Strategic energy projects require long-term finance and vision. The EBRD can deliver
The Financial Times called it “the new Silk Road.” After the break-up of the Soviet Union in 1991, the newly independent countries started looking for new routes for energy exports and supplies. One possible project was an oil pipeline stretching for 1,770 kilometres from the Azerbaijani capital Baku through the capital of Georgia, Tbilisi, all the way to the Turkish port of Ceyhan. The Baku-Tbilisi-Ceyhan, or BTC, pipeline was to have capacity to pump one million barrels of oil per day – slightly over 1 per cent of today’s total crude oil production worldwide.
The vision became reality, and the EBRD played a crucial role in making a dream come true. Cross-border energy projects such as BTC are an immensely complex task that are impossible to get off the ground without the involvement of multilateral financial institutions such as the EBRD, says Riccardo Puliti, EBRD Managing Director for Energy and Natural Resources. They require long-term financing not usually available in developing markets. Development banks also bring environmental and social standards and partly ensure against political risk.
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Kevin Bortz, for many years EBRD Director for Natural Resources and currently seconded to the Union for the Mediterranean, remembers how it all began: “The EBRD’s involvement in BTC originated from the Early Oil Project (EOP) oilfield financing, for which the EBRD and the International Finance Corporation (IFC) provided a syndicated loan during the Russian financial crisis of 1998. EOP is recognised as the first large-scale oil project in the Caspian Sea region. Our participation demonstrated to the oil companies the important role that the EBRD could play both in successfully structuring and syndicating large innovative regional projects and in working with governments to help resolve problems.”
The EBRD has been a driving force behind many projects which have energy security at their heart. For instance, Georgia, formerly dependent on one supplier of energy, is today fully energy-independent, with BTC and the South Caucasus pipeline bringing it oil and gas from Azerbaijan, and the Black Sea Transmission Line helping Georgian hydroelectricity producers sell renewable energy to Turkey. These three strategic projects were all co-financed by the EBRD. Today, the Bank is working on the rehabilitation of the pipeline bringing gas from Europe to Ukraine and on reforms of energy markets in many countries.
Before BTC, the EBRD financed many other energy projects, including the first cross-border project in the Caspian, Early Oil. But the Baku-Tbilisi-Ceyhan pipeline was of such complexity and strategic importance that it changed the destiny of whole countries.
Financing
For Georgia, the project promised to become the first major alternative source of energy to its traditional supplies from Russia. For Azerbaijani – and Caspian – oil, it was the first alternative route to the West. The task was massive. The cost was initially estimated at US$ 3.6 billion before settling slightly higher after some amendments to the route.
In 2003 the EBRD approved a 12-year loan for BTC of up to US$ 125 million for its own account and syndicated a 10-year US$ 125 million loan to commercial lenders. In addition to the EBRD, the IFC, a member of the World Bank Group; governmental agencies including US-Exim, JBIC, Nexi, Hermes, SACE, Coface, ECGD, OPIC; and a number of commercial banks such as Société Générale, ABN Amro, Citibank and Mizuho, also provided finance to the BTC project.
It was developed by 11 oil companies – Amerada Hess, BP, ConocoPhillips, ENI, INPEX, ITOCHU, SOCAR, Statoil, TOTAL, TPAO and UNOCAL. It is operated by BP.
In parallel with BTC, its gas “sister”, the Southern Caucasus Pipeline (SCP), was built alongside to transport gas from the Sangachal terminal near Baku via Georgia to Turkey. Today, SCP is being extended to allow for additional gas from the Shah Deniz field in the Caspian Sea off Baku to flow towards Turkey and Europe. Riccardo Puliti says: “BTC was the first of a series of projects to link the energy resources of the Caspian to international markets, especially in Europe. Now the Southern Gas Corridor project pursues the same objectives and should be able to deliver Caspian gas to Europe”.
Complex negotiations
The political and strategic significance of the project attracted media attention around the world. Jean-Patrick Marquet, then the EBRD banker in charge of the project and now EBRD Director for Turkey, recalls the negotiation process: “It involved on a permanent basis two lead project sponsors, BP and Statoil, representing all other sponsors – however the others sometimes showed up too – two international financial institutions – the EBRD and IFC, six export credit agencies, four commercial bank-mandated lead arrangers, four main law firms, two financial advisers, two technical advisers (upstream and midstream), one insurance adviser, one environmental and social adviser and a few other additional parties. Each of those had at least two to three staff in attendance, adding up to a negotiating group at least 70 to 80 strong.”
The project was concluded in 2005 with a gigantic 'first oil' ceremony taking place at the Turkish Ceyhan terminal on the Mediterranean sea in the presence of the Turkish, Azeri and Georgian heads of state and government as well as minister level representatives from G-7 countries. At the fifth anniversary of the project National Geographic wrote: “BTC Pipeline Moves Oil, Culture”.
Environmental and social lessons
BTC was also where the EBRD learned important lessons, says Jeff Jeter, an environmental specialist who worked on BTC. “The project was extremely challenging. The pipeline was 1,768 kilometres in length, installed at elevations ranging from sea level to over 3,000 metres above sea level, stretching from the coast of the Caspian Sea to the Mediterranean. The project drew huge attention from civil society. The EBRD and IFC engaged proactively and conducted a series of six public meetings.
Michaela Bergman, then an EBRD environmental specialist who worked on the project, says: “BTC has influenced the way we look at projects. We learned how important it was for our clients to work with communities so that not only were any impacts fairly remedied but that they could also benefit from the pipeline, in terms of skills, employment and services – especially women.”
In light of the recent declines in energy prices, private investors might be having second thoughts about the energy sector. But the EBRD is taking a long-term view. It stands ready to support cross-border energy projects that help provide energy security for economies and for the people whose livelihoods depend on it.