The Iraq War, Turkey, and Renewed Caspian Energy Prospects

Abstract

Many have linked US-led invasion of Iraq to its oil resources, leading some observers to question Caspian energy prospects. This article analyzes how Iraqi occupation and Caspian oil prospects have been inter-linked, via evolution of American and Turkish assessments of Iraq and Caspian region. It shows that, contrary to initial expectations, occupation of Iraq bolstered Baku-Tbilisi-Ceyhan project as well as a number of other increasingly significant natural gas export pipelines. The March 2003 invasion of Iraq has been inextricably linked with that country's oil reserves, estimated to be world's third largest after those of neighboring Saudi Arabia and Iran.1 It has been suggested, for example, that Iraq, under influence of US-led occupation, would actively undermine OPEC's collective market power, serve growing US consumer demand for imported petroleum as well as corporate need for new investment opportunities, and even manipulate flow of oil to China.2 American officials did little to dispel suspicions about US motives. As Baghdad fell, Vice President Dick Cheney claimed that Iraqi oil production could reach 3 million barrels per day by year's end, while Deputy Defense Secretary Paul Wolfowitz told US House Appropriations Committee that [t]he oil revenues of that country could bring between $50 billion and $100 billion over course of next two or three years.3 Given these assumptions of Iraq's oil prowess, doubts about Caspian energy resurfaced. More specifically, would Iraqi oil obviate need to transport higher-cost sources from landlocked Azerbaijan (and possibly Kazakhstan) to world markets via Baku-Tbilisi-Ceyhan (BTC) pipeline reaching Turkey's Mediterranean coast? Indeed, as participants at a post-invasion conference on Caspian oil and gas in Istanbul expressed, the prospect of expanded access to Iraqi energy reserves could cause investors to reconsider relatively expensive Caspian off-shore projects and construction of lengthy BTC route.4 In reality, just opposite has transpired. Great expectations for Iraqi oil remain slow to materialize, while BTC pipeline is operational, providing both a valuable alternative outlet for Azerbaijan's crude oil and a small but significant addition to global supplies.5 Although BTC had registered some progress before invasion of Iraq, prolonged damage to Iraq's oil infrastructure under occupation and effects of disrepair and sabotage, albeit marginal, on world energy markets virtually guaranteed economic viability not only of BTC pipeline, but also of its twin Baku-Tbilisi-Erzurum (BTE) or South Caucasus gas pipeline, which also conveys Azerbaijan's gas to Turkey. The seller's market has even brought Nabucco pipeline, a vastly more complex undertaking to transport Caspian and Middle Eastern natural gas supplies to Europe through Turkey, into realm of feasible. These accomplishments seem remarkable in light of fact that seminal BTC pipeline was nearly shelved after price collapse in 1998 and downgrading of Azerbaijan's offshore oil-reserve estimates. Initial US support for BTC was primarily political rather than financial. Despite favorable rhetoric from members of Clinton Administration, American government remained largely noncommittal towards funding BTC, even as a means of breaking Russian control over Caucasus transport corridor. Rather, Washington did more to back project by maintaining its ban on building of new pipelines from and through Iran. The occupation of Iraq inadvertently imparted a new momentum to Caspian projects like BTC and BTE by helping to ratchet up world energy prices. The aforementioned conditions also fed Turkey's interest in completing these projects. Prolonged constraints on Iraqi oil production and exports through Iraq-Turkey (IT) crude oil pipeline, combined with elevated world oil demand, not only improved commercial rationale of BTC and BTE pipelines, but also dampened Ankara's initial expectations that Turkey might obtain higher oil transit revenues and other economic benefits from restored trade with Iraq. …