Memoir: Clinching the Baku-Ceyhan pipeline

This essay is part of a series by American diplomats sharing their impressions of the dramatic early years of Central Asia’s independence from the Soviet Union. These memoirs were written at the invitation of the DavisCenter for Russian and Eurasian Studies at HarvardUniversity. We publish these with special thanks to Nargis Kassenova, director of Davis’s Program on Central Asia.

Beginnings

Joe Presel was a singular American diplomat. When I was stationed as US ambassador to Turkmenistan in the late 1990s, Joe served as the US envoy in Uzbekistan. Fluent in Russian, Turkish, and French, Joe was a true bon vivant, yet also a streetwise product of Providence, Rhode Island.

Joe was visiting me in January 2001, near the end of my Turkmenistan assignment, when I opened an email from Beth Jones, the State Department’s Caspian energy envoy. “Have I got a job for you!” it read. Beth had been promoted to a new assignment, so she needed a successor. Though she never made it to Ashgabat, I had worked closely with her predecessors, John Wolf and Dick Morningstar, exhorting the then-Turkmen dictator, Saparmurat Niyazov, to greenlight a trans-Caspian gas pipeline.

I told Joe I was turning the job down; I didn’t think I’d thrive in a job so free-wheeling. “Wadda you, nuts?” he rejoined, conjuring visions of top-tier negotiations and billion-dollar projects. A reflective cup of coffee later, I took the job. I have long been indebted to the Hon. Presel for that nudge to new vistas.

Happiness is Multiple Pipelines

In the 1990s Kazakhstan, Azerbaijan, and Turkmenistan had massive oil and gas fields that had languished under Soviet management. These countries were, in energy-speak, the “upstream.” Oil and gas money could transform those emerging nations if they could lure companies to develop the fields, and if they could get adequate volumes to market.

The first “if” happened fast. Soon after the Soviet implosion, companies thronged, led by Chevron, developing Kazakhstan’s supergiant Tengiz oil field. Turkmenistan had the world’s fourth largest natural gas reserves. Azerbaijan had the massive Azeri-Chirag-Guneshli (ACG) fields. BP, Total, Shell, Exxon, Mobil, and others soon followed. 

The second “if” was harder. Export routes – the “midstream” – had long existed: the Soviet Union had shipped oil and gas from the Caspian region into the industrial heartlands of Russia and Ukraine. Now, in the independence era, those pipelines were controlled by the Russian monopolies of Gazprom (for gas) and Transneft (for oil), and they squeezed the producers on transit fees. 

That was bad enough economically, but Gazprom and Transneft, then as now, were under the thumb of the Kremlin. If Moscow wanted to crack the political whip on its former vassals, the pipelines were easy-to-use instruments of coercion. Meanwhile, the United States wanted new, strong independent countries to emerge from the rubble of the old empire: new, multiple pipelines outside of Moscow’s grasp were thus a geopolitical game-changer. Accordingly, the Clinton administration created a special envoy for Caspian Basin energy diplomacy in 1998, and that was the assignment I took. 

Pipelines in Play         

By May 2001, when I started the job, some of the lines were settled, for good or for ill. That year the Caspian Pipeline Consortium (CPC) line opened, carrying oil from Tengiz in western Kazakhstan to the Russian port of Novorossiisk. True, the route ran through Russia, but legal agreements helped shield the route from Russian interference, and Kazakhstan has benefited to this day.

Two Turkmen gas pipelines had been in play: TAP, the Turkmenistan-Afghanistan-Pakistan pipeline; and TCP, the Trans-Caspian gas pipeline. Taliban rule in Afghanistan killed TAP, and Niyazov’s mercurial governance twisted the knife on TCP. Ashgabat’s investment-hostile policies daunt those pipelines to this day.

The process of elimination, then, made one trans-Caucasus pipeline the centerpiece of US policy: BTC, the Baku-Tbilisi-Ceyhan oil pipeline, designed to carry 1 million barrels per day of Azerbaijani crude oil to the deep-water Turkish port of Ceyhan. From there, the crude would reach world markets via supertankers. BTC construction would make it feasible to build a parallel South Caucasus gas pipeline (SCP) in the same hundred-meter corridor, sending Azerbaijani gas to Georgia and Turkey, but BTC had to come first. 

My predecessors had done the heavy lifting on BTC, forging regional cooperation and tightening the ties among governments and investors, leading to President Clinton presiding over BTC milestone agreements at a November 1999 Istanbul summit. Still, years of work remained.

17,000 Signatures 

I’m a diplomat. I can’t map a subsurface reservoir or calculate return on capital invested. That’s private sector work, and BP, as the main energy investor in Azerbaijan, oversaw BTC construction and appointed two top oilmen, David Woodward and Michael Townshend, to spearhead the project. 

But a clock was ticking. BP and its partners agreed to put up 30 percent of the project’s $3-billion cost, in addition to the billions they were spending for work on the ACG fields. Commercial and development banks agreed to finance the remaining 70 percent. To get this cash, the bankers’ severe standards had to be met, not just financial metrics, but environmental, social, and pipeline security criteria. 

The toughest lending conditions came from the European Bank for Reconstruction and Development (EBRD) and the World Bank: the environmental and social documentation submitted to them filled 11,000 pages in 45 volumes. We had to have those banks because their participation provided needed confidence to the commercial lenders involved. Each bank also had to be sure that the political will to make the pipelines happen remained strong. At the end of the day, it would take 17,000 signatures on project-related agreements to get the BTC and SCP pipelines off the drawing board. 

The Caspian envoy had two key tasks. First, reassuring the Caspian governments (and the onlooking banks) that the United States was rock solid in its support for the pipelines, and that the transition from the Clinton to Bush administrations in early 2001 had not changed this. Secondly, the envoy mediated between the companies, banks, and governments, brokering, badgering, and problem-solving on the unending actions needed to make the projects a “go.” What did it profit the Caspian governments if they attracted upstream investments only to have the projects bog down in bureaucracy? 

At this point I should note: in this account, I describe my own experiences, but the record should be clear that the Caspian envoy was just one part of an exceptional US team, including Dan Stein of the US Trade and Development Agency (USTDA), Ed Chow, a USTDA consultant, Bud Coote of the CIA intelligence directorate, Geoff Lyon of the Energy Department, and a series of my long-suffering assistants: Justin Friedman, Eric Green, Mary Doetsch, and Rebecca Kinyon. 

Colorful Conversations

Travel as the envoy was a treadmill: midnight arrivals, 2:00 am room-service burgers, predawn departures in armored Chevy Suburbans, and more pilfered hotel soaps and shampoos than my guest bathroom could hold. To reinforce political will, I thumped the theme of “sovereignty and independence” across Eurasian conferences like an old-time politico stumping for votes. The centerpiece event was Dan Yergin’s annual Tale of Two Seas conference in Istanbul, and the Turks were key players, thanks to the calm humor and negotiating prowess of Energy Undersecretary Yurdakul Yigitguden. 

Solving practical problems meant governmental meetings, starting in Baku. All successful pipelines begin at the upstream, and for BTC, that meant Baku. Azerbaijan had been producing oil since 1846 and built its first pipeline in 1878. The Azerbaijanis were old hands at the oil business, and the state oil company (SOCAR) was stocked with smart execs, starting with their incisive chief negotiator, Valekh Aleskerov. We had few pipeline issues there.

And as for Georgia. . . since 1995, Georgia had been under the wise but sclerotic rule of Eduard Shevardnadze. A joke made the rounds: Shevardnadze was playing with his grandson, who asked;

“Grandfather, do you think in our free and independent Georgia, someday I could be president?”

“Why would Georgia need another president?”

Winters were hard in Georgia at the time, thanks to corruption and the country’s dependence on Gazprom. “There are only two seasons in Georgia: winter and preparing for winter,” went one proverb. The BTC and SCP pipelines promised to help this, but hard work was needed. Across the entire project, Washington liberally offered aid: on pipeline security and geological analysis, helping to rewrite outmoded legal codes, and offering export credit funding and insurance. Particularly in Georgia, environmental concerns proved a major issue: politicos and citizens had scores of questions and concerns. BTC needed Georgian officials to approve an environmental decree before it could sign an accord with the government and move ahead. 

Georgia’s point man was the late Gia Chanturia, the whirlwind CEO of the Georgian national oil company. Despite his hard work, the decree was entangled in the country’s bureaucracy as the 2002 Georgia Oil and Gas Conference began in Tbilisi. Then, at the opening ceremony, Gia proclaimed that all obstacles had been overcome. TV cameras rolled and spectators applauded as he and BP inked the environmental accord.

That night we convened for a celebratory banquet. Georgians prize a good tamada, or toastmaster, and Gia was in exuberant form that night. Yet as the wine bottles toppled, he confided: “You know, the president hasn’t gotten around to that decree yet.” Brilliant rascality! A conference splash Gia wanted, and a splash he got. Only months later, however, did the actual decree emerge. 

Kazakhstan, like Azerbaijan, had a deep and skillful bench, with no official sharper than the President’s energy advisor, Maksat Idenov. But the state energy company, KazMunayGas, along with the Ministry of Energy, while professional, had some quirks. March 2002 saw the first US-Kazakhstan Energy Partnership meeting in Astana. At nine o’clock on the morning of the meeting, our US and Kazakh teams met to begin a day of expert talks, and Energy Minister Vladimir Shkolnik and I, with senior staff, repaired to a conference room. Shkolnik was the rare non-ethnic Kazakh in Nazarbayev’s cabinet, a learned physicist with his heart in nuclear energy, not oil. He spoke: “I gotta get to Shymkent. Write what you want for a declaration, and we can sign it.” This was the concluding declaration, summarizing the day’s talks and our plans for the next meeting. We scribbled something out, Shkolnik barked a quick assent, then cracked open the vodka. 

We traded toasts, stories, and jokes in a well-lubricated start to the partnership. The minister, a doppelganger for comedian Rodney Dangerfield, brought down the room with a few humorous anecdotes before dashing to his plane, leaving the rest of us to walk out to a room full of experts whose talks had already been summarized and praised.

No capital, of course, was quirkier than Turkmenistan’s Ashgabat. In April 2002, Ashgabat hosted the first Caspian Sea delimitation summit. Delimitation had long been a thorny issue. The adults in the room – Kazakhstan, Azerbaijan, and Russia – all held reasonable positions, while Iran and Turkmenistan were outliers, making extreme demands. Iran claimed a flat 20 percent of the Caspian Sea, and Turkmenistan claimed most of Azerbaijan’s oil fields. 

Niyazov, the self-styled “Turkmenbashi” (leader of all Turkmen), often boasted that he could solve the delimitation issues “in one day.” (What is it about blowhards that makes them love that phrase?) That day came in April 2002, when he convened the summit, with the leaders of all five Caspian littoral states meeting in Ashgabat. No US official attended, but I heard an identical readout from members of two delegations.

The foreign ministers and their experts negotiated throughout a long day, but came up time and again against Turkmen and Iranian intractability. Niyazov had scheduled an evening banquet to celebrate his expected triumph, and he pressed on despite the diplomatic flop. Iran’s then-president Muhammad Khatami flatly boycotted the banquet, ostensibly because alcohol was served. (Niyazov notoriously loved long, alcohol-soaked fests. In my time as ambassador in Ashgabat, I struggled to ambulate out of a few.) Niyazov also loved the role of tamada, and at the banquet, he announced: “Well, guys, we had this summit to solve our problems and we failed. Whose fault was that? Ours! We’re no better than the Soviet Politburo!” This instantly frosted the Kazakh leader Nursultan Nazarbayev and Vladimir Putin. 

The feast proceeded, and when the dishes had been cleared, Niyazov stood up again and said, “Guys, we have another hour left! What should we do?” Directed merriment often followed Turkmen banquets. In Turkmenbashi’s gala for Ukrainian President Leonid Kuchma, for example, he split the delegations and diplomatic corps into two teams for a song contest.

But on this occasion, Azerbaijani leader Heydar Aliyev snapped, “We can go home!” 

Turkmenbashi turned on him: “Heydar, I don’t know what’s the matter with you! When you were young, you used to drink and dance all night! Now that you’re old, you don’t want to do that anymore!” This had a predictable effect on Azeri-Turkmen relations. With dignitaries alienated, the first Caspian summit concluded.

And what of Russia’s stance on the new pipelines? Russia kept a watchful eye on our energy diplomacy, and sent its own special envoy, Viktor Kaluzhny, on the Caspian trail. Viktor was a former deputy energy minister. He and his ambassadorial deputy, Andrei Urnov, were consummately professional and knowledgeable, but burdened by an unclear brief. Putin was still consolidating control; in those years Russia didn’t oppose the new export routes, but wasn’t quite comfortable with them either. Viktor and I paneled and podiumed from Tbilisi to Houston, and in a quiet moment, he asked me, how do you think America would feel if we named a Great Lakes envoy and sent him to Canada? Whatever fumbled reply I had was only l’esprit de l’escalier, when you think of an answer too late. What I should have said was, what is it in our behavior that would make our neighbor welcome such an envoy?

Presidential Meetings 

The most valuable part of the envoy’s work was done in small-group meetings with the presidents and their ministers. We had to go to the top to crack the bureaucracy, and I entered each meeting with a list of government actions needed to keep the projects on track.

The US ambassador joined me in every presidential meeting, and for our chiefs of mission, the envoy’s visit was welcome. Energy was one of those rare issues where the US and the host government sang in harmony, and those meetings contrasted with the steady and necessary encounters our embassies had on tense topics, from political reform to human rights to ties with Iran.

I was a frequent traveler to Kazakhstan, beginning in March 2002, when I met with President Nazarbayev in Astana, still a small city with construction everywhere. Nazarbayev was foursquare behind energy development, and with CPC achieved, much of our talk involved the next-phase concept of connecting Kazakh oil south into BTC. He had a suitably cavernous office, and we sat at a long, polished side table. 

The discussion turned to Caspian delimitation, and how, the previous summer, Iranian gunboats chased away a BP research vessel from a disputed Azerbaijani field. Always happy to discredit Tehran, I noted that for Iran to take its claimed 20 percent of the Caspian Sea, Kazakhstan, with the longest coast, would have to shrink its sector. In short, “Iran hit Azerbaijan, but they were aiming at you.” Nazarbayev boomed to his notetaker: “Write that down!”

The president extolled Kazakhstan’s development, rightly so: Kazakhstan then as now outpaced the rest of Central Asia. Then pounding the table with his fist, he thundered: “They say there is corruption in Kazakhstan! Where, where is corruption!?” 

For an eyeblink, I thought of quipping, “And how are your children, Mr. President?” – but opted instead just to nod thoughtfully. Nazarbayev continued, “They say my children shouldn’t be in business, they say they are making a lot of money! But it’s a free country. Everyone is free to pursue his activities. What can I do?” 

What indeed?

In that moment, why didn’t I pursue the issue of corruption, and in other top-level Caspian talks, push the other issues that were and are important to the United States: democratization, human rights, regional conflict? Fundamentally, I had a specialized brief to carry out on behalf of the US government, building the energy infrastructure that would help these countries break free of Moscow’s gravitational pull. Securing that degree of independence was a prize in itself, something that could open a path for these countries to shed the Soviet legacy and the crippling imprint of Leninism. 

I also saw how difficult it is to advance our human rights goals with presidents who relished power and the wealth it brought. I knew from 25 years as a diplomat that blunt demands win kudos at Cleveland Park dinner parties, but rarely deliver the goods. I knew also that you have to build a relationship before you can trade on that relationship, and working as partners on energy was a way to build that connection – not for me to cash in, but for the resident US ambassadors. The ambassador was the quarterback; I was a special-teams player. 

And finally, I held the conviction that the way to advance our democracy and human rights goals was through stressing the rule of law, and the practical starting point for the rule of law was commercial law: property rights, land ownership, contract adjudication, and business creation. With the help of the American Bar Association and others, we worked to put into practice these new legal standards, while exchange programs sent dozens of local lawyers abroad. I also valued the social change aspect of Western companies moving into the Caspian: hiring local employees, then sending them to the US and Europe for training; introducing them to international standards of management; enshrining safety and environmental safeguards; and having personnel systems in which you didn’t have to kick back money to the boss, or sleep with him to keep your job. 

Success with BTC

As 2003 began, momentum was on the side of the BTC pipeline. Financing was falling into place, so I was able to travel to Iraq in August 2003 and take on new tasks after the US invasion, managing the end of the UN Oil-For-Food program and transitioning its $10 billion in assets to the new Iraqi government. The UN set a November 21 deadline to end the program. 

Given the epic incompetence of Donald Rumsfeld’s Pentagon, our team of logisticians and lawyers was quarter-staffed, but we finished the work in time. I left Baghdad in December, spent Christmas at home, and the BTC team and its lenders polished the details early in the new year. On February 3, 2004, in Baku’s Gülüstan Palace, the final agreements were signed, and though two years of construction remained, BTC was a reality. The South Caucasus gas pipeline (SCP) was soon to follow.

More Pipelines in Prospect 

Even as BTC progressed, we were looking at the next phase of pipelines. How would the companies export the volumes from new exploration in the central Caspian? And what about exports from the gargantuan Kashagan offshore oil field in Kazakhstan’s zone of the Caspian?

Production estimates for Kashagan’s three phases of development were 475,000 barrels per day; then 1 million barrels; and eventually 1.5 million barrels per day. The Caspian Pipeline Consortium (CPC) line, and even a parallel CPC line could handle exports to the Black Sea, but what then? Oil tanker capacity through the treacherous Bosporus Straits had long been a challenge, and the Straits would be hard-pressed to handle new huge volumes. Thus, we and the companies eyed two options: sending Kazakh oil south and into BTC; and creating new pipelines from the Black Sea to bypass the Bosporus. 

The US steadily encouraged Azeri-Kazakh cooperation and convened the first Aktau-BTC talks in London in 2002, with Kairgeldy Kabyldin representing Kazakhstan, and then-SOCAR vice president Ilham Aliyev – soon to get a major promotion – in the chair for Baku. Meanwhile, entrepreneurs proposed a variety of Bosporus bypass solutions: Samsun-Ceyhan, Burgas-Alexandropolis, Burgas-Vlore, Constanta-Omišalj. Against all sober advice, Ukraine built the Odessa-Brody oil pipeline on spec in 2002 and watched it sit empty. No one had coordinated with oil companies to make sure there were entities ready to ship oil into it, or refineries ready to buy the oil from it. But this was Kuchma‘s Ukraine, a time when normal commercial practices didn’t apply.

Kashagan’s halting progress, however, made our brainstorming moot. Costs skyrocketed, thanks to development missteps, and to the sheer difficulty of developing a high-sulfur, high-pressure field in the shallow Caspian. Delays and cost overruns made it a nightmare, the most expensive infrastructure project on the planet. The cost burden meant that Kashagan might never get beyond the first-phase development. As a result, the idea of a Bosporus bypass pipeline faded from thought.

By the time I left the Caspian envoy position in the summer of 2004, BTC and SCP were assured, CPC was running smoothly, Azerbaijan and Kazakhstan had become familiar destinations for Western energy investment, and the State Department phased out the envoy position.

Lessons in Energy Diplomacy

At a key moment in the post-Soviet era, America catalyzed energy development for countries whose destinies were still uncertain. Energy was the foundation of three new nations’ economies, and critical to an ever-threatened fourth, Georgia. The United States’ convening power and hard work as an honest broker infused international companies, development agencies, and banks with much-needed confidence to make these multibillion-dollar projects a reality.

And now, as Europe shuns Russian gas, this Caspian energy corridor is bringing modest gas volumes into Southern Europe. It will be challenging and very expensive to go beyond modest deliveries, but if Ashgabat ever gets serious about cross-Caspian gas exports – a steep “if” – the volumes could be profound.

A few lessons emerge from this experience. First, that was then, this is now. In that special dawn of post-Soviet sovereignty, energy diplomacy was key in making that link between fledgling governments and the expeditionary private sector. Today’s Eurasian energy challenges are not as simple and involve the complex tasks of alliance management and security affairs, framed by the overarching issue of climate change. 

Yet now as then, the private sector plays a seminal role. Diplomacy and political will alone can’t deliver the goods. The private sector needs to thrive for energy diplomacy to succeed. BTC and its sister pipelines succeeded because credible corporations invested billions in oil and gas fields. A few years later, promoters proposed the Nabucco pipeline, a line to bring gas across Turkey into Europe, but Nabucco never partnered with upstream producers, so despite cascades of political will and years of US cheerleading, the pipeline never happened.

And now Europe is successfully replacing Russian pipeline gas with liquefied natural gas (LNG), but those volumes aren’t moving because of government pledges and pleas – they are moving because companies and energy traders are reacting to price signals. And to get more pipeline gas into Europe from the Caspian and Mediterranean, international oil companies will have to step up their upstream and midstream investments in those regions.

For the Caspian, that’s tricky. The Caspian region is no longer as “hot” in investment terms as it was. Azerbaijan’s oil production is in a steady decline. The expense of Caspian oil and gas development remains high. Oil and gas excitement has moved to Guyana, Africa and, powerfully, US shale. The industry is always shifting, always exploring. Governments from Astana to Kyiv – to Washington – can get new volumes onto the market by offering competitive investment terms and by slashing the bureaucracy and tax burdens that impede oil and gas production. Ultimately, new oil and gas volumes flow because of decisions in boardrooms, not situation rooms.

In Debt Again

The years that followed saw other assignments, including a return to Eurasian energy diplomacy in 2008. Congress had become concerned about Russian energy leverage, after the January 2006 cutoff of gas to Ukraine and Europe, and ordered the State Department to get more active, so Ambassador C. Boyden Gray and I formed a duo to press the Europeans for energy diversification and the Caspian governments to keep their investment climates healthy. 

Just after New Year’s 2009, however, ExxonMobil called me with an offer to join their international affairs group. I pushed off the answer. My heart was firmly in the Foreign Service. My 32 years as a diplomat had seemed to pass in the blink of an eye, and I wanted to keep it going. The Obama administration was about to take office, and the day before the inauguration, I had sandwiches with one of the incoming president’s lieutenants, an old friend. I reminded him of the new president’s campaign pledge to give major ambassadorships to career officers, not as payoffs to campaign donors.

“He said that?” Pause to digest, and not the sandwich. “Ok, what do you want?” I named a couple of European posts; I didn’t want to keep treading the same career ground. “Sounds reasonable to me, I’ll ask the guys.” 

A few days later, I opened an email: sorry, they’ve gone to contributors. How about Ukraine or Azerbaijan?” That week I accepted Exxon’s offer and began a rarefied education in energy from the private sector-side of the table. For that, I have long been indebted to the Hon. Obama.

Editor’s note: In addition to serving as US ambassador to Turkmenistan and as the US Caspian energy envoy, Steven Mann was a fellow of the Harriman Institute at Columbia University in 1985-86.