Events

Caspian Energy: Issues and Prospects

May 14, 2001 // 12:00am

By Joseph Dresen

The "United States needs to support the independence of the Caspian states not only as a moral priority, but because their vulnerability will undermine our own security and energy interests." stated Jan Kalicki, Public Policy Scholar at the Woodrow Wilson Center at a Kennan Institute lecture on 14 May 2001. A central element to ensuring the continued independence and stability of the Caspian states is the development of an east-west transportation infrastructure that would provide a route for Caspian energy to the world market independent from Russia and Iran.

The Caspian region is situated on the crossroads between Western Europe, East Asia, and the Middle East. The region holds gas and oil reserves that will become as important as the North Sea in assuring the future energy security of the West. Kalicki argued that it is vital to U.S. interests to promote the unfettered development and transportation to market of Caspian energy supplies. Doing so would not only promote the independence of the Caspian states, but also decrease the potential for the region to become a bridge to the flow of weapons of mass destruction, terrorists, and narcotics.

Kalicki, former NIS Ombudsman in the Clinton administration, argued that to defend these interests, disengagement from the region is not a serious option for the United States. Yet under President Bush, the position of Caspian Coordinator has been downgraded to that of a senior advisor in the State Department, while the corresponding official in Russia holds the rank of Deputy Foreign Minister and is a former Minister of Energy.

U.S. policy under Clinton had been to advance commercial and foreign policy interests in the region by involving U.S. businesses, promoting the role of Turkey, curtailing the influence of Iran, and counterbalancing Russian influence. The centerpiece of this policy was both support for the Caspian Pipeline Consortium (CPC) pipeline across Russia and the plan for the Baku-Tbilisi-Ceyhan (BTC) pipeline--an east-west pipeline that would bring Caspian energy to the world market through the Turkish Mediterranean port of Ceyhan. The BTC pipeline would not only establish a route independent of Russia or Iran, it would also help solve the most sensitive problem currently facing the transportation of Caspian oil, which is Turkish opposition to ever-increasing oil shipments through the narrow 17-mile long Bosporus straits.

Russia and Iran are actively developing their own alternatives to the BTC for transporting Caspian energy. Kalicki noted that Russia's Caspian negotiator, Deputy Foreign Minister Viktor Kaluzhny, has stated that while Russia no longer objects to the BTC in principle, it will move to create highly favorable tariff conditions to attract Caspian oil to its Transneft system. Iran has also been increasingly active in developing its ability to benefit from Caspian energy. "From a pipeline to the Turkish border to increased processing facilities," declared Kalicki, "from purchasing gas from Turkmenistan to pursuing oil swaps with Kazakhstan, Iran is becoming a player." Kalicki pointed out that European firms are actively investing in Iranian energy projects and Chinese enterprises are assisting Iran to develop transportation infrastructure that can be used for Caspian energy.

Kalicki argued that it is important for our Caspian energy strategy to have strong commercial and political components in developing an east-west transportation infrastructure. Commercially, there must be clear economic incentives to participate in building and operating the BTC, which will cost an estimated $2.4-2.7 billion to construct. Politically, it is necessary to maintain a framework conducive to the commercial development of the BTC.

If the strategy is to succeed, it is necessary to prepare against two contingencies, according to Kalicki. The first contingency, cost overruns, can be insured against, for example through a special facility under the Overseas Private Investment Corporation (OPIC), with deductibles and premiums set in advance to determine the shares to be borne by government and by participating businesses. The second contingency is the threat that Russia and/or Iran may try to undercut the BTC through subsidized tariffs to ensure that Caspian oil and gas transit through their territories rather than through the Caucasus and Turkey. To defend against this second contingency, Kalicki argued, Turkey should make clear that any tariff war would have commensurate commercial consequences against future energy sales by Russia or Iran to the Turkish market.

Kalicki concluded by calling for a renewed focus on the region at the governmental level, as well as a reinvigoration of private-public sector consultations to achieve the goal of an east-west transportation infrastructure for Caspian energy. On the international front, Kalicki recommended that the U.S. consolidate a consensus with our Turkish and Caspian partners, and also with our European partners, on the importance of an east-west pipeline. Both Russia and Iran should be offered incentives not to oppose an east-west project, but we should be prepared to go forward without their approval. Kalicki stressed that the U.S. should oppose the transit of Caspian energy through Iran until there is an operating east-west pipeline.

"While it would be far more preferable to base pipeline development on purely commercial terms," declared Kalicki, "I would argue that the strategic importance of the east-west energy transportation infrastructure is large enough to justify consideration of political intervention as a final resort if this should make the difference for ultimate success."

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