– Another View of
Russia’s Invasion of Georgia

Russian invasion stirs unrest in oil market
SHAWN MCCARTHY -GLOBAL ENERGY REPORTER

OTTAWA -- A major pipeline that runs through Georgia is a threat to Russian domination of energy supply to Western Europe

Russia's invasion of neighbouring Georgia has injected fresh supply fears into an edgy global crude market, as the energy superpower tightens its grip over a key oil and gas export route from central Asia.

Moscow's incursion into Georgia threatens the Baku-Tbilisi-Ceyhan (BTC) oil pipeline, which transports nearly one million barrels of oil a day from one of the world's most attractive hydrocarbon regions to the Turkish port on the Mediterranean Sea.

Despite that supply risk, crude oil prices yesterday continued their month-long swoon from the record high of $147.27 (U.S.) a barrel touched on July 11.

On the New York Mercantile Exchange yesterday, the near-month contract for light, sweet crude fell 75 cents to $114.45 (U.S.) a barrel, as traders focused on weaker-than-expected demand numbers from China.

Market reaction to the invasion was also muted because the BTC pipeline was already shut down by an explosion last week in Turkey that has been blamed on Kurdish separatists.

Any short-term impact of the Georgian conflict on markets will likely be dwarfed by the longer-term geopolitical fallout.

Russia's aggression and Georgia's instability will strengthen the position of an increasingly confident Russia in the global energy trade, analysts said yesterday.

Both the United States and Europe have sought to reduce Moscow's stranglehold over oil and natural gas from energy-rich central Asia.

One strategy has been to promote pipelines through Georgia, a former Soviet republic that is now staunchly pro-West.

Russia has competing pipelines and has sought to undermine the Western-backed projects.

"Georgia's reputation and its viability as a safe alternative route for pipelines bringing oil and gas from Kazakhstan, potentially Turkmenistan and Azerbaijan to Mediterranean markets has been compromised," said Robert Johnston, and analyst at Washington, D.C.-based think tank Eurasia Group.

"The more the fighting extends outside of Ossetia into other regions - or if the BTC pipeline itself gets attacked successfully - then that reputational risks and security risks for any operators considering pipeline expansion in Georgia will be further elevated."

Republican presidential nominee John McCain yesterday slammed Russia's invasion of a U.S. ally, saying it threatened American strategic interests, including the BTC pipeline. Moscow said it launched military action in response to Georgian attacks against pro-Russian separatists in the enclave of South Ossetia.

Assuming that hostilities end fairly soon, the pipeline - which is being expanded from 850,000 barrels a day to more than 1.2 million barrels daily - will likely be spared in the current Russian-Georgia conflict, Mr. Johnston said.

Russians troops have entered Georgian ports on the Black Sea that are a main shipping point of Caspian crude from Azerbaijan, Turkmenistan and Kazakhstan.

More than 500,000 barrels leave these ports daily, and plans are afoot to expand capacity by an additional 200,000 barrels a day.

For years, Russia has been both the principal market - and the main export route - for central Asian oil and gas producers.

It accounts for nearly 25 per cent of Europe's natural gas supplies.

"Russia has a very clear strategy and would prefer Europe's gas to go via Russia and not via independent countries," Dieter Helm of Oxford University told Reuters.

"There is no definite attempt to disrupt supplies ... but it is not unhelpful to Russia that there is unrest."

Azerbaijan and Kazakhstan have emerged as key sources of growing oil supplies outside the Organization of Petroleum Exporting Countries. Kazakhstan is expecting its much-delayed Kashagan field - one of the largest new fields to be tapped in a generation - to come on stream later this year or early in 2009.

Georgia is also a key transit route for natural gas exports from central Asia to European markets, which have faced disruptions in the past when Russian squabbled with Ukraine and Belarus through which the gas pipeline traverse.

As part of its effort to reduce Russian influence, the U.S. had even backed a proposed Turkmenistan-Afghanistan-Pakistan-India natural gas pipeline intended to reduce Russian dominance of central Asia exports.

But that TAPI project is unlikely to proceed unless Afghanistan can be stabilized.

The unrest in the Caucasus may result in Europe losing out to China in the competition for new gas supplies. Turkmenistan is considering building a pipeline to its energy-hungry Asian neighbour, which now appears more attractive than taking on the political risks of a trans-Georgian route.

Georgia conflict threatens oil supplies

Alarm is growing that escalating fighting between Georgia and Russia poses a threat to strategic pipelines that deliver oil and gas from the Caspian Sea to Europe and the United States.

PIPELINES UNDER THREAT

1. Baku-Tbilisi-Ceyhan: The $3-billion U.S. BTC opened in 2006. Owned by BP-led consortium including U.S. oil giants Chevronand ConocoPhillips

Capacity: 1.2 million barrels per day

2. South Caucasus gas pipeline: Operated by BP, 692-km pipe transports gas from Azerbaijan's offshore fields.

Capacity: 20 billion cubic metres per year

3. Baku-Supsa oil pipeline: 830-km pipeline and terminal cost $556-million and was completed in 1999.

Capacity:145,000 bpd

4. Baku-Novorossiysk oil pipeline: Underused following dispute between Russia and Azerbaijan. Russia controls 1,100 km of 1,330-km pipeline.

Capacity: 100,000 bpd

GRAPHIC NEWS; SOURCES: NUPI-CENTRE FOR RUSSIAN STUDIES, HYDROCARBONS-TECHNOLOGY.COM