of most of Azerbaijan.

The democratically elected President Abulfez Elchibey has left Baku for the safety of his native Nakhichevan--a remote region cut off from the rest of Azerbaijan by Armenia. Inside Baku itself, Haydar Aliev, a former KGB general and Soviet politburo member, wields power. The question now is how he will deal with Husseinov.

The Azeri power struggle may spell an end to Turkey's growing influence in the region, and it threatens one of the world's biggest oil plays. A group of international companies has been negotiating with the Azeris over drilling rights to monster fields in the Caspian Sea estimated to hold more than 5 billion barrels. Although the terms of the deal have yet to be worked out, British Petroleum and other oil giants gritted their teeth and paid $70 million to the Azeri authorities as a June 21 deadline passed.

The companies, which also include Amoco, Pennzoil, McDermott, and Unocal, think Azerbaijan has too much potential to pass up. They are also betting that whoever prevails will forge ahead with the oil deal. But they are nervous. With President Elchibey and his top oil officials likely to be ousted, there will be--at the least--delays. The American companies are also suspicious of a recent Azeri move to lump all the companies together into one big consortium, because that makes a BP/Statoil (Norway) group the largest shareholder. "We were about to start pumping serious money into this place, but now it looks like we are back to square one," said one company executive.

It is hard to foresee any quick return to stability. There are too many centers of power. One revolves around the 70-year-old Aliev, who is already acting like a head of state, receiving foreign emissaries and executives.

THIRD FORCE. But Husseinov could spoil Aliev's plans. A rich merchant who made his reputation in the war with Armenia, Husseinov commands a formidable militia--which looks increasingly like the national army itself. A third force, ex-President Ayaz Mutalibov, who was ousted from power in 1992, may soon return from exile in Moscow.

All three of these men have close ties to Russia. In contrast, the fugitive President Elchibey's leanings are toward neighboring Turkey and the West. (The Azeris are a Turkic people.) The Russians would like to bring Azerbaijan, which has refused to join the Moscow-dominated Commonwealth of Independent States, back into their sphere of influence. They would also like a proposed pipeline to bring Azeri oil to the sea to run through Russia rather than Turkey and Iran.

The Russians have provided some backing for the Armenians and are rumored to have aided Husseinov. When the dust clears, Russia will likely have friends in power in Baku.

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