Date: 20 Nov 1999
Time: 22:17:23
Remote Name: 24.30.154.205
11/19/1999 Dow Jones Energy Service (Copyright (c) 1999, Dow Jones & Company, Inc.)
WASHINGTON -(Dow Jones)- Signing of an agreement to build a $2.4 billion oil pipeline from the Caspian Sea to Turkey's Mediterranean coast hasn't answered key questions from the project's potential financiers, government officials and analysts say.
With their Istanbul protocol, Turkey, Azerbaijan, Georgia and Kazakstan formally committed Thursday to building the 1.0 million barrel-a-day pipeline from Baku, Azerbaijan, to the port of Ceyhan in Turkey.
Potential financiers say the protocol does little to address their fundamental concern about whether the Caspian has enough surplus oil to fill the pipeline. And they don't expect answers until some time next year.
"My gut feeling is that you have to wait for the results of exploration in Kazakstan to see if there's enough oil for this pipeline," said Dimitris Tsitsiragos, principal investment officer at International Finance Corp., private-sector arm of the World Bank.
IFC has had talks with potential participants in the project, but it hasn't received a request for funding yet. And it wouldn't be able to consider such a request without a clear indication of project ownership, sourcing of oil and economic viability, Tsitsiragos said.
It has become clearer this week that the project will be financed in two parts. Turkey has guaranteed the cost of its portion, to be built by its state engineering company Botas, for no more than $1.4 billion.
Turkey's government could use its sovereign credit to help finance this portion of the line, but it would still have to show it has commitments from oil shippers, said Matthew Sagers, director of energy services at PlanEcon, a Washington consulting focusing on the former Soviet Union and Eastern Europe.
Potential oil shippers are expected to begin meeting next month and would form a "main export pipeline" company after the project's host country parliaments ratify the Istanbul protocol, likely early next year, according to U.S. officials on hand for the Istanbul signing.
Project Relies Heavily On Kazakstan Oil
After shareholding and supply commitments for the pipeline company are settled, the company would approach private-sector lenders as well as the IFC, U.S. Export-Import Bank and the U.S. Overseas Private Investment Corp., or OPIC. The IFC generally limits its direct project lending to no more than $125 million, but it would likely arrange for two or three times more than that in private-sector financing under the IFC umbrella.
U.S. Eximbank has no limit on financing but can provide loan guarantees only for supply of U.S. goods and services, generally at 85% of the total cost. OPIC has individual project limits of $200 million each on political risk insurance and direct financing. It requires that U.S. companies have at least 50% for insurance and at least 25% equity for a project to qualify for financing.
President Bill Clinton and his cabinet have lobbied hard for the Baku-Ceyhan pipeline as a way of reducing the newly independent Caspian states' reliance on Russian and Iran for petroleum exports. U.S. Eximbank, OPIC and the U.S. Trade Development Agency have opened a joint office in Ankara to help facilitate the Baku-Ceyhan project.
Splitting financing of the project into parcels of $1.4 billion and $1.0 billion might make it possible to secure U.S. and multilateral government financing, but that won't solve the lingering question of oil supplies, according to PlanEcon's Sagers.
The protocol signed Thursday indicates the pipeline would annually carry about 25 million tons, or about 500,000 b/d, of oil from Azerbaijan and another 20 million tons, or about 400,000 b/d, from Kazakstan.
The Azerbaijani volumes would come primarily from Azerbaijan International Operating Co., or AIOC, a BP Amoco plc-led (BPA) consortium. AIOC currently produces about 115,000 b/d and wants to raise production to 300,000 b/d over the next three years and 800,000 b/d after 2005.
Kazakstan has more proven oil reserves, but the amount it could provide for the Baku-Ceyhan pipeline is less certain as much of its production is committed to a new pipeline through Russia to the Black Sea port of Novorossiysk. That pipeline is expected to open in mid-2001 with an initial capacity of 560,000 b/d and capacity of up to 1.34 million b/d in later years.
Oil wouldn't start flowing through the Baku-Ceyhan pipeline until early 2004, and would have to use those volumes from Kazakstan not committed to the Russian line. Whether there would be a 400,000 b/d surplus for Baku-Ceyhan is "highly questionable," Sagers said.
Hopes to reach that level of supply are pegged on drilling under way in Kazakstan's Caspian waters by an international consortium grouping units of Royal Dutch/Shell Group (RD), Italy's ENI Spa (I.ENI), Mobil Corp. (MOB) and six other companies.