Transboundary pipeline development and risk mitigation

least three important ways. First, reliance on the existing frameworks would simply
not have supported the commitment of large-scale foreign direct investment
(planned to be $15 billion upstream and $4 billion midstream) for the construction
of BTC,15 due to high levels of perceived political, legal, fiscal and regulatory risks.
Second, reliance on the existing frameworks would have posed significant challenges
to the application of health, safety, environment, security, social and other
international standards beginning to be demanded by international financial
institutions and the oil and gas companies. Finally, even if each of the transit
jurisdictions had sufficiently mature legal, regulatory and fiscal frameworks to
support the necessary large-scale investment, the development of the BTC pipeline
would have been impeded by the absence of a mechanism to bind the three
jurisdictions together in support of the project and to ensure the harmonised
application of construction, operational and project impact standards and the
appropriate fiscal treatment of the BTC project company and BTC shippers.
The initial risk mitigation efforts of the BakuTbilisiCeyhan lawyers focused
largely on crafting instruments to manage political, legal, fiscal and regulatory risks by
using an intergovernmental and host government agreement structure (IGAs and
HGAs). In order to ensure that all three jurisdictions formally demonstrated their
support for the BTC pipeline, a treaty-level IGA was entered into among the three
transit governments. In addition, in light of the challenges posed to the investment
and to the ability of the developers to implement standards satisfactory to multilateral
lending institutions, the lawyers advising BakuTbilisiCeyhan also drafted individual
investment protection agreements (ie, host government agreements) that were entered
into between the project development company (BTC Co) and each of the three
governments. This intergovernmental and host government agreement structure was
designed to provide an umbrella to protect investment in BakuTbilisiCeyhan against
government-sourced risks by shielding the underlying commercial structure and
transportation arrangements over the life of the project.
While the early BTC development efforts were subject to external criticism by
civil society organisations,16 the states themselves were prepared to adapt the
applicable legal regime to accommodate the commercial and export-related needs of
the private sector players involved. Accordingly, the intergovernmental and host
government agreement structure served both to jump-start a traditionally long-lead
infrastructure project and to provide a form of risk mitigation which, at the time, was
sufficient to support major infrastructure investment. Ironically, the
intergovernmental and host government agreement structure also enabled a
sufficiently flexible structure within which a much broader range of risks could
ultimately be accommodated. The nature of the eventual structure will be examined
within the context of the individual risk areas considered below (see Section 4.2).
15

16

98

Taking into account Shah Deniz ($3 billion upstream) and the South Caucuses Pipeline ($1.3 billion),
the total investment required for the combined projects (upstream and midstream) was in excess of $23
billion.
See Friends of the Earth Campaign (www.foe.org/camps/intl/institutions/bakuceyhan); see also, Human
Rights on the Line, a report issued by Amnesty International on the BTC Pipeline (www.amnestyusa.org
/business/btc_pipeline.html); and World Wildlife Fund (www.foe.co.uk/resource/ media_briefing/
how_public_money_funds_oil.pdf).