Caucasus Conflict Raises Energy Transit Worries

BAKU/MOSCOW (Reuters)–Armed conflict between Russia and Georgia, combined with the impact of a pipeline fire in Turkey, has highlighted the Caucasus’ fragility as an energy transit zone.

But it is still highly prized by the European Union as a way of reducing its dependence on Russian oil and gas and the first route to take energy from the Caspian Sea to the West that avoids Russian soil passes through Georgia.

"Russia has a very clear strategy and would prefer Europe’s gas to go via Russia and not via independent countries," said Dieter Helm of Oxford University. "There is no definite attempt to disrupt supplies … but it is not unhelpful to Russia that there is unrest."

The greatest disruption in the region happened before conflict erupted last Thursday when Georgia attacked South Ossetia, a pro-Russian province that threw off Georgian rule in the 1990s.

Around 850,000 barrels per day (bpd) of crude oil stopped flowing through the Baku-Tbilisi-Ceyhan (BTC) pipeline last week after an explosion on Turkish territory claimed by the Kurdistan Workers Party (PKK).

The pipeline, which ships high quality crude from the Azeri section of the Caspian and is expected to have a capacity of 1.2 million bpd next year, could be closed for two weeks, sources have said.

Industry sources said on Monday Azerbaijan had used rail and oil tankers to re-route some crude that would have been pumped through the BTC pipeline to the Turkish Mediterranean port of Ceyhan, but other options were limited.

Following the bombing campaign over Georgia, small amounts of shipmen’s through the Black Sea ports of Poti and Batumi have been suspended. As a result, Azerbaijan’s state oil company, SOCAR, has asked the Russian pipeline firm Transneft to double the flow of Azeri oil along the Baku-Novorossiisk pipeline, Interfax reported Saturday, citing Transneft Vice President Mikhail Barkov.

The ports are used for exporting oil products by other Caspian Sea exporters, such as Kazakhstan or Turkmen’stan, as well as for Azeri crude.

Exports of Azeri, Kazakh and Turkmen crude and oil products from and through Azerbaijan stood at around 1.3 million barrels per day in early August. They had fallen to 350,000 bpd at the end of last week, according to data from traders and government officials.

The disruption has given some support to bearish international oil markets.

But the price reaction was subdued as evidence of slowing international oil demand offset supply outages and analysts waited to assess the full impact.

"The shine hasn’t quite come off the Azeri star just yet, as it is unclear quite how severe or long-lasting the interruption in supplies through this corridor will be," UBS bank said in a note. "Nor is it clear yet what risks now hang over this pipeline."

The European Union is so keen to avoid over-reliance on Russian supplies, which have also proved unreliable in the past, that Caspian supplies retain appeal. The European Union relies on Russia for about 25 percent of its gas needs.

It has thrown its weight behind the Nabucco pipeline, which is expected to be operational in 2013 and would transport Caspian gas to Turkey and then into Western Europe.

Helm said the current conflict underlined the need for governmen’s to take a tougher line.

"For Europe the lesson is clear. Nabucco and related projects cannot be left entirely to the private companies. Caspian resources need protection from governmen’s," Helm said.

Other analysts said the chances conflict would disrupt the main gas and oil pipelines flowing through Georgia remained low.

"We put a really low probability on the pipelines being affected. It would require a significant escalation of the conflict," said Ana Jelenkovic of Eurasia Group.

A trader with a Western major, a shareholder in the Baku-Ceyhan pipeline, also said it was premature to come to pessimistic conclusions about Azeri oil export prospects.

"I would not get too hysterical about it. If the pipeline to Ceyhan does not resume work within two weeks, it will happen within three weeks. The Turks will raise security, the Russia’s are unlikely to intervene and all will be fine again," he said.

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