Nation & World

Widening Russian action in Georgia affecting global oil supplies

WASHINGTON — Oil traders on Monday shrugged off Russia's widening invasion of neighboring Georgia, but if the conflict spreads further it could threaten nearly 1 million barrels per day of needed global crude supplies from the Caspian Sea, most of it bound for Europe.

In a move welcomed by American motorists, oil prices on Monday continued their prolonged slide, dropping below the psychological barrier of $115 a barrel to settle down 75 cents at $114.45 on the New York Mercantile Exchange.

But this trend could quickly reverse if the conflict in the Caucasus region — a tinderbox area between the Black Sea and the Caspian Sea — doesn't end soon or continues to escalate.

Even before the fighting began Thursday in South Ossetia, a breakaway region in the former Soviet republic of Georgia, the vital BTC pipeline traversing the Caucasus already had been largely shut down by an Aug. 5 bombing of a section of the pipeline in eastern Turkey.

The BTC pipeline takes its crude from Baku in Azerbaijan through Tbilisi in Georgia to the port city of Ceyhan in Turkey. It's the world's second-longest pipeline at almost 1,100 miles; this month, its throughput capabilities were to be boosted from 850,000 barrels a day to 1 million.

That extra capacity, important in moving more supply to the oil-starved world market, was sidelined when the PKK, a Kurdish separatist movement in Turkey, blew up part of the pipeline.

Some Caspian Sea oil had still been moving from Azerbaijan by railcar and a small pipeline to Georgia's western port of Sup'sa, but that had stopped Monday as Russian troops moved beyond disputed South Ossetia and deep into Georgia. The only remaining outlet was to send some oil far north through the Russian port of Novorossiysk on the Black Sea, an option that Azerbaijan apparently rejected.

"Virtually all production has been shut down because of this," said Eric Kreil, an oil analyst who follows the world's oil hotspots for the Energy Information Administration — the statistical and research arm of the U.S. Energy Department.

Like many global hotspots, the conflict in the Caucasus region is in large measure about oil, specifically who controls its flow and who derives its benefits.

The BTC pipeline was built at a cost of $4 billion with support from the Bush administration. It is one of the important sources of new oil to offset falling production in Mexico and elsewhere.

But Russia, the world's second largest oil producer, was upset about competition from Baku, the capital of the former Soviet republic of Azerbaijan, and its hostile, U.S.-backed neighbor, Georgia.

The United States has aggressively sought its own oil foothold in the Caucasus region. The U.S. Overseas Private Investment Corp. and the World Bank provided credit guarantees for the building of the BTC pipeline, whose biggest stakeholder is British Petroleum at 30 percent. The U.S. Export-Import Bank provided about $160 million in financing for the project for construction giants Bechtel Corp. and Petrofac LLC, a British company with U.S. operations in Tyler, Texas.

U.S. oil giant Chevron had a nearly 9 percent stake in the project, while ConocoPhillips and Hess Corp. had stakes of 2.5 percent and 2.36 percent, respectively.

Baku's oil was first commercialized in the 1870s by Swede Robert Nobel, brother of Alfred Nobel, for whom the famed prizes are named, according to The Prize, the 1991 award-winning book on the history of oil.

Roughly two-thirds of the oil moving along the nearly 1,100-mile BTC pipeline is bound for Europe. Any hit on global supplies in a tight world market threatens consumers everywhere.

Environmental groups opposed construction of the BTC pipeline because of concerns that the fighting in the volatile region could lead to pipeline damage and fouled ecosystems.

"That was always identified as a huge potential risk for this project," said Doug Norlen, policy director for Pacific Environment, a San Francisco-based group that helps foreign communities oppose well-financed oil companies. "It demonstrates what the world's addiction to oil results in."

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