As oil production from the Caspian Sea region increases, the Caucasus region has become an integral export route for oil and natural gas. Previously, the only way for Caspian energy to reach European consumers was via the Russian pipeline system. The United States has supported the principle of multiple export options for Caspian exporters, and three of the largest projects to these ends cross through Georgia (Baku-Tbilisi-Ceyhan, South Caucasus Pipeline, and Baku-Supsa, a.k.a the “Western Early Oil Route”)--none of these pass through Armenia. Small oil resources exist in the region, and the new infrastructure will allow these smaller projects (i.e. refineries and smaller oil fields) to tie in to the pipeline and become economically viable.

Roughly 150 miles of the pipeline corridor extending from Baku, Azerbaijan to Turkey will pass through Georgia. This corridor will include the $3.9 billion Baku-Tbilisi-Ceyhan oil pipeline, which began linefill in May 2005, and the $1 billion South Caucasus natural gas pipeline, to be completed in late 2006. Regional governments and international investors expect these pipelines to become two of the primary conduits for Caspian Sea region oil and natural gas exports over the next decade. Georgia will be paid transit tariffs by the pipeline’s operators, and will be allotted a small percentage of fuel passing through the Republic.

Oil transportation tariffs will rise from $0.89 to $1.86 per ton adding $62.5 million per year to Georgia’s national budget, according to a recent study on the BTC pipeline. The study also estimates that the pipeline would lower the level of unemployment by 33.3 percent and contribute to a rise in GDP. Georgia is obligated to receive 5% of the gas carried by the SCP pipeline, or it must pay a fee. In monetary terms, this quantity is equivalent to around $17 million per year.

Georgian environmental and security concerns have influenced the pipeline projects significantly, particularly over the past year. Among other things, the Georgian government has expressed worries that the BTC and SCP pipelines’ planned route traverses the country's Borjomi Valley, home of Georgia's famed mineral water. In November 2002, the Georgian Ministry of Natural Resources and British Petroleum (BP) came to an agreement stipulating that the path be adjusted around the valley. Later, in December 2002, the Georgian government, working in concert with international experts, presented a new set of environmental security standards for the project.

Several non-governmental organizations from Georgia and around the world, however, continue to express reservations about the pipeline project. Critics such as Amnesty International, Green Alternative, Friends of the Earth, and others have conducted their own studies and fact finding missions, concluding that the pipeline may still be environmentally hazardous.

Given Georgia's internal civil strife as well as hostilities between Armenia and Azerbaijan, the Georgian government has also expressed security concerns over oil flows through the country. Georgia and foreign investors reportedly signed an agreement in 2003 with Northrop Grumman Corp. to implement an aerial surveillance program.

On March 8, 1996, Georgian President Eduard Shevardnadze and Azerbaijani President Heydar Aliyev signed a 30-year agreement whereby a portion of the Azerbaijan International Operating Company (AIOC)'s "early oil" will be pumped via Georgia. Specifically, oil will flow to Georgia's Black Sea ports of Supsa and Batumi located 25 miles apart from each other (see map above). The Georgian International Oil Company, a subsidiary of the AIOC, made substantial upgrades to the existing 515-mile pipeline along this route and built the $565-million Supsa terminal on the Black Sea.

The so-called "western route," for AIOC "early oil", which became operational in April 1999, had an original design capacity of 100,000 bbl/d. But recent upgrades have raised capacity, and throughput capacity is now around 220,000 bbl/d at Supsa. The Baku-Supsa route, however, was designed to carry only the early oil from the AIOC's development of the Azeri-Chirag-Gunashli fields, and although there has been discussion of increasing the pipeline's capacity to 300,000 bbl/d or even 600,000 bbl/d, AIOC is planning to export its future production via BTC, once it becomes operational. Exports via Baku-Supsa represented roughly 40 percent of AIOC’s total exports from Azerbaijan in 2005.

During June 2005, ExxonMobil announced it would begin sending oil by rail from its Azeri fields to the Black Sea port of Batumi . Since then, oil and refined product shipments increased to 190,000 bbl/d in 2005 compared to levels of 134,000 bbl/d in 2004. In March 2006, the Batumi port owner announced it would raise capacity at the port to around 260,000 bbl/d .

In 2005, Georgia increased natural gas imports from Russia by 14 percent to 50 Bcf. During 2006, the country's gas consumption is expected to rise to almost 80 Bcf. Almost all (70 Bcf) of Georgia’s natural gas will be provided under a supply agreement with Kazakhstan via Gazprom pipelines. During 2005 Armenia imported roughly 60 Bcf of natural gas via Russian-owned pipelines.

Natural gas imports to the region come primarily from Russia, and in recent years Turkmenistan and Kazakhstan (piped through Russia). But a change in Russian suppliers this year, from the Russian independent Itera, to state-owned Gazprom, has in effect put large portions of the Caucasus countries’ economies in the hands of the Russian monopoly. In January 2006, two explosions damaged the transit pipeline and cut off supplies of Russian natural gas to Georgia and Ukraine. Georgian President Mikhail Saakashvili blamed the explosions on Russia's security services, and Russia accused Saakashvili of being "hysterical".

Armenia and Russia renegotiated the terms of their natural gas contract in early 2006. Armenia’s government ceded to Gazprom its 45 percent stake in ArmRosGazprom, a joint venture between Gazprom and Armenia’s government that controls the transportation and distribution of Russian natural gas to Armenia. In exchange, Gazprom will freeze prices at $110 per thousand cubic meters (mcm) until January 1, 2009. Armenia was paying $60 per mcm the new price for natural gas from Russia until the agreement was signed.

Some of the details of the agreement remain unclear. Gazprom might also obtain various natural gas assets controlled by ArmRosGazprom, such as the Razdan-5 power station in Armenia. Gazprom will also help construct a 140 MW gas-fired electricity turbine at the Razdan-5 plant from which the company can export electricity.

Armenia intends to diversify its natural gas supplies in the future by purchasing natural gas from Iran. Construction finally began in early 2005 on the long-awaited Iranian portion of the Iranian-Armenian pipeline. According to the agreement, the construction must be completed by January 1, 2007. The roughly 90-mile natural gas pipeline will be financed by Iranian Bank of Export and Development at a cost of $30 million. Implementation of the project had been delayed for almost 10 years due to disagreements between the two sides over natural gas prices and the location of the pipeline. An agreement on financing of the construction of the line from the southern Armenian city of Meghri to Kajaran, Iran, was signed between CJSC Electric Networks of Armenia and Iranian company Sanir in Yerevan on Sept 8, 2004. Initially, Armenia will receive 38 Bcf per year (1.08 million cubic meters per year) with plans to double the volume of imports by 2019. In exchange, Armenia will provide Iran with 3 kilowatts of electricity per cubic meter of gas

This is a significant pipeline because it allows Armenia to access Iran’s and Turkmenistan's gas exports without having to use Caspian Sea export routes. If Gazprom obtains control over the Armenian share of the pipeline, Georgian efforts to reduce dependence on Russian natural gas exports could falter. According to a Gazprom press release, ArmRosGazprom will also take ownership of a 30-mile Armenian stretch of the Armenia-Iran pipeline as part of the newly renegotiated Armenian-Russian natural gas agreement described above.