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Sehaty Foreign Exchange

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The U.S. and the Caspian

Petroleum Economist
May 12, 1999

So important to US strategic interests has the Caspian become, that in July 1998, US President Bill Clinton created the Office of the Special Advisor to the President and the Secretary of State for Caspian Basin Energy Diplomacy. Ambassador Richard Morningstar was appointed to the office. As overseer of US policy in the region, he has strongly backed proposals to build a main exporting corridor for Caspian energy to the West. Ambassador Morningstar spoke to Derek Brower

PE: How close is a final decision concerning the Main Export Pipeline (MEP)?

RM: It's hard to say how close. There are intensive negotiations, and there have been some important steps taken, especially concerning the cost of the pipeline. AIOC and Turkey are willing to guarantee the cost of the project, which is important. I think the key point is that there are very serious negotiations.

PE: Has Turkey guaranteed the cost at $2.3bn?

RM: It will be around that.

PE: A spokesman for the Azeri government said that an announcement covering the MEP could be made at the celebrations in Washington DC for the 50th anniversary of Nato. How soon do you expect an announcement to be made? Should we expect an announcement then?

RM: There are no plans to announce anything as soon as that.

PE: What danger exists that the decision concerning the route of the MEP will be made by default - ie, determined by the low price of crude, the consequent shyness of investors, or the failure of exploration in the Caspian to show the necessary reserves of oil in place?

RM: I don't think so. All those factors are obviously important, but, fundamentally, we believe that the route to Ceyhan is commercially viable, especially given Turkey's guarantees about the cost of the project.

PE: And how important has the recent rise in oil prices been in securing the future of the pipeline?

RM: It obviously has been important.

PE: Botas, of Turkey, said recently that it could build the pipeline for $1.7bn. Is that unrealistic?

RM: There have been all kinds of forecasts, some as high as $5bn. All I can say is it is not going to cost anything like that. The way I would put it is that $1.7bn is as likely as $3.7bn. If everything went exactly right, $1.7bn would be realistic. Three separate feasibility studies have shown that the cost of the project will be under $3bn. The estimates have been very conservative, so far.

PE: David Woodward, president of AIOC, was quoted recently as saying that 2003 was an optimistic target to bring the MEP on stream. According to him, 2005 is more likely. He also says that extra reserves need to be discovered before an MEP is laid. Do you agree?

RM: David is very professional and a very good person, and he may be right. But to me, the point is not when the MEP comes on stream, but how. And (with regards to needing additional reserves) that may be, but there's plenty of exploration that's going on. The companies (involved in the Caspian) will also tell you the other side of the coin - that the first 25 holes drilled in the North Sea came up dry holes. So it's really too early. Look, the Caspian is still going to be a major area.

PE: What figure has the US State Department given for estimated reserves of crude oil in the Caspian sea?

RM: A hopefully realistic estimation, but certainly not another Gulf.

PE: The State Department has been criticised for pushing the Caspian too hard in the process building up expectations that won't be met. How do you respond?

RM: The facts will ultimately speak for themselves.

PE: Would the US offer concessionary financing to companies involved in constructing a line to Ceyhan?

RM: Not concessionary financing, because we don't think the companies need it, but financing yes, through banks like US Exim bank and OPIC. We would be able to offer political risk insurance to companies involved. The World Bank has an arm which looks after political risk. The companies will have access to the finance.

PE: What will the US do to secure the pipeline through areas such as Kurdish Turkey and Georgia?

RM: For an equity investor, political risk insurance stands for a lot. That's helpful.

PE: Aside from Baku-Ceyhan, would the US support the expansion of the Baku-Novorossiysk route?

RM: They could expand it - well, I don't know - technically I'm not sure how much they could expand it. There's also a lot of risk involved with that line, for example what's going on now (closure of the Chechnya section of the line). For the Supsa line, Azerbaijan and Georgia, especially, are very supportive of Turkey, anyway, because the first section of the Ceyhan line would go through Georgia and also because of the political ties.

PE: What does the future hold for proposals to transit oil through areas in southeast Europe, such as Romania?

RM: There are several routes (in eastern Europe), including one through Ukraine. My answer to them is, there's going to be plenty of oil coming out of the Caspian and into the Black Sea. No-one wants more oil going through the Bosporus. One problem with the Romania route is that it would pass through Serbia. Personally, I don't believe it will be cheaper, as has been suggested, to pipe crude to the Black Sea, put it on a tanker to ship across the sea, and then unload it to be piped again out the other side of the Black Sea. It doesn't seem like an efficient way of doing it.

PE: Lots of people have claimed that the cheapest way to export Caspian crude is through Iran.

RM: I don't buy that.

PE: If construction started on an MEP to Ceyhan in 2001, it is possible that by this time Iran may be rehabilitated in the eyes of the US. Wouldn't exporters in the Caspian regret that the cheapest route had been ruled out?

RM: Let me give you my response to that. First, the companies I talk to don't think it is any cheaper (to go through Iran). US companies are not pressuring us to export Caspian crude via Iran. Secondly, Iran is a competitor (for exporting countries in the Caspian region): when push comes to shove the question is: will Iran allow transport costing that is more competitive than a route to Ceyhan. Going through Iran, you're tying up most resources in a strong competitor. Companies have not really pressed us on Iran. They're interested in swaps. So our argument is: politically, yes, we have differences with Iran. And there are also strong commercial reasons why an initial pipeline should not go through Iran. In, the foreseeable future we don't see the pipeline going through Iran.


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