30 March (Stratfor)
Editors note: This text has been corrected from the original version, which incorrectly stated the amount of oil Russia exports.
SUMMARY
In an unexpected step, Russian President-elect Vladimir Putin sent his first international message to an unusual recipient, Algerian President Abdelaziz Bouteflika, stressing the importance of a high-level bilateral relationship between their countries. In light of global concern over oil prices and production, it appears that Russia is in fact lobbying Algeria. Although it is a petroleum exporter, Russia is at the mercy of OPEC. But with the help of an OPEC member such as Algeria, Moscow may be able to gain a valuable ally in the cartel’s next decision on production and prices, due in June.
ANALYSIS
In the midst of a busy first week as Russia’s president-elect, Vladimir Putin crafted a note to Algerian President Abdelaziz Bouteflika and sent it with Gennady Seleznev, speaker of the Russian State Duma, on his trip to Algiers, March 28. Putin wrote, “It is important now to develop the existing prerequisites for taking an entire complex of bilateral contacts to a new and maximum high level,” reported ITAR-Tass. Considering the symbolic importance of the act – and the unremarkable history of Russo-Algerian relations – this move initially seems surprising.
The gesture, although too late to have an impact on this week’s Organization of Petroleum Exporting Countries (OPEC) conference in Vienna, is the first Russian move to solidify ties with Algeria. The overture appears to be part of a Russian strategy to play a hand in the next round of decisions over the price of oil. Although Russia exports approximately 3.5 million barrels of oil daily, it has no say in questions of production and prices within OPEC. By beginning to cultivate an ally in a small OPEC nation, Algeria, Moscow may be trying to exert some influence over the next round of production decisions, due in early June.
After several intense days of debate, nine of the 11 OPEC nations agreed March 29 to increase oil production by a total of 1.45 million barrels per day (bpd). Each member, including Algeria, Indonesia, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates (UAE) and Venezuela, will increase its output by varying amounts beginning April 1. Iraq is excluded from the arrangement because United Nations resolutions govern its oil exports, and Iran has refused to sign the deal, but will likely increase production in order not to lose out, due to the expected drop in prices.
Moscow, facing significant losses as a result of increased oil on the market, opposes the OPEC plan. Russia’s oil production is currently at its maximum capacity, putting Russia in a nearly indefensible position as other producers boost exports. If the current situation holds, Russia will only be able to sit by and watch the value of its oil exports drop; oil revenues account for 40 percent of the country’s hard currency. Russian Fuel and Energy Minister Viktor Kalyuzhny has said that Russia wants to keep world oil prices at $26 to $28 per barrel. But prices had already fallen below $25 per barrel at the close of business on March 28 – before the OPEC announcement. The cartel plan is expected to push prices down to $20 to $25 per barrel.
Moscow’s only hope for influence lies in gaining an ally at the next OPEC conference. Because they represent a non-member nation, Russian delegates can only observe these meetings. On June 21, the OPEC countries will meet again in Vienna to examine world oil prices and adjust output again, if necessary. This gives Moscow about three months to ally itself with an OPEC member that will vote with Russia’s concerns in mind. Algeria, which was instrumental in organizing the cuts and held out against the production increase, seems the best candidate for a potential Russian proxy.
Beginning with Putin’s affectionate note, Moscow will likely embark on a three-month campaign to win support. The Kremlin has two levers that it may use to influence Algiers. First, Russia may try to gain more influence in Algeria through deals on arms sales. Bouteflika’s government, however, may be more vulnerable on the question of Algeria’s foreign debt. Algeria owes Russia between $1.5 billion and $6 billion, according to ITAR-Tass. The debt gives Putin leverage, and it can be slimmed down in exchange for a promise of Algerian support during OPEC’s midsummer meeting. Putin seems to have just initiated an attempt to control world oil prices through cartelism.
By Michael Lelyveld
Last week’s agreement between Azerbaijan and Georgia on the Baku-Ceyhan pipeline has raised new questions about the benefits of Caspian oil development. RFE/RL’s Michael Lelyveld examines the issues.
Boston, 27 March
(RFE/RL)
A surprising agreement between Georgia and Azerbaijan has highlighted the big stakes for the region in ensuring that Caspian pipelines are built.
Last week, Azerbaijan President Heidar Aliev announced a major concession to Georgia on the issue of transit fees for the Baku-Ceyhan pipeline, ending a four-month stalemate. Azerbaijan reportedly gave up its entire share of the fees in order to satisfy Georgia’s demands. The deal could clear the way for commercial agreements on the oil pipeline in April or May.
But beyond the announcement itself, the details of the agreement have been confusing and vague. Industry analysts who were contacted last week declined comment until all the facts are sorted out. One problem in understanding the deal is that none of the numbers given in last week’s announcement match any of the figures in previous reports.
Last month, Georgia was said to be seeking 20 cents per barrel as a transit fee. This month, the agreement reportedly calls for Georgia to receive 12 cents during the first five years, 14 cents per barrel for the next 11 years, and 17 cents after that. According to the Reuters news agency, an agreement signed in November allowed only 18 cents per barrel as the combined fee for both Georgia and Azerbaijan.
Similar confusion reigns over the tariff for the entire pipeline. Previously, it was reported to be $2 and 58 cents with $1 and 59 cents reserved for Turkey. The latest reports say that Turkey would receive a maximum of 37 cents in fees. According to figures from the State Oil Company of Azerbaijan, nearly 80 percent of the total tariff will be used to pay construction loans and maintenance costs.
As a result, the amount of actual profit from transit is less than some Western analysts thought. The latest figures raise doubts about whether all the haggling and delays were really worth the wait.
But another reason for withholding judgment is the difficulty of knowing when a deal is actually a deal. A reported agreement between Aliev and Turkmenistan President Saparmurat Niyazov on sharing the trans-Caspian gas pipeline apparently collapsed earlier this month after Azerbaijan restated its terms.
It is hard to tell now whether the trans-Caspian deal is on or off. Niyazov has issued discouraging statements, although there is still some expectation of a signing ceremony next month at the Turkic summit in Baku.
The pact on Baku-Ceyhan could also run into trouble as details emerge. The deal must be ratified by the parliaments of both countries. Opposition leaders in Azerbaijan are already raising objections to Aliev’s concession on the transit fees.
But the reports have also served to clarify the importance of seemingly small differences in revenues to the countries in the region. While the amounts seem small in terms of the $2.400 billion cost of the Baku-Ceyhan project, they could make a big difference to the economies of Georgia and Azerbaijan.
Georgia has already calculated that the $52.5 million a year in transit fees that it expects to receive will be equal to 10 percent of its state budget. Based on International Monetary Fund figures for last year, Georgia’s fees at their peak would be equal to 1 percent growth in the country’s gross domestic product. The value would be 1.6 percent of GDP in the case of Azerbaijan.
Baku may justify the loss of its fees because it stands to gain far more from exporting its oil. Delaying the pipeline could have cost Azerbaijan its share of economic growth. The stalemate had led to active discussions in Azerbaijan about the alternative of exporting oil and gas through Iran.
Much of the Baku-Ceyhan route may also be used for gas, which is becoming increasingly important for Azerbaijan. Its concession may be regarded as a long-term investment in Georgia and its energy routes. It is also an investment in close relations with President Eduard Shevardnadze, who faces re-election next month. The deal seems likely give him a timely boost.
But even if the Georgia deal survives scrutiny, Azerbaijan must still find the needed volumes of oil to fill the Baku-Ceyhan line. All the calculations are based on a line designed to carry 1 million barrels per day. Azerbaijan must look to its Caspian neighbors for oil to supplement its own.
And even if enough oil is found in the Caspian, the task of channeling it into the Baku-Ceyhan pipeline will require many additional deals. That challenge means that Azerbaijan may have to find ways to cooperate with its Caspian neighbors, including Turkmenistan, making the agreement with Georgia only the first of many compromises on revenues and fees.
All Over the Globe is published by IPA House.
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