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CMU MBA 660 - Article Summary

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“SUMMARY OF THE BAKU- CEYHAN PIPELINEMIXING OIL AND WATER WITH BUSINESS AND POLITICS”The case “Baku- Ceyhan Pipeline” was written by “Van V. Miller, Milo C. Pierce andRobert J. Hoover”. It deals with how Oil company executives planned for contingencies forsetting of the “Baku- Ceyhan Pipeline” under various circumstances in highly volatile industryand region where a war with Iraq had just commenced. The challenge they faced was how totransport vast quantities of crude oil from Caspian Sea region to major markets for refining andselling there. The attack of September 11 and Hussein’s apparent downfall in Iraq made mattersmore complex. The business decisions regarding “Baku-Ceyhan Pipeline” are influenced bygeography and by mountain ranges and deep seas.Oil is critically important and involves controversies as it is a major energy source and iseconomically effective and also is a primary input for many other products and so controversiesover it may even cause wars among nations. The daily production of oil at Baku is more than 1.2million barrels which is just a fraction of about 75 million barrels used over the world daily and75 percentage of its production is exported. The region had about one percentage more than theworld’s known reserves of oil.The reason to setup pipeline can be summarized into three main points. First, fortransportation across Asia Pacific and Europe where there is high market demand for oil. Thepipeline thus represents the tactical part of business solution for effective use of Caspian Sea oil.Second, the predictions and forecasts about the demands and supply of oil and its pricing are notaccurate enough and might cause wrong decisions and conclusions and so without Caspian SeaOil supply, the companies cannot have sufficient supply for market. Third reason is the politicalissue with the US since the disintegration of Soviet Union 1991. The United States, the Russiansand the Iranians wanted to influence the events and to become global leaders.After the disintegration of Soviet Union in 1991, the four nations that are formed nearCaspian Sea are Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan. All these had politicalinfluence on BCP issue. Even Armenia and Georgia which lie between the Caspian Sea and theBlack Sea impact the issue.The various possible routes to transport the oil are- The Black Sea provides the closest water routes- Iran, Iraq and the Persian Gulf offers another route which is the cheapest- Russian borders on the northern shore provides one another route- Turkey provides direct access to the eastern Mediterranean SeaThe proposed “Baku-Ceyhan Pipeline” route is most costly of all and it connects Baku,capital of Azerbaijan and Ceyhan, Turkey on Mediterranean Sea via Tbilisi of Georgia (avoidingArmenia because of war with it). It is even lengthy covering 1075 miles, also the route is quitemountainous and earthquake prone which makes the construction even more expensive. Thisroute is opted in spite of its huge costs and length due to rivalry among nations and politicalissues involving in BP and US. The “Baku-Ceyhan Pipeline” has a capacity of 1 million barrelsper day. After detailed engineering study by Azerbaijan International Operating Corporation(AIOC) led by BP by 2002, the construction began there after by 2005.Other potential routes possible are- Eastern Black Sea port to Western Black Sea port by tankers and then to Greek port on theMediterranean by pipeline which avoids passage through the Bosporus Strait but would involvemore governments into it and complicate the transportation task.- Pipeline towards China which has long term potential- Route via Afghanistan and PakistanBritish Petroleum had a dominant position due to its highest ownership among all having34% shares influence decisions of AIOC and thus it had impact on pipeline decision of takinghigh cost route which was politically acceptable to US.Capital costs for construction, operating costs for using it are the two major costsinvolved in pipeline issue. 30% of capital costs funded by business partners and remaining aregiven international banks and lending institutions. Operating costs include production and transitcosts. Initially AIOC was expecting transit costs of more than $5 per barrel and these costs aremuch lower for Saudi oil and Iraqi oil. So it was thought that the Caspian Sea oil at Ceyhancannot fetch profits if priced below $20 per barrel. But Export Import Bank of US, the OverseasPrivate Investment Corporation and the Trade and Development Agency provided fundingassistance for the pipeline. Turkey announced agreement to cap pipeline construction costs intheir territory in 1991 November limiting its construction costs which come under capital costs;even it announced tax and transit fee redemptions. The project is done in 2006. 375000 barrels ofoil rolled through the pipeline per day initially.The case thus presents the Central Asian geography and helps to know the politicalimpacts on a global business and about political and business organizations. The title of the case“Mixing Oil and Water with Business and Politics” is apt for the


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