Caspian Dispute as BTC Faces Legal Challenge

Economic News

22 Jul 2010
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As Azeris celebrated the anniversary of the foundation of their republic on May 28, doubts remained over the country's future leadership following President Haydar Aliyev's recent illness. However, while that issue may be uncertain, efforts to bring some clarity to two other issues of pressing importance have been underway. Both of these concerned the tricky business of territorial definition. Firstly, regarding the Caspian Sea, and secondly, concerning jurisdiction over the territory occupied by the Baku-Tblisi-Ceyhan oil pipeline.

Azeri Republic Day marks the establishment of the short-lived Azerbaijan Democratic Republic back in 1918 - a state that was overrun two years later by the Soviet Red Army. Nowadays, relations between Baku and Moscow are generally much better, with both countries now following a similar line on the thorny question of how to divide up the Caspian Sea and its important energy resources.

The sea's littoral states - Russia, Kazakhstan, Turkmenistan Azerbaijan and Iran - have been debating this issue for years, with the latest round of talks taking place May 12-14 in the former Kazak capital of Almaty.

Two alternate views on the sea's division are currently being debated The first, held by Iran, is that the sea should be divided into equal 20% shares. However, Azerbaijan, Kazakhstan and Russia support a "median-line" principle, which divides off the sea into five sections radiating from a line drawn down the middle. This, supporters argue, gives a more representative division according to actual Caspian coastline But it also means that each country gets a different share, with Iran's slice dropping to just 13%.

Turkmenistan has not declared itself for either proposal, and has instead steered a rather unpredictable course through these often stormy negotiations.

However, the Kazak first deputy foreign minister, Kairat Abuseitov, told the press May 14 that "about 40% of a comprehensive Caspian pact" had been agreed during the talks. This, Interfax news agency reported, mainly covered environmental issues and implementation technicalities. Abuseitov was honest enough to admit though that "It would be naive to think that there are no more differences."

Without Iran's agreement, the three "median-line" states then signed an agreement demarcating the seabed without Tehran or Ashgabat. Kazakhstan received a 29% share, while Russia and Azerbaijan each obtained around 19%. Explaining their move, the three states said that they were "hoping to set a precedent" by acting without the others.

As with the grander issues of territorial waters - and perhaps more importantly, seabed delimitation - even environmental questions have a political dimension in the Caspian. Analysts such as eurasianet's Sergei Blagov speculated that Russia is seeking to build into any future agreement between the Caspian states a clause banning the development of any future pipelines. Environmental grounds are given for this, but the true purpose, Blagov said, was Russia's desire to create a North-South energy corridor, linking up distribution networks from St, Petersburg to the Indian Ocean.

Hardly a position Azerbaijan could have much sympathy with as it presses ahead with an alternative East-West energy corridor. Central to this is the Baku-Tblisi-Ceyhan (BTC) pipeline, and this month saw a number of developments in this project, which is crucial to the development of the country's oil industry.

First of all was a new challenge to the BTC's legal framework. The human rights group Amnesty International (AI) launched a legal challenge just before the May 16 start date for construction work on the Azeri end of the pipeline.

Chris Marsden, Chair of Amnesty International's UK Business Group, told reporters that "The legal agreements signed by the Turkish government and the pipeline consortium effectively create a 'rights-free corridor' for the pipeline, disregarding the human rights of thousands of people in the region."

AI claims that the Host Governments Agreements (HGA) signed by Turkey, Azerbaijan and Georgia create a problem of legal jurisdiction over the territory occupied by the pipeline, its pumping stations and areas used for construction work. AI argues that the HGA effectively forbids the host countries' authorities taking any action on the territory of the construction work, by posing the risk that the host country might have to pay for any direct and/or indirect damages any delay due to their action might cause.

However, BTC consortium regional affairs director Barry Halton came back at the AI allegations, telling Caspian Business News in its May 19 edition, "The HGA provides a balance, in that it seeks a fair arrangement between the governments and the consortium." He added that the clauses in the agreements were necessary as "The likelihood of rent-seeking, particularly at regional level, and the threat of nationalisation are very real. It is in this sense that the consortium also needs protection."

Despite these concerns, British insurance and reinsurance broker Marsh still agreed to take the BTC's risks onto the international reinsurance market May 20, agreeing a deal with the Russian-Azeri reinsurers Ateshgah, who had won the tender to insure the pipeline.

Ateshgah also won the tender to insure the first upstream stage of Azerbaijan's USD3.2bn Shah Deniz gas project. Thomas Smith, Senior Vice-President of Marsh's Marine and Energy Practice branch, said May 20 that Marsh had been able to place construction and assembly risks for this stage despite the "unpopularity of the given market". Risk volume for this stage he estimated at around USD1bn.

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