Opening the Caspian Oil Tap

A pipeline long sought by the U.S. looks set to win approval

It's one of the world's great geopolitical fault lines. Since the collapse of the Soviet Union a decade ago, the Caspian Sea has been a jousting zone for cold war victor America and a humbled-but-still-potent Russia. Their dueling has fueled a regional rivalry between the oil-rich, former Soviet republic of Azerbaijan, which has realigned itself as an ally of the U.S. and Turkey, and Iran--a major purchaser of weapons from Russia.

But now, for the first time, there are signs that tension is easing in this zone of confrontation. That's important, since the Caspian--bordered by Russia, Iran, and the former Soviet republics of Azerbaijan, Kazakhstan, and Turkmenistan--holds an estimated 110 billion barrels of oil. Indeed, the Caspian's reserves rival those of Iraq, whose deposits of 113 billion barrels rank second in the world only to OPEC leader Saudi Arabia's 262 billion barrels.

SHUT OUT. The most important changes are in Moscow's policy. After years of resistance, the Russian government looks ready to give the green light to a key oil pipeline that has long been championed by the U.S. Once it is finished in 2005, the 1,750-kilometer-long pipeline is expected to carry up to 1 million barrels of oil per day from the Azeri port of Baku to Turkey's Mediterranean port of Ceyhan. Russia has opposed the pipeline, whose prime developers are oil giant BP and the governments of Azerbaijan and Turkey, because it skirts Russian soil, shutting Moscow out of transit fees and other revenues. The Kremlin has also accused the U.S. of trying to keep the Caspian a solely Western preserve.

But in a sudden reversal, the Kremlin in late November invited executives from BP to make their case for the Baku-Ceyhan route. That gesture follows other moves by Russian President Vladimir V. Putin to find common cause with the Bush Administration on issues such as nuclear arms reduction since the September 11 terrorist attacks. Although Moscow is still weighing its decision, both BP PLC and Russian oilmen are optimistic the Kremlin will endorse the Baku-Ceyhan project.

If Moscow gives the nod, companies such as Lukoil, the country's largest oil producer, would be freed up to invest in the pipeline--locking in access and preferential tariffs for shipping their own oil. Both Lukoil and Russia's No. 2 oil producer, Yukos, have expressed interest in buying minority stakes in the pipeline. "We hope Russian companies [will] put a foot forward," says BP CEO John Browne. Russian backing "would be the ultimate validation of the [pipeline] project," notes Steven Dashevsky, oil analyst at Aton Capital Group in Moscow.

This is a key deal for the West, and the Bush Administration has been pushing it strongly. Energy Secretary Spencer Abraham recently visited Moscow to discuss the pipeline and other energy issues. The main advantage of the Baku-Ceyhan pipeline, proponents argue, is that it avoids the accident-prone Bosphorus Straits, the choke point between the Black Sea and the Mediterranean. The only other pipeline from the region, which opened in November, stretches from Kazakhstan to the Russian port of Novorossisk on the Black Sea, and requires companies to ship oil on tankers through the Bosphorus to the Mediterranean.

DASHED HOPES. Along the Baku-Ceyhan route, oil producers will have a second, secure option. That would help ease the West's dependence on OPEC. By 2010, the Caspian could represent 3% of global oil output and 5% of non-OPEC oil production, says Moscow brokerage Renaissance Capital. Although the pipeline will cost $2.8 billion, BP has concluded the project is cost-effective. The company is now soliciting bids for the contract to install the pipeline.

Moscow's backing of the Baku-Ceyhan pipeline also would send a strong political message to Iran and Central Asian countries that Russia broadly shares American goals in the region. That's likely to dash Tehran's hope for yet another pipeline stretching from Kazakhstan through Iran to the Persian Gulf. U.S. Secretary of State Colin L. Powell signaled American opposition to an Iran pipeline in an early December visit to Kazakhstan. Meanwhile, Moscow, as a major arms supplier to Iran, is well positioned to push Tehran to ease tensions with Azerbaijan in the Caspian, where the two countries have fought over borders and oil rights. This geopolitical fault line seems to be healing fast.

By Paul Starobin in Moscow

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