World Politcs Watch: New Oil and Gas Pipelines Threaten Russia's Regional Energy Dominance

Despite falling oil prices, uncertain reserve sizes and a non-existent legal framework, an extraordinary volume of international investment poured into the region in 1997 and 1998.

By 1999, more than 20 oil exploration contracts were signed in Azerbaijan alone, representing more than $30 billion in long-term capital investment and some $2.5 billion in committed investment. It was widely expected that the poorly explored, but high-potential Caspian oil reserves would change the world energy market and provide an alternative to Middle Eastern oil and Russian regional dominance.

These expectations turned out to be exaggerated, however, and soon the Caspian hype faded away. After 1999, most contracts were either closed or put on hold. Two oil companies, Arco and Conoco, decided to exit the region.

Recently, however, everything has changed. Earlier this year, the Baku-Tbilisi-Ceyhan (BTC) pipeline, connecting Caspian oil with the Turkish port of Ceyhan, became operational. A few days earlier, natural gas began passing through the South Caucasus Pipeline (SCP), another new route. These new pipelines offer real competition to Russia's regional energy dominance. They also increase Turkey's importance in Europe's strategic calculations.

Talk of bypassing regional giant Russia started as early as 1994. As part of a Production Sharing Agreement between Azerbaijan and BP, foreign investors were tasked with finding an export route for land-locked Azeri oil. Several possible routes were looked at, including the Baku-Novorossiysk pipeline through Russia, Baku-Supsa to the Georgian Black Sea port, and the BTC to Turkey.

Before 2003, none of the bypass options seemed significant enough to threaten Russia's regional monopoly on oil transportation. According to experts, the existing Baku-Supsa route together with the Russian route to Novorossiysk could only have been expanded to transport 450,000 barrels of Caspian oil a day, not nearly enough. Alone, the Azerbaijani fields of Azeri, Chirag and deepwater Guneshli would average 700,000 to 800,000 barrels per day at their peak.

In late 2003, however, the threat of a bypass became much more credible. As oil prices rose, the BTC Pipeline Company, formed in 2002 and led by BP, found enough investors to go on with the now-completed project. The following year, Azeri and Kazakh officials began discussing the possibility of directing Kazakh oil flows through BTC. In the fall of 2005, the pipeline was completed. In June 2006, the first BTC oil reached the Ceyhan terminal.

The competition of the Baku-Tbilisi-Ceyhan and the South Caucasus pipelines is a huge milestone marking the end of Russian dominance over the European energy markets. The pipelines will re-shape energy consumption and the geopolitics of the region in three ways.

First, they will decrease Russia's near-monopoly on energy transit from the Caspian states to global markets. As a result, Russia will have to adapt to international competition. Second, European consumers will now have access to Caspian energy directly, avoiding Russia altogether. Finally, Turkey will gain an important position in the European market as a new energy crossroads.

By Gordon Feller, the chief executive of the Urban Age Institute and editor of Urban Age magazine.

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