Asian oil refinery margins jump on outages in Mideast, Asia
* Despite outages, enough fuel remains available to meet demand
* Tensions rise in Caucasus over axe killer's release
* Azerbaijan-Armenia war could trigger regional conflict
* New weapons hold potential for widespread destruction
* No solution in sight on Nagorno-Karabakh status
By Timothy Heritage and Francesco Guarascio
LINE OF CONTACT, Azerbaijan, Sept 11 A dusty trench, interrupted every few metres by lookout posts and gun positions, winds its way as far as the eye can see.
"Put your head above the trench and they'll shoot you," says a young ethnic Armenian soldier, peering through a narrow slit in a concrete watchtower at Azeri lines 400 metres away where he says snipers lie in wait.
The bullets fly both ways. On the other side of the minefields, Khosrov Shukurov's daughter was recently shot in the arm. The 70-year-old Azeri farmer keeps his cows on leashes to stop them straying beyond the wall built to protect his village.
Sporadic firefights have intensified along the front line around Nagorno-Karabakh, a mountainous enclave within Azerbaijan in the South Caucasus controlled by ethnic Armenians since a war in the early 1990s that killed about 30,000 people.
Azerbaijan has stepped up threats to take the region back and its decision to give a hero's welcome to a soldier convicted of hacking an Armenian to death on a NATO course has highlighted the risk of a war that could draw in Turkey, Russia and Iran.
When the ethnic Armenian majority in Nagorno-Karabakh declared independence as the Soviet Union collapsed, and took over more Azeri territory outside the region than within it, Christian Armenia avoided direct war with Muslim Azerbaijan.
It now says it would not stand aside if the enclave it helped establish was attacked.
Both it and Azerbaijan have more powerful weapons than two decades ago and if pipelines taking Azeri oil and gas to Europe via Turkey or Armenia's nuclear power station were threatened, war could spread.
Armenia has a collective security agreement with its regional ally Russia, while Azerbaijan has one with Turkey, itself a member of NATO for which an attack on one member state is an attack on all 28.
U.S. Secretary of State Hillary Clinton warned of a "much broader conflict" when she visited Armenia in June and NATO Secretary General Anders Fogh Rasmussen said on Friday he was "deeply concerned" by the Azeri soldier's pardon last month.
Political and military analysts say war is not inevitable, and that the potential for destruction and a regional war serve as a deterrent. But they are increasingly discussing how a conflict between Armenia and Azerbaijan might play out.
The most likely trigger is seen as a particularly deadly skirmish on the line of contact between Nagorno-Karabakh-held territory and the rest of Azerbaijan or on the Azerbaijan-Armenia border. Nine people died in clashes in June.
"At some moment the crossfire will not be limited to the use of small weapons. One side will hit the other with heavy weapons," said Rasim Musabayov, an independent member of parliament in Azerbaijan's capital, Baku.
"Then you can see a scenario in which the other side responds with air power and then it all goes from there."
Less likely would be a political decision to go to war - despite Azerbaijan's threats to regain control of Nagorno-Karabakh - or a pre-emptive strike by Armenia or Nagorno-Karabakh if an attack by Azerbaijan seemed imminent.
If a conflict did break out, Azerbaijan would likely try to besiege Nagorno-Karabakh, a region of about 160,000 people linked to Armenia by a narrow land corridor, since the enclave's troops dominate the high ground and have mined elsewhere.
"A key factor is the topography, the extent to which Nagorno-Karabakh has created defences in depth. This could make the lower land killing fields. Progress would come at a high cost," said Wayne Merry, a former U.S diplomat and an expert on the region at the American Foreign Policy Council in Washington.
The Azeris could also attack the towns of Jebrail and Fuzuli to the south and southeast, outside the enclave before the 1991-94 war but part of the 20 percent of Azerbiajan under ethnic Armenian control since.
"SPASMS OF MUTUAL DESTRUCTION"
Azerbaijan's annual defence spending is more than Armenia's entire budget, but Armenia has warned of an "asymmetrical" response to any attack, threatening what Merry called a "spasm of mutual destruction" fuelled by bitterness from the last war.
Abbas Aliyev, 66, was forced out of Fuzuli as it was seized by ethnic Armenian troops and settled with his wife and four children in the cramped basement of an apartment bloc in Baku where one toilet is shared by 16 families.
He is one of hundreds of thousands of refugees, most of them Azeris, who cannot return home until the conflict is resolved. "I want to breathe the fresh air of my region again," he said.
Ethnic Armenians in Nagorno-Karabakh use similar words to explain why they would not give the region up.
"I got all the paperwork I needed to go to the United States but decided not to go. It's marvellous here. Look around you, breathe the air," said Samvel Gabrielyan, an artist in Stepanakert, a quiet city of nearly 57,000 in the mountains.
Smart new apartment blocs stand on the rubble of buildings destroyed there during the war. A few still have bullet marks.
"We'd be ready to fight again if we had to. Otherwise what did all those deaths in the last war mean?" Gabrielyan said.
Such passions, and a belief on both sides that they can win a war, risk encouraging the politicians and military.
Thomas de Waal, a Caucasus expert at the Carnegie Endowment for International Peace in Washington, said a war now would be much more destructive than the low-tech conflict of the 1990s.
"It would be much more bloody and become a full state-state conflict with unpredictable consequences."
Obvious targets in Azerbaijan would be the Baku-Tbilisi-Erzurum (BTE) natural gas pipeline and the Baku-Tbilisi-Ceyhan (BTC) crude oil pipeline. Both are in northwest Azerbaijan, within range of Armenian forces, and have a role in Europe's attempts to reduce its reliance on Russia for energy supplies.
A consortium of Western oil companies operates the Azeri, Chirag and Guneshli oilfields in the Azeri sector of the Caspian Sea, as well as Azerbaijan's large Shah Deniz gas field.
Led by British Petroleum and including Norway's Statoil and two U.S. companies, Chevron and ExxonMobil, it has plenty to lose if war breaks out.
Each side can hit the other's capital, and Armenia's, Yerevan, is only 30 km (19 km) from its Metsamor nuclear power plant. Northwest Azerbaijan contains a water reservoir and power station as well as an international highway and railway.
"We think that if hostilities resume, they could not be limited to a local or regional framework. I think they would have a wider geographical spread," Bako Sahakyan, the self-styled president of Nagorno-Karabakh, said in an interview.
Turkey closed its border with Armenia in a gesture of solidarity with ethnic kin in Azerbaijan during the Nagorno-Karabakh conflict and rejects Armenia's insistence it recognise the killing of Armenians in Ottoman Turkey during World War One as genocide.
Russia has a military base at Gyumri in northwest Armenia.
Neither, however, would want to rush into a war that would damage their own, fragile relationship and Russia would not want to upset its efforts to deepen ties with Baku.
Iran, another regional force, was neutral during the 1991-94 war and would be likely to remain so. But its relationship with Azerbaijan has soured, especially since Baku started buying arms from Israel, and it might be sucked into a conflict if it allowed goods to keep flowing through its border with Armenia.
Efforts to find a political solution led by the Organization for Security and Cooperation in Europe (OSCE), have had little success, and political concessions are hard for leaders who would risk losing power if they looked weak.
"Nagorno-Karabakh is an integral part of Armenia. This is how ordinary people see it," said Archbishop Pargev Martirosyan, the Armenian Apostolic Church's senior official in the enclave, which is still part of Azerbaijan under international law.
"We will do everything to save our land."
On the other side of the line of conflict, farmer Shukurov will not move from the village of Ciragli, despite his daughter's injury and the bullet holes riddling his house. "That is what the Armenians want, but I will not give up," he said.
Diplomats and analysts say that if another war breaks out, it is likely to end in stalemate. "The Azeris can't retake Karabakh now. They are militarily incapable of doing it," said Matthew Bryza, a former U.S. ambassador to Azerbaijan.
"I don't think they could dislodge the Armenian forces from the high ground. I think that's extremely difficult."
Yusif Agayev, an Azeri military expert and veteran of the war, said there was no mood for a protracted fight.
"I think it would be a month or two, that is the amount of time our armed forces could fight for. If it drags on longer then it will become a war that society will have to participate in, not just the army," he said. "I don't think the society of my country is ready for war."
* Despite outages, enough fuel remains available to meet demand
* Kremlin had trumpeted sale as proof of foreign interest (Releads, adds new details)
BEIJING, Jan 17 China's State Council on Tuesday issued new measures to further open the world's second-largest economy to foreign investment.