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I sent this out earlier today, but it doesn't
seem to have got anywhere. If it appears twice, please
forgive.
Ed
----- Original Message -----
From: Ed Weick
Sent: Tuesday, May 24, 2005 10:27 AM
Subject: Bad news for the oil patch For a few days now, the Business section of the
Globe&Mail has been carrying a series of articles on the state of oil.
Today's main article concerns the Caspian Sea, which until recently was viewed
as a major alternative source of oil to the troublesome Middle East. It
was believed to contain reserves of 200 billion bbls., not much less than Saudi
Arabia. A $3.6 billion pipeline has been built from Baku in Azerbaijan to
Ceyhan, Turkey, on Mediterranean. Now, as the G&M sadly reports,
it appears that estimates of Caspian reserves were greatly exaggerated.
They may be no larger than 35 billion bbls. and as small as some 8 billion
bbls. The final paragraph of the article sums it up:
Time to trade those suburban assault
vehicles in for smart cars?
Ed
The great Caspian Sea adventureOne of the biggest pipelines ever is set to turn on the taps in Azerbaijan, says MARK MacKINNON. After years of hype, the question is: How much oil is there, really?BAKU -- Tomorrow morning, amid expected fanfare at BP PLC's gleaming Sangachal terminal on Azerbaijan's Caspian Sea coast, crude oil will finally start to flow into one of the most significant and expensive pipelines ever built. It's a day that, once upon a time, was supposed to forever alter global oil markets, making prices fall at the gas station near you and finally lessening the West's reliance on the Organization of Petroleum Exporting Countries. But after 10 years of hype, the Caspian oil balloon has burst. When the first crude begins its winding 1,760-kilometre path through mountain passes and around conflict zones on its way to Turkey's Mediterranean port of Ceyhan, few will be expecting it to have much of an impact on oil prices. Instead, the question that will be asked is: How much more oil is there, really? And how did so many get so badly snookered? The $3.6-billion (U.S.) Baku-Tbilisi-Ceyhan, or BTC, pipeline, was born of the excited chatter that surrounded the Caspian in the early 1990s, when there was a mad stampede to the region, which had previously been sealed behind the walls of the Soviet Union. Big oil firms spoke fantastically of a "new Middle East" without the tormented politics of that region. Tiny Azerbaijan, a former Soviet republic in a very strategic position, was to become the next Kuwait. Diversifying has become the buzzword of a Western world hooked on Middle Eastern oil after Sept. 11, 2001, when the perils of counting on the volatile Persian Gulf for supply were made all too clear. Since then, oil companies have scoured every corner of the planet, looking for the big find that could cut down reliance on OPEC. Back in the 1990s, the U.S. State Department was the lead cheerleader behind the boom, telling analysts and oilmen that there were up to 200 billion barrels of crude under the choppy black waters of the Caspian Sea, a figure comparable only to the 262 billion barrels believed to sit beneath the sands of Saudi Arabia. No less a figure than Dick Cheney, then the plugged-in chief executive officer of oil services giant Halliburton Co., got caught up in the excitement. "I cannot think of a time when we have had a region emerge as suddenly to become as strategically significant as the Caspian," he said in 1998. At Washington's urging, the BTC was born along its incredibly complex route through Azerbaijan, Georgia and Turkey to make sure the oil got to Western markets without dallying in Iran or Russia (the route via Iran would have been far shorter and cheaper). The end terminal, at Ceyhan, sits not coincidentally near the U.S. air force base at Incirlik. Before the rush, Azerbaijan, home to a mainly Muslim population of 7.6 million at the southeastern end of the Caucasus mountain range, was a forgotten and crumbling backwater at war with its neighbour, Armenia, over the disputed province of Nagorno-Karabakh. Today, an uneasy peace holds on that border, and the money that followed the oil to Azerbaijan is visible on the skyline of its capital city, Baku, where Western-style apartment buildings and glitzy hotels have sprung up to surround its stone-walled old city centre. But just as the crude is finally starting to creep westward, it's becoming clear that there's much, much less oil in the region than had been originally trumpeted. Instead of the 200 billion barrels predicted in 1995, most estimates now put the figure at somewhere between 17 and 32 billion, most of it on the other side of the Caspian from Azerbaijan, in the waters off Kazakhstan. BTC will still bring a desperately awaited one million barrels a day to market once it hits full capacity in an estimated four years' time, but -- in providing perhaps 3 per cent of global supply -- it's going to do nothing to change the West's reliance on the House of Saud. "I think that there were some people that did exaggerate the amount of oil reserves in the Caspian. That is without doubt," said Michael Townsend, executive director of BTC Co., the BP-run company managing the pipeline. "It's not another Middle East. It's more similar to another North Sea, or Algeria, or Norway." Sitting in BP's head office in central Baku, a former Communist Party office known locally as the "Villa Petrolea," Mr. Townsend labels the initial filling of the BTC a major accomplishment for his company, coming after years of delays caused by environmental concerns, cost overruns and political wrangling. There were always dissenters about how much crude lay in the Caspian basin. The London-based International Institute for Strategic Studies issued a report in 1998 that said the State Department estimate was "an order of magnitude away from reality" and that there was likely somewhere between 25 billion and 35 billion barrels, including discoveries not yet made. The respected Oil and Gas Journal gave an even more low-ball figure -- saying proved reserves totalled only eight billion barrels. But the State Department figure, developed with the U.S. Department of Energy and published in a report to Congress in 1995, was the one many here say drove the rush to Baku. Three years later, a State Department official admitted the number was "speculative." "The 200 billion figure was never really realistic, but people believed it because it was official," said Robert Cutler, a Montreal-based researcher specializing in the Caspian region. He said it was intensely promoted by the Clinton administration because it suited American geopolitical aims to draw Western investment to countries such as Azerbaijan and Georgia so as to pull them out of Russia's orbit. In September, 1994, at the height of the hype, Azerbaijan signed a $7.4-billion production sharing pact with 11 foreign oil majors to develop the initial Azeri-Chirag-Guneshli field. But, perhaps unsurprisingly in a country ranked 140th out of 146 countries on Transparency International's annual corruption index, the oil isn't where Azeri geological maps said it would be. Only one significant discovery has been made since the fall. While Azeri-Chirag-Guneshli has played out largely according to expectations so far, producing 130,000 barrels a day, other majors that signed in its wake have hit dry well after dry well. Of 15 production-sharing agreements signed in the Azeri sector of the Caspian since then, only two have proven commercially viable. For those companies who did flock to the region in those years, the problem has flipped from how to build enough pipelines to get all that oil to market, to how to find enough oil to keep the pipelines filled and economically viable. The first oil from the BTC is expected to be boarded onto ships at Ceyhan and heading to market by year's end. Mr. Townsend admits the pipeline will not be full the whole time, but says it still makes economic sense even if it is used only to pump out Azerbaijan's recoverable reserves over the next 20 years. He dismisses two studies by independent American think tanks, the Cato Institute and the Carnegie Endowment for International Peace, that suggested BTC will require hundreds of millions of dollars in subsidies to break even. But in the next breath he adds that he's working hard to persuade Kazakh officials to ship their oil via BTC, rather than the current route through Russia to the port of Novorossiisk. BP, however, has done better than most through Azerbaijan's boom-gone-bust. Other oil majors who rushed to Baku have come away bruised. In March, Exxon Mobil Corp. announced it would quit exploring two fields it owns off the coast of Azerbaijan after spending $150-million at one of them only to find nothing. It is so sure that there is nothing commercially viable at the second field that it has offered to pay the government $27-million to escape its exploration contract. While swearing that it has not given up entirely on Azerbaijan, Exxon decided to slash its staff at its Baku office. Late last year, the Russian oil major OAO Lukoil also cut back its involvement after an expensive series of dry wells. There's little hope left that the excitement of the 1990s will ever be justified. "Azerbaijan is one of the most drilled countries on the face of the earth," said Raymond Conway, an Albertan who works as senior banker in the Baku office of the European Bank for Reconstruction and Development, a major backer of the BTC project. "There could still be some major finds, but I don't think anyone here expects that to occur." |
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