Energy suppliers wary of Georgia after war

MOSCOW (Reuters) – Energy suppliers in the Caucasus and Caspian region could turn their backs on Georgia as a transit route after the country’s brief war with Russia, denting confidence in the Nabucco pipeline project.

Ambitious plans for Nabucco, a U.S.- and EU-backed project that would take Azeri gas to Europe via Georgia and Turkey, bypassing and reducing reliance on Russia, are crumbling as instability scares off investors.

Caspian Sea producers are favoring Russia as their route to European markets or to China.

Ex-Soviet Georgia is a now a key energy transit route. It is at the centre of the Baku-Tbilisi-Ceyhan (BTC) pipeline, which ships 850,000 barrels per day (bpd) of high quality Azeri crude from the Caspian to the Mediterranean.

It also has three major ports on its Black Sea coast, Batumi, Poti and Supsa, which send oil products and crude to western Europe and are used by Azerbaijan, whose ports are on the landlocked Caspian Sea.

The Baku-Tbilisi-Erzurum gas pipeline (BTE), like its oil counterpart, stretches from Azerbaijan to Turkey via Georgia. Opened in 2007, it will eventually be able to carry 20 billion cubic meters (bcm) of offshore Azeri gas per year.

But faced with a now unstable neighbor, Azerbaijan is considering other routes for its oil and gas.

“Hostilities between Russia and Georgia increase the risk around the South Caucasus as a westward transit route for Caspian oil and gas, both now and over the longer term,” said Tanya Costello at Eurasia Group in London.

Azeri state energy firm Socar expects to reroute 300,000-400,000 tons (6,066 bpd-8,087 bpd) of crude this year through Russia, using the Baku-Novorossiisk pipeline rather than the BTC link.

Socar had previously said it would send 1 million tons to Russia via the pipeline in 2008, but is now considering pumping 1.3 million to 1.4 million tons, the company told Reuters, citing fears of “instability” in Georgia.

On August 7, Socar asked Azeri pipeline operators to reroute some of its crude volumes through Russia — the same day that Georgian troops stormed Georgian breakaway region South Ossetia, provoking a huge counter-response from Russia.

BTC had already halted supplies for several days prior to the invasion after an explosion on Turkish territory claimed by the Kurdish separatist Kurdistan Workers Party (PKK).

“Baku’s new interest (in Russia) may stem from a desire to protect the relationship with Moscow, or a sense that Nabucco is less likely than ever to materialize,” Costello said.


The United States and the European Union have been pushing for the Nabucco pipeline, as a rival to the Nord and South Stream pipelines that will be part-operated by Russian gas export monopoly Gazprom and pipe Russian gas.

Washington was quick to push for Nabucco in the aftermath of the intense but brief war. Vice-President Dick Cheney will fly to Tbilisi, Baku and Kiev next week, with energy on his agenda.

“Cheney’s trip will be… inflammatory… His rhetorical track record and known views on Russia make very strident statements likely,” said Cliff Kupchan of Eurasia Group.

But analysts say the feasibility of the 30 bcm per year, 7.9 billion euro ($11.62 billion) scheme is vanishing.

“The Georgian conflict will complicate efforts to move the Nabucco gas pipeline project forward, particularly if the instability prompts Central Asian suppliers to turn to other potential export routes,” said analyst Andrew Neff at Global Insight.

Azerbaijan is in talks with Gazprom to sell gas to Russia, and the Russian giant has agreed to gradually increase payments for Central Asian gas from knockdown prices in previous years to lure the countries away from exporting to China and to Europe via an Azeri-Turkey route, or as possible Nabucco candidates.

“Europe and China are facing increasingly more demand for imported energy, and they haven’t managed to get it from Central Asia, and that window is now firmly closed. Russia has been much more successful in getting those deals tied up,” said Chris Weafer, chief strategist at Russian bank UralSib.

The Vienna-based Nabucco consortium, which would build and operate the pipeline, rebuffs any suggestions of a supply

“Political problems aside, we could import gas from the middle of the next decade,” a spokesman said, adding that gas could come from Iran, Egypt, Iraq and Saudi Arabia.

“There are several possibilities to fill Nabucco without pumping gas through Georgia,” he said.

Utility companies OMV from Austria and Germany’s RWE, two of the shareholders in the project, said the conflict is not affecting their plans.

For Azeri crude, Reuters uses the conversion rate of 7.4 barrels per ton as opposed to 7.33, which is the standard rate for Russia Urals crude and was previously used.

Check Also

Ukrainian Parliament Passes Mobilization Bill But Punts on Demobilization

A long-delayed bill on mobilization passed its second and final reading by the Ukrainian parliament …