December 8, 2008
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Home / Issue Archive / 2008 / September #9 / Oil Pipeline in Israel Suggests a Twist to Georgian, Russian Tiff

№ 9 (September 2008)

Oil Pipeline in Israel Suggests a Twist to Georgian, Russian Tiff

I consider myself to be well informed. Yet in August when a British friend greeted me over the phone with the words, “we’re at war” I was a bit perplexed. Georgian troops had attacked South Ossetia and sacked the capital, Tskhinval. In response, Russian troops moved in. Why? No one seemed to know.

Pat Davis Szymczak

By Pat Davis Szymczak, Oil&Gas Eurasia

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Tskhinval
CNN went to work spinning the whole thing as Russian aggression. Ordinary Russians were offended that once again, the Western media that had been a beacon of truth and light during the darkest Soviet times was – in the post Soviet period – behaving again like a government propaganda ministry. The US White House fumed. France and Germany thanked God they’d blocked Georgia’s admission to NATO (which would have required an allied response and might have sparked WWIII.) Georgia tried it’s best to hide itself behind the American flag.
And humiliation of all humiliations for the West, the Russian army kept coming, crossing the border into Georgia and maneuvering around the port of Poti. It was like watching a male cat mark it’s territory. Had they had wanted to march on Tblisi they could have. But they stopped. The point of the exercise, in my opinion, was to prove that they could, if they wanted to. And shortly thereafter, Russian President Dmitry Medvedev becomes a champion of the new prime time PR talk show, “Who’s a Bigger Democrat”, by declaring Russian support for an independent Ossentia.
My Russian friends said it was about “territory”, a centuries old dispute. You know the old story. Two otherwise normal 21st century adults (who saw man walk on the moon) look at each other say, “Your great, great, great, great, great grandfather, called my great, great, great great grandfather an old goat, so now I have to kill you.”
Sorry, I’m from Chicago and in Chicago old editors always tell young journalists that if they want to really understand something, just follow the money. Or, if you’re talking Central Asia and the Caucuses, follow the pipelines. And guess what, if you turn off CNN, cruise the Internet, talk to some people and really think between the lines, you’ll find your answer.
First, let’s go back to the start of this year. On Jan. 17,  2008, the Israeli newspaper Ha’aretz (www.haaretz.com) published an article by Avi Bar-Eli, headlined “Israel proposes crude pipeline from Georgia to Eastern Asia.” For the most part, I’d like to just quote from it.
“Israel may be on its way to becoming a crude oil transport bridge to the Far East. The Eilat-Ashkelon Pipeline Company (EAPC) is leading an international initiative to channel crude oil from Ceyhan in southeast Turkey to eastern Asia, using its infrastructure in Israel. A consortium of energy firms and international shipping companies will manage the initiative, and a memorandum of understanding is expected to be signed within three months.
“The oil would be pumped in Georgia and Azerbaijan, and be brought to Turkey by pipeline. From Turkey it will be shipped by tanker to Ashkelon, whence it would be transported by pipeline to Eilat. In Eilat, the oil will be loaded onto a new set of tankers for transportation to eastern Asia.
“The Ashkelon-Eilat Pipeline Company is a privately owned firm, owned jointly by Israel and the government of Iran. Tehran is currently not an active partner, and it and Israel are involved in international arbitration [Israel refuses to pay the Iran a compensation for its EAPC’s shares and other debts which are estimated to be around $5 billion]. (OGE note – keep in mind this was written on Jan. 18 and so could have changed.)
“EAPC recently completed a trial run. A Turkish tanker of crude oil came to Ashkelon, and EAPC transported the oil to Eilat. A tanker owned by an international trading company awaited the shipment at the petroleum distillates port in Eilat, loaded the oil, and took it to an east Asian port. Loading of the tanker in Turkey, shipment to Israel and subsequent piping to Eilat was completed in about five days.
“The project’s entrepreneurs calculate that the savings to East Asian oil importers in time and costs generated by a regular transport line between Turkey and Israel could amount to $4 per ton, when compared with the cost of using the Suez Canal. Such a savings justifies investment in the project, as the cost of oil soars and growth rates in the developing nations of East Asia, and China and India in particular, continue to rise.
“The EAPC aims to reach a final agreement on establishment of a regular transport line with leased 250,000-ton tankers (‘shuttles’) moving the oil between Turkey and Israel, and 280,000 to 320,000-ton tanker shuttles used to transport through the Red Sea to the east. Shipment through the Suez Canal is limited to tankers with a maximum capacity of 130,000 tons.
“The initiative includes construction of a reservoir farm for storage of oil in eyhan, and infrastructure at eyhan port, in southern Turkey, for loading oil into tankers. The cost is expected to reach an estimated $200-$300 million, and the company is already in final stages of partnership negotiations with Turkish firms and an Indian energy company, for financing of the project. Simultaneously, the EAPC’s board of directors has approved expansion of its reservoir farm on the Ashkelon coastline by 20 percent, at the cost of an estimated at $60-$80 million, to be self-financed by the company.
“The company is currently able to pipe about 20 million tons of oil to Eilat annually. According to its business plan, construction of another pumping station, at a cost of $10 million, will double its capacity to 40 million tons of oil, thus generating tens of millions of dollars in additional revenues each year. The initiative was conceived with the completion of the BIC project, the 1,760-kilometer pipeline connecting Baku, Azerbaijan, on the Caspian Sea, to the Ceyhan port. The pipeline is now used to transport some 30 million tons of top quality ‘Azeri Light’ crude oil annually, an amount scheduled to increase to about 50 million tons annually within the next few years.
“Establishment of the pipeline will bring an increase of 20 percent in the amount of oil moving in the Mediterranean area, and is expected to result in lower prices, and attract the interest of Far Eastern countries eager to expand their sources.
“Turkey also intends to lay another pipeline, between Samsun, on the Black Sea coast, and Ceyhan. According to the plan, the line will be set to transport an annual 60 million tons of crude oil to Ceyhan within two years, making the project even more lucrative. The Pipeline Company is currently considering participation in this $1.5-billion project as well, together with other international energy firms.
“This initiative will constitute a breakthrough for the global energy market and the fabric of international relations, which will place Israel as an intermediate country connecting Eurasia and the East, and make a strategic contribution to reducing dependence of the entire world and particularly Eastern Asian countries, on oil from the Persian Gulf, ” the chair of the Ashkelon-Eilat Pipeline Company, Oren Shachor, told The Marker. Shachor will present the initiative at the eighth annual Herzliya Conference of the Institute for Policy and Strategy. The conference, which takes place January 20-23, 2009, will deal with the balance of Israel’s national security.”
Here’s a comment from the fellow who sent me this link, Don Parry, UK Editor for the Johannesburg-based publication World Air News, “When this (pipeline) was built it brought oil northwards, more recently the pipeline has been adapted to transfer oil south. Why not leave it on the ocean tankers? This would mean passage via Suez Canal which has limited capacity and is expensive. The whole point of the operation is cheap energy for the Far East.”
Now another Internet site out of Jerusalem, www.debka.com, took this story a bit further with a report published on Aug. 8, 2008. Again, I’ll just quote from the site and I would suggest that readers visit the “Debka.com” listing on www.wikipedia.org to be clued up on its reputation. The site won the Forbes “Best of the Web” award but Forbes also pointed out its downside – the publishing of unattributed information. So, conspiracy theorists, here you go:
“DEBKAfile’s geopolitical experts note that on the surface level, the Russians are backing the separatists of South Ossetia and neighboring Abkhazia as payback for the strengthening of American influence in tiny Georgia and its 4.5 million inhabitants. However, more immediately, the conflict has been sparked by the race for control over the pipelines carrying oil and gas out of the Caspian region.
The Russians may just bear with the pro-U.S. Georgian president Mikhail Saakashvili’s ambition to bring his country into NATO. But they draw a heavy line against his plans and those of Western oil companies, including Israeli firms, to route the oil routes from Azerbaijan and the gas lines from Turkmenistan, which transit Georgia, through Turkey instead of hooking them up to Russian pipelines.
Saakashvili need only back away from this plan for Moscow to ditch the two provinces’ revolt against Tbilisi. As long as he sticks to his guns, South Ossetia and Abkhazia will wage separatist wars.
DEBKAfile discloses Israel’s interest in the conflict from its exclusive military sources: Jerusalem owns a strong interest in Caspian oil and gas pipelines reach the Turkish terminal port of Ceyhan, rather than the Russian network. Intense negotiations are afoot between Israel Turkey, Georgia, Turkmenistan and Azarbaijan for pipelines to reach Turkey and thence to Israel’s oil terminal at Ashkelon and on to its Red Sea port of Eilat. From there, supertankers can carry the gas and oil to the Far East through the Indian Ocean.
Aware of Moscow’s sensitivity on the oil question, Israel offered Russia a stake in the project but was rejected. Last year, the Georgian president commissioned from private Israeli security firms several hundred military advisers, estimated at up to 1,000, to train the Georgian armed forces in commando, air, sea, armored and artillery combat tactics. They also offer instruction on military intelligence and security for the central regime. Tbilisi also purchased weapons, intelligence and electronic warfare systems from Israel.
These advisers were undoubtedly deeply involved in the Georgian army’s preparations to conquer the South Ossetian capital. In recent weeks, Moscow has repeatedly demanded that Jerusalem halt its military assistance to Georgia, finally threatening a crisis in bilateral relations. Israel responded by saying that the only assistance rendered Tbilisi was ‘defensive.’ This has not gone down well in the Kremlin. Therefore, as the military crisis intensifies in South Ossetia, Moscow may be expected to punish Israel for its intervention.”
OK. So have you digested all of this yet? There’s more. Remember the push to get two former Soviet states into NATO – Georgia was one, the other was Ukraine. I think everything above pretty much answers the Georgia question.
Also in late August, Ukrainian President Viktor Yushchenko signed a decree to terminate the current reverse flow of the Odessa-Brody oil pipeline. According to the decree, the pipeline will start pumping crude from Odessa into the Druzhba pipeline by the end of 2008. Ukraine plans to fill the pipeline with crude from Azerbaijan and Kazakhstan shipped to Odessa from the Georgian port of Supsa via the Baku-Tbilisi-Supsa pipeline (the Georgian branch of the Baku-Tbilisi-Ceyhan pipeline). The current reverse mode implies Russian export oil is pumped from the Druzhba pipeline to Odessa and onward shipment to southern European markets by tanker.
Chris Weafer, Chief Strategist at Uralsib Equity Research in Moscow, sees this as a negative for the Russian oil industry in the short term, but in the long term, it could turn positive. Russia can turn the situation to its political and economic advantage. Weafer wrote in his daily equity research letter: “With no further tax cuts planned for the oil industry, new Transneft projects such as the East Siberian-Pacific Ocean pipeline (ESPO) and the second stage of the Baltic pipeline system (BTS-2) may lack crude volumes. As ESPO is a priority project, the westbound BTS would likely see lower volumes from Russia, in the view of Uralsib. The potential gains could be even stronger if certain European markets are dropped in favor of Asian markets, assuming the former are developing at double the rate of the European markets.”
OK, problem solved. So much for ancient tribal blood feuds in the Caucuses. It seems 21st Century wars and even little skirmishes are about those two or three SUVs (sports utility vehicles) we like to drive in Russia, the United States and Europe, and about all that industrialization going on in India and China. Remember that this was all taking place while the world was in a love fest at the Beijing Olympics. Medvedev and George “W” were there to cheer on their nation’s athletes, and even CNN admitted that they met. I’d even make an educated guess that they shared a beer or two.

Pat Davis Szymczak is Editor in Chief of Oil&Gas Eurasia.

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