Pipeline Fire Underscores Vulnerability of Russian Oil Supply

Even though it only represents about 1% of the planet’s daily oil usage, a fire at the BTC pipeline transporting crude from Azerbaijan to Turkey was cited as the reason oil jumped nearly a buck and a half on Thursday to top out at just over $120 a barrel. Kurdish rebels operating in northern Turkey immediately claimed responsibility but officials said it was too early to confirm that the fire was the result of sabotage and not simply a technical failure.

Even if it turns out that the fire was not sabotage, it still shows how vulnerable the global oil supply is to even minor disruptions. In this case, the BTC pipeline – which contributes a relatively modest one million barrels a day – was enough to reverse two months of falling crude prices.

A spokesperson for British Petroleum PLC which owns just over 30% of the pipeline holding company, noted that it could take up to 15 days to get back on line. Faced with this fact, BP served notice that it would be invoking the force majeure clause of their existing contracts freeing them from obligations to deliver crude oil to its customers for reasons beyond their control.

Of far greater potential consequence is the growing conflict between the Republic of Georgia and what is described as the “break-away” region of South Ossetia. South Ossetia is located in the Caucasus region of Georgia and despite being wholly-contained within the Republic, the region has attempted to maintain its independence from Georgia by retaining loyalty to Russia.

In 1992, South Ossetia held a referendum on separation where the vote heavily favored a split from Georgia. The referendum was not officially sanctioned by the government of Georgia which refuses to recognize South Ossetia as a separate country. Several skirmishes have broken out since the early 1990s, but reports of fighting overnight on Thursday indicate that Russian forces have moved in to support the separatist troops of South Ossetia.

Prime Minister Vladimir Putin – the former Russian President and KGB officer – announced that “war has started” in reference to the fighting in Georgia. Georgian President Mikheil Saakashvili countered by calling Russia’s involvement a “well-planned invasion” and noted that Georgian troops are fighting to fend off thousands of Russian troops pouring over the border into Georgia. Russian tanks and other equipment have been sent into Georgia and Russian jets have reportedly bombed the Georgian cities of Gori and Karelli. Georgian military officials claimed to have shot down three jets but this is unconfirmed.^[1]

Reaction to the fighting was immediate. The ruble continued to lose ground to both the US dollar and the euro while the Micex composite index fell to its lowest point in almost two years. But it is the price of oil that has analysts are holding their breath.

Friday saw oil fall by over three dollars on continued concerns over a decrease in global demand, but this is sure to change if fears that the current fighting could risk supplies. As the number two producer of crude oil in the world, Russia exports over six and a half million barrels a day, and any interruptions to these exports could have an immediate impact on the price of oil.

Facts About the BTC Pipeline

Completed in may of 2006, the BTC pipeline gets its name because it runs from the Azerbaijan port of Baku, through Tbilisi in the Republic of Georgia, and terminates in the Turkish port of Ceyhan. The pipeline runs over 1000 miles providing a direct means to transport crude from the Caspian Sea to Ceyhan where it is loaded into massive tankers destined for refineries in the West.

From end to end, the pipeline has a capacity of 10 million barrels of oil moving at approximately six feet per second and can deliver one million barrels per day at peak capacity.^[2]

References

1. ↑BBC News – August 8th, 2008
2. ↑BP Website – www.bp.com