Pipe Dreams
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    Turkish workers
Turkish workers check a section of the pipeline.
(By Dan Morgan – The Washington Post)
Page Three
A British 'Coup'
Continued from preceding page

In September 1992, BP pulled off a coup that unnerved its competitors and appeared to put the British firm back on top. Former British prime minister Margaret Thatcher arrived in Baku and handed the Azerbaijani government two BP checks totaling $30 million.

The money was a down payment for a proven field called Chirag and for an unproven bloc called Shak-Deniz. To Azerbaijani officials, a deal with BP was tantamount to a deal with the British government; not only did visiting British officials lobby relentlessly for the company, but for months Britain's diplomatic mission to Azerbaijan had operated out of the BP offices.

By contrast, Azerbaijani officials didn't know what to make of the American companies, whose government seemed ignorant about – or even hostile to – their involvement in Azerbaijan. In the fall of 1992, for example, Congress – heavily lobbied by Armenian-American groups – banned most direct U.S. aid to Azerbaijan, while earmarking generous assistance to Armenia.

For U.S. oil men in Baku, "the chill was there immediately" after the passage of Section 907, as the restrictive legislation was called, according to Tom Hamilton, who had left BP to become Pennzoil's chief of worldwide exploration. Section 907 "was always a lever, always a club, that they beat on you with when nothing else was working," Hamilton recalled.

To Stacy, who took over Amoco's Caspian operations in mid-1993, Washington needed to be educated.

"We were the 'American Oil Company' and the Azeris felt like we had more pull with our government than we really did," Stacy later said. He began meeting with administration officials and members of Congress, offering primers on Central Asia's potential and geopolitics. Given the level of ignorance about the Caspian in Washington, he usually took along a map of the region.

The American Comeback

Heydar Aliyev took power in June 1993, after an armed insurrection ousted the country's elected president, Abulfez Elchibey. Aliyev was a 70-year-old former KGB chief who had served on the Soviet Politburo during the regime of Leonid Brezhnev. Some Azerbaijanis and Western oil men believed Moscow had engineered the coup in hopes of blocking a major oil deal by Baku with Western companies.

But Aliyev turned out to be the leader U.S. oil companies had been waiting for – a shrewd operator who understood petro-politics. After a shaky period when the Azerbaijanis put a pistol-toting Slovak businessman in charge of oil negotiations, Aliyev himself stepped in by directing his minions to pursue a deal at Amoco's office in Houston, heart of the U.S. oil industry.

Working in shirt sleeves on the fifth floor of the Amoco building and ordering pizza when talks dragged on at night, the negotiators hammered out an agreement, using Amoco computers to check their figures. On Sept. 20, 1994, Aliyev and oil executives gathered in Baku for the ceremonial signing of what the Azerbaijani president called the "deal of the century."

A consortium called the Azerbaijan International Operating Co. (AIOC) agreed to spend $7.4 billion to develop the three major fields: Azeri, Chirag and an adjacent patch, Guneshli. The avowed goal was to produce 800,000 to 1 million barrels a day by 2010.

U.S. companies – Amoco, McDermott, Unocal and Pennzoil – collectively took more than 40 percent, by far the largest bloc. Exxon Corp. would join the consortium the following year. BP was given a 17 percent share, and the rest was divided up among the Azeri oil company and a variety of smaller foreign concessionaires.

Remp was handsomely rewarded as the first foreign oil man into Baku in 1989. His Ramco got 2 percent; the little Scottish company could count on 8,000 to 12,000 barrels a day free and clear once pipelines were completed, potentially netting $30 million a year as long as the consortium stayed in business.

Pennzoil was in, but only after playing hardball. Before the final deal was announced, Azerbaijani officials summoned Hamilton and told him Pennzoil would be excluded.

"Basically the conversation started out that Pennzoil wasn't going to get any share, and at the end I had explained why we were going to get a share," Hamilton recalled. Hamilton reminded the Azerbaijanis that Pennzoil had recovered $3 billion from Texaco in a 1987 lawsuit settlement.

That, Hamilton suggested, was more money than Azerbaijan could afford to lose.

AIOC platform
The Azerbaijan International Operating Co. oil platform, off Baku.
(AIOC photo)
The Pipeline Problem

In 1995, the AIOC consortium moved into a building in Baku once occupied by the Soviet Navy's House of Culture. The symbolism was not lost on Moscow.

Russia already had signaled its resistance to any U.S. inroads in the Caspian. Before his first trip to the region in 1994, Deputy Secretary of Energy William H. White took a phone call from Russian Energy Minister Yuri Shafranik.

"Remember," Shafranik warned, according to White, "those are Russian reserves. They will be developed by Russia."

Russia had only a modest piece of the AIOC deal – a 10 percent interest held by Russia's largest private oil company, Lukoil. But Russia possessed the leverage of geography.

The Caspian's landlocked resources could reach world markets only by crossing the territory of politically unstable neighbors or commercial competitors such as Iran and Russia. In Azerbaijan's case, all that was left of the Nobels' 19th-century pipeline from Baku to the Black Sea was "a trail of rust," as Hamilton put it. Azerbaijan's link to the world oil market consisted of a few rusty barges that could haul oil up the Volga River and a lone pipeline that ran the wrong way – from Russia into Azerbaijan – and passed through war-battered Chechnya.

The exporters also faced a unique legal conundrum: Who owned the Caspian and its resources? Earlier in the century, Iran and the Soviet Union had signed treaties designating the sea as their common lake. Now the Soviet Union was no more, but Moscow continued to assert its special treaty rights.

The situation left AIOC companies unusually dependent on international diplomacy to negotiate pipeline transit routes.

By early 1995, the U.S. oil companies operating in Azerbaijan had set up a Foreign Oil Companies group in Washington. It met with National Security Council energy expert Sheila Heslin and later with an interagency committee headed by her boss, Samuel R. "Sandy" Berger.

Government documents show that the NSC and oil companies worked together in June 1995 to forestall an attempt by Lebanese-American oil financier Roger Tamraz to promote his own pipeline from Baku to Turkey, via Armenia. Pennzoil's Hamilton alerted NSC officials of oil company opposition to the Tamraz initiative, effectively killing any White House support for the project.

The immediate issue facing the administration and the AIOC was the choice of an exit route for the initial flow of Caspian oil. A decision on a main export pipeline was deferred.

The Russian pipeline could be reversed cheaply, allowing oil to be pumped out of Azerbaijan. But that would allow Russia to dictate commercial terms for shipping AIOC oil; the pipeline also ran to the Black Sea port of Novorossiysk, closed by ice several months a year.

The Clinton administration and U.S. companies wanted other options. Ever since Chevron acquired the huge Tengiz field in Kazakhstan in 1990, Russia had imposed obstacles preventing a pipeline for Tengiz oil across its territory.

"If there wasn't an alternative [route], we'd be in the same boat as Chevron," one American oil company official later explained. "Russia had continually screwed them over. ... You really needed to have some leverage."

During the summer of 1995, Berger twice met with the AIOC companies. He worked to convince Terry Adams, a BP executive who served as AIOC president, of the need for a new $250 million pipeline west from Baku to Georgia's Black Sea port of Supsa, free of Russian control. BP favored the cheaper solution of spending $50 million to fix the pipeline through Russia.

Berger was persuasive. In September 1995, AIOC agreed to use both the Russian line and the new U.S.-backed western route. In the Clinton administration, a policy had emerged: "multiple pipelines" for Caspian oil.

Agreement at Last

The decision still had to be sold to Aliyev, whose government would negotiate the pipeline routes with neighboring countries. Given the pressures from Russia, that support was far from certain.

Soon after the AIOC decision, national security adviser Anthony Lake privately asked Zbigniew Brzezinski, his predecessor in the Carter administration, to carry a letter from Clinton to Aliyev. The letter stressed the U.S. preference for two pipelines and, as an incentive, offered Washington's help in resolving the dispute with Armenia.

Brzezinski eventually would become a paid consultant to Amoco. But as he left for Baku in September 1995, he later recalled, he was motivated by anxiety over Russian intentions in the Caucasus. The Clinton letter burned a hole in Brzezinski's pocket at a large dinner hosted by Aliyev at the presidential palace. When the Azerbaijani president invited the guests to his private "cave" in the basement, Brzezinski followed, wondering how to get Aliyev alone.

The cave was illuminated by lights resembling stalactites. Guests lounged on chairs and couches covered with sheepskin while Aliyev regaled his guests with stories from the Brezhnev days.

It was approaching midnight before Brzezinski could whisper to the president that they must talk alone. Looking regretful at having to leave the party, Aliyev led Brzezinski to his office. There Brzezinski pulled out the letter and summarized its contents.

Over the next several days, the two men held protracted talks. The Russians, Brzezinski learned, had demanded that all Azerbaijani oil go through Russia and that Russian troops be based in Azerbaijan.

On Oct. 2, Clinton called Aliyev to lobby for the double-route plan. Fortified by his new tacit alliance with Washington, Aliyev gave his approval a week later.

By early 1996, the Russians folded a weak hand, concluding that control over one of the two pipelines out of Azerbaijan was better than being excluded completely. But Russian-American frictions were only just beginning.

© Copyright 1998 The Washington Post Company

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