The Oil is not enough

Transcription

1 Oil 8/3/03 6:29 am Page 1 The Oil is not enough Financing the right pipeline in the Caspian Frédéric Blanc-Brude From the onset of independence Azerbaijan took the lead in attracting foreign investment to the Caspian region. The Azeris understood that, in order to guarantee the country s independence, foreign investment would be needed to fund national economic development, which in turn would strengthen the state, and so provide the means by which it could survive on its own. Similarly, Kazakhstan also began to actively court foreign investors and in 1993 signed a contract to develop the giant Tengiz oil field with Chevron (US). Azerbaijan followed Kazakhstan in 1994 by signing what was called the "Contract of the Century" with the Azerbaijan International Operating Company (AIOC), a consortium of western companies led by British Petroleum (BP). The contract was a Production Sharing Agreement (PSA) to develop the Azeri- Chirag-Gunashli (ACG) oil fields, which were Azerbaijan s primary oil assets. By 1994 both Kazakhstan and Azerbaijan had given western companies a stake in the socio-economic development of not just their countries but in the entire region. Finding and securing access to oil and gas is not the risky part of Caspian business, even though estimates of available reserves vary dramatically. The real challenge for developers lies in mitigating the multitude of risks associated with operating in difficult host-country environments. The so-called "above ground risks" (risks not directly linked to drilling) are plenty in such a complex and disputed region, and as the nineties unfolded, it turned out there was plenty more than expected. This article will discuss the merits and faults of pipeline development in the region, with a focus on two gigantic, one billion barrels per day, projects: the CPC pipeline (Caspian Pipeline Consortium) between Tenzig (Kazakhstan) and Novorossyisk (Russia) which started operating in 2001, and the BTC pipeline (Baku-Tbilisi-Ceyhan) between Azerbaijan and Turkey, scheduled for completion by These two projects are competitors in more than one way: they represent competing attempts at regional dominance (Russia vs. US), competing development models (economic vs. strategic) and competing financing schemes (equity finance vs. project finance.) Financing the CPC was, and still allegedly is, a heavy burden on the Chevron-led consortium which developed the project. But the potential of Kazak oil combined with the northern pipeline route through Russia still made enough business sense for private stakeholders to go ahead. Involvement with the BTC pipeline however, while ranking high on the US administration agenda, demanded guarantees that would prove very hard to provide. Mitigating above the ground: pipeline diplomacy in the 1990s No other region brings together so many "above ground risks" in such a complex fashion than the Caspian. When companies re-entered this region in the early 1990s after an 80 years absence, they did not anticipate the magnitude of the commercial challenges. Nevertheless, some companies were willing to assume the commercial risks because of the huge upside. At the time, international oil companies (IOCs) were attracted to the Caspian because of declining production in the Alaskan North Slope and the North Sea. With the Middle East (Iraq, Iran) largely off limits, companies were searching for new sizeable international growth opportunities. The Caspian region seemed to hold out such promises. Managing the domestic, commercial and political risks of operating in these countries turned out to be just a small part of a much larger package of risks. Such a package involved the strategic agendas of peripheral countries Russia, Turkey and Iran and a number of players outside the region, most importantly, the US. These strategic agendas were to be best realised in a series of pipelines, solid links of steel and concrete, cementing relationships between countries. Throughout the nineties, these pipeline plans became the objective as well as metaphoric expression of regional dominance: Russia vs. Turkey vs. Iran. After 1997, as the US became increasingly wedded to East-West pipeline routes, Turkish dominance also meant US dominance. The countries of the Caspian region have embraced the US strategic agenda because it has brought with it some explicit and implicit promised benefits from the US government, both economic and military. The leaders of these countries felt that the US would ensure their future independent power bases. As for companies operating in the region, they got caught up in the New Great Game to fashion a Silk Road Strategy for the Eurasian Energy Corridor. Notwithstanding such "flowery" language public diplomacy is a nascent art from the categorical nature of the oil imperative could not to be ignored by developers. J. Robinson West, Chairman of the Petroleum 59

2 Oil 8/3/03 6:29 am Page 2 Finance Company, recalls that "companies were gradually forced to take sides in an all or nothing game either do it the way the US wants and potentially sacrifice the business imperative of making money or don t get resources to market." An early version of the war on terror formula (either with us or against us) applied to the war for oil. Under US guidance, commercial considerations were to be secondary and companies would be asked to shoulder the financial burden of paying for it. Commercial entities accountable to their shareholders would be asked to assume the role of nation-builders. This sets the stage for developers involvement in the region and the difficult choices they have to make between commercial profitability and the quandaries of an international strategic agenda that is none of their making. CPC: The Equity Route Chevron was the first company to embark on exploiting oil in the region. When it signed the contract for the Tengiz 1 oil field in Kazakhstan in April 1993, Chevron identified the Russian route for oil exports as the most commercially expedient for this crude. In the beginning however, the pipeline project between Tenzig and Novorossyisk (Russia) that was to be built by the Caspian Pipeline Consortium (CPC) was only a joint venture among Kazakhstan, Russia and the Oman Oil Corporation. In 1994, Chevron found itself being asked to finance most of the thenprojected US$1.4 billion cost, since Russia and Kazakhstan had no money. Yet Chevron was offered only a minority stake (15 percent) in the pipeline. The bulk of its share under the original consortium structure would instead go to governments (Russia 24 percent, Kazakhstan 19 percent and Oman 7 percent) which own 50 percent of the CPC, but whose financial participation could only be minimal. This quandary led Chevron to slash its investment in the Tengiz field by 90 per cent for From the beginning Chevron wanted a direct pipeline to a port, but disputes arose over which port it should be, who should pay for construction, and how. Restrictions by Russia on oil exports from Kazakhstan created doubts about the viability and future of the investments around the Caspian Sea almost as soon as the USSR began to disintegrate. In 1993, Russia limited exports of Kazakhstani crude oil, saying that the Tengiz field had too high a level of mercaptans, a family of sulphur compounds that corrode pipeline. As a result of Moscow's insistence, Chevron's Tengiz venture had to build a treatment plant to extract hydrogen sulphide from the crude oil before putting it into the pipeline system. In early 1995 Russia and Kazakhstan agreed to construct a US$400 "BTC will traverse three countries and cross a mountain range in Turkey that is up to 2500 meters high. Its technical challenges are compounded by security risks particularly on the territories of Georgia and Turkish Kurdistan." million section of the CPC pipeline. However, financing for the remaining 750- mile link to the Tengiz field remained a problem. Kazakhstani officials then suggested that British Gas and Agip might join Chevron in financing it. Between 1995 and 1998, the US did a considerable amount of work, through its embassy in Almaty, to convince people that the CPC pipeline could in fact be built. It also assisted in finding ways to restructure the consortium so that it could attract financing. When construction of the final section began in 1998, the agreed government/company cost split was 50/50. As their 50 percent share of costs, the Russian and Kazakh governments agreed to contribute rights of way and existing Russian and Kazakh pipeline assets to the project. 740 km of existing pipes would be used, or about half the length of the project. The companies (eventually Chevron, Lukoil/ ARCO, ExxonMobil, Rosneft/ Shell, British Gas, Agip, Kerr McGee, Kazakhoil/BP) financed their stakes in the form of equity to pay the US$2.5 billion cost of old pipe refurbishment, new pipe construction and for a new terminal in Novorossiysk. This means that each company was financing two times its share in CPC to cover the 50 percent cost burden that governments were not paying. Finally in March 2001, Kazakhstan's Prime Minister Kasymzhomart Tokayev turned the Tengiz tap to begin filling the 1,580-kilometer pipeline. The pipeline had cost US$2.5 million to build - twice the originally estimated cost and has an initial capacity of somewhat less than 600,000 barrels per day. Other issues for corporate shareholders included having the Moscow-appointed CPC director fired in In step with expansions at the Tengiz concession, its eventual full capacity will range from million bpd by However, even when Tenzig reaches its production peak in 2010 (750,000 bpd) there will be plenty of excess export capacity for CPC. Indeed, CPC was meant to hook up with the Transneft network (Russia), and never did. Last December, Russia's Federal Energy Commission (FEC) had still not abandoned its plans to put the Russian portion of the CPC route on the official list of natural monopolies, which would give the Russian government the right to regulate the tariffs and access to the pipeline. Sound economics and Moscow's energy politics are still to be reconciled. In a recent interview, Chevron confirmed that CPC is not yet profitable. Azerbaijan: the routes multiply When Chevron embarked on its pipeline quest through Russia, the US government 60

3 Oil 8/3/03 6:29 am Page 3 Graph 1: CPC Ownership Structure British Gas 2% Agip 2% Mobil 7.50% Russia 24% Chevron 15% Kazakoil-Amoco 1.75% Rosneft Shell 7.50% Kazakhstan 19% Lukarko 12.50% Oman 7% Source: CPC still favoured a close relationship with Moscow although the ties had begun to weaken. While the US was and continues to be supportive of the CPC, it has simultaneously embarked on the "Silk Unocal, ExxonMobil, Devon and Amerada Hess) for the Azeri, Chirag and deepwater Guneshli fields, with 4 billion barrels of reserves. The northern pipeline route from Road Strategy," which favours the Azerbaijan (owned by Russian pipeline construction of East-West pipe-line routes. company Transneft) that traversed Largely directed at the southern Caspian, namely Azerbaijan and Turkmenistan, the US seeks to anchor these countries to Turkey with an oil and gas pipeline network that is envisaged as a transport corridor that will bring resources from the eastern side of the Caspian, under the sea, Dagestan and Chechnya into Russia, was experiencing security problems. So, plans were devised by AIOC to build a second 830 km pipeline (just over half the length of CPC) to the Georgian port of Supsa. Drawing on lessons learned from the CPC experience, Supsa was going to be built on to Azerbaijan, Georgia and Turkey. the premise that existing pipes in The development of Azerbaijan s oil Azerbaijan and Georgia could be potential was started in 1994 by the BP refurbished at low cost. This turned out to Amoco-led Azerbaijan International be a more difficult proposition for the oil Operating Company (AIOC - also includes pipelines in these countries, and the Table 1: CPC Pipeline Pipeline Current 2015 Related field and Peak project capacity capacity available production reserves CPC 565,000 bl/d 1.34m bl/d Tenzig: 6-9 billion 750,000 bpd barrels (by 2010) Src: EIA companies eventually found themselves having to build a new pipeline at a cost of US$560 million, almost double the original US$315 million that had been budgeted by AIOC for the Supsa connection. The US$1.8 billion Supsa pipeline was completed in December 1998, and onstream in April Sorting out who pays for this cost overrun remains an issue between the AIOC member companies and the Azeri government. EBRD, Citibank, Dresdner Bank and Société Générale were given mandate to arrange financing for Baku-Supsa pipeline in November On February 19, 1999, the EBRD and IFC each provided financing of US$200 million, of which up to US$100 million was syndicated 2. The facility was provided by way of five separate loans by each of the EBRD and IFC to affiliates of BP Amoco plc, Exxon Corporation, Lukoil Joint Stock Company, Turkiye Petrolleri A.O, and Union Oil Company of California. Citibank, Dresdner Bank and Société Générale acted as Co-Arrangers and each contributed US$ 25 million to the syndicated loans. Supsa is currently transporting all of AIOC s 145,000 bpd of production. Plans for further upgrades, even though strongly favoured by AIOC, have been abandoned at the US and Turkey s insistence, to focus on the Baku-Tbilissi-Ceyhan pipe-line (BTC). However, US-backed AIOC was not the only contender for Azeri oil. In early April 2000, Transneft announced that it had completed a US$160 million, 312 km bypass pipeline around Chechnya, heading north out of Azerbaijan via Dagestan. The entire length of the northern pipeline is close to 1500km, comparable to CPC, and it could carry up to 360,000 bpd. The state-owned Azeri company SOCAR is committed to ship 100,000 bpd through the northern route built by Transneft. While the northern route option is less ideal because the oil received at the other end (in the Russian Black Sea port of Novorossiysk) still has to be shipped through the Bosporus straight, the infrastructure is not costing the companies or 61

4 Oil 8/3/03 6:29 am Page 4 Table 2: Export Pipelines from Azerbaijan Pipeline project Current capacity 2010/15 capacity Related field and ACG Current ACG Peak available reserves Production Production 2010 BTC 1 million bpd (2005) 1 million bpd Baku-Supsa 145,000 bpd 145,000 bpd Azeri, Chirag and Baku-Novorossyisk deepwater Guneshli (via Grozny) 100,000 bpd 300,000 bpd fields (ACG) with 450,000 bpd 800,000 bpd Baku-Novorossyik 4 billion barrels (via Dagestan) 120,000 bpd 360,000 bpd Total 1,365,000 bpd 1,805,000 bpd Src: EIA the Azeri government anything to build. Thus, even the US$2.15/bbl transport fee (though higher than on the Supsa route) is competitive. Moreover, having the northern route option available gives all investors in Azerbaijan a measure of comfort. For the AIOC consortium, it makes business sense to ensure that the northern route is supplied. It also makes business sense to ensure that the western route to Supsa is supplied. These two routes provide AIOC export outlets for at least 350,000 bpd i.e. almost the amount of oil that AIOC will pump out of the Azeri, Chirag and deepwater Guneshli fields by But the time had come to challenge the northern route. A new pipeline had to be built, cutting through the region s web of oil & gas fields and export routes: a pipeline that would go directly from the Caspian to the Mediterranean: the BTC. The Silk Road: Project financing the BTC The new option promoted by the US government and favoured by the governments of Azerbaijan, Georgia and Turkey is the Baku-Tbilisi-Ceyhan (BTC) pipeline. The BTC would be 1,730 km in length of new pipe construction (vs. the CPC with 1530 km and some existing pipes). The BTC is estimated to cost US$3.3 billion (first estimates in 2000 were US$2.4 billion) and is scheduled for completion in This time again, the US administration was deeply involved in securing the project: the 1998 "Caspian Map 1: Caspian oil pipelines exports routes Source: IJ 62

5 Oil 8/3/03 6:30 am Page 5 Basin Initiative" features an Ankara-based Caspian Finance Centre and the creation of the post of Special Advisor to the President and the Secretary of State for Caspian Energy Basin Diplomacy. Relentless trips to the region by the various Special Advisors eventually led to the brokering of the project agreement, signed on the margin of the OSCE conference in Istanbul, in November The BTC is not an easy pipeline to build. It will traverse three countries (465 km in Azerbaijan, 255 km in Georgia and 1010 km in Turkey) and cross a mountain range in Turkey that is up to 2500 meters high. Its technical challenges are compounded by security risks particularly on the territories of Georgia and Turkish Kurdistan. Most troubling for developers, however, there seems to be insufficient reserves at present in Azerbaijan to commit to BTC. First estimates concluded that a 1 million bpd pipeline would need 6 billion barrels of reserves. The maximum reserves AIOC could bring to the pipeline are 4 billion barrels. Despite earlier misgivings, BP, the operator of AIOC, threw its support behind the Baku-Ceyhan proposal in BP had been opposed to the project, citing doubts that enough oil has been found to justify the high costs. However, BP revised downwards the amount of oil reserves that would be needed to make the pipeline economical, from 6 billion barrels to a more achievable 4 billion to 4.5 billion barrels 3. Seven of the ten members of the AIOC consortium decided to go ahead with the BTC sponsor group, with only Lukoil, ExxonMobil, and Devon Energy declining the offer. Meanwhile, SOCAR, which originally had a 50% stake in the sponsor group, sold ENI - a non-member of AIOC - a 5% share in the pipeline project in October After failing to come to agreement with other energy companies to join the sponsor group, in March 2002 SOCAR reduced its stake in the pipeline project to 25%, distributing 20% among other group members. In June 2002, SOCAR sold an additional 5% share to TotalFinaElf, but rejected a proposal from ChevronTexaco to join the sponsor group. At the end of June 2002, the head of the sponsorship group, Michael Townshend of BP, said that the pipeline ownership group was complete. Shares in MEPCO (Main Export Pipeline Company) are as follows: BP (38.21%), SOCAR (20%), Unocal (9.58%), Statoil (8.9%), TPAO (7.55%), TotalFinaElf (5%), ENI (5%), Itochu (3.4%), and Delta Hess (2.36%). The difficult task of convincing developers to get involved required solving two sets of issues: first, drafting an agreement covering the building and operation of the pipeline which sufficiently "ring-fenced" the potential legal, regulatory, security and tax problems that could arise between Azeri, Georgian and Turkish institutions. That was finalised at the Istanbul Summit in November Second, project financing of the project had to be secured, allegedly the most difficult and still unresolved issue. Fencing the ring: the Baker Botts tour de force Only by having lawyers draft the contracts that would lay the pipeline s legal Graph 2: BTC Ownership Structure Source: BP Total Fina Elf 5% TPAO 7.55% Statoil 8.90% Unocal 9.58% Itochu 3.40% ENI 5% SOCAR 20% foundation could the companies determine the actual cost. The companies demanded that each host government provide predictable construction costs, transit fees, taxes, land use rights, and physical pipeline security. Involved very early on in the deal, Houston-based Baker Botts led the drafting of a binding international treaty that would supersede the domestic laws of each of the three host countries. Some of the different countries laws conflicted or did not address complicated corporate transactions. Azerbaijan s and Georgia s legal systems were still in transition. The law in Turkey was more developed but would not allow a foreign company to own land. The list was endless Instead of having local laws amended, an international treaty could solve all these issues at once. IOCs would also not trust local courts to enforce the terms of the agreement. So the consortium insisted that all conflicts arising under the contracts be submitted to private arbitration under UK law. Whilst such agreements are common for oil and gas projects, this time, instead of one contract between one consortium and one government, separate agreements were Delta Hess 2.36% BP 38.21% 64

6 Oil 8/3/03 6:30 am Page 6 struck with each govern-ment individually, and another one between the group of companies and all three different governments collectively. The agreements do not only supersede current domestic laws, but also all future laws for up to 60 years. Any subsequent environmental regulation cannot apply to the consortium project. The same goes if one of the host countries wants to raise corporate taxes, or if fighting with local guerrilla breaks out and the government decides that it needs more money for pipeline security. Azerbaijan, Georgia, and Turkey each had unstable tax laws with rates higher than the consortium was willing to pay. Baker Botts had to create a tax structure which, by keeping taxes associated with the project as low as possible, would keep down the cost of building and running the pipeline. Each country was made to agree to exempt the contractors and subcontractors building and operating the pipeline from domestic taxes, dramatically lowering costs for the consortium. Security was also an issue. Pipelines are frequently targets of sabotage or terrorism, so the companies insisted that each country commit its security forces to ensure the project s safety. The contract exempts the consortium from any legal responsibility for the actions of those security forces. Finally, Land acquisition was another sticking point. In each country, the government had to exercise its own form of eminent domain in order to give the companies the rights to build on the land along the chosen route. Although associated conflicts with landowners were left to local courts to decide, the companies got what they wanted: a guarantee of complete access to the land. As for local governments, the incentives were too strong to resist. And to make sure that everything would go smoothly, Washington provided the necessary advisors: because Turkey was the key to the Silk Road (half of the pipeline will be built on its territory) the Turkish government received significant help from Washington s Dickstein, Shapiro, Orin & Oshinsky, the only other large US Law Firm involved in the negotiations 4. The free money While negotiations over all of those issues were proceeding, the oil companies were conducting preliminary engineering studies. In 1999, IOCs realised they had a serious problem: The Turkish portion of the pipeline was projected to cost more than they were willing to pay. So Turkey made an offer: The country s state-owned pipeline company would construct and operate the Turkish portion of the pipeline for far less than the oil companies estimates suggested. Although the companies would lose some control over the process, Turkey s promise to build it for a fixed cost was necessary to save the project. AIOC could not refuse. 5 This is quite telling of how cost problems would be addressed by the project participants. Although construction on the Turkish section of the pipeline could begin, financing for the Azeri and Georgian sections still had to be arranged; and unlike with the CPC, the oil companies were not ready to carry the burden of financing such an expensive pipeline. For years, they had resisted this route. Could the US make it worth their while? Indeed, the US holds the purse strings for key lenders, provides political risk insurance through OPIC, and a large shareholder in the World Bank. By providing low-interest loans, these public institutions could lend the project what the oil companies could not afford. Indeed, BP s President is on the record as saying that the consortium will need up to 70 percent of "free public money" for the BTC pipeline to materialise. 6 With project-finance/ private-sector lending being difficult and complex to arrange, what could the multilateral institutions do? The IFC limits direct project lending to US$125m but can arrange two to three times this amount (or up to US$375m) in syndicated privatesector financing. US Ex-Im Bank has no limit on financing but can provide loan guarantees only for the supply of US goods and services at 85 percent of total cost at the request of US companies. OPIC has individual project limits of US$200m each on political risk insurance and direct financing (for US companies). The nationality of the investor at project registration can potentially play role here (i.e. US Amoco s registration of BTC with OPIC prior to the BP Amoco merger). With the US government weighting in, OPIC accepted to take significant exposure: in June 2002, OPIC announced it would allocate US$300 million to cover the political risks of the project. The other organizations which should be involved are the World Bank and EBRD. But the mandate of the World Bank has shifted away from lending to oil and gas projects, and it may have difficulty in justifying lending for a pipeline project except of course if strong poverty alleviation and or/environmental arguments can be made to justify BTC. Shareholders in each organization (World Bank and EBRD) could block financing if developmental (including environmental Turkey/Bosporus) benefits to each country (Azerbaijan, Georgia and Turkey) are not detailed. French influence in EBRD could block Baku-Ceyhan. In the World Bank, France, Italy, Russia and Iran could try to block financing. And securing the public money is not Table 3: BTC Financing IFC proposed financing of the BTC project: IFC US$300 million EBRD US$300 million ECAs US$ million PRI US$ million Senior Up to US$600 Sponsor million Loans Total US$2.3 billion project debt D/E ratio 70:30 Src: IFC 65

7 Oil 8/3/03 6:30 am Page 7 just a matter of string-pulling. A number of NGOs are campaigning very actively against BTC, questioning the environmental and human rights standards of the project. Indeed, the Bank s final decision has to be motivated along environmentally-friendly, poverty alleviating lines. And if that was not enough, First Vice- President of SOCAR, Ilham Aliyev, recently declared that "The IMF's ill-defined (reform) proposals have not received a warm welcome on our part because they do not meet our national interests." Free public money does not come easy. Financing proposals to lenders were completed in September Decision on financing by IFIs was scheduled for February/ March But last December, BP announced that the deadline for completing financing was being pushed back by 6 months, due to the "complexity of negotiations" with lenders. Commercial viability: available reserves According to 2001 calculations by UK analysts Wood Mackenzie, the BTC pipeline will need to transport 5-8 billion barrels of crude, depending on the tariff, to reach profitability. Yet even the most optimistic estimates of reserves at ACG, operated by BP, stand at 5 billion barrels. The AIOC has yet to proceed to Phase 1 of its development plan, which is designed to gradually boost production to around 800,000 bpd by Theoretically, such volumes would make BTC commercially viable in a decade. The major practical problem, however, of how the additional incremental oil will be sent to markets pending the completion of Baku-Ceyhan remains to be solved. For instance, the reserves available to export pipelines out of Azerbaijan in 2004 from AIOC will permit about 450,000 bpd of production. This production will be split among routes. Presuming that BTC does get built, it will not all be available for BTC. No matter what happens with BTC, it would be too risky for AIOC to put all these reserves behind a single project. This is why SOCAR is contractually committed to ship some volumes north. Indeed, under the PSA, at the full development stage, percent of the output will accrue SOCAR. Similarly, other AIOC members are likely to seek route diversification, making less than their respective reserve volumes available to BTC. AIOC is not a monolithic entity, and the member companies are contractually free to decide which direction they want to send their oil. 7 Conclusion: a pipeline too far? There has been speculation that Russia did held up the opening of the CPC in order to compel Kazakhstan to renounce its intention to export oil, later in the decade, through the Baku-Tbilisi-Ceyhan (BTC) pipeline from Azerbaijan to Turkey's Mediterranean coast. If so, the tactic was unavailing. According to news reports, Azerbaijan's Heydar Aliyev was the first person to whom Kazakhstan's President Nursultan Nazarbayev confirmed his support of the BTC pipeline, which he seeks to transform, with US encouragement, into the Aqtau-Baku- Ceyhan (ABC) pipeline. Work is now under way, with US assistance, to develop an intergovernmental agreement between Kazakhstan and Azerbaijan covering the commercial principles for Kashagan oil and eventually gas across Caspian. Linking Kazakhstan to Turkey may be the grand strategy which underpinned the Silk Road Strategy from the beginning. However, the old dispute about the legal status of the Caspian Sea prevents any progress for now. Was it to happen, would it guarantee the commercial viability of the BTC pipeline? For anybody drilling in Kazakhstan in the near-to-distant future, there is plenty of excess export capacity with the CPC, taking the northern route into Russia. In the long run, the most efficient pipeline will be the most successful, and in the longer term, export commitments will align themselves with the lowest-cost alternative. If a pipeline is less economical than other alternatives, future shippers will not use it. This also means that the enduser markets that are the most attractive will be the markets that win. Currently, Mediterranean markets are the markets of choice for Tengiz and Azeri crude sales. However, if there is another major oil find in the Caspian, Asian markets will be preferred. The fastest rate of growth in oil demand is in Asia, and the highest netbacks for these future barrels will be in Asia. The oil will flow to those markets where the demand is greatest and where it can command the largest premiums. The routes then will cross Iran and China. i J Frédéric Blanc-Brude 1 Tengiz is among the largest oil fields in the world today, with estimated reserves of 6-9 billion barrels, and TengizChevroil (TCO) currently produces about 210,000 bpd. New drilling at the Tengiz concession area could prove up even more reserves. The Kazakhstan s TengizChevroil (TCO) joint venture for the Tengiz field is a US-led consortium (Chevron, ExxonMobil, Lukoil/ARCO and Kazakhoil.) 2 EBRD s financing included an A-loan of US$100 million for the account of the Bank and a B-loan of US$100 million for the account of participating banks. The IFC funded five A-loans up to US$100 million and five B-loans up to US$100 million. The IFC s role in the project was to provide long term financing, mobilize financing from international commercial banks and mitigate cross-border and other political risks. 3 Lazard Brothers bank is BP s financial advisor for the project; Sullivan & Cromwell is legal advisors on financing. 4 Dickstein, Shapiro was mandated and paid by the US Government, through a grant from the US trade and Development Administration. 5 Construction on the Turkish section of the pipeline was launched in June Still, BP, Unocal and Statoil will provide guarantees for Azerbaijan's loans in the BTC project in exchange for two million barrels of the country's oil, to be supplied once the pipeline goes on-stream. 7 The AIOC has also been looking at an offer by the Iran National Oil Company to accommodate up to 800,000 bpd in northern Iran's as part of a swap arrangement. While current US policy effectively prevents US oil companies from taking advantage of this commercially attractive alternative at the moment, it is clear that the AIOC would not mind keeping all its options open for as long as possible. 66