For energy bereft countries, the next best thing is to position your nation as a transit nation crisscrossed by a skein of pipelines, in order to extract transportation fees from producers and end market consumers.
The post-Soviet Caucasian nation of Georgia has decided that its future lies in such a policy, after more than two decades of economic and political turbulence in the wake of the sudden implosion of the Soviet Union in December 1991.
The energy rich neighbor?
Rising Caspian petro super-state, Azerbaijan.
Neighboring energy poor Turkey and westwards, more affluent European nations.
Georgia is so confident of its expanded role as hydrocarbon transit nation that its government has just announced tenders for building two East-West pipeline sections.
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Tbilisi is dreaming big, envisaging a Georgian Trans-Caucasian corridor for Caspian output. During a presentation of a Georgian Railway development plan Georgian Energy Minister Kakha Kaladze stated that the development of Georgian Trans-Caucasian corridor could be strategically important for the entire region, commenting, “(The Georgian Railway development plan”) provides both economic and social provision for the country and all this must be done in the shortest possible time. Both energy and railway are strategic spheres for us and we must do everything to make our corridor strategically important for the entire region. There is a great interest in the corridor, including from Turkmenistan and Kazakhstan. We must do our best to ensure that there is even more interest."
Kaladze spoke from bitter experience. Georgia’s rocky path to independence since 1991 has been strewn with setbacks. At first, all seemed to be going well, in 1999 Tbilisi opened the 550-mile refurbished Soviet Western Route Export Pipeline (WREP), better known as the Baku-Supsa line, for Azeri oil exports having expanded its export capacity to 140,000- barrels per day.
But the real triumph came in May 2005 with the opening of the $3.6 billion, 1 million barrel per day, 1,092-mile Baku-Tbilisi-Ceyhan pipeline. BTC now supplies a million barrels per day to Western consumers, transiting Azeri high-quality crude from its offshore Azeri-Chirag-Guneshli fields to Turkey's deep-water Mediterranean terminus at Ceyhan.
Fast forward three years later, when the government of Georgian President Mikheil Saakashvili rashly precipitated a conflict with the Russian Federation over the disputed Georgian region of South Ossetia, where Russia had stationed peacekeeping troops, by shelling the town of Tsvinkali.
A five day Russo-Georgian war ensued. Complicating the energy transit picture, BTC suffered a terrorist attack on August 5, two days before the outbreak of hostilities between Georgia and Russia, by the Kurdish separatist Partiya Karkeren Kurdistan (Kurdistan Workers’ Party). The assault caused BTC operator BP to declare force majeure and halt shipments as authorities waited for the affected section to burn itself out. Seeking an alternative route following BTC’s closure BP switched to the WREP, which was then running at about 90,000 bpd. On August 12 BP announced that it was suspending shipments through Baku-Supsa, as well as the South Caucasus Pipeline (SCP), which transports natural gas from Baku to Turkey via Tbilisi.
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The conflict also halted maritime oil exports from the Georgian Black Sea ports of Poti (100,000 bpd) and Batumi (200,000 bpd), both supplied by rail, and Kulevi, Georgia’s third Black Sea oil terminus, which opened in 2007 and is capable of shipping 200,000 bpd, was shuttered as well.
For Tbilisi, the revenue losses from BTC’s closure were significant. In 2007 BTC fees generated $25.4 million in transit revenues and Saakashvili’s government estimated transit payments for 2008 at about $45 million.
The final result of all this was to remind Western oil companies that Azeri oil exports westwards flow via courtesy of Russia for Western countries led by the U.S. In the flurry of anti-Russian Western press at the time, few stopped to consider Saakashvilii’s indiscriminate shelling of his own disaffected citizens.
Since then Georgia has deepened its relationship with the State Oil Company of the Azerbaijani Republic and last month SOCAR affiliate Georgia Gas launched the first section of its newly-constructed gas pipeline in Tianeti in a ceremony attended by both Kaladze and SOCAR Energy Georgia CEO Mahir Mammadov.
The interweaving of oil and natural gas pipelines across the Caucasus is ongoing, and a win-win situation for European consumers, energy producer Azerbaijan and transit nation Georgia, if peace can be maintained. War is obviously less profitable than peace there.
But, given the turbulent history of the Caucasus, that remains to be seen.
By. John C.K. Daly of Oilprice.com