Black Gold: West lays its bets as the Caspian's oil bonanza begins

The first stage of the rush for Caspian oil ended yesterday with a celebration in Azerbaijan, but plenty of snares lie ahead. As Phil Reeves reports from the Azeri capital, Baku, the West is engaged both in a new Great Game and a considerable gamble.

Eighty miles out in the Caspian Sea yesterday, a group of politicians and oilmen stood on an oil platform, dipped their hands into a bucket of oil, and smeared it on their faces. Oil smearing is a tradition in the Caspian nation of Azerbaijan when people want to celebrate. The officials - who included ministers from Britain, the US, Russia and Azerbaijan's President himself - were anointing themselves with the first oil to be extracted from Azerbaijan's Caspian oil fields in partnership with the West.

The evil-smelling slime on their cheeks symbolised the end of the first chapter in a race for one of the most prized energy resources of the next century. It has been a tense period when the newly-independent Azerbaijan carefully parcelled out its oil wealth to a group of international oil companies in an effort to strike a geopolitical balance that would keeps its neighbours at bay. The oil in question was extracted by a US-dominated consortium led by British Petroleum - the Azerbaijan International Operating Company (AIOC). With the Azeri government, it is leading the path to the ex-Soviet republic's oil deposits, thought to be about twice those in the North Sea.

So far - despite the odds - they have succeeded without igniting any of the explosive issues that dot the map. Yesterday, international oil executives, western diplomats and Azerbaijani officials were united in self-congratulation. It was a "great turning point in the region" and a "remarkable moment in modern history", the US energy secretary, Frederico Pena, told an audience locked into a Soviet concert hall in Baku for five hours of speeches.

Yet, for all the thunderous applause, the assembled investors knew this was not only a rerun of the last century's Great Game; they are also engaged in a great gamble. What, for example, happens if Azerbaijan's president, Haidar Aliyev, the chief architect of the deal, departs from power? He is 74 years old, a statistic that his aides airily wave aside. "Our President does not smoke or drink," said a presidential spokesman. "He is a very healthy man indeed."

At present, no successor is in view. But his rule over this small republic will end well before the arm-wrestling over its riches, producing a power vacuum that could easily destabilise the region. There is a "key succession issue", said Foreign Office minister Derek Fatchett after returning from the smearing ritual. Since achieving power in 1993, Mr Aliyev has transformed himself from a Politburo hardliner to an Azerbaijani nationalist who rules his semi-desert territory with an iron hand. A former head of the Soviet-era Azeri KGB, he is well versed in the murky arts of propaganda and, in particular, the personality cult. Newspapers and television are censored.

None of this has lessened the rush from Western governments, who trip over themselves to curry favour. Yesterday, Tony Blair invited him to Number 10; it is, the Government argues, better to do business with those you seek to change than to spurn them.

Next year, Mr Aliyev faces re-election, a process that is widely seen as a foregone conclusion. "When it comes to the next election, it is just a question of whether Aliyev gets 99 per cent or 99.1 per cent," said one senior western executive. He rules the roost unchallenged, despite a list of social problems that would unseat many others. New banks, restaurants and super-chic boutiques are spouting up among the boulevards of Baku, which already has two British pubs.

But most of the country is very poor. Nor is the uncertain succession the only cloud threatening the Caspian's deceptively calm waters. International oil companies have been pouring in investment dollars - some $1bn (pounds 620m) from the AIOC alone - even though no agreement has yet been reached in a legal battle over how to carve up the Caspian among its bordering nations. And there are also the volatile forces that lurk beneath the tense surface of the Trans- Caucasus - particularly the unresolved issue of the conflict between Azerbaijan and Armenia.

Moves by the United States to build stronger relations with Azerbaijan have prompted the Russians and the Iranians to tighten their bonds with the Armenians in an effort to counterbalance Washington's rising influence in the Caspian and Baku's growing power.

The path of the main pipeline is among the most crucial issues of all. No matter what path Azeri oil takes to its western markets, it will cross territory dotted with small wars, troubled ethnic groups and geopolitical strife. Two smaller routes have already been chosen for the first oil - one, which is open, through Russia via Chechnya to the Black Sea; the other, which will open next year, across Georgia to the Black Sea. But the main pipeline has long been a bone of contention.

It now seems certain to run through Georgia and Turkey to the port of Ceyhan. This is the most expensive of three proposed routes (the others run along the path of the two smaller pipes). But yesterday - to the annoyance of the Russians - Mr Pena made clear that the Turkish option had Washington's support. The Americans are not alone. Above all, the route is also backed by President Aliyev, the elderly ex-Soviet apparatchik whose hand most of the rest of the world now wants to clasp.