#16 - JRL 7214
Forbes Global
June 9, 2003
Precarious Pipeline
British Petroleum has its hands full as a project in the Caucasus enters a critical stage.
By Natalia Antelava

Environmentally savvy BP has its hands full as a mammoth project in the Caucasus enters a critical stage.

When BP (nee British Petroleum) breaks ground this month on a $2.9 billion pipeline project less than 15 kilometers from the Georgian Republic's Borjomi-Kharagauli National Park, the company will encounter breathtaking mountains cloaked with pines and drained by virgin white-water rivers. Working in environmentally sensitive areas always poses a challenge to oil companies; it's 's bread and butter. What the energy giant might have been unprepared for was the mix of these issues with regional politics, Caucasian-style. In Georgia, for , the two have mixed like, well, oil and water.

"There are pipelines that are difficult to build because they go through mountainous terrains or politically unstable countries, through ecologically and culturally sensitive areas, through conflict zones. This pipeline has it all," says Edward Johnson, BP Georgia manager. For 40 years starting in the spring of 2005, more than 5.2 billion bbl. of Azerbaijan's crude oil is to be delivered to thirsty Western markets through what BP calls the most modern and perhaps the most difficult pipeline it has ever built. The pipe (called the BTC pipeline for its Baku-Tbilisi-Ceyhan route) will carry a million barrels of crude oil a day from Caspian oilfields through the troubled former Soviet state of Georgia to the Mediterranean port of Ceyhan in Turkey.

The pipeline should become the first Western gateway to the OPEC-free Caspian Sea, one of the world's remaining hot spots of oil and gas. Pumping out the Caspian crude has dominated the oil industry agenda for more than a decade. Any viable pipeline would have to bypass Russia and Iran, for reasons of lingering distrust and political risk--especially in the eyes of Washington and other capitals that are godfathers of the project. But this means investing billions in a project that would cross the politically turbulent Caucasus region and avoiding a politically explosive Kurdish region of Turkey.

"What's unique about BTC is the fact that it is the only pipeline that crosses three countries. Each one of them has its own problems, and this requires an unprecedented degree of cooperation," says Barry Halton, a regional director of BTC Co., funded by an 11-company consortium (see table below). Within Georgia itself there's general hope for better times resulting from the project, but suspicion about the specifics. Partners in the Pipe

Only after ten years of planning were conditions right for the BTC pipeline--after additional oil discoveries and the interest from international agencies like the World Bank in providing up to 70% of construction money in public funds finally got the oil industry to act. When all is said and done, it will entail 10,000 workers to build the pipe and 150,000 sections of pipe--one of the biggest privately-led construction projects the world has seen.

The pipeline neatly dovetailed BP's recent strategy of moving into new territories with large oil reserves, such as the Caspian Sea, while sustaining its hard-fought image as environmentally aware oil company (see sidebar): By taking the oil to Ceyhan, the company would bypass the busy traffic of Turkey's polluted Bosporus straits, where shipping accidents could cause further harm to the Black Sea.

BP may have done the Bosporus a favor, but now international critics--most vocally, nongovernmental organizations (NGOs)--are crying foul over the pipeline's threat to Georgia's environment. By opting to route the pipeline through the support zone of Borjomi Park, an area notorious for landslides, the builders would cause oil to sluice through a once-and-future tourist spot (the park was a favored vacation spot for Russian nomenklatura during Soviet days) and a source of natural resources vital to the Georgian economy. Thus the pipeline could turn out to be a far from unalloyed boon for an impoverished country.

Take the mineral water bottled from springs in the park. Borjomi-brand water accounts for $20 million, or 10% of Georgia's current annual exports. An oil pipeline--leaking or not--that's a smack 12 kilometers away from a natural water source isn't exactly good for brand image, says Badri Japaridze, vice president of Georgian Mineral Glass & Water, which sells the beverage.

Then there's the surrounding beauty, somewhat forgotten in Georgia's desperate last decade. Would BP build a pipeline hard by America's Yellowstone National park? "We would, if the U.S. government forced us to," responds BP's Johnson.

Routing the pipeline through the buffer zone of the Borjomi Park wasn't BP's idea, Johnson explains, it was Tbilisi's. Environmental protection and preserving crucial local businesses might seem like the natural concerns of government, but to officials in Georgia the easy money of a pipeline guaranteed to generate $65 million a year in transit fees was irresistible. The annual state budget is less than $1 billion. Democratic institutions of the sort that might lead to a full airing of the issue are hardly developed there.

An alternative route would take the pipeline through the country's Akhalkalaki region, home to a fiercely pro-Russian ethnic Armenian minority and a Russian military base. For Georgia, keen on using the pipeline to increase its own strategic importance to the West and desiring to free itself of the Russian yoke, that wouldn't do.

The "presence of the Russian base in Akhalkalaki ... could be the basis of a subversive act, and therefore is a threat to a project that is of absolutely vital importance to Georgia," says Georgian President Eduard Shevardnadze, foreign minister of the Gorbachev-era Soviet Union and before that, Georgia's Communist boss.

Last December Shevardnadze rammed through approval of the pipeline over the public objections of Environment Minister Nino Chkhobadze, who recalls telling him, "The application did not even meet the basics, the ABCs of environment."

Chkhobadze won conditions that obliged BP to provide more paperwork, including a study of yet another alternative route that would take the pipeline just a few kilometers away from Borjomi's dangerous landslides and sensitive rivers and through the uninhabited, nearby Karakaia mountain range. But according to BP's Johnson, that alternative is not an option, as it will require the company to shave off a mountain top, causing too much expense and environmental harm.

Shevardnadze says that, for his part, "We would never damage Borjomi. I like the mineral water myself. All of us like Borjomi!"

Borjomi is not just fancy bottled mineral water sold overseas, it is also a tap water supply and protected by Georgian law. Allowing BP to skirt local laws is a host government agreement that BP signed with Georgian officials. The agreement is inferior in a legal sense only to the Georgian constitution. The pact says BP will abide by Dutch and Austrian environmental standards, where national legislation does not apply--a nod to the fact that Georgia's own rules are lacking. A Dutch commission recently evaluated BP's analysis of the pipeline route and came to a blunt but nonbinding conclusion: Crossing a water-producing region "would not be acceptable for Western Europe," summarizes Dick de Zeeuw, its chairman.

"We were astonished that no other alternatives were taken into account. From the beginning BP just focused on the central corridor [the present route]," says De Zeeuw.

Environmental groups argue that the region's high seismic activity will increase the chances of pipeline damage and an oil spill; in a region where the waters of mountain rivers churn like washing machines, cleaning them in the immediate aftermath of an accident would prove impossible.

The environment minister has told BPto conduct a study of alternative water sources in the event of a spill. "The landslides and mountainous terrain will make the construction difficult," admits Ed Johnson. But as he draws schemes of landslide support systems on the white board in his office in Tbilisi he says he is confident BTC's advanced technology pipeline, made of Japanese high-grade steel with an anticorrosion coating from Malaysia (as well as leak-detection systems and valves), will be able to handle anything.

Far away from BP's posh Tbilisi quarters, 89-year-old Tamar Gogoladze shakes her head in disbelief. Seated in the crumbling living room of her house in Borjomi's Dgvari village, Tamar is hardly an expert in geology or pipeline engineering. But landslides are part of her everyday life, and Tamar says she is fearful that digging into Borjomi's shifting grounds will make them shift even more.

"I wake up every night, and I can hear the ground squeaking, moving under the floor. You never know when the ceiling might fall on your head. All of us here have to rebuild houses every five years," she says. "If they start building this monster here, we will probably have nothing to rebuild from. We will have to leave," she concludes.

Most in Dgvari's 1,000-person village say that they would not mind leaving, if only they had a place to go. But resettling people is not what BP has come to Georgia for.

Anyway, it's for Georgia's sake, says the pipeline consortium's Halton, that the project needs to proceed--and soon. "I don't think it's an exaggeration to say that this project presents a possibility to generate change in the lives of people," he says. "For Georgia, for example, BTC is the only thing of significance that is happening in the country. If BP does not succeed in Georgia, then who can? What other investors will come?"

BP insists that all of its studies have been thorough. According to Johnson, "Once the construction is over, the pipeline will be buried underground. You won't hear it, you won't smell it, you won't feel it."

But it has been gaining visibility. When BP received an environmental permit for construction through Borjomi, protesters took to the streets in Tbilisi. Other Georgian controversies intervened in the meantime, but environmentalists haven't let go. A coalition of NGOs says BP bullied the regional governments into providing favorable terms and failed to consult with local communities affected by the route. (The Turkish arrangements also have drawn NGO fire.)

BP pipeline issues were amplified in a recent series published in New York City's Village Voice, a left-leaning weekly, although they have yet to draw wide public notice internationally.     

While BP already has the go-ahead from the Georgian government, it has yet to get an approval for $2.4 billion from the World Bank, the European Bank for Reconstruction & Development and export-credit agencies of the U.S., the U.K. and Europe. Public money is the best leverage point for the environmental and other opposing groups.   

"We are not against the pipeline," says Manana Kochladze of Central & Eastern Europe Bankwatch group, a Prague-based watchdog organization. "But we are against the way it is being implemented. The BTC consortium should not be able to use taxpayer money to build a pipeline that violates national legislation."

"We have the highest environmental standards, and before the funding is approved we will make sure that the consortium has met them," assures Corrie Shanahan of the World Bank's International Finance Corp., which is reviewing the challenges to the project.

By committing to World Bank standards and promoting itself as a company that is "beyond petroleum," BP has submitted to both higher expectations and more pressure from the critics.   

The international institutions have delayed writing checks. This, however, hasn't delayed the construction. BP is confident that World Bank money will come through; until then the company is relying on the consortium's allocated equity funds.

In any case, the company calls the project economically robust and says that with or without public funds the pipeline will be built.

So is the Borjomi route a done deal? Opponents still hope that nature will force an alternative where politics and business could not.

Several prominent Georgian geologists have detailed the geological impossibility of the project (they wrote a later report contradicting that one). BP, however confident in its ability to lay the pipe, admits it will have to improvise on landslide avoidance once the construction in Borjomi gets under way. This has brought speculation that construction problems will force a last-minute switch to the Karakaia mountains route. Of course that would entail its own set of objections.

But it's one battle at a time for the assorted foes of an ostensible godsend of a project in a country where corruption is widespread, security fragile, and government unpopular and rickety. As Chkhobadze, the environmental minister, puts it: "Our hope is that Borjomi will do what we failed at, and that it will protect itself."