Baku: Oil rich and dirt poor

Tom Hall

Baku, Azerbaijan, is a city that is well known by world oil interests, but probably not very familiar to people outside the industry. The reason is simple. Baku and the Caspian Sea region hold huge oil and natural gas reserves. But Baku — indeed, all of Azerbaijan — faces a staggering array of problems since gaining independence in 1991.

The U.S. Energy Information Administration says that Baku’s oil fields hold 3.6 billion-12.5 billion barrels of proven oil reserves and 11 trillion cubic feet of natural gas. Depending on oil prices, the potential exists for a $1 trillion payoff. Chuck Becker, director of the Alaska Export Assistance Center, told the Alaska World Affairs Council Jan. 15 that getting the oil to market is fraught with social, economic, political and logistical challenges to Western oil interests.

Six weeks in Baku

With industry experts describing the Caspian Sea region’s potential as comparable to that of the North Sea, Becker believes that the area holds promising opportunities for Alaska companies in the oil field service and supply industry. He hopes to take a group of Alaska business people to Baku and, he added, “Perhaps even get Senator Murkowski to lead that group, if it works into his schedule.”

Becker estimates that investment opportunity in the region could range anywhere from $40 billion to $60 billion. “It’s like standing at the helm of a sloop in a gale,” said Becker. “You can’t miss getting wet.”

Eleven international oil companies from seven countries comprise a consortium called the Azerbaijan International Operating Co. They are in the process of developing the offshore area around Baku but Becker said that their immediate problem is they don’t have enough rigs. Azerbaijan International has only two rigs and they are shared through two rig clubs. A third rig is under construction but when it becomes operational in 2000, it will belong to a different consortium.

Becker said that another problem is stacked rigs. “Western oil interests don’t want to touch them with a 10-foot pole,” he said, “but the national oil company (State Oil Company of Azerbaijan Republic) wants them to recycle. This is an ongoing arm wrestle.” Despite the limitations, Azerbaijan International produced 180,000 barrels per day in 1998. “By the year 2000 they estimate it’s going to be 270,000 and by the year 2007, we’re talking about 900,000 barrels per day.” Interest in the area is high. No fewer than 11 nations — including Russia and Iran — have a presence in Azerbaijan. “BP, Pennzoil, ARCO, Chevron, Mobil, Unocal, Amoco, Exxon — they’re all there,” he said. Baku is rapidly being transformed. Becker said that 71 U.S. companies are involved in joint ventures outside the oil industry.

Obstacles along the path

Corruption is endemic throughout the Caspian Sea region. Becker said that getting U.S. companies out of hot water because of corrupt practices in the area was one of the challenges he faced there.

A recent ethnic war with Armenia resulted in more than 1 million refugees living in unimaginable conditions. Becker related an instance where the U.S. Ambassador went to inspect an apartment building that housed a large number of refugees. So much fecal matter had accumulated in the basement from overflowing toilets that a power line had to be run through a second story window because the fuse box in the basement was completely filled. The ambassador told Becker that the odor coming from the building was overwhelming.

Health care is abominable. “You don’t want to get sick in Azerbaijan,” Becker said.

Unemployment is remarkably high. Becker said that an Azeri — a board certified physician — worked in the U.S. Embassy because he could not afford to practice medicine at $85 per month.

The United States could help alleviate many of the region’s social ills but a provision called Section 907 of the Freedom Support Act prohibits government to government aid to Azerbaijan by the United States. That could change. Becker said that the Export Council of Alaska and the Alaska Support Industry Alliance have adopted resolutions calling on Alaska’s congressional delegation to support repeal of Section 907.

Perhaps the biggest problem facing oil producers is getting the oil to market. Oil transportation is a logistical nightmare with existing and planned pipeline routes each having their own unique hazards. Azerbaijan currently has two pipelines, the northern route and the western route. A third route called the main export pipeline that would run from Baku through Georgia and down to Ceyhan, a Turkish port on the Mediterranean Sea. The advantage of this route is that it avoids the Bosporus Straits. With 50,000 tankers passing through the Bosporus in a year, the Turks don’t want or need any more ships going through. Aside from its length (approximately 900 miles) the main export pipeline would face other potential hazards. Internal strife in Georgia (with the Ossetians) and Turkey (with the Kurds) could make the pipeline a terrorist target. Becker said that he’s heard a litany of pipeline routing ideas. Ultimately, he believes, “Some organization, some consortium is going to make that first investment and people will follow that and use those pipelines.”

Western oil companies, in recognition of the squalid conditions in the country, are investing in Azerbaijan’s health care. Becker said they are working toward the eradication of childhood diphtheria and polio and are getting involved in the community as they did in Alaska.

And the U.S. government — once the restrictive provisions of the Freedom Support Act’s Section 907 are repealed — can help alleviate some of Azerbaijan’s most serious social and economic problems.