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The Energy Factor

Nick Amies
August 12, 2008

While it looks as though the fighting between Georgia and Russia has abated in the strategically important Caucasus region, the conflict still sent waves of concern through already jittery international energy markets.

A pressure gauge is seen showing a low flow at the receiving station of an oil pipeline
Russia has a reputation for using oil supplies as bargaining tools and for asserting pressureImage: AP

Despite the fact that Georgia itself does not produce oil, the country is a key transit point for crude and gas exports from Azerbaijan to markets in the West and disputed reports of Russian warplanes staging raids near the Baku-Tbilisi-Ceyhan (BTC) pipeline, the world's second longest, has put Europe, in particular, on alert.

Inaugurated in 2006, the BTC pipeline carries oil from Azerbaijan on the shores of the Caspian to Western markets via the Turkish Mediterranean port of Ceyhan. It is capable of transporting 1.2 million barrels a day.

Europe is one of the main customers of oil coming through the south Caucasus pipelines as they were set up in a bid to make the West less dependent on supplies from Russia, which has shown a willingness to close the taps in disputes with other ex-Soviet states in recent years.

While there has been some speculation that the conflict was actually orchestrated by Russia to disrupt the BTC pipeline, forcing Europe into more dependence on its own supply, Natalia Leshchenko, a Russia analyst with economic consultants Global Insight, said geopolitical factors are behind the conflict.

Geopolitical factors behind war

A worker lays the first pipe during the ceremony that marks the start of construction of the Baku - Tbilisi - Ceyhan oil pipeline in the Tetri Tskaro district, eastern Georgia in 2003.
The BTC was not a major factor in the recent warImage: picture-alliance/ dpa

"The disruption of the BTC pipeline would undoubtedly offer a nice bonus to Russia by diverting Azerbaijani oil exports along Russian routes, but the scale of the gain is not worth all the human and reputation losses the Russian government has committed itself to in the operation in Georgia," she said.

Besides that, some experts said the importance of the region in terms of production has been overstated and that, while increasing oil and gas supply from the Caucasus region would serve the EU's goal of diversifying its energy imports, the future importance of the region as a relevant energy supplier is in doubt.

"According to many, there are many untapped hydrocarbon resources in the Caspian Sea bordering Azerbaijan," said Arriana Checchi, an energy security research fellow at the Center for European Policy Studies, a Brussels-based think-tank. "To others, the resources of the region are not enough to undertake major export projects such as the Nabucco gas pipeline from the Caspian across the Caucasus and Turkey to central Europe and Italy.

Checchi, however, added that the Caucasus region would remain an important corridor to connect energy-rich countries in central Asia to Europe.

Delays but no serious after-effects expected

Burning apartment building after the bomb attack of Russian warplanes on Gori, Georgia
The region's instability won't fill investors with confidenceImage: picture-alliance /dpa

The effect of the conflict may still have some negative effects for Europe, Checchi said. The increased instability may contribute to a further setback for the Nabucco project, a gas pipeline designed to bring Caspian and central Asian gas into Europe, which has been strongly supported by the EU as a means to strengthen Europe's security of supply.

"The war in Georgia may confirm the existing doubts about the reliability of Georgia as a transit country," she added. "This may lead not only to political reluctance towards the Nabucco project but also to decreasing investors' confidence."

Despite this added concern, if Georgia -- as expected -- remains a sovereign state but the status of South Ossetia changes through the painful negotiations, expects say not much would change in terms of the oil supplies coming from the region.

Despite hope of a settlement, the oil markets are still likely to remain jumpy with Russia making it clear that, while the current fighting will stop, hostilities may be resumed if it feels that South Ossetia is again a target for Georgian aggression.

Oil price determined by other factors

A worker operates the valves at the oil fields of Rumailah, near the southern city of Basra, Iraq
Increased production will have more effect on pricesImage: AP

A slight increase in oil prices registered on Monday, Aug. 11, may have been the first signal of the war's effect on oil prices, Checchi said, but she added it would be difficult to prove a connection between the Russia-Georgia conflict and the price of crude.

"It is too early to tell in what extent the war in Georgia will affect the overall price of oil," she said. "Oil prices may be affected only on a temporary basis leaving the major responsibility of determining the new level of oil prices to other trends and factors like the recent decrease in US energy demand and the recent increase in oil production in Saudi Arabia.

"It is important to keep in mind that the war in Georgia will be nothing more than just one factor among many which will determine the future level of oil prices – both on the demand and the supply side."

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