U.S. Caspian Energy Diplomacy: What Has Changed?

"U.S. Caspian Energy Diplomacy: What Has Changed?"
Ambassador Elizabeth Jones, Senior Advisor for Caspian Basin Energy Diplomacy
Caspian Studies Program, Harvard University
April 11, 2001

Summary by Emily van Buskirk

Ambassador Elizabeth Jones, Senior Advisor for Caspian Basin Energy Diplomacy, spoke on the topic, "U.S. Caspian Energy Diplomacy: What Has Changed?" on April 11, 2001 at the John F. Kennedy School of Government. Regional specialists, students, professors, journalists, and energy industry representatives attended the on-the-record seminar, sponsored by Harvard's Caspian Studies Program (CSP) and chaired by Graham Allison, Director of the Belfer Center for Science and International Affairs and chair of CSP.

Ambassador Jones began by outlining the four strategic goals that define U.S. policies toward the Caspian Region: (1) to support the independence and sovereignty of states in the region; (2) to promote economic integration and interdependence among the Caspian states and also between them and Turkey; (3) to secure reliable sources of energy and exports to the world market that are safe from disruption (i.e. not exclusively reliant on the Bosphorous Straits); and (4) to support U.S. business interests and investment in the region.

These goals are not new. However, the Ambassador remarked on a change in the way the new Administration talks about the oil pipeline that will run from Baku, Azerbaijan through Tbilisi, Georgia, to the Turkish port of Ceyhan. Jones made it clear that while the pipeline itself is not an American strategic interest, the U.S. Government promoted and continues to promote it-as a commercially viable project-because it is seen as one of several ways to implement these U.S. strategic goals. "The BTC pipeline is," she continued, "a strategic interest of Azerbaijan, Georgia, and Turkey."

Ambassador Jones next spoke about the history of the BTC pipeline and U.S. involvement in its planning. In the early nineteen nineties, when newly independent Kazakhstan and Azerbaijan began to increase oil production and exports, the existing pipeline system led through Russia. Moscow used the pipelines as political leverage, "turning off the spigots" when the Caspian states acted in ways that were seen as threatening Russia's interests (such as joining NATO's Partnership for Peace). To guard against dependence on Russia and also prevent dependence on Iran, which would have an interest in controlling Caspian oil because it is a competitor in the oil market, the U.S. supported a policy of multiple pipelines, starting with the Caspian Pipeline Consortium project. Subsequently, Azerbaijan, Turkey and Georgia decided on the idea of the Baku-Ceyhan pipeline. They sought and received U.S. support for this East-West energy transportation route.

However, there was a great deal of skepticism about the pipeline, because of its length (1073 miles), the uncertainty of sufficient volumes to make it commercially viable, and because it would pass through three countries with varying degrees of political stability. The U.S. became involved in the project to help create and sustain the political and economic conditions that made implementation of this commercial project possible. U.S. involvement helps address these issues and reduces skepticism, according to Jones. The U.S. eventually created the position of Special Advisor for Caspian Energy Issues in August 1998. In this post, Ambassador Richard Morningstar and his successor Ambassador John Wolf helped the host governments come to agreement on pipeline support, basic tariffs, customs arrangements, cost overruns, and other key issues. The pipeline signing ceremony, which was held on the sidelines of the OSCE Summit in Istanbul (November 1999) and attended by President Clinton, represented a "psychological breakthrough" for the governments and the companies who joined the Sponsors' Group, Jones remarked.

Russia, on the other hand, was not pleased by BTC and U.S. involvement in the project -"particularly because of a tendency among the Russians to see power relations in zero-sum terms." Ambassador Jones reiterated U.S. support for the Caspian Pipeline Consortium (CPC) pipeline, recently completed, which runs from Western Kazakhstan to Russia's port of Novorossiisk, mentioning that the U.S. "worked day and night" on CPC. "BTC is not meant to replace CPC, but to be an addition to it," she explained. Russia, however, has seen the growing number of Western companies doing work in the Caspian as a threat to its interests. For this reason, in Jones' view, Russia adopted the strategy of working against the negotiations to demarcate legal boundaries in the Caspian Sea. However, failure to define boundaries did not keep Western companies from setting up production operations in areas that were certain not to change hands, and Russian companies, wanting a piece of the pie, began to pressure their government to seek seabed demarcation. Moscow negotiated agreements with Kazakhstan and Azerbaijan. Russia's Caspian envoy, Viktor Kalyuzhny, in reverting to a focus on demarcation, may have thought this was a way to slow progress on BTC. The fact is, the U.S. warmly welcomes his efforts to conclude agreements on demarcation among the littoral states; demarcation is not an impediment to BTC, because this project does not involve a pipeline across the Caspian.

On the subject of Iran, Ambassador Jones stated, "nothing has changed." She predicted that Iran would not change sufficiently as to affect trends in Caspian energy development in the foreseeable future. While the election of President Khatami and the subsequent parliamentary elections saw the strengthening of reformers, encouraging the U.S. to slightly reform its sanctions regime, in general the debate between Iranian conservatives and reformers about whether to engage the U.S. is unresolved. Jones put forward her opinion that the Bush administration is unlikely to support lifting the Iranian sanctions when the Iran Libya Sanctions Act (ILSA) comes up for renewal in August. "The bottom line is that Iran still supports terrorism, is attempting to acquire Weapons of Mass Destruction (WMD), and stands opposed to the Middle East Peace process," she reiterated. Jones said her judgment is that the Administration would find it difficult to lift sanctions, because of strong views in Congress that Iran has not earned this improved treatment.

To update the audience on the changing business picture in the Caspian, Ambassador Jones emphasized the importance of the Istanbul agreements that determined the baseline tariffs and host government agreements for BTC. She also noted that the environmental hazards of tanker traffic through the Bosphorous have lately become more and more clear to the oil companies. It is practically inevitable that there will be another oil spill there, and when it happens, the companies have decided that they need an alternative export route. Even some of the companies in the Caspian Pipeline Consortium may need an alternative to the Bosphorous.

Finally, Ambassador Jones gave an update on BTC pipeline progress, mentioning the Memorandum of Understanding signed by representatives of the Kazakhstani government and the countries already participating in the BTC project on March 2, 2001, in which Kazakhstan pledged to participate in BTC. Although Kazakhstani President Nazarbayev had said previously that he intended to ship early oil from Kashagan through BTC, it is a fact that Kazakhstan as a government does not have oil volumes to commit. However, Nazarbayev's strong political support for Aktau-Baku-Tbilisi-Ceyhan (as the Kazakhstani Presidetn and others have started to call it) is an important step in enhancing the pipeline's commercial viability. His government is now working with the producing companies to agree on internal tariffs, port and barge arrangements. Companies will be encouraged to participate when they know what the transportation costs will be. As further progress, Jones reported that Viktor Kalyuzhny recently said publicly that "Russia no longer opposes BTC as long as it is commercially viable," a very important change in the Russian position. Jones also mentioned that the basic engineering studies are underway, after which (in May/June) the companies can decide to move to detailed engineering studies. When these studies are complete, financing and volumes still need to be in place before construction will begin. Speculation about alternatives to BTC (swaps with Iran, temporary expansion of Baku-Supsa, etc.) are likely to continue until the final stages.

Discussion
Ambassador Jones elaborated on additional points during the question and answer discussion. Below are the highlights.

What if the companies decide to take an extra year to conduct studies on BTC?
The companies are under certain time restrictions, because many of the Production Sharing Agreements (PSAs) expire in 2024. It is in the companies' best interests to ship as soon as possible, especially because their upstream investment is much bigger than the cost of the pipeline. Finally, Jones noted, the companies would not take such a decision before first talking to Azerbaijan, Georgia, and Turkey. Only if it is in everyone's interests to do so would a decision to delay be likely.

What is the nature of competition between Russia and the Caspian States (esp. Turkmenistan and Azerbaijan) for the Turkish gas market?
Turkmenistan's actions seem to be independent and unpredictable, Jones began. There is also the outstanding issue, she continued, as to how much gas Turkey can absorb. One possible idea is that since demand for gas in the European Union is growing, Turkey could become a gas transit country in addition to being a consumer. Russian gas contracts with Europe would remain in place, of course.

There have been rumors that the Key West peace talks on Nagorno-Karabakh are related to the idea of rerouting Baku-Ceyhan through Armenia, instead of Georgia. Is there any truth to these statements?
Jones restated that the intergovernmental agreements signed in Istanbul set the pipeline route through Georgia. It would not be appropriate to make the pipeline contingent on a peace plan or vice versa.

Some say that over the past ten years, economic dependence on Russia is being gradually replaced by economic dependence on the United States. Would you agree, and do you think that the United States can stand up to Russia on behalf of the new Caspian States or would it give the region up?

"There cannot be economic 'dependence' on the United States," Jones answered. "We do not have the kind of relationships with these countries that Russia once did." But the U.S. has developed good relations with the countries in the region, including with Russia, in which the U.S. pursues its interests: economic development, democratic development, independence and sovereignty. Together with the EU, the U.S. has countered Russian pressure in certain cases, as when Russia turned off gas supplies to Georgia. Finally, Jones reminded, it is not for the U.S. to "give up" a region. The Caspian states themselves determine their own orientation and are masters of their own futures.

* * *
The seminar concluded with a few further questions and responses. Later in the afternoon, Ambassador Jones discussed U.S. policy toward the Caspian and a Kennedy School case study with students from Graham Allison and Robert Blackwill's course, Central Issues of American Foreign Policy.