The Caspian Pipeline Debate Continues: Why Not Iran?

By Miles, Carolyn | Journal of International Affairs, Fall 1999 | Go to article overview

The Caspian Pipeline Debate Continues: Why Not Iran?


Miles, Carolyn, Journal of International Affairs


The export of oil and gas reserves from the heavily resource-endowed Caspian states--Azerbaijan, Georgia, Iran, Turkmenistan, Kazahkstan and Russia--is an economic problem that has evolved into a complex network of geo-strategic concerns. The countries whose transit routes are eventually chosen will benefit not only from heavy capital inflows in terms of investment and transit fees, but more importantly, will gain considerable influence throughout the region. This article will focus specifically on the transportation of oil and gas from Azerbaijan and will examine the contentious option of a pipeline route via Iran.

The Azerbaijan International Operating Company (AIOC), a consortium between the Azerbaijani government and 15 international oil companies,(1) is primarily responsible for deciding the direction of the main export pipeline route (MEP), which would originate from the city of Baku in Azerbaijan. The decision on the MEP will have enormous implications for the region's future economic windfalls as well as security. Three routes are being considered for the MEP: (1) a pipeline west through Georgia then to the Turkish port of Ceyhan, (2) a pipeline west to the Georgian port of Supsa where tankers would carry shipments through the Bosporus strait or (3) a pipeline south through Iran (see Map). Due to low oil prices, political events and financing constraints, the AIOC has been unable to reach a consensus on which of these routes to choose.

The third possibility--that of a pipeline south through Iran--has been dismissed by the AIOC as a result of the United States containment policy toward Tehran. American objections have consequently swayed investment from Iran to Turkey and Georgia. The U.S. government's opposition continues despite the many potential benefits of an Iranian route, including possible future reconciliation between the United States and Iran; an inexpensive route that would quickly benefit the Caspian countries and industry players; and the potential for economic development as the catalyst for significant political change in Iran. Nevertheless, firms--both U.S. and non-U.S.--are increasingly turning to Iran because of reasonable construction estimates, changes in that country's political environment and its geographic proximity to Azerbaijan.

Choosing an Iranian route, however, does not come without risk. The memory of terrorist acts and the mistrust between Iran and the West prevent serious support of a pipeline southward. Furthermore, Western fears that Islamic revolutionaries may attempt to stir up a religious movement in the Caspian states--further binding the Central Asian states to their neighbor--have intensified U.S. resistance toward an Iranian pipeline. Yet at the same time, political instability in Turkey, ethnic tensions in Georgia and Armenia, potential environmental threats from shipping oil through the Bosporus and high construction costs are factors that are making industry players skeptical about choosing the Baku-Ceyhan or Baku-Supsa options.

As a result, AIOC members are drifting away from the U.S.-preferred route of Baku-Ceyhan. Oil prices are at a historic low because technological advancements have reduced exploration, development and production costs and because demand for oil has decreased as a result of the relatively mild weather in the Northern Hemisphere this past winter. The globally depressed energy industry has forced the AIOC to delay its decision on the MEP until the year 2003, at the earliest. David Woodward, head of the consortium, announced in February 1999 that the consortium itself would reduce operating expenditures by 20 percent in response to low oil prices.(2) With declining profits and depressed oil prices, companies are basing their decisions on the most financially affordable and timely route rather than complying with the geo-strategic concerns of the United States. The recent oil slump has also forced oil and gas companies to reevaluate the significance of the Caspian's reserves and to consider the quickest way to transport oil to Western markets. …

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