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Giving all a piece of the pie
The political risks of various pipeline routes in the Caspian basin

November 12, 1998
The Iranian

A lecture presented by Hooshang Amirahmadi at the Conference on Energy for Europe: Perspectives and Problems of Crude Oil Exports from the Caspian Sea to Europe Technische Universitat Braunschweig, Germany, October 19, 1998.

Geopolitics of pipelines from the Central Asia and Caucasus to markets in Europe, Asia and elsewhere have become a major foreign policy issue for the U.S. in the last few year. Countries like Iran, Turkey and Russia are competing to gain a piece of the great pie. However, Washington favors Turkey for political reasons and against the will of its business community. At stake for Iran is strategic, not just economic, gains or loss. No wonder the U.S. is not letting the business executives and the states in the Caspian region play the pipeline game among themselves. The winners of the game will reap strategic benefits while losers will become marginalized for sometime to come. It is in this context that I assess the political risks of various pipeline routes and suggest an alternative.

To assess the political risks associated with various pipeline routes from Central Asia and the Caucasus to markets in Europe, Asia and other world regions one must account for a multiple of often paradoxical factors at national, regional and global levels. Yet the current positions held by the major players involved often ignore this complexity in favor of narrowly defined strategic and economic interests largely informed by shortsighted political animosity, rivalry or alliances. To advocate for particular routes on the basis of a policy that excludes some players and includes others in the so-called great game that has ensued in the wake of the oil and gas rush in the Caspian basin is haphazard at best. The current approach is equally dangerous for it remains oblivious to internal political and economic developments of the countries involved.

In what follows, I shall first provide a description of various routes and their advocates and then give an outline of the major risk factors involved including the extent they are ignored or accounted for in the positions held by the regional players. I shall conclude by proposing that decisions concerning oil and gas pipelines should recognize the need for multiple routes as dictated by political, economic, technical and strategic realities, and that a grand cooperative and win-win strategy is preferred over the current alliance-making and win-lose games. Yet, the most important preconditions for a sustainable transport of Caspian energy are national political and economic developments. The proposed framework is based on the assumption that the long-term prospect for every player is much richer than what it can achieve by maximizing its short-term gains.

Pipeline Routes and Their Advocates

Currently, five pipeline routes are available, proposed or contemplated. They include northern, southern, western, eastern, and southeastern routes. As we shall see, some are extensions of existing pipelines while others are altogether new and have to pass through untested and contested geographies. Rough terrains, ethnic violence, bureaucratic infighting and individual ambitions need to be accounted for along the way. They are also distinguished in terms of their strategic significance, economic feasibility and technical complexity. More importantly, these routes involve uneven political and environmental risks, as explained in the subsequent sections of this lecture, and are viewed within a framework of win-lose and alliance-making strategies.

Yet the real difficulty with pipeline politics is that it must find a solution to often opposing business and strategic interests. For example, while Iran provides the most economical routes, the U.S. opposes this alternative in an attempt to curb Tehran's future regional influence. The fact is pipelines offer more than economic benefits and trade possibilities; they would form strategic cores of power along which communications, transportation and other infrastructure corridors will develop. The nation or alliance that controls such corridors would supposedly hold sway over the region. The U.S. policy is set for an East-West axis, the so-called New Silk Road, which excludes Iran and Russia. As this U.S. policy goes against economic logic of the companies involved, it has become a stumbling block to pipeline construction; meanwhile other countries have used the U.S.-Iran tension to push for less than optimal routes through their territories with a view to gain business and strategic advantages.

Northern routes

Advocated by the Russians, both Kazakhstan and Azerbaijan could join existing Russian pipelines by building extensions or new pipelines that would take their oil to Novorossisk on the Black Sea. The Caspian Pipeline Consortium (CPC) is already busy developing the line. For the Kazakh oil, the pipeline will be built as it encounters no rival or opposition at present. For the Azeri oil, however, the routes will have to pass through the insecure Chechnya territory or near it, a rather unpleasant possibility for prospective investors. Chechnya's economy is in ruins with no real prospect for future growth and is seeking political independence from Russia. These conditions combined with elite rivalry and a growing drug trade calls for continued political violence there. Besides, both Azeris and Kazakhs remain concerned about Russia's continued dominance of their political life; for the Azeris, the concern is elevated to fear by their Turkish, Israeli and American allies. The real problem is this: Russia as the holder of world's largest reserves of natural gas can hardly be excluded from the growing world gas market, thus making the northern route a real option.

Western routes

Preferred by the U.S., Turkey, Azerbaijan and Georgia, these routes are intent to bypass the Russian territories and Iran. The less expensive alternative is to build an upgraded pipeline to the Georgian port of Supsa on the Black Sea; from there oil will have to be taken by tankers through the Bosporus to Europe. One immediate problem is the current political instability in Georgia: the Abkhazia separatists would have to be suppressed or co-opted first. Even then there is the problem with the rebellious South Ossetia. According to one report, the people living in the vicinity of the pipeline going to Supsa made some 800 holes in the line, forcing Azerbaijan International Operating Company (AIOC) to build a whole new line for its early oil. The other problem is environmental. Turkey claims, rightly, that the Bosporus is already too congested and further tanker traffic will endanger Istanbul's marine safety. Despite these problems, this route seems to be on schedule for construction given a lack of better or more politically acceptable alternative. The Bosporus problem could be addressed in a number of ways including a bypass from Bulgaria to Greece or pipeline from Baku to Ceyhan.

Turkey instead has pushed, with the U.S. and Israeli support, for another pipeline direct from Baku to its Mediterranean port of Ceyhan. A Trans-Caspian pipeline will then feed Kazakh oil and Turkmen gas to these routes. The U.S. is currently lobbying the Kazakh and Turkmen governments to support the pipeline. The US' attraction to the Ceyhan route and the Trans-Caspian line emanates from its desire to build an East-West axis of influence and commerce in the Eurasia region. But this alternative is too expensive and passes through the Kurdish-dominated territories. The proposed Trans-Caspian pipeline poses additional environmental hazards to the Caspian. No wonder despite serious U.S. effort, the Ceyhan alternative is resisted by the companies. Even the AIOC has argued against it. The companies had asked for American subsidies at a substantive level. The U.S. originally resisted but after it became clear that the line may not be built by the companies, the U.S. offered to assist with $823,000 toward a projected cost of $2.8-$4.0 billion (NYT, October 22, 1998). Turkey, which originally did not come up with the promised incentive package, was also forced to bow but its offer remains as yet vague and unattractive. Financial difficulty aside, companies also complain that "the instability of Turkey's government has made it a difficult partner"(NYT, October 11, 1998).

Southern routes

Favored by Iran and oil companies, the southern routes make economic and commercial sense. They are cheaper to build, pass relatively safer territories, and pose no serious environmental hazard. Significant pipeline and port infrastructure also exists. A gas pipeline extends from Turkmenistan to Iran, which they hope to extend to Turkey via a new pipeline to be constructed by Shell. Extensive oil pipelines south of Iran also exist as do port facilities in the Persian Gulf from where both Europe and big Asian market could be efficiently served. Most notably, the Southern routes also offer the swap option, something no other routes have offered as yet. Oil companies and governments worry that the southern option increases the world's reliance on the Strait of Hormuz, a concern that can be addressed by linking the pipelines to the port of Jask on the Oman Sea. Certain geologists have also argued against the line because of possible seismic problems in Iran. Yet, in the last several decades earthquakes have not posed problems for the pipelines in Iran. The U.S. is opposed to the southern routes for obvious political reasons and has made it a policy to prevent its realization. Opposed to the routes is also Azerbaijan which remains wary of Iran's intentions, a fear largely instigated by its allies, the U.S., Israel and Turkey. Yet, the U.S. and others may find it hard to advocate Iran's exclusion because it holds the world's second larger gas reserves and is the fourth largest oil producer.

Eastern routes

China is increasingly energy-hungry and needs to seek new markets. The Kazakh option is attractive because it is comparatively speaking the most accessible. Thus, the Chinese signed a contract with Kazakhs in September of 1977 to build a 2000-mile long and extremely expensive pipeline from two fields in Kazakhstan that China has proposed to purchase. The deal, commercially unattractive, can only go if China was to continue viewing the Kazakh option as a new strategic necessity. All indications to date point to China's commitment to the proposed pipeline. However, financing the project can prove much harder than the Chinese had originally anticipated. This is the only route that seems to have no rival or enemy despite the fact that it can cause China's influence to rapidly grow in the Caspian region.

Southeastern route

Favored by Pakistan and Afghanistan, UNOCAL, an American oil company, with Saudi Arabia's Delta Oil, has been promoting a pipeline to transport oil and gas from Turkmenistan and possibly Kazakhstan, through Afghanistan, to Pakistan and eventually India. The line has also had the tacit approval of the U.S. government until last summer when, following the bombing of American embassies in Africa, Washington had to bomb Osama bin Laden's terrorist camp inside Afghanistan. Taliban's identification with bin Laden has also forced UNOCAL to withdraw its proposal for the time being. The Afghan geography presents some difficulty and cost, though reasonable, could make fund-raising a bit too difficult. Yet, the real obstacle is a political one. As long as the Afghan civil war is not fully ended and Iran-Afghanistan crisis continues, any attempt to build the line will prove futile.

Major Political Risk Factors

Alternative pipeline routes are exposed and vulnerable to uneven political risks and involve risk factors of national, regional, and global origins and significance. It must be noted that these risk factors are interdependent given that national and regional borders are increasingly at the mercy of global forces. The risk factors are also dynamic due to the fact that the region as a whole is in a state of transition to a new political-economic future. Clearly, the transient character of the region makes any short-term strategic alliances unstable as political changes will make loyalties shift and national interests change. For example, Russia, whom Americans thought would become a strategic partner of the U.S. in the wake of the Soviet collapse, has already become a strategic rival to it. Another case in point is Afghanistan. Iran thought encouraging Islamic movements there will help its cause but the Taliban victory can jeopardize Iran's national interest. Indeed, Taliban will not serve even the strategic interest of Pakistan and Saudi Arabia, the group's main political patron and cash register, respectively.

National-Level Risks

As The Economist (February 7, 1998, p. 6) noted: "Oil companies take a more relaxed attitude to political risk than many other firms. They are used to dealing with violent or unstable countries. Because oil is simply pumped out of the ground and can be speedily exported, they can tolerate economic mismanagement, civil disobedience and even isolated violence in the host country more easily than other industries." Nevertheless, political independence, stability and certainty concern them to a great extent. Pipeline security will particularly depend on the political stability in countries of origin and transverse. These include Azerbaijan, Turkmenistan and Kazakhstan as countries of origin, and Russia, Iran, Afghanistan, Georgia, Armenia, and Turkey as countries of possible transverse.

The fact that proposed pipelines would have to pass through two or more countries makes the situation even more complicated. Additional political sensitivity arises due to multi-ethnic and socially polarized character of the countries involved. Another risk-contributing factor is the undemocratic nature of the ruling elite in most of these states, in countries of origin in particular. Political independence is not fully assured given the harsh political-economic conditions in the countries of origin and due to Russia's growing interventionism in its near abroad. The explosive population growth is generating increasing and urgent needs for jobs and economic growth. Meanwhile, the new generation is demanding more and has higher expectations than its predecessor generation. They will hardly accept the continuation of current political repression and backwardness for long. They will demand democracy and development.

Equally unacceptable will be the current social inequalities in income and wealth distribution and in geographic distribution of national expenditures leading to extreme territorial imbalance. Such inequalities generate abject poverty and leads to environmental degradation and unsustainable growth. Just in the case of Persian Gulf states, oil economies in the Caspian region tend to overestimate the role that oil revenue can play in sustainable growth of their economies. Any undue over-reliance will result in unstable economic policies and unwise spending. Finally, ethnic disparity and the unresolved question of nationalities are additional sources of national cleavage in the Caspian states. The desire of ethnic elite to gain from pipelines economically and politically adds to the volatility of the political situation.

Regional-Level Risks

The Caspian pipelines face a series of risks that originate from regional and inter-state conflicts. Ethnic movements are quite prevalent in the region. The Kurds in Turkey dominate the eastern mountains of the country and are a major source of worry for Ankara who wishes to promote the Ceyhan route. The current crisis between Turkey and Syria is an indication of Ankara's deep concern with its Kurdish question. The Lezgins are struggling for national unity and independence. At present, they are divided into two parts in the Russian Federation and Azerbaijan. The Abkhazia separatist movement has destabilized the government in Georgia and continues to remain a source of national cleavage in that country. Chechnya and Dagestan continue to remain potential violent spots in the Russian's Caspian frontier. The Chechens are particularly adamant about their independence and possible gains from future pipelines through their territories. Conflict among more then a dozen other ethnic groups in the Caucasus can flare up if their political and economic demands are not met.

The conflict between Armenia and Azerbaijan over Nagorno-Karabakh is on hold and could lead to renewed fighting in the future. Presently, twenty five percent of Azeri's territories is occupied by the Armenians and this makes pipelines from Baku less than safe. In Afghanistan, while Taliban seem to have secured its position as the dominant force, the end game remains less than certain there given the crisis with Iran. Other regional or international crisis can develop given the alliance-making policy that some states follow. Meanwhile two other important source of tension remain: dispute over the legal regime of the Caspian and a possible environmental conflict that can follow from the unwise utilization of resources in the Caspian by the oil producing states, Azerbaijan in particular. Iran and Russia have little oil and gas resources around the sea; instead, they depend on its clean environment for fishery and caviar. In addition, agriculture, forestry and tourism are vital for the people in the Iran side of the sea. Any degree of pollution can harm Iran's interests and become a cause for political conflict.

Global-Level Risks

Another set of political risks that face a rational decision regarding pipeline routes emanates from global games for strategic gains. The East-West axis strategy followed by the U.S. propose to exclude Russia and Iran while including Turkey along with states in the Caucasus and Central Asia. The rivalry this strategy generates can prove unproductive for the independent and democratic development of the very states the U.S. wishes to promote. Both Iran and Russia are central to the coherence and wellbeing of the larger region. Their cooperation can help while their antagonism is sure to hurt. To view the Caspian solely as a linchpin of American global game for strategic gains is unwarranted. The current power game and alliance-making policy goes against the need for cooperation in building, utilizing and safeguarding the pipelines.

As part of its global and regional games, the U.S. has tried to cripple Iran economically and isolate it politically. The economic impact of the containment policy has been simply devastating for the Iranian people who continue to suffer from declining income and employment opportunities. Politically too the U.S. policy has hurt Iran by making it enemies to its otherwise natural allies. At present, three sets of regional alliances are organized around and against Iran: Turkey-Azerbaijan-Israeli alliance in the northwestern and western borders, Iraq-Mojahedin-UAE alliance in the western and southwestern borders, and Pakistan-Taliban-Saudi Arabia alliance in the southern and southeastern borders. These destructive attempts notwithstanding, the U.S. has not been able and will not be able to bring Iran to its knees as the country benefits from a rich history of national dignity and regional role.

Aside from destructive rivalry between the states, the present policy discourse in the Caspian region will increase the tendency toward anti-externalism, reviving the largely outmoded anti-imperialist political culture so embedded in the minds of the Caspian people. If current outside intervention leads to failure of the states to develop their respective societies, alternative social systems and ideologies will come to challenge the current drive for establishing liberal political and economic systems. Extremism and national fascism are candidates for such an eventuality. From this perspective, pipeline routes need to be decided with a view to regional development not as tools to serve strategic interests of particular states or groups of states. The key to altering the present discourse is a change in U.S. policy toward Tehran and a good starting point will be for the U.S. to free Iranian assets in a symbolic gesture and to drop its opposition to pipelines going through Iran.

Toward a Cooperative and Win-Win Strategy

The above analysis indicates, among other considerations, that the best solution to the current stalemate may be found within a cooperative framework that emphasizes four principles: a win-win strategy, a multiple-pipelines approach, political reform and sustainable economic development. A win-win strategy will de-politicize decisions with regard to pipeline routes, seeks a balance of national interests, and includes existing and prospective investors in determining the optimal routes. Meanwhile, the states with high stakes in the region, namely the U.S., Russia, Iran and Turkey, must realize that their current rivalry or hostility serves no one in the longer term and that a more amicable solution to outstanding claims will serve all parties involved. In this regard, a solution to the current standoff between the U.S. and Iran is the most critical. Here as in the case of other rivalries, visionary leadership is called for in which sensationalism is subordinated to rationalism and long-term gains.

A multiple-pipelines approach is an optimal and logical solution to the current stalemate. First, multiple-pipelines approach will reduce dependency on a few countries and avoids concentration of world energy in a few hubs such as Baku, the Strait of Hormuz in the Persian Gulf and Novorossisk or Ceyhan and Supsa on the Black Sea. Second, the multiple-pipelines approach has economic logic. For example, while, Iran offers a cheaper alternative than Russia or Turkey for pipelines from both Central Asia and the Caucasus, its comparative advantage lies in providing swap arrangements and easier access to fields in Turkmenistan and Kazakhstan. Turkey and Russia could have offered attractive routes for pipelines originating from points in Azerbaijan but, cost aside, feasibility is seriously constraint by political and environmental difficulties. Third, the political logic of multiple-pipelines is equally attractive as it reduces sensitivity to political instability in a given country or countries along a given route. The current largely political logic applied to pipeline routes not only goes against the economic logic but is counterproductive because of its superficial treatment of regional politics. For example, while bilateral political and strategic alliances are emphasized, internal political development is ignored.

Fourth, the technical feasibility of various routes also increases with a multiple-pipelines approach. This is due to the varying geographic and environmental difficulties that certain proposed routes pose. Within a cooperative framework, pipeline routes can be modified to avoid country-fixed solutions and possible inter-state environmental conflicts. Finally, the multiple-pipelines approach lessens possible strategic losses while increasing potential strategic gains. Pipelines are long-term commitments to a nation and countries that lose will do so strategically. While there is no guarantee that the winning side will remember the favor, the losing side will sure develop a structural animosity toward countries it considers as the culprits. Given the deep-rooted anti-imperialist political culture or nationalistic tendencies in most of these nations, such a structural anti-externalism can lead to social upheavals. Needless to say that in that case, the domestic and international players in the pipeline and energy games of the Caspian region will encounter a lose-lose situation.

Political reform is key to political stability in the Caspian region and as such is the most important precondition for the safe operations of the pipelines in the long run. The reform must be genuine and lead to political participation, elite circulation and the role of law. It must also end corruption, create discipline within the state and increase its accountability. Current personality-based and exclusionary politics will not last for long. The new generation expects freedom, participation and development. The new global community is too transparent concerning what has been achieved by developed nations and represents models for emulation and potentials. The future leaders of the Caspian states will have difficulty to justify underdevelopment and dictatorship in an increasingly democratizing and developing world. As a basic requirement of political reform, the states must prepare the ground for expansion of civil society institutions and alternative discourses in all spheres of national life.

Political development is a precondition for sustainable economic development. Yet, the states in the region cannot afford to postpone the latter until the former has been achieved. Here lies the challenge facing the emerging economies in the Caspian region: They must develop as they democratize. The one and only possible alternative in this direction is a balanced development strategy: one that allows for economic growth and diversification, provision of basic needs, expansion of civil institutions and circulation of the elite. As states promote political liberalism and free-market principles, they must also devise visions for re-inventing the government, expanding social networks and promoting political competition. In short, political and economic pluralism along with a complementary social policy is the key to state-building and national development in the region. Unless and until these conditions are met, pipelines will continue to remain vulnerable to domestic violence and inter-state conflicts.

In closing, I wish to invite attention to the consequences of Iraq's invasion of Kuwait for the pipelines that used to take millions of barrels of Iraqi oil to international markets. Those who promoted the pipelines on the basis of economic, technical or strategic criteria never thought that Saddam Hussein's dictatorship and undemocratic approach to the states in the region would become a cause for their closure. Had the Iraqi people and the states involved insisted in a balanced political-economic development of the country, Iraq would have not lost billions in oil revenue investment, and the pipelines would have been carrying more oil to the world energy markets for the benefit of all involved (except for the Caspian states!). As it is rightly said, democracies do not fight, internally or externally; but dictatorships do! I am only hoping that this and similar other examples will make current decision-makers think deeply about the multiple conditions that needs to be satisfied for a sustainable Caspian energy transport.

Hooshang Amirahmadi is a Rutgers University professor and president of the American-Iranian Council, Inc.

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