Caspian Pipelines Safe for Now as War Risk Returns to Caucasus

  • Pipelines run less than 30 miles from Karabakh conflict zone
  • Azeri-Armenian cease-fire holding, the two sides say

The resurgence of violence between Azerbaijan and Armenians poses little immediate risk to the key pipelines that link European markets to the Caspian Sea, according to analysts from London to Washington.

In a region where risk is the norm, “these sorts of localized difficulties tend to get shrugged off in the current environment,” according to Michael Hewson, a London-based analyst at CMC Markets Plc. Markets have not put any added risk premium on deliveries from the Caspian Sea to the Mediterranean, the focus instead remains on a global supply glut, he said.

The fighting over the mountainous Nagorno-Karabakh enclave has killed and wounded dozens and raised concern that the conflict would spread in the region bordered by Russia, Turkey and Iran. A BP Plc-led underground oil pipeline, which carried 720,000 barrels a day from Baku to Turkey’s Mediterranean port of Ceyhan last year -- about the equivalent of Turkey’s total consumption in 2014 -- runs less than 30 miles from the conflict zone. The $45 billion Southern Gas Corridor, which will pump Azeri natural gas to Europe once completed, is at a similar distance.

The battles threaten to reignite full-scale fighting in the Caucasus mountains, part of a new arc of instability along Russia’s border that stretches north and west from Nagorno-Karabakh through Georgia, Ukraine and further to Moldova. Fighting between Armenia, a Russian ally, and Azerbaijan, which has stronger ties to NATO member Turkey, would bring more turmoil to the region.

Pipeline Threat

The importance of the pipelines and the potential disruptions aren’t lost on the combatants. Levon Mnatsakanyan, defense chief of the unrecognized Nagorno-Karabakh republic, said that the oil pipeline would be one of the first targets of any new war.

“This is a very serious financial resource for Azerbaijan and we need to deprive them of these means,” he said last year in an interview in the capital, Stepanakert. BP on Wednesday said the clashes haven’t affected operations at its pipeline.

Brent crude prices have collapsed to almost a third of their levels previous to a 2014 decision by the Organization of Petroleum Exporting Countries to defend market share rather than cut supply.

The spiraling violence over the Armenian-controlled enclave in Azerbaijan sparked international alarm amid the largest loss of life since a Russian-brokered truce 22 years ago. Armenian President Serzh Sargsyan warned on Monday that escalation in the conflict could trigger a “full-scale war.” As a cease-fire announced late Tuesday has largely held, the market was focused on other potential shocks.

“I doubt it will affect oil prices,” Edward Chow, a senior fellow at the Center for Strategic and International Studies said by e-mail. Markets remain oversupplied and focused on what agreement, or lack there of, producers meeting in Doha on April 17 can achieve, he said.

Pipelines are always a target to attack due to their strategic importance, Bloomberg Intelligence analyst Philipp Chladek said by e-mail. In the case of the BP link to Ceyhan, any disruption would mainly hit Azeri oil exports and European refiners, particularly those with Mediterranean operations, Chladek said.

2008 Blast

In such a volatile region, there’s always a risk of disruptions. The pipeline exploded on Turkish soil in 2008 halting deliveries for about three weeks. The Kurdistan Workers’ Party, or PKK, an armed separatist group in Turkey, claimed credit. The Turkish government blamed the explosion on a technical malfunction, saying there was no evidence of sabotage. The blast may have been the result of a cyber attack, according to an investigation. Hostilities in Georgia during a conflict with Russia over disputed territories, which happened around the same time, also raised concern that the link’s security may be threatened.

World powers are looking to contain the conflict. The Organization for Security and Cooperation in Europe will send U.S., Russian and French mediators to the region this week.

Russian Prime Minister Dmitry Medvedev will travel to Yerevan on Thursday and Baku on Friday, the RIA Novosti news service reported, while his foreign minister Sergei Lavrov arrived in the Azeri capital late Wednesday. President Vladimir Putin called Sargsyan and Azeri leader Ilham Aliyev to express his “serious concerns over large-scale military clashes” and to urge a complete halt to the hostilities, the Kremlin said in an e-mailed statement Tuesday.

While the first cease-fire lapsed within hours, the latest attempt has largely held. Still, in a sign of the truce’s fragility, Azerbaijan said Wednesday morning that its forces had fired 120 times in the previous 24 hours in response to Armenian violations that included artillery strikes.

“There is certainly a risk of further escalation and miscalculations due to these higher-intensity clashes, but a regional war does not appear to be on anyone’s agenda at this time,” Emily Stromquist, an energy analyst at Eurasia Group in Washington, said by e-mail. “An attack on the pipeline may force Europe to consider limiting intakes along this route in favor of energy security.”

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