November 10, 1997

The New Pipeline Politics


WASHINGTON -- In obvious disregard for American sanctions against Iran, the French oil company Total recently announced a $2 billion joint venture with Gazprom, Russia's gas conglomerate, and Malaysia's state oil company, Petronas, to develop Iran's gas reserves. At the same time, the Royal Dutch/ Shell Group, based in the Netherlands, is preparing to build a $2.5 billion gas pipeline from Turkmenistan to Turkey via Iran.

France, Russia and Iran explain their deal simply as good economics. But the world runs on oil and gas, and those who control it wield commercial and geopolitical power.

The deals will allow Iran to attract scarce foreign investment and penetrate new markets, generating income that could modernize its military and promote terrorism. Gazprom will be able to continue its aggressive expansion into foreign markets. For France, the deal will gain it new influence with Russia and Iran, while raising its profile in the Middle East.

The Total and Shell deals, in fact, signal the emergence of a new strategic alliance of commercial players, backed by their governments, seeking to pre-empt the United States in the resource-rich Caspian region.

These developments are forcing a reluctant American Government to clarify whether it has vital interests in who develops the region's oil and where the pipelines are built. In the process, the United States will have to make fundamental choices about its policy toward the South Caucasus and Central Asia and their powerful neighbors, Russia, Turkey, Iran and China.

For this region, only two main pipelines will be built in the next five to seven years. The first, already under construction, will carry crude oil from Kazakhstan's Tengiz oil field across Russia to the Black Sea port of Novo-rossiysk. It is the route of the second pipeline, from Azerbaijan with eventual links to Turkmenistan and Kazakhstan, that remain undecided. Two options exist: a "southern corridor" through Iran or a "western corridor" from Baku, in Azerbaijan, west through the Caucasus to the Mediterranean port of Ceyhan in Turkey. Iran and Russia hope that, with help from Total and Shell, the southern corridor option prevails.

The perception of American acquiescence to these developments is about to set off a chain reaction, rendering Washington's policy toward the Caspian hollow and undermining our broader strategic interests in Europe, Eurasia and Iran.

Some American oil companies are already beginning to back away from investing in the Baku-Ceyhan pipeline, hoping that a softening American attitude will permit them to go through Iran in a year or two. Other companies, sensing an opportunity to extract financial sweeteners from Washington, have proposed to build the western pipeline only halfway, to the Georgian coast, while pressing the United States (and Turkey) to underwrite the second half of an otherwise commercially viable project.

Most troubling, the Total and Shell deals would allow Russia and Iran to lock up the main pipeline routes for the next five to seven years and to gain substantial control of Caspian access to global markets. The consequences would be dire.

The energy-producing states -- Azerbaijan, Kazakhstan and Turkmenistan -- would be forced to continue to sell their energy to Russia and Iran at well below world market prices, depriving the region of an economic engine to promote growth and stability. Also, a Eurasian transportation corridor was to be constructed along the Baku-Ceyhan pipeline and include roads, railroads, ports and telecommunications stretching from China's western border to Black Sea ports in Georgia, Ukraine and Turkey. In the absence of that pipeline, prospects for such a transportation corridor linking the region directly to the West would be undermined.

Gazprom would strengthen its stranglehold on Europe's energy needs, enabling it to continue to charge high prices for its gas. Increasingly, an intransigent Iran would control Turkey's energy needs, and with that would come the power to press for a shift in Turkey's strong Western orientation. Also, Russia would deepen its alliance with Iran. Finally, while European companies moved ahead, American companies would be shut out of Iran and find themselves competing for diminishing export space through Russian pipelines and through the Bosporus. Success would also embolden this new commercial alliance of Iranian, Russian and French interests to extend its strategy to South Asia, costing Turkmenistan the chance to ship its gas to Pakistan and India.

The United States simply cannot afford to allow Russia and Iran to dominate the energy resources of the Caspian, with the enormous political leverage that would confer in the region and even in Europe.

American interests would be best served by the emergence of independent, stable, energy-exporting states in the South Caucasus and Central Asia, states at peace with their neighbors and with solid links to the West. Then, the region could play an important role as a buffer between ambitious but potentially unstable regional powers in Eurasia, Asia and the Middle East. A determined United States policy toward the Caspian region should stress several elements.

F irst, the Administration must immediately draw a clear line against expansion of Iran's gas production and export capacity by working to delay and reduce the Total project.

At the same time, the United States should seek to limit Gazprom's access to international capital to finance its investment abroad until the company's commercial practices are brought in line with global norms. As a first step, Gazprom should be compelled to lift its unilateral blockade on Turkmenistan's gas exports to Europe, which have cost that country $3 billion in the last three years.

Equally important, the United States must demonstrate its unequivocal support for rapid Caspian energy development and a secure export network by making sure that the next Caspian pipeline built is on the Baku-Ceyhan route and that the Eurasian transportation corridor is developed along with it. Toward that end, the Administration should seek to reduce the political aspects of investment risk in the Caspian region by providing traditional export credits to American companies and by encouraging the World Bank and other such organizations to extend political risk insurance to regional governments for pipeline development. This would minimize the need to provide special subsidies for oil companies to build the Baku-Ceyhan pipeline.

More broadly, it is critical that the United States promote regional stability by encouraging these states to deepen their economic reforms and use their energy windfalls to foster development and raise living standards. Washington needs to further step up efforts to resolve regional conflicts, particularly Georgia's stalemate with Abkhazian separatists and Armenia's conflict with Azerbaijan over the enclave of Nagorno-Karabakh. Beyond the South Caucasus and Central Asia, the United States should encourage a skeptical Russia to participate in the Baku-Ceyhan pipeline, which would provide Russia much-needed access to Turkey's dynamic markets and the Mediterranean.

Increasingly, the Caspian region is emerging not only as a critical component of Western energy security, but also as a linchpin in the evolving balance of power in Eurasia, Asia and the Middle East.

The United States must act, and soon, to promote our strategic interest in the emergence of a fully independent, prosperous and secure South Caucasus and Central Asia at peace with its powerful neighbors and with strong ties to the West.

Sheila N. Heslin was the director for Russian, Ukrainian and Eurasian affairs at the National Security Council in 1995 and 1996.

Copyright 1997 The New York Times Company