Caspian Oil Boom Prospects Suffer Setback

By Sebastian Alison

BAKU (Reuters)–Prospects for a much-vaunted Caspian oil boom were looking bleak on Wednesday as one consortium pulled out of a project in Azerbaijan and a pipeline plan appeared to be facing major delays.

The Caspian International Pipeline Consortium–led by US Pennzoil–told Reuters it would almost certainly drop plans to develop the Karabakh field offshore Azerbaijan as reserves were too low.

At the same time the only international consortium already producing oil offshore Azerbaijan may well not decide on an export route for that oil for the foreseeable future as members are nowhere near agreeing a common position.

All this as the price of oil has plunged to levels which put the value of Caspian product under pressure.

"If demand doesn’t take off Caspian oil may become marginal–even non-viable. It’s already on a knife-edge and needs to be exported in volume," said one Western diplomat.

Azerbaijan International Operating Consortium–a 12-member group developing three fields in the Caspian–is meeting on Thursday and Friday to discuss a preferred choice for an export pipeline route.

AIOC made clear last week that there was no real chance a recommendation on the route would be handed to the Azeri government–which will take the final decision–this year.

Members of the consortium have agreed a confidentiality deal and will not discuss the content of the talks.

But industry sources in Baku close to the Turkish interest in the consortium told Reuters on Wednesday that there were serious tensions within AIOC.

"Some members are insisting on pushing Turkey into a corner to force (Turkey) to put money into it for their own benefit," an industry source said.

Asked if members were actively looking for a quick decision on the route–he replied: "We are starting to doubt if that is the case–as long as the oil price keeps declining."

When asked if he thought AIOC may put off a decision for months or even longer–he replied: "That might be."

At issue is a pipeline to carry up to a million barrels per day (bpd) of AIOC and other production to markets.

AIOC says output will exceed the capacity of the existing infrastructure by 2003. By then–either a new export line must be in place or production will have to be shut in.

AIOC is considering three routes: from Baku to Ceyhan in Turkey–to Supsa in Georgia and to Novorossiisk in Russia.

The Turkish–Russian and Azeri governmen’s favor the Ceyhan route but many AIOC members favor Supsa as shorter and cheaper.

Turkish TPAO–with 6.75 percent of the project–is state-owned and unlikely to back any option except Baku-Ceyhan.

While internal disputes rumble on and prevent AIOC even deciding its preference–the recent crash in oil prices is making the viability of the whole project look questionable.

AIOC data showed that given a crude price of $21 per barrel–the value of oil from the AIOC fields alone over the whole 30-year life of the project would be $40 billion if sent to Ceyhan at a cost of $2 per barrel–or over $50 billion if sent to Supsa at $2 per barrel.

By contrast–at a crude price of $12 per barrel–the value dropped to well under $10 billion over the life of the project if exported to Ceyhan.

Brent crude futures on London’s International Petroleum Exchange were barely above $10 per barrel on Wednesday.

The Western diplomatic source told Reuters he would not be surprised if AIOC was deliberately stalling for time given current price levels.

Some have said Caspian oil would already be loss-making at current prices. But a source at one AIOC member company pointed out a pipeline could not be completed before 2003 at the earliest.

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