Case Name: Azerbaijan Oil Consortium(BP,Exxon,Saudis,DNKL,Lukoil etc)

1. The Issue

On 20 November 1994 a consortium of oil companies signed a
contract with the nation of Azerbaijan. The consortium, led by
British Petroleum, is to invest $8 billion for oil production over
a period of 30 years. The consortium is made up of the American
companies Amoco Corp., Exxon Corp., McDermott International Inc.,
Pennzoil Co., and Unocal Corp.; British Companies, British
Petroleum PLC and Ramco; Norway’s Statoil; Turkish Petroleum;
Saudi Arabia’s DNKL Oil; Lukoil, the State oil firm of Russia; and
the State Oil Company of Azerbaijan. The consortium believes it
can extract up to 4 billion barrels of oil from three wells in the
Caspian Sea. However, a problem has developed dealing with the
route the oil will take to the world market. At the moment there
are three alternatives to choose from; One which would transport
oil north from the Azerbaijani port of Baku through Russia;
second, which would transport the oil through Georgia; and
finally, a southern route through Armenia and Turkey.(Pope 1994,
1) There are many environmental aspects to the issue. They all
basically deal with the possibility of damage or destruction of
the pipelines. This is due to the fact that this is a politically
volatile region of the world.

2. Description

In 1990 the government of Azerbaijan began negotiating a
possible oil deal with the British oil giant British Petroleum.
Both sides saw that there was chance to earn large profit from the
deal. Azerbaijan needed desperately to redevelop its obsolete oil
drilling and refinery equipment (production had fallen to 1900
levels and was declining at a rate of 6 percent per year.) As for
British Petroleum, this was a chance to enter into a vastly
underdeveloped market. In addition, Azerbaijan no doubt
recognized the political benefits to come from an agreement,
namely independence and hard currency, which mattered greatly in
the early post-Cold War. Finally, after three years of
negotiation a deal was struck.(Pope 1994, 3)

A consortium of oil companies led by British Petroleum, known
as the Azerbaijan International Operating Company, signed a $8
billion 30 year contract with the nation of Azerbaijan.(Pope,
1994, 2.) The consortium was between what grew to be twelve
companies from England, Norway, Turkey, Saudi Arabia and the
United States, as well as the state oil companies of both Armenia
and Russia. The agreement calls for the development of three
Azerbaijani oil fields in the Caspian Sea. Oil production will be
phased in in increasing increments starting in 1996. By the end
of 1997, it is hoped that the peak sustained output of 700,000
barrels per day will have been reached.(Pope 1994, 4) In all,
there is believed to be a reserve of 4 billion barrels of oil.
These fields are thought to hold enough oil to be “a bonanza that
rivals Kuwait.”(Southerland 1995, A11)

While the consortium finally have the agreement signed, there
was a problem that required immediate attention. Their plan is to
sell the oil on the world market. As such, the oil must be
transported from Baku, the Azerbaijani port of origin to potential
world clients by way of the Turkish port of Ceyhan. There were 3
possible routes to be taken. The first involves constructing a
pipe line from Baku to the west in neighboring Georgia. From
there it would be shipped to Ceyhan. A second would involve
constructing a pipeline that would travel south through Armenia
into Turkey to Ceyhan. Finally, an existing pipeline could be
used by sending the oil north to the Russian port of Novorossiysk,
from there it would be shipped to Ceyhan.(Daniloff 1995, C2)

All the nations involved stand to earn a great deal from the
agreement, particularly Russia. For one thing, Russia wants to
retain a ‘special’ (influential) relationship with those states
that were former members of the Soviet Union. It would lose this
opportunity, it feels, if a distribution route that bypasses
Russia is chosen. In addition, there is a great deal of money to
be made from this agreement through sales, profits and tariffs
from oil crossing the Russian border. . . hard currency that the
nation is in dire need of. Lastly, and perhaps most importantly,
there is the issue of Russian security. Russia is fearful that it
will be in a negative position if it did not have a hand in oil
distribution because the deal is between a former member of the
Union and current members of NATO. In addition, if the
Azerbaijani consortium turns out to be successful, there is
another former republic, Kazakhstan, that is in a position to be
as successful as, if not more so than Azerbaijan. This is due to
the large reserves of oil it holds in the Caspian Sea.

For Azerbaijan, the issue also relates to security.
Azerbaijan will gain both physical and financial stability. The
chances of increasing its per capita income are much greater due
to its contract with the consortium. This increased financial
stability will allow it to have greater control over its dometic
and international affairs. In addition, it will be provided with
perhaps true and final independence from its former overlord,
Russia. The West also can gain security from the consortium. It
would be a chance to reduce its reliance on the Persian Gulf as a
source of oil.

The choices to be made are thus influenced by a myriad of
details. However, there is one rather important issue which has
not been discussed, the environment. The environment serves to be
severely damaged if any number of very likely events occur.
Firstly, the threat of terrorism on every possible pipeline route
is very high. The first route is through Georgia, which has not
yet rid itself of the horrors of civil war. Thus there is the
possibility of the pipeline being targeted by the combatants. The
second route, through Armenia, is the sight of an almost 7 year
clash with Azerbaijan over the disputed Ngorno-Karabakh region.
The final route through Russia directly traverses the Chechen war
zone. In addition, the Russian oil pipelines are in a horrendous
state of upkeep, with over 700 spills per year.(BBC Monitoring
Service 1995, 2) There is also the likely possibility that the
Caspian Sea itself will be polluted by any number of possible
mishaps. Finally, if one of the first two oil routes were chosen,
oil would have to be shipped to Turkey through the already
overcrowded Bosporus Sea channel. Thus animal or fish life, the
very ecosystem itself, could be adversely affected by pipeline or
shipping spills. For other relevant TED Cases, see Ecuador Case,
Norwoil Case, and Shetland Case.

The decision on which route to use faced a lengthy debate.
Finally, on October 9 1995, in a show of compromise, the twelve
member consortium agreed to have 2 pipelines. The first will be
the Russian route. The 1400 kilometer route will traverse Chechnya
and end at the Black Sea port of Novorossisk. The construction of
27 km of new pipeline is required. The second route will be
through Georgia to its Black Sea port of Batumi. This 920 km
pipeline requires the construction of 140 km of new pipeline.
This decision reflects, in part, geo-political influences. In one
sense, the consortium was influenced by the Western governments to
accept a Russian route, this was done so Russia would not feel
alienated. Secondly, selecting 2 routes disallows Russia from
having a strangle-hold over oil distribution.(Clark and Levine
1995, 1) Though a decision has been finally reached, it leaves
much to be desired environmentally.

3. Related Cases

See BOSPORUS Case
See EXXON Case
See ECUADOR Case
See SHETLAND Case
See SHELLRIG Case
See OGONI Case

KEY WORDS

(1) Trade Product= Oil

(2) Geography= Azerbaijan

(3) Environmental Problem =oil spill

4. Draft Author

Michael Goulet

Legal Cluster

5. Discourse and Status: AGR and INPROG

The consortium has recently agreed on a pipeline route, however,
there is still work to be done concearning construction of new
areas of pipeline, as well as security for the line running
through Georgia.

6. Forum and Scope: NGO and 3-Regional

7. Decision Breadth

Number of Parties Involved: 12 – United States, England,
Norway,
Azerbaijan, Russia, Saudi Arabia, Iran ,Turkmenistan, Kazakhstan,
Ukraine, Romania, Bulgaria

These are the nations which are involved in the consortium, as
well as those nations which surround the Caspian and Black Seas.

8. Legal Standing: NGO

This is a nongovernmental agreement between several oil companies,
albeit that 2 of these companies are state owned.

Geographic Filters

9. Geography

a) Geographic Species Domain: Asia

b) Geographic Conflict Site: West Asia

c) Geographic Impact: Azerbaijan

10. Sub-National Factors: No

This is a non-governmental agreement between oil companies that
was approved by the government of Azerbaijan and corresponds to
the laws regulating business agreements of the other signatories.

11. Type of Habitat: Ocean

The environmental impact of this agreement will be felt in and
around the Caspian and Black Seas.

Trade Filters

12. Type of Measures: NAPP

13. Direct vs. Indirect Impact: NAPP

14. Relations of Measure to Impact

a.Directly Related to Product: No

b.Indirectly Related to Product: No

c.Not Related to Product: No

d.Related to Process: No

15. Trade Product Identification: Oil

Indirectly related to this issue are the petrochemical and plastic
industries.

16. Economic Data

Industry Output: Varies with price per unit, measured in
barrels
of oil which was $17.31 as of 19 October 1995.

Employment:

17. Degree of Competitive Impact: High

18. Industry Sector

PETROLeum

19. Exporters and Importers

Case Exporter: Azerbaijan

Case Importer: Many

Leading Exporters: Various-Persian Gulf Nations

Leading Importer: Various-Europe

Environmental Cluster

20. Environmental Problem Type: POLL

21. Species Information: Many

If an environmental accident were to occur, there would be a
large number of species, including both land, air, and sea life.

22. Impact and Effect

Resource Impact: HIGH

Resource Effect: STRUCTure and SCALE

The outcome of an accident such as an oil spill in the area of
the
Caspian or Black Sea, or in the pipeline system on land would
undoubtedly have a high impact on and effect both the composition
and scale of the wildlife and its habitat.

23. Urgency and Lifetime: NAPP

An environmental problem has not occurred. The possibility of an
incident warrants concern for many species, but a determination of
the urgency for species protection is not applicable (yet?).

24. Substitutes: CONSV

There are a number of alternatives to the use of oil as an energy
source. If there was a serious attempt made at using these
alternatives then this could alleviate the dangers of oil spills.
However, considering that this is not very likely, then the next
best alternative would be using energy substitutes.

Other Factors

25. Culture

No

26. Human Rights

No

27. Trans-Boundary Rights: Yes

The conflicts between Azerbaijan and Armenia and between Russia
and Chehnya (also less obvious is that between Russia and the
former republics of the Soviet Union) serve to raise caution
against terrorist incidents against the pipelines/drilling
equipment or outright conflict between members.

Read

 

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