Turkey’s Interests and the U.S. Perspective on Caspian Sea Oil and Gas Pipelines

Executive Summary

Since the early 1990s, Turkey has expressed interest in an export pipeline through its terrain to the Mediterranean for Caspian oil. At present, it prefers a Baku-Ceyhan route for geopolitical, environmental, and economic reasons. This also coincides with U.S. interests in the region. Thus, the two nations have worked together to achieve a Baku-Ceyhan pipeline routing.

Both nations desire a route that avoids Russian control. Furthermore, Turkey is pushing for a route that avoids the Bosporus Straits, and the U.S. desires a route that bypasses Iran. These interests are all met by a Baku-Ceyhan pipeline, incorporating Azeri and Kazakh oil (through a trans-Caspian pipeline), as well as a parallel gas line for Turkmen gas (into Turkey, though not to Ceyhan). The oil producing nations of the region - Azerbaijan, Kazakhstan, and Turkmenistan - also support a Baku-Ceyhan pipeline.

Despite its political appeal, the economics of a Baku-Ceyhan pipeline do not look favorable, particularly in the face of recent decreases in the price of oil, and oil production that is lower than expected. The other export route options will be much cheaper, and may satisfy some, though not all of the U.S. and Turkey’s objectives. The route to carry oil from Azerbaijan to markets will be decided ultimately by the oil companies, based on commercial viability. Therefore, if the U.S. and Turkey desire the Baku-Ceyhan route, they must be willing to provide financial banking to make the route commercially viable.

Introduction

Turkey and the U.S. have worked hand-in-hand to secure a western oil pipeline route from Baku to Ceyhan (a Turkish port on the Mediterranean), as well as trans-Caspian oil and gas pipelines from East of the Caspian to Baku, and thence to Ceyhan (for oil) and to Turkish markets (for gas). This paper analyzes the motives of Turkey and the U.S. for promoting this route, and considers the likelihood that the Turkish and U.S. objectives will be met.

Turkey’s Pipeline Interests

Exploitation of Caspian oil and gas reserves is contingent upon the laying of transport pipelines from the oil fields to seaports for export. The principal oil-producing countries in the Caucasus are Azerbaijan, Kazakhstan, and Turkmenistan (which also has considerable gas reserves). Turkey is involved or has invested in the oil and/or gas projects of all three countries. As a result, Turkey is promoting an oil pipeline route that travels from Baku to Ceyhan, with a trans-Caspian oil line for Kazakh reserves feeding into this system from Turkmenbashi, and a gas pipeline for Turkmen reserves parallel to the route. The primary source of oil for a western pipeline route through Turkey, however, is the Azerbaijani fields.

Turkey’s interests in having an oil and gas pipeline run through its territory stem partially from the geopolitical desire to take on a leadership role among the nations of the former Soviet Union. The proposed Baku-Ceyhan pipeline would be the only oil pipeline in the region free from Russian control. Turkey feels this is extremely important for the independent development of the oil producing states, and from a commercial, competitive standpoint.

The advantage most heralded by Turkey is that a pipeline terminating at Ceyhan will not increase traffic in the Bosporus. In order to reach the Mediterranean and oil markets from the Black Sea, ships must navigate the narrow and winding Bosporus Straits. International maritime legislation drawn in 1936, at the Montreux Convention, allows free shipping through the Bosporus, yet acknowledges the need for more stringent physical and political constraints due to increased shipping activity. In recent years there has been a sharp increase in shipping accidents in the straits, and Turkey has voiced grave environmental and safety concerns over increasing tanker traffic through the area. Concerns are especially great because Istanbul, the nation’s largest city with 10 million inhabitants, is located on the Bosporus. Turkey imposed stricter rules on safety inspections for Turkish boats traveling the straits in June 1994, and is currently in the process of establishing a vessel tracking system. Russia, as well as some parties that utilize the Bosporus, feel that Turkey is using the Bosporus safety issue as a lever for aiding its own political and economic motivations to secure a pipeline route through Turkey.

An additional motivation for attracting a pipeline route through Turkey is the economic benefits that would result. A pipeline through Turkey would bring money and jobs from pipeline construction, refining, and export. Turkish officials hope that a pipeline running through Turkey will "carve a role for Ceyhan as a major oil center" (as the terminal for Caspian and potentially Iraqi oil in the 21st century).

Turkish companies are also involved directly in the oil projects of the Caspian region. The Turkish Petroleum Company (TPAO) holds a 6.75% share in the Azerbaijan International Operating Company (AIOC). In Kazakhstan there is a joint venture between TPAO and the local state entities that has secured exploration licenses in four regions of the country, and has begun test productions in some of these regions.

Oil as well as gas imports to Turkey have risen rapidly in the past few years. Currently, Turkey’s primary domestic sources of energy are hydropower and coal, but the country is shifting towards a heavier reliance on oil and natural gas in order to reduce costs. In 1994, Turkey imported 22 million metric tons of oil. This quantity is expected to rise to 28 million in 2000 and to 40 or 50 million in 2010. Gas imports are also rising: in 1994 5.3 bcm of natural gas were imported, and projections predict a rise to 10 bcm per year by 2000 and 39 bcm by 2020. Turkey looks to Central Asia and the Caucasus to provide the major portion of their future oil and gas imports. If the nation is to rely more heavily on oil and gas, however, it will want assurance that the supply is secure. This provides an additional incentive for attracting transport pipelines for Caspian oil and gas reserves through Turkey. A Baku-Ceyhan pipeline route, with Turkey as the first major customer on a supply network serving Europe would help to ensure energy security.

There are several additional benefits to a Baku-Ceyhan pipeline route. A terminus at Ceyhan is economical because the port already has the technological and operational capacity to handle large tankers as a result of the Iraqi/Turkey pipeline. The port of Ceyhan is advantageous because it is located in an area of good weather conditions, and so can remain open almost 365 days a year (in contrast to Novorossiysk, which must be closed for up to 2 months per year due to storms and bad weather). Location is additionally advantageous because Turkey is placed proximally to the growing markets in southern and western Europe, which would make for easy and economical transportation. Since Turkey understands the principles of western markets, it would be unlikely to interfere with oil flows for political reasons.

Azerbaijan is very interested in securing a route for their oil through Turkey as well. In part, the Azeri government prefers transport through Turkey because of the historic and cultural ties between the two nations. An additional motivator is an Azeri desire to avoid Russian control of its resources. President Aliyev stated on May 10, 1998, "We must transport the oil to international markets. There are many ways to transport the main oil, but for Azerbaijan the most beneficial way, the most important way and, taking into account the friendship and fraternal relations between Azerbaijan and Turkey, the most reliable way of transporting the Azerbaijani oil, the Caspian oil, is Baku-Georgia-Turkey-Ceyhan." Most recently, Azerbaijan has stated that it will establish another oil company to implement the Baku-Ceyhan project, should the AIOC refuse to invest in it.

In the past year, several other nations have included their written support for the Baku-Ceyhan oil pipeline. On May 15, 1998, Turkey, Azerbaijan, and Georgia signed an agreement on a Baku-Ceyhan line, that later in the month was expanded to include Kazakhstan and Turkmenistan.

Turkey is also promoting a trans-Caspian pipeline route for Kazakhstan oil, an option that was first proposed in 1995 at the first-round negotiations for pipeline routings. A pipeline would carry oil from Tengiz south to Turkmenbashi, and then across the Caspian to Baku, where it would join Azeri oil in the Baku-Ceyhan pipeline. In October 1997, an agreement was signed between Yilmaz, the president of Turkey, and the Kazakh government, agreeing on a pipeline to carry Kazakh oil to Ceyhan. On October 29, 1998, an accord was signed expanding support for a Kazakh trans-Caspian line to include Azerbaijan, Georgia, and Uzbekistan. Alternative export routes for Kazakh oil have been proposed through Iran, bypassing Turkey altogether.

The Evolution of Current Routings

When the Soviet Union was dissolved, in 1991, Turkey made it a goal of its foreign policy to promote the historical, linguistic and religious ties that it held with the former Soviet states, and to attempt to foster close relations with these nations, uniting them under a sort of Pan-Turkicism. Turkey envisioned its own role as that of a political leader in the region. In this same time frame international companies became interested in constructing pipelines westward from the Caspian Sea. The Turkish government saw the attraction of a line through its territory as a means of promoting its geopolitical strategy, and thus began a bid for a Turkish route.

Since the Turkish government first became interested in hosting the Caspian export pipeline, routing designs have gone through several revisions. For Azeri oil reserves, a Baku-Ceyhan route traveling by way of Armenia was initially proposed in 1992 by the Botas Pipeline Company (a Turkish state oil company) (Appendix I). This routing is the shortest and most simple proposed, and uses a part of the existing Iraq/Turkey oil infrastructure.

There are three potential problems associated with this route, which ultimately led the Turkish government to develop other options. One dilemma is that the Armenian portion of the pipeline travels through the area of fighting in the Nagorno-Karabagh dispute. Since 1988, the Karabagh Armenians have been fighting to secede from Azerbaijan. A cease-fire was effected in 1994, but forces still occupy the territory. This could pose a security problem and flow delays in the pipeline should fighting resume. Turkey has heralded as a benefit of the route the potential incentive it could provide for a peace agreement, but the likelihood of this happening is doubtful. One alternative proposed was to route the Armenian portion through a section of Iran, in order to avoid the Nagorno-Karabagh struggle. Yet an additional option proposed was to construct both segments, making a parallel pipeline route.

A second problem associated with this pipeline route is the fact that the Turkish section passes through southeastern Turkey, where the PKK insurgence is located. Since 1984, the Kurdish Workers Party (PKK) has been fighting for an autonomous Kurdish homeland in southeastern Turkey. The PKK has declared its determination to sabotage Turkish assets, including present and prospective oil and gas pipelines. Oil installations have commonly been targets in the past, creating damages as high as $800,000. Turkey has utilized its large armed forces to counter and suppress the PKK insurgency, which has led to many violent encounters. The violence in combination with the extreme poverty of the region suggests that a resolution is not likely in the near future. Turkey has increased its military operations in the region since March of 1995, which is believed to be associated with its desire to ensure security for energy exploration and development. The Turkish government insists that a Baku-Ceyhan pipeline route will be secure. However, oil flow delays could occur should the PKK decide to disrupt the flow of oil (as they have threatened to do). This could also prevent investors from contributing to the funding of the pipeline project if they deem this to be a large risk factor.

A third problem associated with this routing is its design to utilize the existing Iraq/Turkey infrastructure. This would be a hindrance because Iraq retains throughput rights on the line, and opposes the use of the pipeline for Azeri oil.

In face of these dilemmas the Turkish government began searching for an alternative routing for Azeri oil, particularly one that would bypass southeastern Turkey, and therefore avoid two of the three problems delineated above. The plan that emerged, and is now preferred, is a routing from Baku to Ceyhan through Georgia.

The Baku-Ceyhan line via Georgia would be considerably longer than the proposed route through Armenia, and would be more costly. The cost increase results from the additional length and the fact that it could not use the existing Iraq/Turkey pipeline, nor the refineries at Midyat. Although this route would still traverse some areas of PKK violence, these areas are less violent and under greater government control. However, the security of transiting Georgia is questionable because of civil conflict, affecting the ability of the government to lay or control a pipeline through the region.

The AIOC is orchestrating the exploitation of Azerbaijani oil and the routing decision. In December 1994, the Azeri government ratified the AIOC, and began a 54 month development program. The exploitation of the Azeri oil reserves was divided into two phases, a preliminary, early routing pipeline system, and a later, main pipeline route. The early routes will be used to transport early oil on a small scale (approximately 300,000 barrels per day). The main pipeline system will be built on a larger scale for the transportation of greater volumes of oil (up to 1 to 1.5 million barrels per day) to be extracted when full capacity is reached between 2007 and 2010. The routing for the early oil was decided among the AIOC members in 1995 and 1996. Turkey pushed for a Baku-Ceyhan pipeline that would combine Kazakh and Azerbaijani crude oil, but saw a Baku-Supsa pipeline as an alternative for an early routing, should the Baku-Ceyhan route be too difficult to develop in the first stage. In October 1995, the AIOC announced that two pipeline routes would be constructed to export the early oil from Azerbaijan: one route north through Russia to the port of Novorossiysk and the other a route west from Baku to Supsa, Georgia. Russia opposed the Baku-Supsa pipeline because it wanted the pipeline to run solely through Russian territory. From both ports (Novorossiysk and Supsa) the crude oil will be shipped on the Black Sea and through the Bosporus to gain access to the Mediterranean and the world’s oceans.

In March 1996, the Turkish government offered to provide the capital costs of renovating the Baku-Supsa line (the section already in existence), provided four assurances from the AIOC: (1) that the contract for the main pipeline reconstruction and extension be awarded to a Turkish company or Turkish-led consortium, (2) that a limit be placed on the early Baku-Supsa line’s capacity of 6 million tonnes per year (about 120,000 barrels per day), (3) an eight year, through-put guarantee be extended to ensure Turkish north coast communities’ access to Azeri crude oil on a sustainable basis, and (4) an explicit guarantee be given by the AIOC that the Baku-Supsa line be a precursor to a full-scale Baku-Ceyhan line. The members of the AIOC would not agree to these terms, primarily because the agreement would bind them to the contruction of a Baku-Ceyhan line. As a result, Turkey did not contribute to the funding of the Baku-Supsa line.

The Baku-Novorossisyk line has already been opened, and is currently exporting 75,000 barrels per day. The Baku-Supsa line is under construction and is expected to begin operation in the spring of 1999. It will have a capacity of 100,000 to 150,000 barrels per day.

Though the AIOC would not agree to the contingencies Turkey set forth for provision of the Baku-Supsa line, at the time of the two-pipeline early route announcement (10/9/95) the AIOC envisioned Turkey as the eventual route for the late oil pipeline. The AIOC president was quoted at this announcement: "As we see it now, Ceyhan will be the eventual exit point for the main pipeline."

In order to promote the Baku-Ceyhan pipeline, and its goal of pan-Turkicism, Turkey has made significant efforts to forge relationships with the nations of the Caucasus and Central Asia, establishing a strong political and business presence in Azerbaijan, Kazakhstan, Turkmenistan, Uzbekistan, and Kyrgyzstan. Particularly strong relations have been formed with Azerbaijan. At present, Turkey is also cultivating a new partnership with Israel, especially for military cooperation. Since the rise of the current political party in June 1997, relations with the U.S. have also been particularly strong.

In addition, Turkey has been trying to improve relations with countries with whom they have not had good relations traditionally. For strategic importance, the Turkish government is trying to forge better relations with Armenia. They have also taken measures to improve their relationship with Russia, in an attempt to end a hundred-year history of rivalry. In 1997, Turkey signed an agreement with Russia to import $20 billion worth of natural gas over a 25 year span. Despite such trade agreements, Turkey believes that the Caspian countries should decrease their dependency on Russia, especially for oil exports.

Turkey’s economy is still emerging, and is in the process of securing a presence in the global market. It is also undergoing a large privatization effort that will place them at a more advantageous position for exporting on the global market. Russia and the former Soviet states comprised 10% of Turkey’s exports in 1995, and this percentage is increasing quickly. In 1995, exports to Russia amounted to $2 billion, and exports to the other CIS states also totaled about $2 billion. As a result, it is in Turkey’s interests to have oil and gas revenues flow to Russia and the former Soviet states, in order to strengthen the export markets for Turkish goods (though Turkey has a greater interest in accruing these revenues directly).

The Turkish Position on other Pipeline Routes

Turkey does not oppose the CPC pipeline that is currently under construction, linking Tengiz oil in Kazakhstan to Novorrossiysk, and they have no financial interest in this consortium. This route will use the Bosporus for transportation out of the Black Sea, but since the route has already begun implementation Turkey can do nothing to change the routing. Turkey opposes both a Baku-Novorrossiysk routing and a Baku-Supsa routing for the main oil pipeline for Azeri reserves. Both routes would significantly increase tanker traffic on the Straits, and would involve Russian control of the pipeline (for the Baku-Supsa route Russian control is indirect, nonetheless, the Russian presence in Georgia is very strong). In response to Turkey’s complaints about Bosporus traffic, Russia has formed an alternative plan that would bypass the Bosporus by way of Greece for their Baku-Novorossiysk option.

There have been several proposals for transporting Turkmenistan oil and gas through Turkish pipelines. Two oil routes have been proposed, one from Turkmenistan at Turkmenbashi, through Iran and on to Turkey, the other under water across the Caspian to Baku and then on to Turkey. The trans-Caspian pipeline would carry Kazakh oil and small amounts of Turkmen oil, following the same route as that proposed for Kazakh oil.

Turkey’s Gas Interests

Turkey’s main interest in a gas pipeline is to meet growing domestic demand (although some of the gas is planned to be exported over land to the rest of Europe). Turkey has signed a 30 year agreement with Turkmenistan to buy gas through a trans-Caspian pipeline. Initially, Turkey has agreed to purchase 16 bcm annually, with the amount possibly increasing to 30 bcm in the future. In addition to exploring gas supply options from the Caspian Sea, Turkey has signed initial deals with Russia, Iran, and most recently, Egypt for gas purchases.

One route for Turkmen gas, traversing Iran, would run from Ekarem in Turkmenistan, through Tabriz, Iran, and on to Ankara, Turkey (and eventually to Europe). Shell has signed a memo of understanding to ship Turkmen gas to Turkey via this route. The results of a feasibility study completed in late October 1998 have determined this 3500 km route to cost $4 billion. Such a pipeline would fulfill the terms of a memorandum that was signed in May 1997 by Turkmenistan, Iran, and Turkey, agreeing to provide 28 bcm of Turkmen gas per year to Europe. No funding has been provided for this project so far, but Shell has pledged to find the necessary finances.

Preliminary estimates by several construction companies suggest that a trans-Caspian pipeline would also be a competitive option. A trans-Caspian pipeline might be more feasible currently because the U.S. supports this routing, while the U.S. does not support the line through Iran. In fact, the U.S. began serious consideration of a trans-Caspian pipeline after Shell had signed a transport deal with Iran. In June of 1998 BP/Amoco, General Electric, and Bechtel announced a plan to build a 1200 km trans-Caspian gas pipeline from Turkmenbashi, Turkmenistan, to Baku, and then over land along the proposed Baku-Ceyhan oil pipeline route into Turkey, where it would join the Turkish gas pipeline system. This line, called the TransCaspian Gas Pipeline System, would initially carry gas from eastern Turkmenistan, but would ultimately include exports from Uzbekistan and Kazakhstan. The line would carry an initial 7 bcm of gas per year, expandable to 34.3 bcm per year. If Amoco establishes and secures this land route, it could serve as the path for a future oil line as well. Russia and Iran strongly oppose the trans-Caspian option because it counters options through their respective countries.

U.S. Position on Caspian Oil Pipelines

The United States has provided assistance to the states of the Caucasus and Central Asia since the dissolution of the Soviet Union in 1991. The focus has been on four dimensions of support: (1) to secure sovereignty and independence for the new states, (2) to provide commercial opportunities for them, (3) to ensure energy security and energy independence of the region, and (4) to leverage economic development to help resolve regional conflicts. Since 1992, the U.S. has provided over $2.2 billion in assistance to the states of the Caucasus and Central Asia. Despite this stated policy and investment, the U.S. did not show a major interest in the Caspian region until July 1997. Before this, the U.S. approach was more focused on Russia than on the Caspian region. Clinton shifted to a more Caspian-centered approach following the May election of a moderate President in Iran. The election of President Khatami has increased Europe’s commercial effort in the region, which has made the U.S. more alert to sanctions against, and the need to exclude Iran.

In keeping with the above goals for the region as a whole, the U.S. seeks to ensure that oil and gas development in the Caspian will: (1) create significant commercial opportunities for U.S. firms involved, (2) help to depress oil prices over time (or impede their increase), and (3) diversify world oil supply, decreasing the dependence of global oil markets on exports from the Persian Gulf.

In order to promote both their political and economic objectives in the region, the U.S. supports a northern pipeline from Kazakhstan to Novorossiysk for the CPC oil in Kazakhstan; two pipelines for Azerbaijani oil, one north to Novorossiysk and one west through Turkey to Ceyhan; and a cross-Caspian route for Kazakh oil and Turkmen gas. The U.S. is in agreement with Turkey on the advantages of a Baku-Ceyhan pipeline. However, they support multiple pipeline routes for Azeri oil, believing that export markets should be diversified, and that the avoidance of a Russian route altogether might prove extremely uneconomical and cause political tensions. In addition, the U.S. favors the Baku-Ceyhan route because it bypasses Iran, and believes Turkey can serve as an effective counterbalance to the Islamic fundamentalism of Iran.

The U.S. explicitly promotes an export pipeline route that avoids Iran because of ILSA and the dual containment policy of the U.S. against Iran and Iraq. The U.S. sanctions against Iran are very stringent, while other western nations do not hold such strict opposition to commercial agreements with Iran.

The desire to diversify the oil routes stems from the goal of preventing Russian dominance in the marketplace, as well as preventing market dominance by Iran. Iran and Russia are both competitors of the Caspian region in the oil and gas market, so the development of a route or routes that avoids one or both of these nations would be desirable. Russia has used its pipeline monopoly as a foreign policy mechanism for thwarting Caspian energy development. A non-Russian route would help to secure commercial rates for non-Russian exports, and would bring pressure on Russia to bring their rates for export facilities down to the commercial price.

The U.S. interest in diversification also argues against the development of a pipeline route through Iran to the Persian Gulf (separate from U.S. political interest in avoiding Iran). At present, a substantial percentage of the world’s exported oil flows through the Persian Gulf region. Routing a pipeline for Caspian oil through Iran to the Gulf increases the amount of oil that will be disrupted should an accident or act of terrorism occur in the Persian Gulf. Thus, a routing that avoids the Persian Gulf will increase the diversity of oil supply on the global market.

Recent Developments

Since the spring of 1998 there has been an increased interest in the main pipeline route chosen, because of the stated intention of the AIOC to reach a decision on the pipeline route in October 1998. The preferred route has yet to be determined: the AIOC has moved back the decision date repeatedly, and has now postponed the decision indefinitely. The president of the AIOC, Heydar Aliyev, has stated that the decision has been postponed because oil prices are low, and recovery is not high enough at present to necessitate a decision. Some experts, such as Julia Nanay, feel that it will be a few years before a main pipeline route decision becomes necessary.

At present, oil production in the Azeri fields is 75,000 barrels per day - less than 25% of the expected capacity for the first stage of production (300,000 barrels per day). A combination of factors has stifled early production efforts. For one, Azerbaijani oil fields include an abundance of natural gas that must be extracted simultaneously with the oil. Currently there is nowhere to store the gas; thus, it is impossible to lift high volumes of oil. Another factor is the recent decrease in the price of oil.

Even if the AIOC oil fields reach peak production estimates (approximately 700,000 to 800,000 barrels per day), the Baku-Ceyhan line will not be commercially feasible if the price of oil remains low. In order to achieve commercial viability an additional billion barrels of oil reserves must be added to the volume or an additional $1 billion must be given to the project. This means that Kazakh reserves must be included if the pipeline is to become commercially viable without significant government assistance. The addition of Kazakh reserves to the Baku-Ceyhan line is not likely in the near future because the current reserves at Tengiz are being exported through the CPC pipeline to Novorossiysk, and it is unlikely that a surplus will occur soon. Thus, additional reserves must be found in Kazakhstan before a pipeline to Turkey becomes feasible.

The Kazakh issue is complicated further by the U.S. preference for a more expensive trans-Caspian line over a trans-Iranian line. Kazakhstan prefers the less expensive route through Iran, but last year agreed to delay these plans if the U.S. would agree to pay the estimated $2 billion additional cost of the trans-Caspian line. As of October 7, 1998, Kazakhstan had yet to hear from the U.S., who stated that a feasibility study would be completed "in the very near future." If financial support is given it will come from the U.S. Export-Import Bank and the Overseas Private Investment Corporation.

The possibility of finding additional funding for the pipeline has also become a hot topic within the last six months. The U.S. refuses to provide any direct financial incentives in the region, because they fear such an act would appear as a subsidy to the oil industry. However, the possibility of U.S. Export-Import Bank funding has surfaced recently, though no definite commitments have been made. The Turkish government has also pledged financial support recently, stating on October 25, 1998 that it would offer tax incentives, custom duties, and other concessions to oil companies to encourage them to build the Baku-Ceyhan line.

Turkey’s lack of financial backing for the Baku-Ceyhan project has frustrated the U.S. A recent New York Times article predicted a Baku-Supsa decision at the AIOC declaration (then slated for 10/29/98). U.S. officials attributed the anticipated Baku-Ceyhan defeat to an unstable and disorganized Turkish government, and their inability to provide a lucrative incentive package early enough. Turkish officials deny the claims that the Baku-Ceyhan line will not be chosen. Cumhur Ersumer, the energy minister of Turkey, called the New York Times article "baseless".

The stability of the Turkish government is a serious concern, however. The three party coalition structure of government has proved to be relatively unstable: several different coalitions have been formed among the three parties within the last three years, and all three parties have held power. The high turnover in government administration, and the constant battle among the three parties for prominence has led to a lot of internal bureaucracy that impedes clear policy formation and focus, and weakens the strength of the government.

Despite stated assurances from Turkey that the Baku-Ceyhan line will be chosen as the main export route, recent actions suggest the Turkish administration is fearful it may not prevail. Turkey’s foreign minister, Ismail Cem, announced on October 29, 1998, that if another route was chosen, Turkey would "prioritize non-Caspian energy sources and producers for its energy investments and imports." Even more threatening to the Caspian states is an alleged warning from Turkey to the AIOC that Azeri oil shipments may be restricted or even barred entrance to the Bosporus Straits if a Baku-Ceyhan route is not chosen. This is not an empty threat: Turkey has the ability to impede and discourage traffic in the Bosporus by expanding their 1994 legislation to include all traffic (not just domestic), increase insurance costs, and increase waiting periods for tanker traffic.

A recent development that may strain U.S.-Turkey relations is the commencement of construction on an Iranian-Turkey gas pipeline announced on November 9, 1998. Construction has begun on the Turkish link (Erzurum to Ankara). Turkey stated that this link will be necessary for either a trans-Caspian or an Iranian pipeline. Turkey has assured the U.S. that it prefers a trans-Caspian route, but due to its great need for natural gas, it will choose whichever route materializes first. Though Turkey’s export agreement with Iran does not violate ILSA, the U.S. opposes the deal because an Iranian gas route would preclude the possibility of a trans-Caspian gas route, and in turn inhibit the viability of a Baku-Ceyhan line. The economic benefit of a parallel gas pipeline along the trans-Caspian line has been pushed recently to improve the viability of the trans-Caspian line (and also the Baku-Ceyhan line).

Conclusion

Given current market prices and the unexpectedly low volumes being extracted from the Azeri oil fields at present, the outlook for an AIOC decision (if one is made in the near future) appears likely to favor a Baku-Supsa route over a Baku-Ceyhan route. The Baku-Supsa route, at $1.5 billion, is half the cost and half the length of a Baku-Ceyhan route. Though many of the countries of the region, as well as the US, favor a Baku-Ceyhan routing, the ultimate decision and the majority of project financing must come from the commercially-motivated oil industry. Unless national governments and international organizations can assure significant financial backing, the Baku-Ceyhan line will not be commercially viable.

The geopolitical and environmental factors that lend favor to a Baku-Ceyhan route must be evaluated by the countries and parties involved to determine whether they are significant enough to warrant additional financing. A pipeline independent of Russian influence would be beneficial to promote the independence of the former Soviet states, and to encourage market competition. An increase in Bosporus traffic would represent a serious environmental danger and health hazard; thus a route avoiding the straits would also be a wise decision.

The U.S. desire to avoid routing through Iran, however, may not be prudent. A route through Iran to the Persian Gulf would meet the above goals, avoiding Russian influence and the Bosporus straits. It would also be much cheaper than a Baku-Ceyhan pipeline. Though this route would not diversify export routes, it may nonetheless be the best available route. The nations of Europe already have begun entering commercial deals and partnerships with Iran. It may be in the best interest of the U.S. to reevaluate their policy towards Iran.

Ultimately, economics will decide the pipeline decision. If the U.S. and Turkish governments are willing to make financial investments in the pipeline projects in order to see their goals realized then the Baku-Ceyhan line may come to fruition. Otherwise, a Baku-Ceyhan pipeline route is not likely to be realized in the near future.

Appendix I: Routing for a Proposed Baku-Ceyhan pipeline through Armenia

This pipeline would travel from Baku up the Aras valley and into Armenia. It would transit 40km of Armenia and then enter the Azeri exclave of Nakhichevan, and finally enter Turkey at a point near Dogubayezit. In Turkey the pipeline would head southwest along the western shore of Lake Van to a pumping station at Midyat on the Iran/Turkey line. From Midyat the existing Iran/Turkey line would be used, carrying the oil to the port of Ceyhan. The route would total 1065km, including a 500km stretch on the Iraq/Turkey pipeline.

Appendix II: Routing for a Baku-Ceyhan Pipeline through Georgia

The Baku-Ceyhan line through Georgia would follow the Coruh and Kizil Irmak rivers in the northern region of eastern Turkey from Erzurum to Erzincan. It would then go to the region of Kayseri and then head south to Ceyhan, travelling a total of 1100 miles. If this line was constructed it would have an initial capacity of 1 million barrels per day and cost approximately $2.5 to $3 billion.

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