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. Last Updated: 07/27/2016

Georgian Peace Key to Pipelines

BASHKOI, Georgia — More than 800,000 barrels of high-quality Caspian crude oil flow daily to the Mediterranean beneath this Georgian village, 42 kilometers from breakaway South Ossetia.

Bashkoi marks the closest point at which the BP-led Baku-Tbilisi-Ceyhan pipeline — one of several crossing the region — skirts the Russian-backed territory, underscoring the risks to investors with stakes in Georgia as an energy corridor to the West.

Last August’s five-day war over South Ossetia rattled nerves over the flow of oil and gas. Analysts cite current plans to expand BTC as evidence the worst fears were misplaced.

But a year on, with the sides facing off over tense boundaries and no sign of a peace process, the risk of renewed hostilities remains high.

That threat could impact future projects, notably the U.S.- and European Union-backed Nabucco gas pipeline plan, a 3,300-kilometer transit route to bring gas to Europe from the Caspian and Middle East by 2014.

Villagers in Bashkoi, a bumpy 110-kilometer drive west of the Georgian capital, recall seeing jets and Russian Mi-24 helicopter gunships during the war, and people fleeing the fighting.

“We still think about the possibility of another war with Russia,” said 45-year-old school librarian Ketino Devdariani. “Do you think war will start?” she asked a visiting reporter.

Devdariani said she hoped Nabucco would be built nearby, providing a much-needed boost to the impoverished rural area, where some homes stand abandoned by villagers who left looking for work elsewhere.

Nabucco’s rationale is to reduce Europe’s energy dependence on Russia, but it has long been beset by problems with supply and financing.

Last month’s breakthrough transit deal between EU countries and Turkey “indicates confidence in Georgia as a transport corridor,” said Kate Hardin, head of Russian and Caspian Research at U.S.-based Cambridge Energy Research Associates.

A new war, however, would renew doubts about the viability of Nabucco, which has yet to secure gas supplies from Azerbaijan. Instability in Georgia has already played into Azeri thinking about where to sell its gas, with Baku now looking to Russia as an attractive alternative.

“We still have no map for the pipeline and as a result there is no discussion yet about Georgia being a transit nation,” said Ana Jelenkovic, an analyst at Eurasia Group.

“If Azeri supplies are secured by the Nabucco consortium and pipeline construction discussions begin in earnest, then Georgia would be discussed as a potential transit nation,” Jelenkovic said. “I think at that point you might have that issue [instability in Georgia] raised.”

Georgia hosts major pipelines feeding oil and gas to Europe from the Caspian Sea, including BTC and gas counterpart Baku-Tbilisi-Erzurum. It also has three major Black Sea ports — Batumi, Poti and Supsa — handling oil products and crude.

The war shattered progress made since Georgia’s 2003 Rose Revolution to attract investment to the former Soviet republic under pro-Western President Mikheil Saakashvili.

Poti was briefly held by Russian troops, and thousands of Russian soldiers remain in Abkhazia and South Ossetia, some 50 kilometers from Tbilisi at their nearest point.

BTC was closed for two weeks at the time of last year’s war due to an unrelated explosion in Turkey, and it was not damaged in the conflict. But bombs did fall within 15 meters of the Baku-Supsa pipeline, which BP was then in the process of reopening, two years after it had been closed for maintenance.

Russian troops seized the main East-West highway, and explosions hit the key railway also used to export Azeri oil.

But the immediate impact of the war “was more like a hiccup in terms of export disruptions — oil and gas exports were interrupted only briefly, and the long-term impact on transportation has been less than it could have been,” Hardin said.

Azerbaijan re-routed some oil through Russia.

Then in June, it agreed to sell Russia a modest 500 million cubic meters of gas beginning in 2010. Russian state-run gas giant Gazprom said it had secured priority in buying gas from the second phase of Azerbaijan’s Shah Deniz deposit — Europe’s main hope for supplying Nabucco.

Analysts say Azerbaijan, faced with an unstable Georgia and trying to balance political interests between East and West, wants to diversify export options.

Underscoring the interplay between energy interests and territorial disputes in the Caucasus, Baku is also looking for Moscow’s backing in its dispute with Russian ally Armenia over the Armenian-backed rebel region of Nagorno-Karabakh.