Russia-Georgia conflict raises worries over oil and gas pipelines

Several important lines pass through Georgia, and for Europeans and others, the routes represent a crucial counterbalance to Russia's control of energy resources.

By Elizabeth Douglass
Los Angeles Times Staff Writer

August 13, 2008

Russia's invasion of neighboring Georgia has raised doubts about the security of oil and gas pipelines that cross through the former Soviet republic and the wisdom of further investment in the transport lines.

The foray also put an emphatic stamp on Russia's growing influence over the region's natural resources and, by proxy, over Europe.

The pipelines, supplying about 1% of the world's daily oil needs, have not been damaged by the fighting, but the prospect of that led pipeline part-owner BP to shut down one of the oil lines as a precaution Tuesday. A second oil export line has been out of commission since last week because of a fire in Turkey.

"The Russians have clearly demonstrated their military capability of getting very close to the pipelines," said Edward Chow, an energy expert at Washington's Center for Strategic and International Studies. "And they also sent the Black Sea fleet off the Georgian coast, so they also have demonstrated that they can blockade Georgia anytime they want."

The pipelines begin in Azerbaijan and pass through Georgian territory en route to ports on the Black Sea and the Mediterranean Sea, where tankers take the crude mostly to Western Europe.

Chow worries about whether transit lines through Georgia will remain secure in the long run and whether additional foreign investment would be safe. Russia is an energy giant on two continents through the state-controlled Gazprom, its largest company.

Gazprom produces 85% of the nation's natural gas, controls 17% of the world's reserves and is a major supplier to countries across Central Asia and Europe.

Its former chairman, Dmitry Medvedev, was elected Russia's president in March.

For Europeans and others, the routes through Georgia represent a crucial counterbalance to Russia's control over pipelines and energy resources. Some hoped expansion projects throughout Georgia might further loosen Russia's grip over European energy supplies.

Those projects were not far along, Chow said, but in light of Russia's actions, "investors would have to reconsider how attractive those projects are."

James L. Williams, publisher of the Energy Economist newsletter, was blunt about the possible repercussions.

"For Russia, control of Georgia and the pipeline would restore much of its influence over many of the former satellites of the U.S.S.R.," he said. "It would have the clear benefit of increasing Russia's energy chokehold on Europe."

Amy Myers Jaffe, an energy fellow at Rice University's Baker Institute, believes an assertive Russia flush with oil and natural gas revenue can exercise its power by controlling crucial resources. "When the Russians are trying to claw back their power, energy is the major lever in their pursuit to do so," she said.

However, political and economic analyst Natalia Leshchenko of consultant Global Insight believes the pipeline issue has been overblown.

"The Georgian president brought in the whole pipeline issue to probably send more worries to the West, and especially to the European consumers, to draw more attention to the conflict," she said. "It's not that we should ignore it, but it's certainly not a cause to panic."

So far, energy markets have shrugged off the risk. The cost of oil fell again Tuesday, dipping $1.44 to $113.01 a barrel on the New York Mercantile Exchange. The closing price was more than $34 below the peak posted on July 11.

The most prominent among the existing pipelines is the 1,000-mile Baku-Tbilisi-Ceyhan line, which can carry up to 1 million barrels of crude a day from the Azerbaijani coast on the Caspian Sea, through Georgia and Turkey to the port of Ceyhan on the Mediterranean Sea.

The BTC is owned by a consortium of companies. It was expected to carry more than 900,000 barrels of oil a day this month for export, bypassing routes that would have taken the oil through Russia and subjected it to that country's transit fees.

Deliveries through the BTC pipeline were halted Aug. 4 after a fire along the Turkish portion of the route. A Turkish separatist group claimed responsibility for the incident.

BP also shut down a smaller line, the Western Route Export pipeline, which was recently overhauled. It can carry up to 160,000 barrels of oil a day from Baku on the Caspian Sea in Azerbaijan to the Georgian Black Sea port of Supsa.

Also as a precaution, BP also shut down the South Caucasus gas pipeline, which transports natural gas from Baku through Georgia into Turkey. That gas is not exported.