Oil's Vital New Power

(2 of 4)

Fifteen years after the Soviet Union's collapse, it's tempting to think of the cold war as history--until you land in Baku. This is the front line of a new East-West contest, one that is as consequential as the nuclear-weapons face-off of the past: the battle for energy supplies among countries heavily dependent on imported oil and gas, which include the U.S. and the E.U., plus the rocketing economies of China and India. That necessity is a powerful weapon in this new battle. Shortly before Christmas, Russian President Vladimir Putin forced Royal Dutch Shell to cede control of Sakhalin II, the world's biggest oil and gas project, to the state-owned giant Gazprom, opening the North Pacific island's vast resources to Asian markets. The $7.45 billion price was small to Gazprom, whose value has soared from $9 billion in 2000 to $270 billion today, after years of record energy prices.

That's given Russia immense power to dictate terms for much of Europe. In one power play, the Russians briefly blocked gas last winter to Ukraine, leaving millions freezing. In December, Putin threatened to do the same to Belarus unless it began paying Western-level gas prices. Belarus agreed. Infuriated that Azerbaijan's new BP-operated pipeline to the West bypasses Russia, Putin has said he intends to double gas prices for Azerbaijan, which in turn threatened to stop exporting its oil through the Russian-controlled section of the Baku-Novorossiysk pipeline to the Black Sea. "We want to put an end to this!" says Khosbakht Yusifzadeh, slamming his fist on his desk. He is the aging first vice president of the State Oil Co. of Azerbaijan and spent decades as a Soviet official. The country's best shot at breaking Russia's grip is BP's parallel gas pipeline, which in December began transporting gas from Azerbaijan's massive Caspian Sea gas field named Shah Deniz. "I see it now," says Yusifzadeh, looking at a wall map of the Caspian Sea in his office. "A photo of Shah Deniz with the caption: THIS IS THE PLACE THAT MADE AZERBAIJAN INDEPENDENT OF RUSSIA."

That could take a while. Azerbaijan--which BP says stands to earn about $230 billion from BP's pipeline during the next 20 years--has rarely been independent either of Russia's influence or foreign treasure hunters. Baku's élite included the Rothschilds during the 1890s, when Azerbaijan produced half the world's oil supply. Oil production slid steadily as the Soviets let the infrastructure rot. Today hundreds of rusted oil derricks and pump jacks, many predating World War II, cram the seafront outside Baku like a scrap-metal forest, with old Soviet tractors turning several wells. The astonishing sight was memorialized in the 1999 James Bond movie The World Is Not Enough. Towering over the area now is a 16,000-ton water-injection platform being built by BP, which will be towed to an oil field 75 miles offshore, where the company expects to pump about 320,000 bbl. a day beginning in April 2008. "This is a time of big change," says Mushvig Osmanov, 26, an Azeri engineer for BP, standing atop the half-built platform, gazing at the crumbling old oil wells. "Suddenly we have Western styles and tastes."