Caspian: LUKoil decision unlikely to affect pipeline

Michael Lelyveld

The developer of a Caspian pipeline from Azerbaijan to Turkey says the project will be a commercial success, despite a decision by Russia's LUKoil not to participate. An official says the move was the result of LUKoil's failure to win Russian government approval rather than a reflection on the project's returns.

A top official of a U.S.-backed Caspian pipeline project has defended its profitability despite criticisms by Russian officials and analysts last week.

Michael Townshend, general manager of the Baku-Tbilisi-Ceyhan project, said the recent decision by Russia's LUKoil not to invest in the pipeline would have no effect on its commercial viability.

In a phone interview from London on 30 April, Townshend told RFE/RL, "If they don't come in, it really doesn't make much difference to us." But he added that he would still like to see LUKoil take part.

Russia's largest oil company negotiated for months to take a share in the project but announced on 15 April that it would not join in the $2.9 billion project.

Townshend said he was "absolutely confident" that construction of the 1,730-kilometer pipeline would take place as planned, and that it would have enough oil to fill its capacity of 1 million barrels per day. The project is sponsored by a consortium of oil companies, led by Britain's BP.

The pipeline from Azerbaijan through Georgia to Turkey has been a major goal of U.S. regional policy for the past six years. But Russia has argued that it is not commercially viable and has vowed to compete with its own export route to the port of Novorossiisk on the Black Sea.

After LUKoil officials voiced interest in the project known as BTC, the Russian government sent conflicting signals about allowing it to take part. LUKoil already owns 10 percent of the Azerbaijani offshore oil venture that would use the line for its exports.

The Kremlin's influence over LUKoil's decision has been a matter of debate. The Russian government holds a 13.5 percent interest in the company but has announced plans to sell 5.9 percent of the stock this year. LUKoil has not commented on the reasons for its decision.

Questions about the commercial viability of the BTC pipeline have focused on the available oil to fill it and the promised rate of return on the investment. In the past year, both Russia and the United States have tried to downplay political differences over the route.

Last week, the Russian investment bank Troika Dialog argued in an analysis that LUKoil's decision against the pipeline was made "mainly on economic grounds." It called the economics of the project "poor," adding that its expected annual return on investment is only 12 percent.

The figure is half that estimated by BP in a study last December. The Azerbaijani state oil company SOCAR and LUKoil have both cited the higher return of 24 percent.

But Townshend said the varying estimates are not in conflict, adding, "All of these numbers are very misleading."

The differences are the result of complex definitions in financial terms. Townshend said an investment in the BTC project offers an "internal rate of return" of 15 percent, which is equal to a 12.5 percent "real rate of return."

Unlike other measures, the internal rate of return considers only the venture's future revenue without comparing it to a risk-free but low-yielding investment, like U.S. Treasury bills. The lower real rate takes inflation into account.

Townshend said the higher rates of over 20 percent were for return on "equity," which is also known as net worth. But much of the investment is also being financed by debt.

Proponents and opponents of the project seem to have used the higher and lower figures to support their arguments, although all the numbers describe the same investment. Townshend said that pipeline investors have been offered a fixed rate of return over the next 20 years.

He also argued that LUKoil's decision had little to do with its opinion of BTC's commercial viability.

Townshend said: "I don't think their position changed. I just don't think they have the approval of the Russian government. I don't their views of the economics of the project have changed."

The BTC project is expected to start in June or July with the awarding of contracts and logistical work like moving steel into place, said Townshend. The actual pipeline construction will begin next March, he said.

http://www.rferl.org/nca/features/2002/05/02052002085417.asp