The Quest: Energy, Security, and the Remaking of the Modern World Page 7

  Onshore, in and around Baku, were innumerable antique “nodding donkeys,” still bobbing up and down, helping to pump up oil from wells that had been drilled in the late nineteenth and early twentieth centuries. Hiking into the wide, dry Kirmaky Valley just north of Baku would take one back even earlier in time. There one would step over pipelines and clamber up barren hills that were pockmarked with hundreds of pits that been dug by hand in the eighteenth and nineteenth centuries. In those days, one or two men would be lowered into each of these narrow, dangerous pits, past walls reinforced with wood planks, 25 to 50 feet down to the claustrophobic bottom, where they would fill buckets with oil that would be hoisted out with primitive rope pulleys.

  Down on the other side of the hill was the Balachanavaya Field, where a gusher had been drilled in 1871. That field was still crowded with old rigs, densely packed up against one another, some of them going back to the days of the Nobels and the Rothschilds. Altogether 5 billion barrels of oil had been extracted from the field, and it was still modestly producing away, while gas leaking from a nearby mountainside continued to burn in an “eternal flame.”

  Thus, awaiting the arriving oil men in Azerbaijan was an industry deep into decline and decay, starved of investment, modern technology, and sheer attention. Yet what the oil men also saw, if not altogether clearly, was the opportunity—though tempered by many risks and uncertainties.

  “ALL ROADS ARE THERE”

  Azerbaijan was ground zero for the Caspian Derby. As a Russian energy minister put it, it was the “key” to the Caspian, for “all roads are there.” Every kind of issue was at play, and so many of them the result of geography. The most immediate problem was to the west, the newly independent state of Armenia, with which war had broken out over the disputed enclave Nagorno-Karabakh. Armenia, with some Russian support, was victorious; 800,000 ethnic Azeris, primarily from Nagorno-Karabakh, became refugees and “internally displaced peoples,” living in tent cities and corrugated tin huts and whatever else Azerbaijan could find for them. This displacement—equivalent to 10 percent of the Azeri population—added to the woes of what was already an impoverished country, with a broken-down infrastructure and teetering on economic collapse.

  In the first years of the 1990s, various consortia of international oil companies pursued what has been described as “disruptive and complex negotiations” with successive Azeri governments, which had largely come to naught. The country itself seemed to be entrapped in endemic instability and insurgencies, and, as various clans struggled for power, headed toward civil war.8

  “THE NATIVE SON”

  During Soviet times, Heydar Aliyev had risen to the pinnacle of power in Azerbaijan, initially as a KGB general and then head of the local KGB, and then as first secretary of the Azeri Communist Party. He had subsequently moved to Moscow and into the ruling Politburo, becoming for a time one of the most powerful men in the Soviet Union. But after a fiery falling-out with Mikhail Gorbachev and a spectacular fall from power, he was expelled not only from the Politburo but also from Moscow, and denied even an apartment back in Baku. He returned to his boyhood home, Nakhichevan, an isolated corner of Azerbaijan, which, after the collapse of the Soviet Union, was cut off from the rest of the country by Armenia and was reachable only by occasional air flights from Baku. While in this internal exile, he discovered his new vocation and identity—no longer as a “Soviet man,” but, as he put it, as a “native son.” He bided his time.

  With the political battle in Baku getting even hotter and the country teetering on civil war, he returned to the capital city and, in 1993, amid an attempted insurrection, took over as president. At age seventy, Aliyev was back in power. He brought stability. He also brought great skill to the job. “I’ve been in politics a long time, and I’ve seen it all from inside out as part of the core leadership of a world superpower,” he said not long after taking power. He was now an Azeri nationalist. He was also a proven master of tactics and a brilliant strategist. He would use Azerbaijan’s oil potential to turn the country into a real nation, and to enlist key nations in support of its integrity, and, in the process of doing all of this, ensure his own primacy and control. But he also knew the Russians and the mentality of Moscow as well as anyone, and he understood clearly how to deal with the Russians and how far he could safely tread out on his own path.9

  “THE DEAL OF THE CENTURY”

  In September 1994, Aliyev assembled a host of diplomats and oil executives in the Gulistan Palace banquet hall in Baku for the signing of what he proclaimed the “deal of the century.” The signatories included ten oil companies—representing six different nations—that belonged to what was now the Azerbaijan International Operating Company (AIOC) plus the State Oil Company of Azerbaijan Republic (SOCAR), the Azeri state company. BP and Amoco were the dominant Western companies, but also, and of great significance, in the deal was Lukoil, the Russian company. Later the Japanese trading company Itochu joined the AIOC, bringing the number of national flags to seven. Given the complexities and uncertainties, some mumbled that a better sobriquet than “deal of the century” would be “Mission Impossible.” After all, how was this going to get done? And how was landlocked Azerbaijan ever going to get its oil to the world market? Yet as the CEO of one of the Western companies put it, “the oil had to go somewhere.”10

  Moreover, even with Aliyev in power, the political situation was far from stable. Baku was under nightly curfew, and, shortly after the signing of the “deal of the century,” two of Aliyev’s closest aides were assassinated, including his security chief, to be followed by a failed military coup.

  The object of the “deal of the century” was the huge Azeri-Chirag-Gunashli field (ACG) in the Aspheron trend, seventy-five miles offshore. It had been discovered prior to the collapse of the Soviet Union, but it was a mostly undeveloped project, and a very challenging one. Much of it had proved well beyond the technological capabilities of the Soviet oil industry. However, during Soviet times, development had started in a more shallow corner of the field, and if the platform could be successfully refurbished and upgraded to international standards, some early production would be possible. This would become known as Early Oil. It was desirable, because it would create an early income stream and, perhaps even more important, build confidence among the AIOC shareholders.

  WHAT ROUTE FOR EARLY OIL?

  But Early Oil was also highly contentious, for it would create a big and immediate problem. How to get the oil out? Once ashore, some of it could be shipped in railway tank cars, just as in the nineteenth century, but that was a limited and hardly satisfactory alternative.

  The only obvious answer was a pipeline. And, with that answer, the Caspian Derby turned clamorous. By reversing directions, the oil could go north through the existing Russian pipeline system, which is of course exactly what the Russians wanted. But that would also have given Russia very considerable leverage over Azerbaijan’s economic and political fate, and the United States strenuously opposed it.

  The other option for the Early Oil pipeline was to go west into Georgia and to the Black Sea, where tankers would pick up the oil and carry it through the Bosporus to the Mediterranean—a route that tracked what had been the main outlet for nineteenth-century Baku oil. But that would make Azerbaijan dependent on Georgia, which was wracked by separatist struggles and which had a very tense and uneasy relationship with Russia. This route would also be a great deal more expensive, entailing much more construction in difficult terrain. The AIOC was under great pressure to choose. The Azeris needed revenues ; the companies needed clarity. But the United States and Russia were at loggerheads. Yet something needed to be done. One way or the other, Early Oil was coming.

  THE TWO-TRACK STRATEGY: “OFFEND NO ONE”

  In a nondescript conference room in central London, some senior AIOC staff and a small group of oil and regional experts debated the choices—“Early Oil Goes North” and “Early Oil Goes West”—and the likely backlash to each. It was recog
nized that “an unequivocal choice in either direction would be perilous from the standpoint of political risk.”

  Finally, one of the participants who had sat quietly in the corner spoke up. Why choose ? he asked. Why not do both? The more pipelines, the better. Even if the cost was higher, dual pipelines would provide more security. It would be a great insurance policy. That approach would also help assure speed and discourage foot dragging—since the AIOC could always threaten to go with the “other” option. So taken together, two routes made a lot of sense.11

  Of course, one had to start somewhere. And that meant starting with the Russian route. After all, a pipeline was in place. The politics were right.

  Heydar Aliyev saw it that way. On a dreary, cold February night in 1995, in his office in the hills above Baku, Aliyev gave his marching instructions both to Terence Adams, the head of the AIOC, and to the head of SOCAR. Nothing should be done that would “alienate” the Russians, said the president. It was too risky. A contract had to be signed with the Russians before anything else was done. “The geopolitical imperative could not have been made clearer for Baku oil diplomacy,” Adams later said. The president made one other thing very clear. Failure in any form would be a major disaster for Azerbaijan, and thus would certainly also be a disaster for AIOC and personally for all those involved. He looked hard at both men. At the same time, Aliyev emphasized that the relationship with the United States was also essential to his strategy. His message to the oil companies was challenging but clear: “Offend no one.”

  Things were also changing with the United States. There had been a very sharp debate in Washington between those highly suspicious of Russia, who favored an “anything but Russia” pipeline policy, and those who believed that a collaborative approach with Moscow was required for the development of energy resources and transportation in the former Soviet Union. And, in the latter view, that development was necessary to meet the two objectives: helping to consolidate the nationhood of the newly independent states and enhancing energy security by bringing additional supplies to the world market. In due course, matters were generally—although never completely—resolved in favor of the more collaborative approach. In February 1996, the northern route won official approval.12

  Agreement for the western Early Oil route soon followed. For its part, the Georgian route offered a counterbalance to the Russians. Getting this plan done drew upon the personal relationship between Aliyev and Georgian president Eduard Shevardnadze, whose career, like Aliyev’s, had tracked from the local communist security service to leader of the Georgian communist party to the pinnacle of Soviet power in the Kremlin as Mikhail Gorbachev’s foreign minister—and, thus, the opposite number of U.S. Secretary of State James Baker in negotiating the end of the Cold War. Now Shevardnadze, who had returned as president to Georgia after the breakup of the Soviet Union, was negotiating a pipeline whose transit fees would be important to keeping impoverished, independent Georgia afloat. Even more important was the geopolitical capital that Georgia gained from U.S., British, and Turkish engagement with which to balance against the Russian giant to the north.

  PIPELINE POLITICS

  The battles over pipeline routes for oil and gas became known as the Caspian Derby.

  Source: IHS CERA

  By 1999 both Early Oil export lines were operating. The western route tracked the old wooden pipeline built by the Nobels in the nineteenth century. The Russian northern line passed through Chechnya, where in that same year the second Chechen War would erupt between Russian forces and Islamic rebels. That conflict forced the shutdown of the Russian pipeline. This proved the insurance value of a second, western Early Oil line through Georgia.

  That took care of Early Oil. Meanwhile, as the decade progressed, the technical challenges were being surmounted offshore of Azerbaijan, and it was clear that very substantial additional production would begin in the new century. The resources had been “proved up”: oil could actually be economically extracted in large volumes from beneath the Caspian Waters.

  WHAT ROUTE FOR THE MAIN PIPELINE?

  Now that the resources were bankable, a main export pipeline capable of transporting much greater volumes had to be built. It was back to the same battles as over Early Oil. This time, however, there could be only one pipeline. Given the costs and scale, the difference could not be split between two lines. The Russians, of course, wanted the pipeline to go north and flow into their national pipeline system, which would give them some degree of control and leverage over the Caspian resources. Another option was to go through Georgia. But in both cases, the oil would have to be picked up by tankers that would carry it across the Black Sea and then sail through the Bosporus, the narrow strait that runs through the middle of Istanbul. And that was a big problem.

  The Bosporus, which connects the Black Sea and the Mediterranean and is the demarcation between Europe and Asia, has loomed large throughout history. It was on its banks that, in the fourth century A.D., the Roman emperor Constantine established his new eastern capital—Constantinople—in order to better manage the far-flung Roman Empire. In more recent centuries, it was of great strategic importance for both the Russian and Soviet empires, as the only warm-water ports for their fleets were on the Black Sea, and their warships had to pass through the Bosporus to reach the world’s oceans.

  But the Bosporus was becoming increasingly crowded with the growing fleet of oil tankers that would carry Russian and Caspian oil to the world’s markets. And the Bosporus was no isolated waterway; it ran right through the middle of Istanbul (as Constantinople had been officially renamed in 1930), a city of 11 million people. Turkey was apprehensive of a major tanker accident in what in effect was Istanbul’s living room. And with good reason. The 19-mile waterway has 12 turns. Its narrowest point is 739 yards, which requires a 45-degree turn. Another turn is 80 degrees, almost a right angle. 13

  There was still another option for the main outlet, and in dollars and cents, the cheapest of all. Go south and deliver oil to refineries in northern Iran, which would supply Tehran. And then swap an equivalent amount of oil from fields in the south of Iran for export via the Persian Gulf. Hence, it would not be necessary to build a pipeline through Iran. Such a swap was the least cost option in economic terms. But it was wholly unacceptable to the United States and other Western countries, and thus a complete nonstarter. It would not only have bolstered Iran, but would have given the nation the trigger finger over Azerbaijan’s future, which was hardly something that Heydar Aliyev wanted. Moreover, it would have completely undercut the whole quest for diversification and energy security by putting more oil into the Persian Gulf and increasing dependence on the Strait of Hormuz, when the whole point was to diversify away from it.

  There was one more option—go west, skirting around Armenia into Georgia, and then turn left near the Georgian capital of Tbilisi and head south down through Turkey to its port of Ceyhan on the Mediterranean. This was the most logical route. The problems with the proposed BTC pipeline—Baku to Tbilisi to Ceyhan—were two: First, it would be one of the longest oil export pipelines in the world, and the engineering challenges over the tall peaks of the Caucasus were enormous. And, second, it was by far the most expensive route. It was very difficult to make the economics work.

  As decision time approached, the arguments over the main pipeline became increasingly fierce. The Russians were out to scuttle the project. The Azeris clearly wanted it, as did the Turks. Both pressed BP to push it forward. For a time, it seemed that the United States was most vociferous proponent of all for Baku-Tbilisi-Ceyhan. Its representatives took every opportunity to argue the case, sometimes with a force that surprised and even shocked other participants in the debate. For Washington, the thought that the main export pipeline could possibly go through Russia was unacceptable. The risk was too great.

  Madeleine Albright, Bill Clinton’s secretary of state, privately summed up the matter at the time. One afternoon, sitting in a little room on the seventh floor of
the State Department, she said, “We don’t want to wake up ten years from now and have all of us ask ourselves why in the world we made a mistake and didn’t build that pipeline.”

  “NOW IS THE MOMENT”

  For half a decade, an annual conference, the “Tale of Three Seas” (Caspian, Black, and Mediterranean), had been convening in Istanbul each June. It would start in the evening, as the sun went down, in a hillside garden overlooking the Bosporus, with a soothing outdoor concert by what was called the “Orchestra of the Three Seas.” Its music was meant to symbolize the healing of all the historic breaches that needed to be healed, for its members were drawn from the Caucasus and Central Asia and from a number of Arab countries, as well as Israel.

  And then, the next day, all the harmonies would disappear as the raucous Caspian Derby began in earnest. Year after year, the conference sessions and the corridors were the scene of agitated arguments and increasingly vocal debate over pipeline routes—and, at least once, a shoving match among very senior people.

  The conference dinner, on a warm summer night in June 2001, was held in the Esma Sultan Palace, with a sweeping view over the Bosporus. The speaker was John Browne, the chief executive of BP, now the dominant company among the shareholders of the AIOC. He stressed that the Bosporus simply could not take any more tanker traffic. “The risks of relying solely on this route would become too high. Another solution is necessary,” he said. And that solution was “a new export pipeline”—the Baku-Tbilisi-Ceyhan line.