TURKEY AND THE AZERBAIJANI OIL CONTROVERSIES: LOOKING FOR A LIGHT AT THE END OF THE PIPELINE

by Bulent Aras &  George K. Foster

The appearance of new states in Central Asia and the Caucasus region at the collapse of the Soviet Union caused a radical shift in the foreign policy of Turkey, and triggered a search for means of tactical political-economic penetration into these countries.(1) Turkey's efforts in this regard have been motivated by a desire to spread the Turkish model of government and society -- consisting of parliamentary democracy, relatively free-market economy, and secularism in a Muslim society -- as well as to take advantage of the mutual development opportunities that cooperation can create.  For Turkey these opportunities include guaranteed access to vital energy resources, lucrative oil transport revenues, as well as increased diplomatic clout and strategic importance.  For the new republics these opportunities include the prospect of attracting investment and technological expertise, as well as of establishing a secure route for distribution of their products to the West.

Azerbaijan, a Turkic-speaking former Soviet possession that shares borders with Russia, Georgia, Armenia, and Iran, has attracted the greatest interest on the part of Turkey among the newly independent states.  The source of this interest is not only the linguistic, ethnic, religious and cultural affinity shared by Turkey and Azerbaijan, but also the tremendous oil reserves possessed by the tiny Caucasian state.

It is not difficult to understand why Turkey has oil on its mind. It has been estimated that to maintain the present course of its economic development, Turkey will require the importation of vast amounts of crude oil in the coming decades -- roughly 22 million tons annually by the year 2010.(2) But as the Turkish president said recently:  "We see this rich region of oil and gas reserves not just as a source of energy, but as an element of stability. Just as the founders of the European community saw coal as a source of peace and stability for Europe, so we see oil and gas in our region serving the same role."(3) Turkey knows that forging trade and investment links with Azerbaijan and throughout the region will facilitate good relations and create an atmosphere of cooperation which may go a long way toward preventing petty squabbling and opportunistic land-grabs among the ethnically and religiously diverse states that occupy the Caucasus and Central Asia.

Yet since Azerbaijan gained its independence in the early 1990s and the first talk of developing its phenomenal oil reserves began, multiple controversies have arisen which have delayed implementation of various strategies for exploitation, and that have at least temporarily frustrated both Turkish and Azerbaijani ambitions.  These controversies are by no means limited in their implications to Turkey and Azerbaijan, or even to the region as a whole.  Rather, they have caught up dozens of players -- both at the national level and below -- which stand to benefit, or lose, from the successful exploitation of Azerbaijani deposits.

This study addresses these controversies, discusses the players involved in them, and offers some limited suggestions for their resolution.  In doing so we focus on the perspective of Turkey and its stake in the outcome of these controversies.  In the first part of Section II, we discuss the first of the major oil controversies, namely the dispute over the legal status of the Caspian and the alternative approaches to dividing its resources that follow from that status.  In the second part of Section II, we discuss the debate over the location of the route or routes to transport Azerbaijani oil to the West, which represents the second major oil controversy.  Next, in Section III, we analyze the strategic regional policies of the two powers that pose the greatest obstacle to a resolution of these controversies in a manner favorable to Turkey: Iran and Russia.  This is followed in Section IV with a limited blueprint for the successful contribution of the United States to the achievement of Turkey's oil-related ambitions.  Finally, in Section V, we offer some concluding thoughts on these controversies and the policies of the powers that have a stake in them.    

THE AZERBAIJANI OIL CONTROVERSIES   

Lake Caspian?: The Debate Over How to Classify an Enormous Inland Waterbody  

For the last three years, the five littoral states of the Caspian -- Azerbaijan, Russia, Kazakhstan, Turkmenistan, and Iran -- have been involved in a dispute over whether this body of water should be legally designated as a "lake" or a "sea." This arcane debate stems from the dramatically divergent methods of dividing the Caspian's resources that follow from the choice of term.  The Caspian contains some of the largest deposits of oil and natural gas in the world, and so billions of dollars ride on the outcome.(4)

Under the 1982 United Nations Convention on the Law of the Sea,(5) (U.N. Convention) if a body of water is a "sea," those countries which border on it have the right to claim as their own the waters closest to their shores, with exclusive rights of resource exploitation within those waters.  Technically, coastal states are entitled to claim as their sovereign territory only those waters within 12 miles of their shores,(6) but they are allowed to exploit as their "exclusive economic zone" those waters within 200 miles from the edge of their territorial waters.(7) Therefore, under the "sea" designation, those states in closest geographical proximity to the largest oil deposits will reap the greatest economic rewards from the exploitation of the water body's hydrocarbon deposits.  However, unfortunately the U.N. Convention never defines the term "sea," and so this agreement is of no help in determining the Caspian's legal status.

If a body of water is not a "sea" and thus not regulated by the U.N. Convention, then by default it falls under the classification of a "lake." While no international convention defines the term "lake" or establishes a rule for dividing such a body's resources, precedent has established that those countries which border on a lake are to divide its resources equally between them, as has been done with the American Great Lakes on the U.S.-Canada border and with Lake Chad in Africa.(8)

The positions taken by each of the five littoral states of the Caspian over the water body's legal status are predictable when one considers the geographical distribution of deposits beneath its waters. Azerbaijan and Kazakhstan both assert firmly that the Caspian is an inland sea, and it is these states which have the richest deposits within what would be their "exclusive economic zones" under the U.N. Convention.(9) Azerbaijan is the most vocal of the two, and has even written into the text of its Constitution the assertion that the waters off its shore are within its exclusive sovereignty.(10)

Russia, whose waters have perhaps the most meager deposits, has been the most outspoken in advocacy of the "lake" characterization.  For example, Russia sent a document to the United Nations General Assembly entitled "The Position of the Russian Federation with Regard to the Status of the Caspian Sea," in which it asserted that the U.N. Convention is inapplicable to the Caspian.  Russia pointed out that the legal status of the water body was previously defined by treaties negotiated between the Soviet Union and Iran in 1921 and 1940, which cast it as a salt-water lake whose resources were to be divided communally.(11) Russia has demonstrated some willingness to compromise; at a regional conference in November 1996 Foreign Minister Yevgeny Primakov came forward with a settlement offer which would have allowed each littoral state exclusive economic rights within 72 kilometers (45 miles) of its shore, as well as in those hydrocarbon fields beyond where extraction had already gotten under way.(12) This was not considered seriously by Azerbaijan, as 45 miles of exclusive ownership is a far cry from the roughly 212 miles contemplated by the U.N. Convention.

Iran also adjoins an area of the Caspian with relatively meager mineral deposits, and not surprisingly its position is very close to that of Russia. Teheran supports the Russian suggestion that the U.N. Convention has no application, adding that all issues related to the Caspian's exploitation should be settled by the five states which touch its shores, without any external interference.(13)

Turkmenistan has swung back and forth on this issue.  Initially it supported the "sea" characterization, but at the end of 1996 it began to move toward the Russia-Iran camp.  Yet early this year, Turkmenistan again switched back as Turkmen President Saparmurad Niyazov came forward with the assertion that two oil fields previously claimed by Azerbaijan, both among the richest deposits in the Caspian, lie in the Turkmen sector.(14) Again, we see the correlation between the extent of mineral deposits over which each country claims a territorial association, and the legal designation for the Caspian which it advocates.

The countries involved in this dispute are all convinced that the anticipated revenue from the exploitation of the Caspian's mineral reserves will provide a significant boost to their economies and bring in much needed foreign currency.  But due to its small size and relatively low level of economic development, perhaps the country that stands to gain or lose the most is Azerbaijan.

The Azerbaijani government has asserted that development of Caspian shelf deposits will turn around its lagging economy and allow it to alleviate the suffering caused by the ongoing conflict that began in the early 1990s with neighboring Armenia over the disputed Nagorno-Karabakh enclave.  Doubtless Azerbaijan also hopes that the ownership of massive energy deposits will bring it into a position of greater strategic significance, thereby boosting its currently weak diplomatic bargaining power vis-?-vis energy-hungry states around the globe, including the U.S. and members of the European Union.  The ideal outcome from the perspective of Azerbaijan would surely be to induce these countries to pressure Armenia into settling the Nagorno-Karabakh dispute in a manner favorable to Azerbaijan, ending the Armenian occupation of some 20% of its territory.(15)

The people of Azerbaijan simultaneously suffer from despair over the Armenian occupation of Nagorno-Karabakh and feel burgeoning confidence in the country's future as a major oil producer.(16) The Azerbaijani government has vigorously set about trying to realize the country's oil ambitions.  Its first move was to begin negotiations through the State Oil Company of the Azerbaijani Republic (SOCAR) with a group of foreign oil companies in 1993, culminating in the signing of a deal on June 4, 1994 that has been widely dubbed the "Contract of the Century," worth around $7.4 billion.(17)

Officially named the "Agreement on the Joint Development and Production Sharing for the Azeri and Chirag Fields and the Deep Water Portion of the Gunashli Field in the Azerbaijan Sector of the Caspian Sea," the contract called for the establishment of a business entity known as the Azerbaijan International Operating Company (AIOC), whose purpose is to exploit some of the richest oil reserves over which Azerbaijan claims sovereignty.  The shares of the AIOC consortium are currently divided between the SOCAR and foreign companies as designated in Table 1.   

Table 1. The Oil Companies and Their Shares

Originally SOCAR was to have a 20% share, which would have given it a majority interest, but it subsequently transferred 5% of the total shares to TPAO state oil company from Turkey, and an additional 5% to Exxon when SOCAR proved unable to come up with the necessary capital.(18)

In addition to this monumental project, SOCAR has since signed a separate deal to extract and distribute the oil and gas of its Karabakh field, an agreement purportedly worth $1.7 billion over 25 years. Ownership of the Caspian International Petroleum Company (CIPC), an entity formed pursuant to this agreement, is divided as follows: 32.5% to LUKoil of Russia, 30% to Pennzoil, 30% to Italy's Agip and 7.5% to SOCAR.  CIPC began drilling in the Karabakh field on August 6, 1997, and has set a deadline to complete all prospecting in the field by February 1999. (19)

As a Russian expert has pointed out, the Azerbaijani policy with respect to its oil reserves has been "to move ahead on existing projects even before all of the outstanding issues, including those related to legal matters, are resolved."(20)    

Who Gets to be Middleman?: The Debate Over Alternative Routes for Oil Transport  

Further development of Azerbaijani oil reserves will necessitate the establishment of adequate methods by which to transport the oil to consumers in Europe and beyond, and various alternatives are currently under consideration.  From the perspective of Azerbaijan and the companies extracting the oil, the factors of principal importance in selecting the optimum route are of course cost, available financing, and security.  But such business factors alone will not determine the outcome of the debate, as the economic, political, and environmental interests of the countries through which the oil would pass have largely come to eclipse such factors.(21)

Before it fully realized the politically-charged nature of the debate and the complexity of the factors to take into account, the AIOC consortium initially decided to transport its oil to Western markets via an existing pipeline to the Russian port of Novorossisk in Russia, then by tanker through the Black Sea and into the Mediterranean via Turkey's Bosphorus Straights.(22) However, this proposal raised objections from Turkey due to the grave environmental threat posed by the increased shipping volume that this alternative would entail.(23)

Ankara intends to issue a tender for a Vessel Tracking System to facilitate safe passage through the Straits,(24) but no technology can completely eliminate the potential for a spill.  19 miles long and a mere 700 meters wide at its most narrow point, the Bosphorus is one of the most difficult waterways in the world to navigate, with tankers having to change their course at least 12 times due to abrupt shifts in topography.(25) According to Turkish figures, nearly 45,000 vessels pass through the Straits each year, and there are frequent accidents. The Bosphorus witnessed 167 large scale accidents in the decade between 1983 and 1993, with the average annual rate of accidents having increased 35% since 1988.(26)

The International Maritime Organization (IMO) warned in 1994 as follows: "Navigation through the Bosphorus straits... presents an increasing potential risk to shipping, safety, the environment and the well-being of the local community."(27) The 1994 Nassia tanker accident is an unforgettable example of the threat that shipping poses to the 12 million residents living on both sides of the Bosphorus.  In March 1994, the Greek Cypriot tanker Nassia collided with another ship, killing 30 seamen and spilling 20,000 tons of oil into the ocean.  If this accident had occurred a few miles to the south, Istanbul itself would have faced a major urban disaster.(28)

The Convention of Montreux, adopted in 1936, still regulates the passage of cargo ships through the Bosphorus.  It requires the Straits to be kept open to merchant ships of all nations, regardless of the nature of their cargoes.  This agreement greatly restricts the ability of the Turkish government to adopt the regulations required to ensure safety of passage through the Bosphorus, but on July 1, 1994 Ankara did what it could under the circumstances.  Turkey issued a new set of regulations designed to promote safer traffic, one key objective being the establishment of a traffic separation scheme to maintain safe distance between vessels.(29)

Russia and some other states that border on the Black Sea have complained that Turkey's unilateral interference with shipping in the Straits is illegal(30) -- despite the fact that "[f]reedom of passage [required by the Montreux Convention] does not mean uncontrolled passage," as pointed out by the Turkish representative to the IMO.(31)

Following the Turkish government's expression of hesitancy to allow the massive increase in shipping volume that would be involved if the Black Sea route for Azerbaijani oil were used exclusively, the AIOC began to contemplate various alternative routes.  One such route would involve transport of oil from the Azerbaijani capital of Baku to the Turkish port of Ceyhan on the Mediterranean near the Syrian border.(32)

A few other options have also been put forward.  The first of these is that of shipping oil from Azerbaijan to the Black Sea port of Poti in Georgia, then on to Odessa in Russia, where the oil would channel into the Druzhba pipeline that extends across Russia and the Ukraine and on to Europe.(33) Gunes Taner, the Turkish Minister of Economy, has proposed yet another alternative called the Novorossisk-Samsun route, which would involve shipping oil by tankers to Turkey's Black Sea Samsun port and then transporting it south across the Anatolian Peninsula to Ceyhan via a pipeline that would have to be constructed in part. He argues that since there is already a pipeline from Kirikkale -- a city in Central Turkey -- to Ceyhan, the construction costs would be manageable.(34)

The options that have been the subject of the most serious consideration are the Baku-Ceyhan route, and either of the northern routes going through Russia, with Turkey and Russia each fervently advocating the route passing through their respective territories. Ankara supports the direct Baku-Ceyhan alternative because this route would protect the Bosphorus from the dangers of tanker shipping, still allow Turkey to reap the financial rewards of being a conduit for the oil, and would be more direct than the vertical trans-Anatolia alternatives.  However, since Turkey has no border with Azerbaijan, for the direct Baku-Ceyhan route to be viable a stretch of connecting pipeline through a neighboring country would have to be constructed.

The shortest route from Azerbaijan to Turkey would be through Armenia.  However, ongoing conflict between Armenia and Azerbaijan over Nagorno-Karabakh makes this option unrealistic for the near future for security reasons. The U.S. government objects to the transport of oil through Iranian territory pursuant to its general policy of limiting the international trade and investment prospects for the fundamentalist republic.  This factor seriously diminishes the likelihood that this alternative will be chosen.  Recently the White House announced that it would not oppose transportation of oil from Turkmenistan through Iran to Turkey,(35) which can be taken as an indication that the Iranian route through Azerbaijan is not out of the question after all.  But until Washington actually gives the nod, its acquiescence cannot be counted on.

If U.S. resistance to the Iranian route remains strong, the only alternative for the transport of Azerbaijani oil into Turkey would be through Georgia, in a deviation from the Novorossisk-Samsun route proposed by Gunes Taner.  Again, this route would take the oil from fields in Azerbaijan to Georgian ports, and from there by tanker to Turkish ports on the Black Sea, then by pipeline across Turkey to Ceyhan.(36) Another Georgian option is a route from Baku directly across Georgia, then down through Turkey to Ceyhan, thus bypassing the Black Sea altogether. The length of the pipeline from the Georgian border to Ceyhan would be about 1,900 kilometers, and the cost of construction of the pipeline would be an estimated $3 billion.  The Turkish government has declared that it is ready to finance the entire cost of any pipeline that would pass through its territory.(37) Turkish President Suleyman Demirel and Georgian leader Eduard Shevardnadze expressed their joint support for a route through Georgia during a visit by Demirel to Tbilisi in November 1994.(38)

Ankara is quick to point out that Ceyhan can handle many times the capacity of the Russian port of Novorossisk.  In addition, Ceyhan is open all seasons of the year due to the calm climate of the Mediterranean, whereas Black Sea ports are shut down in the winter by dangerous weather conditions.(39) As expressed by Ahat Andican, a state minister and an influential figure in shaping Turkish policy toward the Turkic republics of the former Soviet Union: "With new the oil field development project under discussion, the total output from the Caspian and Central Asia will eventually be 50 to 60 million tones a year, but the Baku-Novorossisk and Baku-Supsa routes have a combined capacity of 16 million tones [a year]. Therefore the Baku-Ceyhan pipeline is the most inevitable and stable option."(40)

Some critics of the Baku-Ceyhan route have attempted to bring the Kurdish insurrection in Eastern Turkey to the forefront of the debate, portraying it as a potential threat to the security of the pipeline.  Yet as we near the end of 1997, this argument seems to be losing its force, given that the Turkish army and security forces have had considerable recent success in suppressing Kurdish military activity.(41)

Turkey is far from alone in its advocacy for the Baku-Ceyhan route.  The president of the AIOC, Terry Adams, has thrown his weight behind this proposal as well.(42) Jim Norosky, vice-president of the U.S. petroleum company Amoco (which holds a 17.01% stake in the AIOC), has also suggested that the Baku-Ceyhan route is preferable, despite the extra cost imposed by its greater length.  Such extra cost, he suggests, should be offset by tax breaks or other measures on the part of the relevant authorities.(43) Turkey has also succeeded in gaining the support of Azerbaijani President Aliev, who has stated that he is in favor of giving priority to the direct Baku- Ceyhan alternative.  He expressed this position during a visit to Turkey, and then later during a visit to the U.S.(44)

At this point the most significant obstacle that Turkey faces in its efforts to establish the Baku-Ceyhan pipeline is Russian opposition. Russia has a deep fear that if any route for transporting Azerbaijani oil bypasses Russian territory, Russia will not only lose a lucrative source of revenue, but will also experience the diminishing of its economic and political influence in this resource-rich region.(45) It is for this reason that the Turkish decision to restrict tanker passage on the Bosphorus was received so bitterly by Russia.

As part of their efforts to ensure that a northern route through Russia is selected by the AIOC consortium, foreign policy officials in Moscow have recently entered into a series of agreements.  First, on July 11, 1997, Boris Nemstov, the Russian Deputy Prime Minister and Minister for Fuel and Energy, signed a five-point agreement with the heads of the Chechen and Azerbaijani state oil companies.  The following day Russian and Chechen representatives signed an agreement setting out a plan to fix a war-damaged pipeline that crosses Chechen territory on its way to the Black Sea.(46) This was followed by a third agreement on September 9, 1997, also between Russia and the Chechen government, which provided that Russia would pay Chechnya 43 cents per ton of oil transported, plus a surcharge of $768,000; these terms are to apply for the first 200,000 tons transported.(47) It is apparently hoped by Russia that these agreements will ensure the viability of the first leg that would have to be followed by any of the possible northern routes -- the journey from Azerbaijani oil fields to Russia.

Russia's efforts in this regard will be in vain if the Chechens attempt to use the pipeline as a bargaining chip in future conflicts with Moscow and do not respect the letter of the agreements.  As the Sevodnya daily newspaper in Russia quoted a Russian government source as saying: "For Chechnya, the pipeline is a political instrument, which is why it is impossible to resolve questions over the transit of Azeri oil separately from political, customs, border and other issues."(48)

Due to this concern, the Russian government has threatened to build a bypass pipeline through Daghestan, an ethnic-majority state within the current borders of Russia, to the Black Sea port of Novorossisk.(49) But Russian oil companies have not been willing to commit to the investment for several reasons, including the factors discussed above that Novorossisk has such a limited capacity for conducting oil, and that weather conditions on the Black Sea result in it being closed to tanker shipping at least a third of the year.(50)

If a northern route for Azerbaijani oil were selected, the only alternative to the use of tanker transport to convey the oil from Novorossisk to Western ports would be the use of the antiquated, decrepit Druzhba pipeline network inherited from the Soviet Union.  That this network is in a dangerous state of decay is illustrated by a rupture that occurred recently in Novorossisk, which resulted in the spilling of 386 tons of oil into the Black Sea.(51) As of yet Russia has not been able to obtain the financing necessary to address the network's deficiencies, and it is doubtful that the will exists to come up with it in the foreseeable future.  Accordingly, Russian efforts to resist alternative transport possibilities for Azerbaijani oil, if successful, could result in the indefinite postponement of the exploitation of the Caspian's rich reserves.(52)    

IRAN AND RUSSIA: STANDING BETWEEN TURKEY AND THE LIGHT  

Iran: The Pragmatic Radical