Sunday, July 20, 1997

Black gold, once Red, fuels an oil rush Azeri supply, and its impact, could be huge

By INGA SAFFRON / Knight-Ridder Newspapers

BAKU, Azerbaijan - This medieval trading town smells powerfully of salt water and crude oil.

Near the old city walls and shaded caravansaries, primitive wooden derricks suck sluggishly at the scrubby earth. There is so much oil here that it sometimes puddles to the surface or sends flames of combusted natural gas shooting out of the ground.

The Nobels and the Rothschilds grew rich here in Azerbaijan, a mountainous land that has been passed for centuries between Russia and Iran. Adolf Hitler's dream of controlling the Baku oil fields inspired him to invade Russia in 1941. He never made it, but the Soviet Union later drained Azerbaijan's known reserves before moving on to more exploitable oil fields in the 1960s.

Now the surest sign that this newly independent nation is having another oil boom is the proliferation of Texas twangs, Cajun restaurants and mobile phone dealers on the streets of the capital. From Houston's Jazz Club to Margaritaville's Tex-Mex kitchen, Baku is swarming with a new generation of oil pashas hoping to cash in on the latest gusher.

If their most optimistic drilling appraisals are correct, then Azerbaijan still has as much oil sitting offshore in the Caspian as Kuwait has under its sands - at least 20 billion barrels, possibly 100 billion. By autumn, the first batch should be glugging its way by pipeline and tanker to a destination somewhere in Europe.

This is big news for the United States, which consumes half of the world's oil output and whose proven reserves are just 22.3 billion barrels. Other countries in this turbulent region also have copious amounts of petroleum, but only Azerbaijan is ready and willing to deliver it to a port outside the Persian Gulf - that is, a port not subject to the whims of Middle East politics.

"The U.S. government is just starting to realize the importance of this find," observed a veteran Texas oilman whose company is about to begin prospecting of the Caspian's placid, steel-gray waters. "The U.S. wants an area of the world with free access to oil, and this is it."

Ever since the 1973 Middle East oil embargo, when American motorists stewed for hours in gas lines, "one of the main planks of U.S. energy policy has been to develop oil sources outside of the gulf," explained Robert Ebel of the Center for Strategic and International Studies, a Washington think tank.

The discoveries in the British North Sea helped improve supplies, but Azerbaijan's reserves are probably 10 times as big. American companies - among them Exxon, Pennzoil, Amoco and Unocal - have already invested $5 billion in Azerbaijan. They own nearly half the shares in the largest drilling consortium here.

"The Caspian region could become the most important new player in world oil markets over the next decade," the Energy Department wrote in an April 17 report to Congress, estimating the potential total revenue at $4 trillion.

The Caspian oil still can't match the combined riches of the gulf states in terms of total reserves. The sea will yield probably no more than 3 or 4 percent of the crude sold on the world market, oil experts forecast. Yet when all the oil-producing states surrounding the Caspian - Kazakstan and Turkmenistan, along with Azerbaijan - are finally connected to westward-flowing pipelines, all the geopolitical configurations of the last two decades will have to be recalculated.

Not only will Azeri crude give the West an alternative to Persian Gulf oil, it could even force down wholesale prices, argued Terry Adams, who heads the largest foreign oil consortium in Baku, the Azerbaijan International Operating Co.

"While the extent of Caspian oil reserves is not yet definitely known ... the region could have potential reserves of as much as 200 billion barrels, which would rank it second only to the entire Middle East," the Energy Department report said.

It's an enormous prize, but getting Azerbaijan's oil to a Western port resembles one of those fairy tales where the hero is obliged to cross vast distances and perform supernatural feats. With Russia to the north, Iran to the south, and the multiethnic Caucasus Mountains strewn across its middle, Azerbaijan is in one of the world's most war-prone neighborhoods.

"The Caspian represents a whole lot of money and political power. And a lot of different people want a piece of it," drawled the Texas oilman, who asked to remain unidentified because of his company's delicate courtship with Azerbaijan's autocratic president, Heydar Aliyev.

Besides Russia and Iran, there are the rebellious Chechens, who control the main pipeline route from Azerbaijan to the west, and the Georgians and Turks, who are lobbying furiously to have the oil rerouted through their territories instead. And to the west is Armenia, which has occupied 20 percent of Azerbaijan's territory since it seized the enclave of Nagorno-Karabakh in the early 1990s, and has vowed to block any oil pipeline in its vicinity.

Yet, U.S. officials in Baku say they hope that Azerbaijan's oil will salve the region's ethnic animosities, rather than aggravate them. Because pipelines will have to be built across several countries, the thinking goes, everyone stands to benefit.

President Clinton has personally telephoned the Azeri leader, Aliyev, to recommend that oil be pumped out through two pipelines, one traversing southern Russia and one through Georgia, and then perhaps continuing on to Turkey as the oil flows increase.

Clinton also mentioned in that conversation that it would also make him happy if Azerbaijan minimized Iran's role in the oil project, in keeping with America's effort to isolate Iran's fundamentalist government. Although Azerbaijan has no open quarrel with Iran, Aliyev readily agreed, according to Ebel, who is familiar with the exchange.

President Aliyev, a canny former Politburo boss who rules Azerbaijan with only token political opposition, is well aware of his country's importance to the United States and the West, and he is trying to make the most of it.

When he handed out exploration contracts, he made sure that oil giants from every major Western country were in on the deal, including Exxon, Pennzoil, Amoco, Unocal, British Petroleum, and even Russia's Lukoil.

By crafting such an elaborate network of friendships, Aliyev hopes to balance all the forces who greedily eye his country's wealth. Azerbaijan is the only former Soviet republic outside the Baltic states that has not been forced to accept Russian military bases. It is unabashedly pro-American, and has even petitioned to join NATO. The Turkish ambassador in Baku, O. Faruk Logoglu, describes Aliyev's diplomatic juggling as "a beautiful embroidery."

The United States, which favored Armenia in the recent Nagorno - Karabakh war, now finds itself in the strange position of having stronger business and security interests with Armenia's enemy - Azerbaijan.

"We are going to have to start learning to speak English instead of Russian," joked Eldaniz Ibragimov, an art expert who has already made a tidy sum by renting space in his sprawling family compound to foreign oil companies, and will soon open an art gallery catering to flush foreigners.

Ibragimov isn't the only Azerbaijani to welcome the onslaught of foreign companies. Azerbaijanis are, of course, counting on the oil rush to transform their impoverished nation of 7.7 million into a prosperous, modern state. But they also believe the presence of big multinational concerns is the only way to protect Azerbaijan's independence from its covetous neighbors - Russia, Iran and Armenia.

Just as Azerbaijanis are now favoring English instead of Russian as their second language after Azeri, they also want the United States to replace Russia as its main protector.

The Russians intensively developed the Baku oil fields, even constructing a whole city of chemical factories, yet they still left Azerbaijan one of the poorest regions in the former Soviet Union. The countryside outside Baku is strewn with sagging pipelines, abandoned derricks and industrial debris. Pools of salty scum pock the former sheep pastures where Soviet derricks extracted Azerbaijan's wealth, and the industrial city of Sumgayit has virtually shut down.

In the pursuit of oil, the Soviets built a city several miles offshore in the Caspian after World War II, a vast Erector Set architecture of derricks, platforms, prefab housing, and an network of floating causeways to link it all together.

Yet, in the end, Soviet technology was insufficient to probe the 600-foot depths of the Caspian. In the 1960s, the Soviets began shifting their main oil production from Azerbaijan to Central Asia and Siberia.

The floating city was already crumbling into the sea when the Soviet Union collapsed and Azerbaijan gained independence in 1991. Traveling its causeways now, drivers must take care not to plunge through car-sized potholes into the sea. Whenever he looks at the Soviet Union's floating city, said Paul Justice, one of the Texans working for Pennzoil, "I ask myself, 'How were they smart enough to build such an amazing place, and dumb enough to let it fall apart?' It's absolutely the biggest junk pile in the world."

The Western companies now developing the Caspian are trying to rebuild a portion of this city on the sea. They, too, will face formidable technological problems. From the drilling platforms, they will have to lay pipe far below the surface, in a shifting seabed with volcanoes periodically active.

On land, a few miles south of Baku, Western companies have already built an operations camp. Unlike the decrepit Soviet version, it sparkles with a military order. It also offers workers hot showers.

From there, the pipeline will rise out of the gray Caspian and begin its journey overland to Western markets. Bits and pieces of a rusting Soviet pipeline are already in place and can be used until a larger export pipeline is built. One heads north through Russia and Chechnya to the Black Sea port of Novorossisk; the other goes west across Georgia's mountains to the town of Supsa, also on the Black Sea.

The political obstacles are just as formidable. In Russia, the new Chechen government is prepared to shake down Moscow for huge fees to protect the pipeline from bandits. Meanwhile, on the western route, the pipeline skirts dangerously close to Armenian-controlled territory en route to friendly Georgia.

As Azerbaijan prepares to send its first batch of oil to the West, incidents near that triple border have been on the increase. From their luxuriantly green hilltop bases, Armenian soldiers have a clear shot at the pipeline route.

Armenia is the only country in the region that has nothing to gain from Azeri oil, and many fear that may be an incentive to act as a spoiler. "I can see construction crews being taken hostage, damage inflicted on the pipeline by the Armenians or rebel groups," said Robert Ebel, the oil analyst.

Unless a peace agreement is reached, the dispute between Armenia and Azerbaijan could interfere with the West's oil supply. "Peace can bring a pipeline," Ebel said. "But a pipeline cannot bring peace."