Global Insight Perspective | |
Significance | Escalating fighting between Georgia and Russia in the breakaway region of South Ossetia spread during the weekend to another Georgian breakaway region—Abkhazia—and came to include Russian airstrikes on Georgian infrastructure, which have reportedly continued today. |
Implications | Azeri and Kazakh oil transfers through Georgia have been disrupted and largely rerouted over Russia, although the Baku-Tbilisi-Ceyhan (BTC) pipeline has been shut down since 6 August, when Kurdistan Workers Party (PKK) rebels in eastern Turkey bombed the pipeline as part of their quest to fight the Turkish state. |
Outlook | While the overall Russian-Georgian conflict is in danger of escalating and Azeri oil exports are set to be severely disrupted, these recent events have also stressed that the entire route of the BTC—the only major oil pipeline from the Caspian region outside of Russia's control—should now be treated as high risk, and Turkey's viability as an energy bridge to Europe has been thrown into question. |
Connecting the Powder Keg
With one of Eurasia's perennial powder kegs erupting again into what has looked disconcertingly close to all-out war, the overall geopolitical stakes in the wider region and for the European continent—as well as for Middle Eastern states such as Iran and Iraq—are just beginning to be fully understood.
As diplomats scramble to try to isolate the conflict and get Russia on board with a unilaterally declared Georgian ceasefire yesterday, it remains clear that Azerbaijan has emerged completely reliant on Russia for all further oil exports as long as hostilities continue in neighbouring Georgia, while a smaller number of Kazakh oil transfers have also been affected. Russia was reported by the United Kingdom's Daily Telegraph to have fired 51 airborne missiles within hundreds of metres of the Baku-Tbilisi-Ceyhan (BTC) pipeline yesterday, demonstrating that any further escalation of the conflict would mean a direct hit on Georgia's strategic oil and gas transit capacity, damaging its main foreign strategic interest-drawing asset. The BTC pipeline has the capacity to bring up to 1 million b/d of crude from Azerbaijan over Georgia and eastern Turkey to the Turkish Mediterranean seaport of Ceyhan.
Meanwhile, the success by separatists from the Kurdistan Workers Party (PKK) in having severed the BTC pipeline in eastern Turkey has demonstrated the rising threat from a resurgent Kurdish nationalist movement, widely thought to have been all but defeated earlier this decade.
All in all, the convergence of the two conflicts on the BTC pipeline demonstrate its vulnerability and could render further foreign investment in oil and gas transport links that bypass Russia too risky. Apart from the direct consequences of the violence and destruction suffered by Georgia and South Ossetia, Azerbaijan and Turkey appear to be significant losers, with risk premiums on Azeri investments potentially going up and Turkey's attractiveness to Europe as a potential energy bridge from the Caucasus/Central Asian region—as well as from Iran, Iraq and the wider Middle East—being called into question. Russia, however, does not emerge as a particularly big winner either. It is being regarded as an aggressor and regional bully, despite the Georgians having sparked the fighting by attacking the Russian-protected South Ossetian region. With South Ossetia having reaffirmed its wish to be independent from Georgia in referenda, the technicalities of the conflict will take time to untangle, and a full negotiated settlement—including the scope for any compromises—is hard to envision.
Georgia for its part has managed to challenge Russia and portray itself as a small state suffering Russian harassment, earning widespread global sympathy thus far. Counting on U.S. and European Union (EU) support to ultimately underpin its territorial integrity, it is probably hoping to rebuild and repair the damage incurred on its territory through grants and support from its allies. Nevertheless, Russia seems eager to ensure that the challenge from the Georgians is not rewarded in this way, considering that this would set a precedent for numerous other potential international and domestic challengers. Hence the risk of serious escalation remains, despite Georgia yesterday calling a ceasefire.
Threats Along the Line
For the BTC pipeline consortium, however, the fighting in Georgia—exposing the strategic link's weakness in the face of Russian aggression—and the almost simultaneous PKK bombing of the pipeline in eastern Turkey has raised several problems, perhaps even impeding investor will to pursue the pipeline's suggested future capacity increase from 1 million b/d to 1.6 million b/d.
Eastern Turkey, particularly the parts through which the BTC is routed, was seen just a couple of years ago as an area where peace had largely been restored after decades of separatist Kurdish violence. Chaotic events in Iraq following the 2003 U.S.-led invasion, however, provided the PKK movement not only with a wider safe haven, but also greater access to weapons and funds, of which it had suffered a dearth following the 1991 break-up of the Soviet Union. That the movement has finally been able to inflict serious damage on the BTC—shutting it down for perhaps several weeks—despite it being strongly guarded, indicates just to what level the PKK has managed to reinvigorate itself, and suggests that bringing some form of peace to eastern Turkey will once again be a long-term project for the Turkish military.
Regional Energy Options Thin
In the meantime, Turkey's attractiveness and feasibility as the energy bridge between the Middle East, Caucasus/Central Asia, and Europe has been cast into doubt. While Europe politically is likely to be willing to take some risks in reducing its energy dependence on Russia for its gas and oil imports—perhaps even larger risks in the face of Russia's perceived attempts at regional bullying— investors are likely to further question the security and prospects of returns on their investments. From this regard, the success of the PKK operation might be even more damaging than the Georgian-Russian conflict should it end in a settlement, as it also throws other pipeline ventures that would cross the region, such as the proposed Nabucco gas pipeline (possibly including a link from Iraq) and the Arab Gas Pipeline from Egypt over Jordan and Syria, into potential doubt.
Outlook and Implications
The Russia-Georgia conflict has put the spotlight on the security risks for large-scale energy investment in the Caucasus region. The conflict could potentially escalate into a war where the only main oil and gas link (if the Baku-Erzurum gas pipeline is included) from Azerbaijan that is not controlled by Russia is blocked on a long-term basis. However, if the conflict is contained, Georgia could carve out greater room for manoeuvre for itself, with Russia already having been branded globally as a regional bully and aggressor, despite not having instigated the fighting.
Nevertheless, from a geopolitical energy point of view, the successful targeting of the BTC pipeline by the Kurdish PKK could well be the more significant event, if it indeed serves to demonstrate the movement's successful resurgence and herald intensified battles for perhaps years to come. If so, Turkey's centrality to continued Caucasian energy transfer growth is thrown into doubt, and new ventures to connect the Middle East and Central Asia to Europe through Turkey could now even be considered non-viable, although they are politically desirable by a Europe eager to rely less on Russian exports and transfers.
The violence—now a threat to virtually the whole route of the BTC—could well mean that the commercial interest to construct pipelines takes a further hit. Greater interest in Russian transfers from Central Asia, and in LNG projects from the Middle East, could well be the long-term result unless the EU, in particular, comes in with much more generous financial guarantees and political involvement to support pipeline projects.
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