The recent conflict between Russia and Georgia is not specifically about energy, but has major implications for energy security.

Instability in this region automatically casts doubt on plans for the massive expansion of oil transit through Georgia to access global markets via the Mediterranean and ambitious European Union plans to create a "Fourth Corridor" for gas supplies to Europe.
Instability in this region automatically casts doubt on plans for the massive expansion of oil transit through Georgia...

Georgia and the South Caucasus are a bottleneck through which 1 million b/d of Caspian oil reaches European and Mediterranean markets.

In the short run, the fact that the biggest artery of all, the Baku-Tbilisi-Ceyhan (BTC) pipeline, had already been closed down as a result of a fire in Turkey on 5 August gives customers breathing space.

Turkish officials have said it may take one or two weeks to repair the line, which had been carrying around 850,000 b/d before the fire.

But a combination of Russian bombing and general chaos will impact on other oil shipments through Georgia.

The Georgian railway system routinely carries more than 100,000 b/d of crude from Azerbaijan and Kazakhstan heading for external markets via Georgian Black Sea ports.

Russian bombers Friday attacked the port of Poti, with Georgian sources saying the port was "destroyed." There are two ports at Poti - one navy base and one civilian terminal - with the military installations the more likely target.

Question mark over expansion plans

The fighting also calls into question expansion plans. Azerbaijan's state oil company, Socar, has bought the Georgian oil terminal at Kulevi, just 12.5 kilometers south of Poti, and has plans to increase rail shipment capacity from 15 to 25 million mt/year (about 300,000 b/d to 500,000 b/d).

Azerbaijani and Kazakh interests are also looking to develop oil refineries on Georgia's Black Sea coast, both at Kulevi and Batumi.

The immediate issue concerns the state of the infrastructure in the wake of the latest fighting.

A longer term question is whether Azerbaijani and Kazakh investors will be quite so interested in such projects, given Russian opposition to the existing energy corridor through Azerbaijan and Georgia and its desire to attract Caspian oil and gas to pipelines transiting Russia.

In energy terms the real concerns are long-term.

If the crisis remains confined to Georgia's breakaway region of South Ossetia and to the role of Russian troops as designated peacekeepers, then the immediate oil situation should prove manageable.

But if the conflict deepens and becomes a more general struggle for control of Georgia, then the country's energy infrastructure, devastated during the civil wars of the early 1990s, is at risk.

Although Georgian authorities reported that some Russian bombs have landed near the BTC pipeline, there are no reports of damage to either the line or its pumping stations and monitoring facilities.

The real risk is to plans to expand the BTC from its current 1 million b/d capacity to as much as 1.8 million b/d, so that it can handle large volumes of Kazakh as well as Azerbaijani crude.

The same applies to plans to expand the newly-reopened 150,000 b/d Baku-Supsa line.

Diplomatic problem for BP and Chevron

The two western companies that face the most complicated diplomatic problem as a result of the crisis are BP and Chevron.

BP is the lead member of the groups that developed the Baku-Tbilisi-Ceyhan (BTC) line and its gas twin, the Baku-Tbilisi-Erzurum (BTE) pipeline.
The loss of a direct route to western markets that avoids both Russia and Iran would give Russia a stronger position...

Chevron's interests stem from its immediate need to find new ways of exporting oil from the giant Tengiz field in Kazakhstan, from where it currently transports up to 100,000 b/d by rail across Georgia.

The biggest question mark of all hangs over the future of EU plans to create what it calls the 'Fourth Corridor' for European gas imports through the South Caucasus states of Azerbaijan and Georgia, to augment existing main pipeline gas supply routes from Russia, the North Sea and North Africa.

In the past, international energy companies built oil and gas pipelines from Azerbaijan through Georgia to Turkey, despite the existence of 'frozen conflicts' - even though the front line of one such conflict, between Azerbaijani and Armenian forces over Nagorno-Karabagh, was just 15 kilometers away from the route of both the BTC oil pipeline and the BTE gas pipeline.

With the South Ossetia clashes proving at the very least that these conflicts are all continuing to smolder and can easily burst into flame if they are not managed very carefully indeed, the ability of international companies to raise finance and secure financial guarantees for new projects in the South Caucasus looks very limited.

If the Caucasus is not a safe route for further supplies for increased volumes of oil and gas to travel westward, then major suppliers on the eastern shore of the Caspian, notably Kazakhstan and Turkmenistan, will either look east to expand their plans for supplying the Chinese market, or may even decide to increase their limited oil and gas exports to and through Iran.

The loss of a direct route to western markets that avoids both Russia and Iran would give Russia a stronger position in negotiating gas purchases from Central Asia as well as its own export contracts to European customers.

Georgia itself may face severe energy problems in the immediate future.

It receives around 1 Bcm/year of gas from Russia, which could be cut off, as long as Russia can find an alternative way of supplying gas to Armenia, which receives the bulk of its gas via the same line that serves Georgia.

Created: August 11, 2008