International legal aspects of the construction and operation of the «Baku-Tbilisi-Ceyhan» oil pipeline

Mammadov Lyatif Rustam Postgraduate student, Department of International Law, Moscow State Institute of International Relations (University) of the Ministry of Foreign Affairs of Russian Federation 76 Prospekt Vernadskogo str., Moscow, 119454, Russia, Moscow, - latif0170@gmail.com

Introduction

The Caspian region, in which the Republic of Azerbaijan, the Islamic Republic of Iran, the Republic of Kazakhstan, the Russian Federation and Turkmenistan are located, is distinguished by the richest hydrocarbon resources. This factor increases the geo-economic and geopolitical importance of this region, turning it into one of the main regions for ensuring energy security not only of the Caspian littoral states, but also of the states of other regions of Eurasia.  

After the collapse of the USSR, the Republic of Azerbaijan, located at the intersection of Europe and Asia and possessing favorable geographical opportunities, encouraged international companies and Western countries to use this space primarily as a transport and communication corridor ^{[1, p. 137]}. Increasing oil production and attracting foreign companies to invest in the oil sector have become priorities of Azerbaijan. The presence of such oil pipelines as "Baku-Novorossiysk" and "Baku-Supsa" did not allow exporting large volumes of produced oil, since the throughput capacity of these pipelines did not exceed the volume of 10 million tons per year ^{[2, p. 55]}. The presence of a small number of operating export routes of energy carriers and a large volume of their reserves pushed Azerbaijan to search for alternative routes.

Since the end of the XX and the beginning of the XXI centuries, the fuel and energy complex of Azerbaijan has become not only a national factor in the economic development of the state, but also played a major role in expanding cooperation with other interested states, involving them in such economically significant projects as the Baku-Tbilisi-Ceyhan oil pipeline passing through the territories Azerbaijan, Georgia and Turkey.

The legal basis for the construction and operation of the Baku-Tbilisi-Ceyhan oil pipeline and its route

After signing on September 20, 1994 by eleven oil companies (THE STATE OIL COMPANY OF THE AZERBAIJAN REPUBLIC, AMOCO CASPIAN SEA PETROLEUM LIMITED, BP EXPLORATION LIMITED, MCDERMOTT AZERBAIJAN INC, UNOCAL KHAZAR LTD, LUKOIL JOINT STOCK COMPANY, DEN NORSKE STATS OLJESELSKAP a.s, TURKIYE PETROLLERI, PENZOIL CASPIAN CORPORATION, REMCO HAZAR ENERGY LIMITED, DELTA NIMIR KHAZAR LIMITED) from 7 countries (Azerbaijan, Great Britain, Norway, Russia, Saudi Arabia, USA and Turkey) [see the official website of the Ministry of Energy of Azerbaijan] The agreement on joint development and shared distribution of production from the Aceri-Chirag-Guneshli block of fields, dubbed the "Contract of the Century", has opened up wide opportunities for the Republic of Azerbaijan to increase oil production in the Caspian Sea. Due to the lack of a sufficient number of existing export routes that allow exporting large volumes of extracted oil, Azerbaijan has carried out intensive work on the launch of the Baku-Tbilisi-Ceyhan main export oil pipeline (hereinafter referred to as the BTC oil pipeline).

The legal basis for the construction and operation of the BTC oil pipeline, which allows transporting the growing volume of oil produced in the country to world markets, supporting the development of multifaceted economic cooperation between states and Azerbaijan's long-term interests in this area, is the Agreement signed on November 18, 1999 at the conference of the Organization for Security and Co-operation in Europe (OSCE) in Istanbul between the Republic of Azerbaijan, Georgia and the Republic of Turkey on the transportation of crude oil through the territory of the Republic of Azerbaijan, Georgia and the Republic of Turkey via the Baku-Tbilisi-Ceyhan Main Export Pipeline (hereinafter referred to as the Agreement on the BTC Oil Pipeline) [see ofic. BP website].

The operational partners (investors) for the BTC oil pipeline are BP (30.1%), SOCAR – Azerbaijan BTC (25%), Chevron (8.9%), Statoil (8.71%), TPAO (6.53%), Total (5%), Eni (5%), Itochu (3.4%), ExxonMobil (2.5%), Inpex (2.5%), ONGC (2.36%) [see ofic. SOCAR Midstream website].

The 1768 km long BTC oil pipeline originates from the Sangachal terminal near Baku, passes through the territory of Azerbaijan (443 km), Georgia (249 km) and Turkey (1076 km) and reaches the Ceyhan Sea terminal on the Turkish coast of the Mediterranean Sea [see ofic. BP website].  Currently, oil produced at the Azeri-Chirag-Gunashli field and condensate produced at the Shah Deniz field from Azerbaijan are mainly transported via the BTC oil pipeline. The oil received via the BTC oil pipeline from the port of the Turkish city of Ceyhan is sent by tankers to the world market.

The opening ceremony of the Azerbaijani part of the BTC oil pipeline took place on May 25, 2005, and the Georgian part was put into operation in October 2005. On May 28, 2006, the first part of Azerbaijani oil was delivered to the Ceyhan terminal, and on July 4, the first tanker with oil left Ceyhan [see ofic. SOCAR website].

To date, in addition to oil produced in the Azerbaijani sector of the Caspian Sea, crude oil from Turkmenistan is also transported through this pipeline [see ofic. BP website].

Since October 2013, a certain amount of oil has been delivered via the pipeline from the Tengiz port of Kazakhstan [see ofic. BP website].  Kazakhstan joined the BTC oil pipeline project in accordance with the Agreement between the Republic of Azerbaijan and the Republic of Kazakhstan on Supporting and Facilitating the Transportation of Oil from the Republic of Kazakhstan through the Caspian Sea and the Territory of the Republic of Azerbaijan to International Markets through the Baku-Tbilisi-Ceyhan system dated June 16, 2007 [see information and legal base of regulatory acts of the Republic of Kazakhstan]. The agreement provides for the creation of the Trans–Caspian Transport Infrastructure (hereinafter - TTI) for the continuation of the transportation of Kazakh oil through the BTC oil pipeline and compliance with the principle of freedom of transit, except in the following cases: 1) when the operation of the TTI poses a threat to the national security of the Contracting Party, its environment, public health and its property; 2) when the operation of the TTI is carried out in violation of the safety rules for the performance of works related to the transportation of oil.

Experts emphasize that the technical characteristics of the BTC oil pipeline line comply with all international standards accepted in the world, including standards in the field of environmental protection [Aliyev, 2010: 166].

Analysis of the content of the Agreement on the BTC Oil Pipeline

The subject of the Agreement on the BTC oil pipeline is the establishment of mutual rights and obligations of the participating states of the BTC oil pipeline.

The Agreement on the BTC oil pipeline consists of 11 articles and has several appendices that form an integral part of this Agreement. Three of these annexes are separate Agreements between the Governments of the States Parties to the BTC Oil Pipeline Agreement and operational partners [see ofic. BP website].

The agreement on the BTC oil pipeline is drawn up in 4 copies and only in English. The depositary of this Agreement is the Republic of Turkey.

The preamble of the Agreement on the BTC oil Pipeline notes "the desire, willingness and will of each State party to the agreement to attract, encourage and protect investments of foreign and domestic investors in oil transportation projects on its territory and/or through it", as well as "the desire of each State party to the agreement to ensure the principles of freedom of oil transit through its territory and/or through her."

In addition, in the preamble, the States parties to the Agreement on the BTC Oil Pipeline noted "the importance of uniform, non-discriminatory application of the norms of international law protecting investments and non-discriminatory treatment of investors, as provided for in bilateral and multilateral agreements to which the States parties to the current agreement are parties, taking into account the fact that the projects, related to the transportation of oil through their territories and/or through their territories are transnational in nature."

According to paragraph 4 of Article 2 of the Agreement on the BTC Oil Pipeline, "the State party to the announcement must not interrupt and hinder the freedom of transit of oil on its territory and/or through it, and must also take all necessary measures and actions to prevent the interruption or restriction of such freedom of transit." The Agreements between the Governments of the participating States of the BTC oil pipeline and the operational partners also confirm the commitment of the participating States to the principle of freedom of transit. According to article 5 of the Agreement between the Government of Georgia and the operating Partners of the BTC oil Pipeline, "The Government of Georgia guarantees to each party to the Agreement on the BTC Oil Pipeline that no actions will be taken that may interrupt or hinder the free transit of oil through its territory and/or through it ...". A similar article 5 is included in the Agreement between the Government of the Republic of Turkey and the Operational Partners of the BTC oil Pipeline and in the Agreement between the Government of the Republic of Azerbaijan and the Operational Partners of the BTC oil pipeline, emphasizing the importance of observing the principle of freedom of transit. In all the above-mentioned agreements, an exception to the principle of freedom of transit is a threat to public safety, human health and the preservation of the environment in the event of continued provision of such transit without prompt necessary correction.

According to D.Azaria, such transit obligations are interdependent, that is, the fulfillment of transit obligations by all parties is a necessary condition for mutually beneficial cooperation ^{[3, p. 136]}.

It is noteworthy that the Agreement on the BTC oil Pipeline does not contain a definition of the term "transit", despite its frequent use in the text. However, Article 1 of the Agreement establishes the definition of the concept of "transport system", which means "a pipeline system and related necessary facilities owned, controlled and/or operated by project investors (operational partners) or on their behalf (including all facilities located on the territory of each state of the project), representing an integrated system necessary for the transportation of oil ...".

As D. Azaria notes: "Some private pipeline agreements contain a general definition of the concept of "transit" in accordance with the Barcelona Convention, Article V of GATT-94 and Article 7 of the ECT. Other agreements use the concept of "transportation" by pipeline instead of "transit". However, pipeline transportation also involves transit in accordance with the definition of transit under the Barcelona Convention, GATT-94 or ECT" ^{[3, p. 30]}.

A separate article of the Agreement on the BTC oil pipeline is devoted to tax benefits. Thus, according to the terms of Article 5, "with the exception of conditions specifically stipulated in agreements between the governments of the participating States of the BTC oil pipeline and operational partners, and without limitation of certain provisions, project investors, shippers or any other persons related to goods, works related to the project or part of the BTC oil pipeline project, any persons, Those providing technologies or services in connection with the BTC oil pipeline project are not directly or indirectly taxed. Agreements between the governments of the participating states of the BTC oil pipeline and operational partners fix the rules for the introduction of taxes or exemption from taxation and obligations to provide tax reports." Thus, it can be noted that the participating states of the BTC oil pipeline support the reasonableness of certain fees in accordance with GATT-94 and the Barcelona Convention.

It should be noted that, as stated in Article 1 of the BTC Oil Pipeline Agreement, the term "tax" means "all existing or future taxes, fees, duties, customs duties, deductions, contributions (such as contributions to the social fund and compulsory medical insurance), commission fees, the amount of tax or other similar fees, payable or levied by the State or an organ of the State, together with interest, penalties and fines (including financial and administrative penalties) in respect of them."

Evaluation of the value of the BTC oil pipeline

The construction of the BTC oil pipeline, which is the second important historical event in the field of economic development of the Republic of Azerbaijan after the signing of the "Contract of the Century" ^{[2, p. 55]} and of particular strategic importance for the entire Caspian region as a whole ^{[4, p. 166]}, at the initial stage seemed very difficult and unprofitable. International energy companies have stated that the project is economically inexpedient, considering it the longest oil pipeline among the various proposed options.  Despite all the difficulties, the resolute position of Azerbaijan and the support of Turkey and the United States have become the determining factors for the construction of this oil pipeline ^{[5, p. 7]}.

According to US Secretary of Energy Bill Richardson, who noted the importance of the construction of the BTC oil pipeline, "the BTC oil pipeline project is not just another oil and gas deal and is not just another pipeline, but can change the entire geopolitics in the region" ^{[6, p. 40]}. Russian scientists and experts stressed that the construction of the BTC oil pipeline was "connected with the active lobbying of Turkish diplomacy with the support of the United States as an alternative to Russian export routes for the transportation of Caspian oil" ^{[7, p. 272]}. In their opinion, the BTC oil pipeline met "the geopolitical interests of the United States in depriving Russia of the ability to control the transportation of energy resources from Central Asia, in particular from the Caspian region" ^{[8, p. 105]}.

By exporting its energy carriers to world markets directly through pipelines such as the BTC oil pipeline, Azerbaijan has ensured the growing global demand for energy carriers for a long period ^{[9, p. 1]}. In addition, oil exports via the BTC oil pipeline have allowed Azerbaijan to improve its macroeconomic indicators and strengthen its economic independence ^{[5, p. 9]}.   

Conclusion

The analysis showed that the legal basis for the construction and operation of the BTC oil pipeline was, on the one hand, international treaties of the states of the region, namely the Agreement on the BTC oil pipeline and the Agreement between Kazakhstan and Azerbaijan on Supporting and Facilitating the transportation of oil from the Republic of Kazakhstan through the Caspian Sea and the territory of the Republic of Azerbaijan to international markets through the Baku-Tbilisi-Ceyhan and, on the other hand, agreements between the governments of the participating states of the BTC oil pipeline and operational partners. A special uniqueness of the legal regulation of the construction and operation of the BTC oil pipeline is that all signed agreements between the governments of the participating states and operational partners are an integral part of the Agreement on the BTC Oil Pipeline - annexes to this Agreement.  

The most important provision of the above-mentioned legal acts is the commitment to the principle of freedom of transit of participants. One of the key aspects of the Agreement on the BTC Oil Pipeline is the provision of tax benefits, and agreements between the governments of the participating states of the BTC oil pipeline and operating partners are the consolidation of rules for the introduction or exemption from taxation. The agreement between Kazakhstan and Azerbaijan to support and facilitate the transportation of oil from the Republic of Kazakhstan through the Caspian Sea and the territory of the Republic of Azerbaijan to international markets through the Baku-Tbilisi-Ceyhan system allowed the creation of a Trans-Caspian transport infrastructure to ensure the transportation of Kazakhstan's energy resources to the world market and strengthen existing economic ties between the states of the region.

The mechanism for regulating the construction and operation of an international pipeline project by acts of a public-legal and private-legal nature allowed to consolidate a set of mutual obligations and rights of all participants in the BTC oil pipeline project and became a solid legal basis for cooperation between interested participating States and participating States with operational partners.