Azerbaijani Gas Policy

8/2/2019 Azerbaijani Gas Policy

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European Union Institute for Security Studies1

I

SSOpinion

Union européenne

European Union

Leila Alieva*April 2009

AzErbAIjAn’S gAS pOLIcy:chALLEngES And dILEmmAS

* Leila Alieva is president of the independent

think tank Center for National and International

Studies in Baku, Azerbaijan.

Since its independence Azerbaijan has been a keyactor in ‘re-shaping’ Eurasia. First, it managed tofree the territory from Soviet military bases as earlyas 1993. Second, it challenged Moscow’s energy

monopoly in the North West of Caspian by signingthe ‘contract of the century’ in 1994 with 11 foreign oilcompanies. And third, its commitment was crucial inthe construction of the alternative energy transporta-tion route of Baku-Tbilisi-Ceyhan (BTC) to deliver oilfrom the Caspian to the Western markets.

When in 1999 it became clear that the off-shoreShahdeniz eld had the largest in Azerbaijan gasreserves it meant that the country would turn from apredominantly oil exporter into an oil and gas exporter.This gas discovery opened new opportunities for the

country – both in commercial and political terms. Theofcial number of total gas reserves of the country is2 trillion cubic metres. The reserves of the Shahdenizeld, which is located at a depth of 600 metres andcovers a surface of 860 square kilometres, besides1.5-3 billion barrels of oil, operated by BP, were es-timated at 50-100 billion cmg and 400 million cm of gas condensate. To transport this from Azerbaijan,the South Caucasus pipeline (SCP or Baku-Tbilsi-Erzerum gas pipeline, parallel to the BTC) of 692 kmwas built through the territory of Georgia to Turkey.By 2007 the gas from the Shahdeniz eld had begunto supply all its customers – Turkey, Georgia, and

Greece (via Turkey). Politically it gave Azerbaijanyet another asset of ‘energy diplomacy’, boosting thecountry’s role and strategic signicance as an actor inthe region and beyond.

geoolitial allees

As in the other parts of the world rich with hydrocarbonresources, oil and gas are used as means of political

and economic inuence in the Caspian. But the en-ergy competition is happening under the conditionsof the post-Cold War ‘re-distribution’ of the Caspianresources, where comparatively small new actors −such as Azerbaijan, Kazakhstan and Turkmenistan− have to protect their national interests vis-à-vis tworegional powers: Russia and Iran. Control over pipe-lines is no less important than participation in oil andgas eld development.

Two relatively recent events in the Black and Caspian

Sea regions, or what is called sometimes wider BlackSea region, marked intensied threats to energy secu-rity: the Russia-Ukraine gas dispute and the Russia-Georgia war in August 2008. Although different in na-ture, both point to the role of Russia in the region andthe nature of Russia’s politics towards her ‘insurgent’neighbours. Both events illustrate Russia’s sensitivityto a perceived loss of its traditional ‘spheres of inu-ence’ and its readiness to protect its interests by anypossible means. It also demonstrates how high the

The baku-Tilisi-ceyhan Exort Oil pieline (bTc) and baku-Tilisi-Erzru gas pieline is uilt to reate

an enery orridor develoent to onnet the casian Sea coast to Turkish mediterranean, to rovide oil

and as for Euroean and US arkets. photo shows onstrution in Azeraijan.

C o p y r i g h t : B P / S I P A




stakes have become in Caspian energy geopoliticsand the risks associated with any attempt to changethe power balance in the Russia’s proximity. While theRussia-Ukraine gas payment crisis, which had a di-rect impact on gas supplies to Eastern Europe, waspeacefully settled, the conict with Georgia turned intoa short yet real war. There are some indications thatthe war not only aimed to punish Saakashvili’s Georgiafor, among other sins, NATO aspirations, but also indi-rectly targeted the Caspian gas producers and futurealternative pipelines.

It is precisely in such a complex geopolitical context thatnatural resources become an important tool of diplo-macy, providing for national security and the realisationof political objectives. In addition to Armenia’s occu-pation of around a fth of its territory, Azerbaijan rou-tinely faces post-Soviet Russia’s high and undeterred

ambitions, and Iran with its quickly developing nuclear facilities and anti-American and anti-Israeli stance con-sistently blocks nal consensus on the Caspian statusissue. The orientation to Europe and the US, which,unlike Iran and Russia, are not bordering neighboursand cannot provide fully counterbalance the regionalpressure, was an act of a signicant risk taking andcommitment on the part of Azerbaijan. In spite of thesecurity challenges, through the skillful balancing act of oil diplomacy, Azerbaijan managed not only to survivethe competing interests of the two regional powers andconsolidate its independence, but even led the proc-

esses of reducing the West’s dependence on MiddleEastern oil or on the unreliable partners in the North.

So far Russia’s pressure on the former Soviet republic Azerbaijan was neither able to divert it from the com-mitment to the Western route of the major oil pipelineBTC in the late 90s, nor prevent it from delivering gasto Georgia twice during 2006, when Russia interrupt-ed the gas supply. Azerbaijani resources have beencrucial for the survival of Georgia, which is a major transit state of all Western routes from the Caspianproducers to the Black Sea ports and Europe. In spiteof Russia’s pressure – the declared intention to reduce

threefold gas supplies to Azerbaijan and electricitysupplies vefold, along with doubling of the gas pricestarting from January 2007 – Azerbaijan continued tohelp Georgia during the crisis with Russia in 2006. Inresponse to Russia’s pressure, Azerbaijan refusedRussia’s gas deliveries and threatened to reduce or stop export of its oil through the Baku–Novorossiyskoil pipeline. In the end, Russia was not able to carry outits threat, because of Azerbaijan’s rejection of Russiangas supplies, and Azerbaijan did not implement theinterruption of the Baku-Novorossiysk supply.

Most recently, Azerbaijan’s support for neighbouringGeorgia has been conrmed in the governement’sdecision for the state oil company to supply gas toGeorgia over 5 years to help its strategic ally recover from the August 2008 Russia-Georgia war. Accordingto the agreement, half of a total of 892 cmg will be sup-plied to Georgia in 2009 at a reduced price.

Thus Azerbaijan’s independent policy is explained notonly by the availability of its energy resources, whichhas reduced the country’s energy dependence onRussia and made it less vulnerable to Russian pres-sure, but also by its skillful utilisation of the energy fac-tor in regional politics.

Russian pressure did not prevent Azerbaijan from be-coming the committed gas producer in the new transregional project − the Nabucco gas pipeline.

nauo ielie

Azerbaijan plays an important role in the plannedNabucco pipeline. So far it has been the only Caspianproducer fully committed to lling the pipeline at therst stage of the project. Azerbaijan’s current andprojected volumes of gas will be sufcient to justifythe construction of this pipeline for the rst few yearsof its operation. The annual production of gas at thesecond phase of the development of the Shahdeniz

eld, which starts in 2014-2015, will rise to 20 billioncmg, from the 9.6 billion cmg of the rst stage. Thetotal amount of gas from the rst phase of extractionof the Shahdeniz eld is projected to be 180 billioncmg. The daily production of gas in Azerbaijan is 56.5million cmg, of which 37 million cmg is for domesticconsumption.

The construction of the pipeline via Turkey, Bulgaria,Romania, Hungary to bring gas from the Caspian tothe Austrian Baumgarten should be completed by2014. The cost of the project, operated by the Austriancompany OMV, of a pipeline of annual capacity 26-32

billion cmg, is €8 billion. Not unlike previous alterna-tive transportation routes, the Nabucco project, born in2002, is full of controversies. As a pipeline designedto supply Europe from the Caspian gas resources,it has competed with other projects run by Russia,such as Nord Stream and South Stream, which someEuropean companies have participated in. Due toGermany and France’s bilateral energy relations withRussia, inuencing European common energy policy,Nabucco initially had some difculties in getting thesupport of European institutions. Also, as in the case




with Baku-Tbilisi-Ceyhan, the project encountered ar-guments that the alternative route would irritate Russiaby challenging its monopoly, thus increasing the politi-cal risks associated with the project.

However, the recent Russia-Ukraine gas paymentconfict, along with last year’s Georgia-Russian war,changed the situation dramatically, ultimately convincingthe EU of the vital necessity of the Nabucco project.

The meeting of EU Special Representative PierreMorel with Turkmenistan’s President GurbanguliBerdimuhamedov, the recent trips of Mirek Topolanek,Prime Minister of the Czech Republic, which holdsthe EU presidency, to Kazakhstan, Turkmenistanand Azerbaijan are all signs of the EU interest in theNabucco. Upcoming international conferences − in April in Soa, in May in Prague, and in June the an-nual oil exhibition in Baku − are expected to contribute

to the clarication of some important commercial is-sues related to the pipeline, including the cost.

The potential suppliers for the second stage of the Nabucco pipeline, the Central Asian states of Turkmenistan, Uzbekistan and Kazakhstan, are atthe centre of intense diplomatic activities from theRussian side, which has resulted in some importantguarantees of their participation in some Russian-ledtransportation projects. On the other hand, Azerbaijanand Turkey have tried to convince Turkmenistan tocommit its gas to Nabucco.

In the context of the intense competition for the gassuppliers that justies the construction of the new andexpensive alternative pipeline routes, the importanceof Iran as a gas producer and potential contributor to Nabucco at the second stage of the project hassubstantially increased. Azerbaijan’s relations withIran have also shown some progress. Besides bilat-eral agreements on economic cooperation signed inFebruary, Iran plans to invest and participate in thesecond phase of the Shahdeniz project.

However, with issues surrounding Nabucco still unre-

solved, Azerbaijan is not wasting any time and is lookingfor the best commercial and political bargain. As inde-pendent agency Turan concludes, Azerbaijan, withoutrejecting Nabucco, is looking for other consumers too –President Aliyev has already discussed gas supply op-portunities with Greece during a visit there. Azerbaijancan also provide gas supplies to Italy, Turkey andRussia, and has already had preliminary talks on witheach. The Memorandum of Understanding signed bySOCAR and Gazprom on 27 March 2009 provides anexample of Baku’s strategy to strive for deals that en-able it to pacify Russia without undermining Nabucco.

In the event that Nabucco does not happen, Azerbaijanhas enough gas to sell directly through existing pipe-lines (via the South Caucasus Pipeline and throughnew pipelines under construction connecting Greeceand Italy) to these states. From an Azerbaijani per-spective, this is more benecial than to invest in or -become a shareholder in an expensive new pipelineproject promoted by European states, but for whichthey are hesitant to pay. Consequently, Baku tends toregard the nancing of Nabucco as a European affair.

colusio

In addition to the distribution of the political risks re-ected in the diversication of pipelines routes, thereare several political reasons why Azerbaijan, oftenunexpectedly standing up to external pressure fromRussia, has been committed to the alternative oil and

gas pipeline routes. The most long-term factor resultsfrom the very nature of the modern nation-state of Azerbaijan: established a century ago, it has formeda fundamentally European identity, which, with all cur-rent deviations, remains strong. This has determinedits long-term goal of integration into European andEuro-Atlantic structures. Another reason is that Europeand the US were seen as alternatives to the regionalactors, primarily Russia, which has been unwilling toaccept the independence of the former ‘peripheries’ inthe South Caucasus. Thus, alternative pipelines havebeen one of the means for the transition state to con-

solidate its national independence. Thirdly, against thebackground of Russia’s hampering role in the resolu-tion of the secessionist conicts, which is the prioritysecurity issue for Azerbaijan, as well as Georgia, theWest has a more impartial approach to the conict res-olution. All this has determined Baku’s preference for the Western pipeline routes, weakening the politicaldependence (which comes with control over energyroutes) of Azerbaijan and the region as a whole, fromone of the most ambitious regional powers.

The key role of Azerbaijan in alternative gas and oilsupplies and related geopolitical developments has

raised the signicance of the country’s political lead-ership for the West. One should also not ignore theexternal legitimacy and political support that Aliyevderives from the realisation of strategically importanttrans-regional projects on diversication of energysources and transportation routes, and the impact thatthis may have on the domestic situation.

As recent developments around Nabucco show, theoutcome of the energy dilemmas of the Caspian willalways represent a complex mixture of political andcommercial considerations.

The opinions expressed in this article are those of the author and do not necessarily represent the views of the EUISS

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Azerbaijani Gas Policy