### Baku-Supsa

After many months of postponements, the AIOC has begun construction on its line for early oil. The pipeline will flow from the offshore AIOC fields through Baku and along a new pipeline roughly following existing gas and rail lines to the Georgian capital of T’blisi and then along an existing 20 inches Soviet pipe to the port of Supsa, Georgia. This line will have a total length of 550 miles and a capacity of 100,000 b/d. AIOC had planned to spend $300 million to construct the new pipe and refurbish the Soviet line by the end of 1998, but costs have soared to over $600 million, primarily due to underestimation of the repairs required for the Soviet pipeline. The completion date is now mid-1999. Expansion of this line to carry the high volume expected later in the project (700,000 to 800,000 barrels per day) will cost approximately $1.5 billion or $0.68 / barrel . Although some element of risk is included in the capital recovery cost, additional risk insurance could be purchased to ensure cash flow from the project.

Baku-Supsa (900 kb/d) | Cost / b
Lifting costs at AIOC | $5.00
Pipeline to Supsa | $0.68
Georgian Transit Fee | $0.43
Shipping to Rotterdam, LR-2 | $1.23
Subtotal | $7.34

Given the expense involved several key risks must be considered. One such risk is the conflict between Azerbaijan and Armenia over Nagorno-Karabakh, an ethnic Armenian enclave within Azerbaijan. Home to 160,000 people, 95 percent of whom are Christian Armenians, it is the size of Delaware. To the west of the enclave lies Armenia, less than five miles away at the nearest point. Iran is approximately 15 miles to the south.

Full-scale war broke out between Azerbaijan and Nagorno-Karabakh in 1991, after the ethnic Armenians in the enclave (a.k.a. Karabakhis) demanded independence or the absorption of the region into Armenia. The war is now the longest-running conflict in the former Soviet Union. The Karabakhis, with the help of Armenia, fight for self-determination and independence from Azerbaijan; the Azeris fight for the territorial integrity of their country.

An estimated 35,000 soldiers and civilians have been killed, and one million others, now largely living in the Azeri countryside, have been displaced from their homes in the struggle. The territory stands as a devastated war zone subject to an economic blockade by Turkey and Azerbaijan that has resulted in severe shortages of food and medicine. Ground assaults, shelling, air raids, and heavy artillery have been used by both sides. Although a Russian-mediated cease-fire has been in effect since 1994, over 400 people still die each year on the front lines.
A diplomatic team from Russia, France, and the United States has been trying to resolve the Nagorno-Karabakh dispute. They want the enclave returned to Azerbaijan but to give the Karabakhis “maximum possible autonomy.” Armenia has rejected this, vowing never to allow Azerbaijan to rule there again. The question of how and where to settle the refugees remains unanswered (see US legislation Section 907).

The Baku-Supsa pipeline skirts the enclave itself and other Armenian-occupied territory as it exits Azerbaijan and enters Georgia. Armenians, especially extremists living in the Javakheti region of south-central Georgia, have talked about interrupting this flow of oil out of Azerbaijan. Further, the Baku-Supsa route does not address the problem of the Bosporus. If Turkey shut the area down as the result of war, for example, there would be no way to get the oil to the West. A pipeline that bypasses the Bosporus may have to be built in addition to a Baku-Supsa MEP (Main Export Pipeline). If the Nagorno-Karabakh conflict is resolved soon, an alternative pipeline could conceivably run through Armenia and the areas around Nagorno-Karabakh.

AIOC is poised to make a decision on a MEP for late oil, but there are a number of considerations, both political and economic, that have led to delays. Besides an expanded Baku-Supsa line, the other main proposal is a Baku-Ceyhan line.

Baku-Supsa Links