Two days before hostilities erupted in South Ossetia on Aug. 8, the crown jewel of Western Caspian investment, the $3.6 billion, 1 million-barrel-per-day, 1,092-mile Baku-Tbilisi-Ceyhan pipeline, which began filling operations in May 2005 and is owned by an international consortium, was damaged by an attack claimed by the Kurdish separatist group PKK on Turkey's Refahiye section of the line. BTC operator BP declared force majeure and shut the pipeline, leaving Azerbaijan scrambling for alternatives. The State Oil Co. of the Azerbaijan Republic has a 25-percent share in BTC. Because of disruptions on the BTC pipeline, BP Azerbaijan cut oil production by roughly 70 percent as it frantically searched for alternative export routes. Shipments only resumed on Aug. 26 after extensive repairs.

Baku decided to redirect its output through Georgia's 90,000 bpd Baku-Supsa line, also known as the Western Route Export Pipeline, idled since 2006 for repairs and reopened in June, as well as sending 50,000 to 70,000 bpd oil shipments via rail from the Azeri maritime terminal of Dubendi to Georgia's Black Sea Batumi port and Kulevi oil terminal near Poti. On Aug. 12, however, BP, the operator of Baku-Supsa, shut the line as a precautionary measure.

As a result of all the chaos, Baku was forced to turn to its old adversary Russia's pipeline monopoly Transneft, which agreed to allow Azerbaijan to resume using the Baku-Novorossiisk pipeline. Baku-Novorossiisk had been Azerbaijan's sole export option following the collapse of the Soviet Union when, in 1994, Azeri President Geidar Aliyev signed the "contract of the century" -- a $7.4 billion production-sharing agreement with Western oil companies that led to a massive increase in Azeri oil production. Azeri oil exports only began to be weaned from the Transneft monopoly with the opening of Baku-Supsa in 1999. Moscow's generosity amid the Ossetia confrontation meant that Azeri hydrocarbons were again flowing through Russian territory via the line, but at an extremely reduced rate, because Baku can export only 7 percent to 8 percent of BTC's volume via Baku-Novorossiisk.

On Aug. 23 Azerbaijan subsequently sent an indeterminate amount of oil to Iran for export, because of the disruption, to the Iranian Oil Terminals Co. under a swap arrangement, an arrangement that pleased Tehran as much as it must have distressed Washington; Iran subsequently informed Baku that while it could currently handle 200,000 bpd of Caspian and Central Asian crude, it could boost the volume to 500,000 bpd under swap agreements.

The real blow to Azeri interests in Georgia, however, was the Russian military's occupation of Poti, close by the Kulevi oil terminal, the centerpiece of Azeri investment in Georgia. Opened on May 16, Kulevi's 16 storage tanks under Phase 1 development allowed for the annual shipment of 10 million tons of oil brought by railway, a volume projected to grow to 35 million in Phase 2, with the port's facilities designed to handle 150,000-ton tankers. SOCAR subsidiary Socar Energy Georgia LLC raised more than $300 million in loans from a 15 bank member consortium organized by France's Societe Generale and Dutch bank ABN Amro for purchasing the terminal. On Aug. 12 personnel were evacuated from the facility because of the proximity of Russian forces.

In a studied understatement of the clash's impact on the Azeri economy, on Aug. 21 President Ilham Aliyev said only, "Our transport potential is restricted." An Azeri official, speaking on condition of anonymity, said, "Iran is the best economical and safest route for exporting the Caspian Sea oil into the world markets," while Iranian Oil Minister Gholamhossein Nozari added, "By building oil pipeline 'Neka-Jask' 1 million barrels of oil can be transferred from the Caspian Sea area to the Persian Gulf daily." If the Azeri government decides to diversify its export routes eastward as a result of the turmoil in Georgia, it risks alienating Washington, which under its Iran and Libya Sanctions Act of 1996 threatens sanctions against any government or company investing more than $20 million in Iran's energy infrastructure.

Azerbaijan will hold its presidential elections on Oct. 15, and the government's oil export policies are becoming a campaign issue. The opposition party Musavat, founded in 1992, issued a statement noting, "Though reconciliation was achieved in military actions, there are still difficulties in supplying energy sources, belonging to Azerbaijan, to the world and regional market. �� It is noted that as a result of events in a neighboring country, the Azerbaijani economy sustained losses of billions of dollars. The impossibility of fulfilling commitments to foreign partners increases the potential losses in investments to the country's economy. Musavat considers that the situation is another sign of the unsuccessful economic policy of powers, resulting in the one-sided development of the country's economy and its complete dependence on energy sources."

For Baku, the recent Georgian-Russian conflict is a sobering reminder of the fragility of its recent prosperity, given its geographical position between Iran and a hard place. Several months ago Aliyev's aides were confidently predicting the incumbent would be re-elected with at least 70 percent of the vote. Voter dissatisfaction with his government's placing all its export eggs in the Georgian basket may have a significant impact at the polls and hand Washington a "color revolution" electoral result as black as the country's prime export.

(e-mail: [email protected])

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