ENERGY AND AZERBAIJAN:

ENERGY AND AZERBAIJAN:
HISTORY, STRATEGY AND COOPERATION
editor Rovshan Ibrahimov
Baku 2013
CONTENTS:
PREFACE_ _____________________________________________ 5
Rovshan Ibrahimov
AZERBAIJAN`S ENERGY HISTORY AND POLICY:
FROM PAST TILL OUR DAYS
Azerbaijan and oil production during the Soviet period __________
Oil and Gas Production after Independence:
Situation an Republic, Instability, Economic Deprivation, Conflict ____
Other Energy projects developed after the independence of
Azerbaijan and their significance____________________________
Azerbaijan energy transportation strategy and its implementation___
SOCAR _ ______________________________________________
State Oil Fund of the Azerbaijan Republic_____________________
Dependence on oil _______________________________________
Conclusion _____________________________________________
12
15
26
31
39
45
48
52
Gulmira Rzayeva
AZERBAIJAN AND ENERGY SECURITY OF EUROPE:
BALANCING NATIONAL PRIORITIES AND INTERNATIONAL COMMITMENTS
Introduction ____________________________________________ 55
Nabucco West vs. TAP ____________________________________ 57
CONTENTS:
Nabucco West and its shareholders __________________________ 61
South Stream vs. NW: Market share or volume substitution? ______ 63
Conclusion _____________________________________________ 75
Jarosław Ćwiek-Karpowicz
THE IMPORTANCE, ROLE AND PLACE OF AZERBAIJAN
IN THE EU ENERGY SECURITY
Uncertain EU’s energy demand_ ____________________________
Expectations of growing energy production in the EU ___________
Main challenges for the EU’s energy security __________________
EU strategy in the gas sector _______________________________
Dealing with stagnation in the EU’s oil sector __________________
Azerbaijan’s potential in the energy supplying _________________
Prospects for the EU-Azerbaijan energy cooperation ____________
80
81
84
85
87
89
90
Andrey Semenkovsky
UKRAINE-AZERBAIJAN COOPERATION STATUS
AND PROSPECTS IN THE ENERGY SECTOR _ ___________ 93
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
4
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
PREFACE
Azerbaijan is one of the birthplaces of the oil industry, its history
is linked to the fortunes of petroleum. There is evidence of petroleum being used in trade as early as the 3rd and 4th centuries. The
first modern oil well has been drilled on the Absheron Peninsula,
north-east of Baku in 1848. Also, there the first time in the world
oil tanker was used to transport produced crude oil and the first ever
offshore oil extraction began.
Azerbaijani oil has played one of the most important roles at the
crossroads of various historical events. In the early 20th century,
Baku was producing more than half of the world’s oil. Thanks to
this fact, many locations of Russian Empire and Europe were enlightened by the new technologies development which was possible
only with the industrial production of oil and kerosene. During the
Second World War, Baku and its oil played crucial role in prevention
the occupation of the whole Soviet Union by Nazi Germany.
Azerbaijan once again began to play a key role in ensuring the
energy security of Europe once it restored its independence. In 1994,
“Contract of the Century” was signed between the Azerbaijan government and major International Oil Companies, which led to a new
era of oil production boom in Azerbaijan. Beginning of the exploitation of the giant oil field “Azeri-Chirag-Guneshli” and creating
a network of pipelines to export oil to the world markets, allowed
Azerbaijan to play significant role in the regional context by determining flows of energy resources in Eurasia.
Azerbaijan has also become an alternative source of natural gas
for a number of neighboring countries with the development of the
Shah-Deniz gas and condensate field. With the initiative of the European Commission (EC) of creating the Southern Gas Corridor and
5
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
complementary construction of the Trans-Anatolian Natural Gas
Pipeline (TANAP), but also correspondent European gas network in
Central and Eastern Europe, Azerbaijan’s natural gas to secure well
desired diversification of those regions.
Azerbaijan has proved to be a stable and reliable partner in realization of the energy projects to provide the energy security of
Europe. Azerbaijan’s participation in a particular regional energy
project is being considered as a guarantee of its successful implementation.
This book gives you the information about the historical development of Azerbaijan’s energy strategy, its prospects for the future,
as well as Azerbaijan’s role in ensuring European energy security
vision for years to come. This book is a good source for political
scientists, specialists in the field, researchers, students and all those
interested in the subject, and can be used for further research in this
specific area.
Dr. Farhad Mammadov
Director of the Center for Strategic Studies
6
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Assoc. Prof. Dr. Rovshan Ibrahimov
Head of Foreign Policy Analysis Department
Center for Strategic Studies under the President of Azerbaijan
Republic
Head of International Relations Department
Qafqaz University
AZERBAIJAN`S ENERGY HISTORY AND POLICY:_
FROM PAST TILL OUR DAYS
Azerbaijan has been known for the presence of oil since ancient
times, though oil was produced by means of primitive methods.
However, the industrial development that occurred at the end of the
19th century led to the main oil production. During that time, the
oil product naphtha increasingly started to be used for lightening at
houses.1 Azerbaijan is one of the first places in the world, where oil
was first drilled in the village of Bibi Heybat near Baku in 1848.2
In comparison, Edwin L.Drake began drilling an industrial oil well
in Titusville Pennsylvania only in August, 1859.3 However, it is the
well that Drake drilled which is recognized the first commercially
viable oil production in the world.
Oil production in Azerbaijan was actually intensified years later.
Vasil Kokarev, Peter Gubonin and German baron N.Tornov jointly
1 Daniel Yergin, The Price: The Epic Quest for Oil, Money & Power, Free Press, New York, 2003, p. 23.
2 Mir-Balayev, Mir-Yusif, Azerbaijan Oil History, A Chronology Leading up to the Soviet Era, Azerbaijan
International, Summer, 2002, No 10(2), http://www.azer.com/aiweb/categories/magazine/ai102_folder/102_
articles/102_oil_chronology.html, pp. 34-40.
3 Daniel Yergin, ibid, pp. 26-27.
7
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
opened their first kerosene factory in Surakhany in 1858-59.4 The
state granted them permission to drill oil wells in Baku in 1868. By
1871, oil drilling was carried out everywhere, and a new method of
drilling completely replaced the old method of digging wells. As a
result, the volume of oil production increased to 80 barrels per day
from each well.5
The oil industry received a special impetus in Baku, with
laws adopted in 1872: “The Rules for Oil Fields and Excise from
Photogen Production”6 and the” Rules on the impact of trade
in private hands, state-owned oil sources in the Caucasus and
Transcaucasian territories in paying off the content”.7 Thanks to
these laws, the state monopoly on oil production was ended. The
traditional òtkupshina` system, which had been in effect since 1806,
when Russia occupied the Baku khanate, was amended and state
production licensing arrangements were liberalized. As a result of
these changes, entrepreneurships were granted longer leases, oil
fields were transferred to private hands at public auction for a onetime fee and that encouraged internal and external investment, as
well as expanding industrial drilling for oil.8Additionally, advanced
technology for oil extraction became available for the producers of
oil in Baku. Another important factor for increasing oil production
in Baku was the sharp increase in world demand for this product.9
In 1863, Baku produced 5.4 thousand tons of oil, but then this figure
increased to 63.2 thousand tons in 1873.10
The establishment of The Haji Zeynalabdin Taghiyev Oil Trade
4 Mir-Yusif Mir-Balayev, ibid.
5 Баку и нефть. Период промышленной нефтедобычи, http://www.window2baku.com/oil2.htm,
15.09.2012.
6 John Grace, D., Russian Oil Supply, Performance and Prospects, Oxford University Press, 2005, p.6.
7 Баку и нефть. Период промышленной нефтедобычи, ibid.
8 John Grace, ibid, p.6.
9 Shirin Akiner, Caspian Intersections: Contextual Introduction, The Caspian Politics, Energy and Security,
Editor, Akiner Shirin, Routledge Curson, London and New York, 2004, p.4.
10 ��
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Джуварлы��
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, ��
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, http://www.sakharov-center.ru/publications/azrus/
az_014.htm.
8
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Company,11 owned by Zeynallabdin Taghiyev, who played an important
role in the fate of the Azerbaijan at the end of the 1919 and beginning
of the 20 century, was an important milestone in development. A
huge reserve of oil was found in the Bibi-Heybat district near Baku
on September 1886. Taghiyev became the wealthiest citizen in Baku.
He built a refinery where he processed oil and a dock on the Caspian
Sea, from where his tanker fleet transported oil up to the mouth of the
Volga River. From there, Taghiyev`s barges shipped oil to customers
courted by his Moscow sales offices.12 For a very short time, Taghiyev
succeeded in creating a fully integrated oil company that controlled all
aspects of the industry from exploration and refining to transportation
and sales.
By the end of the 19th century, 167 companies were engaged
in oil production in Baku.13The new law did not only facilitate
the emergence of local manufacturers, but also attracted foreign
capital to Baku. One prominent example of this was Robert Nobel,
although his name has not been associated with the oil business.
Nobel arrived in Baku in 1873. He was the eldest son, of Immanuel
Nobel, who immigrated to Russia in 1837 and created an industry
for the manufacturing of weapons. Nobel’s Armament concern had
obtained a big contract from the Russian government to manufacture
rifles. They needed wood to produce the rifles, and Ludwig Nobel,
who led the company, sent his elder brother, Robert, to the Caucasus
to search for walnut wood. However, during the long sea journey
from St.Petersburg to the Caucasus, Robert Nobel’s interest in wood
slowly decreased. The captain of the ship, who played a pivotal role
in Robert’s journey, talked about the amazing opportunities in Baku
oil production.14
��
Mir-Yusif, Mir-Balayev, ibid.
12 Steve Le Vine, The Oil and the Glory: The Pursuit of Empire and Fortune on the Caspian Sea, Random
House, New York, 2007, pp. 7-9.
��
История развития нефтяной промышленности,
http://www.azerbaijan.az/_Economy/_OilStrategy/oilStrategy_02_r.html
��
Steve Le Vine, ibid, p. 14.
9
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
When Robert Nobel arrived in Baku in March of 1873, without
consulting with his brother Ludwig, he bought a small refinery for
twenty-five thousand rubles, the money meant for the purchase of
walnut wood.15Meanwhile, Robert acquired the ownership of oil
land, which formerly belonged to the captain of the ship. These
two acquisition sled to the establishment of the Nobel Brothers oil
company ‘.16
The refinery acquired in Black city, was significant for the Nobels
because it was the first foreign company to invest in the oil industry
of Baku. At the celebration of the 5th years of the company, “Nobel
Brothers’, the total capital was about 3mln rubles in gold. ‘The Nobel
Brothers’ monopolized the oil trade markets of Russia. At that time,
the Nobel`s oil empire employed about 30,000 workers. Highly
regarded famous engineers, talented economists, scientists, chemists,
and technologists were working with the ‘Nobel Brothers’17 Some
specialists even came from the famous Pennsylvania oil fields18, the
cradle of the oil industry in the US.
Transportation was one of the main problems faced by the
producers of oil in Baku. Crude oil and oil products were mostly
transported in goat or ram skin bags which were loaded onto camel
or horses and carried by caravan long distances until the 1870s.
Thereafter, oil and oil products were shipped in wooden barrels and
carried by boats to Astrakhan, a distance of about 600 miles to the
north on the shore the Caspian Sea.19 However, raw materials for the
production of these barrels were imported from America as the local
woods were not suitable for their manufacture. Simultaneously, ‘The
Nobel Brothers’ acquired an American company manufacturing
drums used in Western Europe.20 All these factors complicated the
��
Daniel Yergin, ibid, p. 58.
��
Steve Le Vine, ibid, p.15.
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, http://azpressa.com/index.php?news_id=5
18 ShirinAkiner, ibid, p.4.
19 ShirinAkiner, ibid, p.5.
20 Daniel Yergin, ibid, p.59
10
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
existent complex system of oil transportation to the major markets.
Eventually, oil was transferred to barges on the Volga River until it
reached the railroad station from where it was transferred for further
shipment.21 Taking all these obstacles into consideration, the Nobel
brothers were trying to solve the problem of transporting oil. As a
consequence, in 1877, the world’s first tanker called Zoroaster was
manufactured for transporting oil from Baku.22 Nevertheless, oil had
to travel a route of more than 2,000 miles to the Baltic Sea to reach
the nearest port of exit to the open seas, despite the fact that Baku is
just 600 miles from Batumi where there is a port on the Black Sea, a
possible way out of the Mediterranean Sea.23
In 1883, the French tycoons the Rothschilds built the Caucasian
railway which connected Baku to Batumi. The export oil was
transported to the Black Sea port where full tankers were dispatched
to markets. Meanwhile the volume of oil production was tracking
increasing, overtaking the US oil production in 1898-1901.
Subsequently, the world’s first oil pipeline—from Baku to Batumi—
was built in 1907.24
When the Azerbaijan Democratic Republic declared independence
in Tbilisi, Baku oil was not only a major source of income for the
new state, but also the subject matter of the struggle between various
regional powers. The Ottoman Empire was one of the first states
with whom Azerbaijan established diplomatic relations. The Treaty
of Peace and Friendship was signed between the abovementioned
parties on June 4, 1918. The agreement also included provisions—in
a separate agreement supplemented to the Treaty—on the status of
the Baku-Batumi pipeline. The pipeline had a great importance for
Azerbaijan, as Baku oil was exported to world markets through this
21 Daniel Yergin, ibid, p.59.
22 Swante E. Cornell, Azerbaijan Since Independence, M.E. Sharpe, New York, 2011, p. 10.
��
Stephen Howard, A Century of Oil, The `Shell` Transport and Trading Company 1897-`1997,
Weidenfeld&Nicolson, London, 1997, pp. 29-30.
24 Thomas De Waal, The Caucasus: An Introduction, Oxford University Press, 2010, p. 167.
11
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
pipeline. In accordance with the treaty, Batumi was incorporated into
the Ottoman Empire and the agreement on the status of the pipeline
became of the tripartite in nature. Under the agreement, Azerbaijan,
Georgia and the Ottoman Empire undertook the responsibility
of operating the Baku-Batumi pipeline.25 However, the Baku
Commissars government was then established by the Bolsheviks in
Baku in charge of ruling Azerbaijan. In compliance with the Treaty
of Peace and Friendship, the Ottoman government sent troops to
Azerbaijan and liberated Baku on September 15, 1918.
During the First World War, Baku oil was an important factor in the
international struggle for the Caucasus. In this regard, oil was the main
reason in the military campaign of German troops to the Caucasus, in
particular Azerbaijan. However, Germany’s ally, the Turks, were soon
forced to leave Baku, after signing the Mudros Treaty with the British
army. As a consequence, Britain took control of Baku and the BakuBatumi pipeline in 1919. Nevertheless, the British soon had to leave this
town as well. Their place was immediately occupied by the Bolsheviks
when the Red Army invaded the de facto recognized - by the Allies in
the Paris Peace Conference - Azerbaijan Democratic Republic on April
28, 1920.26 Shortly after on May 24, 1920, Azerbaijan’s oil industry
was nationalized.27And then, oil production once again reached the
production level of1914 at the end of the same year.28
Azerbaijan and oil production during the Soviet period
Azerbaijan oil played strategic role of crucial importance during
World War II. Azerbaijan was a major producer of oil in the Soviet
��
Али Гасанов, Современные Международные Отношения и Внешняя Политика Азербайджана, ŞərqQərb, Baku, 2007, 73-74.
26 Thomas De Waal, ibid, p. 169.
27 Audrey L. Altstadt, The Azerbaijani Turks, Power and Identity Under Russian Rule, Hoover Institution
Press California, 1992, p. 112.
28 Thomas De Waal, ibid, p. 170.
12
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Union (USSR). Azerbaijan was producing 75mln t of oil, accounting
for 75% of total production in the USSR between 1941-1945.29 The
military target of the Nazi troops was to occupy Baku and control
Baku oil after Hitler’s Germany attacked the USSR. Hitler said:
ùnless we get Baku oil, the war
is lost`.30 Symbolically, Baku was
placed on a cake baked by the
Nazi with a map of the Caspian
Sea on it. The scenes document
Hitler pouring syrup on the cake,
symbolizing the oil, and taking
a piece of cake with the tablet
inscribed with Baku on it.31
German troops fighting in the Caucasus were reinforced to get
closer to Baku in 1942. Germany thought that Baku could be taken
on September 25, 1942. In this context, there was a plan to evacuate
of the equipment and destroy the Baku oil wells in order to prevent
Germans taking control of the oil fields. By the autumn of 1942,
764 wells were prepared to be blown up and 81 sets of drilling
equipment together with staff were transferred to Turkmenistan.
On July 1942, German troops occupied the main supply lines of the
front oil, which was transporting the Baku oil through Grozny to
Rostov. Furthermore, the Soviets had established sea supply routes.
Even under this condition, Azerbaijan’s oil industry pioneers another
technological advancement as the world’s first railway tank with
oil floating on the sea were towed from Baku to the Turkmenport,
Krasnovodsk. Moreover, the Germans were not able to occupy Baku,
as they had shown on the cake.
The desire of Germans to capture Baku made Stalin of the USSR
29 Audrey L. Altstadt, ibid, p., 152.
30 Thomas De Waal, ibid, p. 170.
31 Hitler & co eating `Nazi Cake`, http://www.youtube.com/watch?v=rGzEs3K66hA.
13
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
apply a preventive method by searching for alternative oil sources.
The operations were carried out all along the Volga River, near the
Ural Mountains. Tens of thousands of the best oil specialists from
Baku were sent to explore these regions and produce oil.32 Later
on, this development became one of the reasons why Baku lost
the status of the main center of oil production in the USSR. From
that time on, the major investments in the oil industry directed to
produce oil in Ural.33 Thanks to the Azerbaijani oil specialists, who
were successful in discovering oil, these regions were referred to as
the “Second Baku” and “Third Baku”.34 Additionally, Azerbaijani
scientists and oil engineers explored and discovered large oil deposits
in Kazakhstan and Western Siberia in the 1970s and 1980s.35
However, the main components of deciding to move oil sources
away from Azerbaijan were strategic as well as in technological.36 As
a consequence of this decision, the level of oil production achieved
in Azerbaijan during the Second World War, was no rеstored in the
Soviet period. Due to the destructive production, Azerbaijan could
not produce more than 22.2mln t—the volume in 1940-till 1991
when Azerbaijan gained independence.37 Although Azerbaijan’s
role was shrinking as a source of oil, it was experiencing enormous
development in oil refining and manufacture of oil equipment which
opened up a new stage in making Azerbaijan a center in this regard.38
As oil production was concerned, Azerbaijan was producing only
3% of total oil production in the Soviet Union by 1980.39 Although
Azerbaijan’s oil production was mainly concentrated in the off shore
32 Steve Le Vine, The Oil and the Glory, The Pursuit of Empire and Fortune on the Caspian Sea, Random
House, New York, 2007, p. 50.
33Thomas De Waal, ibid, p. 170.
��
Сахават Гараев, «Контракт Века» Стал Политическим И Экономическим Прорывом Азербайджана В
ХХI Век, Вышка, Newspaper, 20.09.2006, No 37-38.
��
Елхан Полухов, “Контракт Века” (Проблема в исторической ретроспективе), Кавказские Региональные Исследования, Journal, Volume 2, Issue 1, 1997, http://poli.vub.ac.be/publi/crs/rus/R02-005.html.
36 Brenda Shaffer, Energy Politics, University of Pensilvania, Philadelphia, 2009, p. 54.
37 Marshall Goldman, L., Putin, Power, and the New Russia Petrostate, Oxford University Press, 2010, p. 34.
38 ��
Елхан��
Полухов��
��
, ibid.
39 Svante E. Kornell, ibid, р��
��
. 202.
14
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
fields, Oily Rocks city was built on artificial stilts in 1949, which
subsequently became the main source of oil production.40
Simultaneously, new fields were found in the Azerbaijani sector
of the Caspian Sea. To this end, semi-submersible drilling rigs such
as “Khazar” were acquired in order to carry out exploration work
in areas of the sea depth of 70 meters, as well as the installation of
“Shelf” which allowed working in areas of the sea depth of 200m.
As a result, 8 new deposits of oil and gas were discovered in the
1970s, and the volume of oil and gas reserves increased 2 and 3
times respectively. The number of floating drilling rigs were brought
up to 11 in 1980 afterward new fields were discovered at depth of 80350m, including Guneshli, Chirag and Azeri deposits. This triggered
Azerbaijan to carry out construction of deep-sea based plants.41
However, due to lack of necessary technology, these deposits were
not developed in the Soviet period. Prior to the independence of
Azerbaijan, most of the bowels of the earth had extracted 1.4bln t
of oil and condensate - of which about 400mln t were at sea - an
about 500bcm of gas. Azerbaijan reached the peak gas production of
15bcm of gas in 1981.
Oil and Gas Production after Independence: Situation an Republic, Instability, Economic Deprivation, Conflict
_
Instability and political influence
Azerbaijan began to look for ways to develop its own oil and
gas fields immediately after independence. However, Azerbaijan
lacked the necessary financial and technical capabilities to
develop it independently, which required her to attract Western oil
40 Thomas De Waal, ibid, p. 170.
��
Ровшан Ибрагимов, Статус Каспийского Моря и Проект Набукко: Развитие Отношений Между
Азербайджаном и Туркменистаном, 30.04. 2008, http://www.eurasianhome.org/xml/t/expert.xml?lang=en
&nic=expert&pid=1541.
15
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
companies in the beginning of 1990s. However, Azerbaijan faced
many difficulties: the ongoing conflict over Nagorno-Karabakh
with Armenia at that time; the unresolved status of the Caspian
Sea; and the reluctance of neighboring Russia and Iran to accept
the presence of Western companies in the region. Therefore, in the
very beginning, Azerbaijan was pursuing political goals in getting
foreign companies involved, rather than economic-commercial
goals. Azerbaijan tried to balance Russia’s influence in the region,
through the use of energy card. This policy caused Azerbaijan to have
changes of the two governments in a very short time of period. The
Russian foreign policy priorities in relation to Azerbaijan were not
clearly defined during the reign of Ayaz Mutalibov in 1991-1992. In
the case of the Armenian-Azerbaijani Nagorno-Karabakh conflict,
Russian mercenaries fought on the both sides. However, the attempts
Mutalibov made to sign oil agreements with Western companies
led to his resignation on March 6, 1992. Mutalibov was forced to
leave the government after the tragedy that occurred in the Karabakh
town of Khojaly—predominantly inhabited by Azerbaijanis—when
the Armenian armed forces with the support of the 366th infantry
regiment of the former Soviet army staged a massacre on the night
of 25 to 26th February. As a result of the bloody strife, more than
600 civilians were killed, hundreds injured and maimed, hundreds
people were missing.42
Russia started to unequivocally support Armenia and used different
leverage against the anti-Russian government of the Popular Front
headed by Abulfaz Elchibey, who came to power after Mutalibov,
in1992.43 The Elchibey government lasted only one year, and fell
at the outbreak of the self-styled Colonel Suret Huseynov rebellion
in Ganja.44 A few days before the coup-d’etat, the 104th infantry
regiment of Russia stationed in Ganja left the city six months ahead
42 SvanteE��
. ��
Kornell��
, ��
ibid��
, ��
p��
р. 62-63.
43 Thomas��
DeWaal��
��
, ��
ibid��
, ��
pp��
. 117-118.
44 Thomas De Waal, ibid, p. 121.
16
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of schedule, leaving behind all of their equipment.45
Following the coup-d’etat, the situation deteriorated rapidly. As
a result, President Elchibey invited Heydar Aliyev, a former Soviet
Politburo member and KGB general and the chairman to the Majlis46
of Nakhchyvan Autonomous Republic at that time. Elchibey fled
from Baku, and settled in the village of Keleki, where he was born,
in Nakhchyvan immediately after the invitation.47 Aliyev arrived in
Baku on 10 June 1993, following the resignation of the Speaker of
the Parliament of the Azerbaijan Republic, Isa Gambar, and became
chairman of the parliament, which made him Chairman of the
Autonomous Republic, the deputy speaker of the whole country in
accordance with the system formulated in the Constitution of the
Republic. In August 1993, Azerbaijan held a referendum vote of
no confidence for the second president, which resulted in Elchibey
ceasing to be president. Subsequently, Heydar Aliyev became the
President of the country as a result of the next elections on October
3, 1993.48
Despite the many difficulties, Azerbaijan managed to sign the
Contract of the Century aimed at developing offshore Azeri, Chyrag
and Guneshli oil fields on September 20, 1994. Hydrocarbon deposits
were estimated at up to 670mln t of oil and about 130 bcm of gas in
those fields.49 Nevertheless, the situation was far from stable even
after signing the contract. Prime Minister, Suret Huseinov, rebelled
against President Aliyev this time. Aliyev appealed to the people on
a national television broadcast in order to prevent another state coup
d’état which he accused Russia of supporting. Thousands of people
gathered around the presidential palace, forming a human shield
��
Svante E. Kornell, ibid, р��
��
. 76-77.
46 Name of legislative organ in Azerbaijan
47 Kamer Kasım, “Armenia’s Foreign Policy: Basic Parameters of the Ter-Petrosian and Kocharian Era”,
Review of Armenian Studies, (Ankara, ASAM, Volume 1, No 1, 2002), p. 97.
48 Svante E. Kornell, р��
��
. 75.
49 “ExxonMobile in Azerbaijan”, Caspian Energy, Baku, No 3, (July-August, 2002), p. 22.
17
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
within a short time, thus, averting another government overthrow.50
From then, a new stage of the development it Azerbaijan began.
President Aliyev was able to achieve the desired results for the
country skillfully using the oil trump card. The participation of
Western companies in the Contract of the Century allowed Aliyev to
achieve stability within the country and carry out a balanced foreign
policy in the medium term. This development in Azerbaijan was
a challenge for Russia, a major player in the region, because they
considered Azerbaijan in its sphere of influence according to the
doctrine of the “near abroad” in 1993.
However, Western countries were not interested in interfering
in the South Caucasus region. First of all, the integration process
of the former members of the Eastern Bloc and the Warsaw Pact
into the Euro-Atlantic area had already begun. The invisible line
of new spheres of influence was drawn exactly along the former
Soviet border by silent agreement between the West and Russia. In
addition, the existence of “hot” points of conflict in South Caucasus
also prevented the West from actively intervening into the region.
Meanwhile, all efforts were directed on to the resolution of conflicts
in the Balkans that emerged after the breakup of Yugoslavia. As a
result, on 12 February 1992, U.S. Secretary of State, James Baker,
stated that the U.S. had not yet defined its priorities towards the
region, and that the South Caucasus was outside the interest of the
US during a brief official visit to Baku.51
Lack of U.S. national interest in the regional lowed Armenian
lobby to be very influential in the U.S. Congress. Therefore, thanks
to this factor, the Armenian lobby efforts made the U.S. Congress
adopted a” Section 907” to the Freedom Support Act. The act is for
coordinating the various forms of government assistance provided
50 SvanteE��
. ��
Kornell��
, ��
pp��
.85-86.
��
Ровшан Ибрагимов, Визит Клинтон в Баку - восстановление статус-кво или новые тенденции?,
20.07.2010, http://www.1news.az/authors/ribrahimov/20100720115209746.html.
18
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
to countries, which gained their independence after collapse of the
Soviet Union, for improvement of the principles of democracy and
market economy in these countries.52
In this regard, the government of Azerbaijan had the task of
attracting U.S. oil companies in order to establish the U.S. national
interests in the region and get the Armenian lobby balanced in
Congress. Indeed, a balance of forces representing the interests of
both rivals, Azerbaijan and Armenia has been achieved. Since then,
the Contract of the Century gave Azerbaijan an opportunity to pursue
a balanced foreign policy, which will be a major foreign policy
orientation followed by actions of the government of Azerbaijan.
Deal of the Century and new era in energy resource exploitation
in Azerbaijan
Azerbaijan had to adopt a legal framework to cooperate with
Western energy companies involved in exploitation of Azerbaijan
energy sources. So the legal field for the relationship has become a
Production Sharing Agreement (PSA). The first such agreement was
concluded in 1958 between the Indonesian company, Pertamina and
the company Caltex, when the parties agreed on joint development
of the Indonesian field Duri.53
According to the PSA, an oil company pays the costs of exploration
and mining, and then over a period of time due recoups its costs from
profits. The contract period usually lasts at least five and a maximum
of 30 years. After the end of this period, the entire property under
the agreement is being transferred to government control - the holder
of title to the subsoil. The oil company is obliged to reimburse its
expenses from a certain per cent on its share of production for some
��
Фариз Рзаев, 907-я поправка: история и перспективы, Журнал СА&��
CC��
, Издательский дом АВ, Швеция, http://www.ca-c.org/journal/cac-04-1999/st_21_rzayev.shtml.
53 Duri Field, Caltex Pasific, Indonesia, http://www.bornemann.com/duri-field-caltex-pacific-indonesia-199/.
19
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
time. A temporary limitation is the main difference of PSAs from
Concession Agreements, which can operate up to the time when an
oil field has not completely dried up. Since the period the company
is engaged in exploration and production is limited, it describes
immediate refund of the cost of expenditures in many agreements.
Regardless of whether oil is found or not, the company is obliged to
pay royalties to the owner of rights to mineral resources (the state)
as compensation for entering into the PSA.54
This agreement marks the beginning of a new era in relations
between countries, the owners of fields and companies. In place of
concession tenure areas, countries transfer some of their sovereignty
to the participating companies in return for a certain percentage
of deductions from income, which allows the company to become
involved in the development of the explored deposits as well.55
The PSA was the basic document for the “Contract of the Century”,
which became a central project for Azerbaijan and thus affected
subsequent processes both within the country and in the region as
a whole. The negotiation process for the creation of the relations
between Azerbaijan and foreign companies is an historical record
of the early period after the restoration of Azerbaijan independence.
In the early 1990s, the Soviet Azerbaijan government began
negotiations with western companies including British Petroleum,
Statoil, Amoco and Unocal, for the development of these oil deposits.
By early 1991, several steps had been made to create conditions for
early development of oil structures by these companies. On January
18, 1991, by joint decree of the USSR Ministry of Oil and Gas
Industry and the Cabinet of Ministers of Azerbaijan Republic, it
was decided to hold a tender to create a joint production association
“Caspmorneftegaz” to explore and develop offshore Azeri fields. As
a result, the U.S. company Amoco was declared the tender winner in
54 Morgan Downey, Oil 101, Wooden Table Press, 2009, pp. 86-87.
55 Daniel Yergin, ibid, p. 634.
20
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
June 1991.56 This company received 40 % of the general section of
stakeholder participation, the USSR share was 40%; Azerbaijan got
the remaining 20 %.57
After the collapse of the Soviet Union, negotiations were held
directly between Western companies and Azerbaijan. This was the
case when the President Mutalibov decided to put Russia out of the
scope of the contract in 1992. As a result Russia started to provide
support to Armenia in Nagorno-Karabakh conflict and subsequently
Mutalibov lost its power.58
The negotiations between the parties continued after the change
of power in Azerbaijan and the advent of the Popular Front.
Negotiations were conducted by the state oil company Azneft on
behalf of Azerbaijan. The Azerbaijani government signed a contract
with the alliance of two European companies, British BP and
Norway’s Statoil on September 7, 1992.This alliance was given the
exclusive right to explore the field of “Dostlug” which was then
called Chirag.59
The pro rata between Azneft and the alliance was equal. By the
formation of the alliance itself, two-thirds of the shares are owned
by BP and one-third by Statoil. Following the signing of the second
agreement between the alliance BP/Statoil and the newly established
State Oil Company of Azerbaijan Republic (SOCAR), the parties
started operations over the Chirag field in March, 1993.60A few
months later ,the Azerbaijani government announced its intention to
combine the development of the Azeri, Chirag and Guneshli fields
under a single contract in order to increase the efficiency of the
development of offshore fields. In addition, the Turkish Oil Company
56 ��
Елхан��
Полухов��
��
, ibid.
��
Владислав Шорохов, Энергоресурсы Азербайджана: Политическая Стабильность и Региональные
Отношения, http://poli.vub.ac.be/publi/crs/caucasus/shorokhov.htm.
��
Владислав��
��
Шорохов��
��
, ibid.
59 In Soviet times, mine was called Kaverochkin named in honor of the Azerbaijani oil man Mikhail Pavlovich Kaverochkin, the founder of oil on the Oil Rocks. It is now known as the Chirag field.
��
Елхан Полухов, ibid�
��.
21
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
TPAO was included into the consortium, receiving a portion of the
share from BP. This move was greeted positively by the government
of the Popular Front and President Elchibey, known for his proTurkic views. For the same reason, the requests for inclusion by
Russian Lukoil and Iran was denied.61
Because of the change of government in June 1993 the Elchibey
government was not allowed to sign the contract. It was expected
that the contract would be signed on June 30, 1993.62 To this end,
British Prime Minister John Major invited President Elchibey in
London.63 However, the coup d’etat against Elchibey government
delayed the completion of this contract.
On 23 June 1993, Aliyev was elected as the Chair of Azerbaijan
Parliament and suspended the process of signing the contract.
Following the postponement of the signing of the contract, a special
commission of the number of foreign experts was created to review
the contract. Negotiations with Western companies began a gain in
4 February 1994. At the initial stage, the negotiations with Western
companies were conducted with two fields: Azeri and Chirag. As
for the Guneshli field, Azerbaijan wanted to begin production of the
field independently.64 The exclusion of the Guneshli field from this
block was a Russian demand, which was announced at the arrival
of Russian Energy Minister Yuri Shafranik and President Vahid
Alekperov in Baku on 19 November 1993. In addition Russian side
voiced a desire to acquire 20% of the shares to the Lukoil Company
and to control the main export pipeline through the territory of
the Russian Federation.65 It is worth noting that SOCAR’s main
��
Елхан Полухов, ibid�
��.
��
Steve Le Vine, ibid, 171.
��
Svante E. Kornell, ibid, р��
��
. 75.
��
Azərbaycan Respublikasında dəniz neft və qaz yataqlarının işlənilməsinin sürətləndirilməsi haqqında
Azərbaycan Respublikası Prezidentinin Sərəncamı, Bakı şəhəri, 4.02.1004, № 5.
��
Гюнер Оскан, Значение Энергии Каспия для Экономики и Безопасности Азербайджана,
http://atc.az/index.php?newsid=10
22
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
production of oil was extracted from the shallow part of the Guneshli
field, where 6.5mln t of oil was produced per year. The oil company
did not have the necessary equipment for the exploitation of oil in
the deeper part. That is why the parties subsequently returned to
the old formula which included Guneshli, a field located at a depth
of 200m. Heydar Aliyev managed to put face-to-face the military
forces and energy giants in Russia. As a result although some groups
in government who were closed to the decision-making process in
Russia were against the oil contract Azerbaijan succeeded to deal an
agreement with Lukoil.
As a result of the
revision of the treaty,
a number of changes
were made, reaching
its culmination at the
signing of the Contract
of the Century. The
treaty was made for
30 years. Initially, the
consortium members
to participate in a signing ceremony were the following companies:
SOCAR (Azerbaijan) 20%, British Petroleum (UK) 17.127%,
Amoco (U.S.) 17.01%, Lukoil (Russia) 10%, Pennzoil (U.S.)
9.82%, Unocal (U.S.) 9.52%, Statoil (Norway) 8.563%, McDermott
International (U.S.) 2.45%, Ramco (Scotland) 2.08%, Turkish State
Oil Company (Turkey) 1.75%, Delta-Nimir (Saudi Arabia) 1.68%.66
These companies created the Azerbaijan International Operating
Company (AIOC). As previously noted, the agreement covered
offshore Azeri fields67 (located 113km from the coast), Chirag
66 Nasser Sagheb, Masoud Javadi, Azerbaijan’s “Contract of the Century” Finally Signed with Western Oil
Consortium, Azerbaijan International, Journal, Winter, 1994, pp. 26-27.
67 In Soviet times, known as the26 Baku Commissars named in honor of the Bolshevik commune, who ruled
Azerbaijan in 1918.
23
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
(94km) and deep-Gunashli (82km). The companies were subject to
PSA, whereby after the return of investment by companies, revenue
from oil sales had to be shared in accordance with the formula, the
calculation of which was determined in accordance with the world
price of oil. The Azerbaijan government was to get up to 80% of
income from the sale of oil, while 20% would be distributed among
companies.68
Azerbaijan even exceeded its 80%, thanks to high oil prices in
2005-2008, as well as the high percentage of oil production revenues
in Azerbaijan. The wells drilled indicated very high productivity
of reservoirs. Crude oil production originally expected to be 10
thousand barrels a day; however, it recorded 25-30 thousand barrels
per day. The high price of oil and the large reserves have allowed
Azerbaijan receive up to 85% of profit oil from the Azeri-ChiragGuneshli. In addition, recalculation of oil reserves in these fields
increased the initially estimated stocks of crude oil at the AzeriChirag-Guneshli oil fields from 511mln t, to 640mln t, and later to
730mln t. Moreover, in June 2007, estimation of reserves accounted
for 900mln t.69 It has also been voiced that the figure is up to 1 billion
tons. The quality of Azeri crude oil, which is offered for sale on the
world markets under the Àzeri light` brand also impacted positively
on income. The quality of Azeri light crude oil brand is one of the
highest, while the oil itself is one of the lightest in the world. Azeri
crude weighs 36.7 degrees average API gravity, which is even lighter
than Saudi Arabia’s crude oil, which weighs 34.2.
Azerbaijan’s GDP has grown substantially over this period
due to high revenues from oil exports. For instance, in 2005 GDP
growth was 26.4%, 32.5% in 2006, 25% in 2007 and 10.8% in
2008. Overtime, the ranks of the consortium members and their
percentage of participation changed in the Contract of the Century.
68 Nasser Sagheb, Masoud Javadi, ibid, pp. 26-27.
��
Нефтепровод Баку-Тбилиси-Джейхан - любимец фортуны…, 06.08.2007,
http://www.1news.az/articles.php?item_id=20070806100139785&sec_id=12.
24
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The Azerbaijan company of SOCAR delivered 5% of its share to
the Turkish company of TPAO. President Aliyev and Turkish Prime
Minister Tansu Çiller signed an agreement on transferring of shares
5% to the TPAO on in Baku April 12, 1995.70
The Azerbaijani government decided to transfer another 5% to
the Iranian national oil company, under an agreement signed in
Baku on November 1994. The main purpose of President Aliyev was
balancing key forces of the region through the establishment of equal
treatment for all stakeholders. But the U.S. government has opposed
the plan of the Azerbaijani government because existing legislation
makes it impossible for US companies to work with Iran. As a result,
Iran has been denied share and their 5% share were delegated to
the American ExxonMobil in April 1995. However, Azerbaijan was
able to find a way `to compensate` Iranian expectations, highlighting
the country’s share in the Shah-Deniz gas field.71
An important event was the acquisition of the U.S. company of
Amoco by BP in 1999 for the price $55bln. Thereby, BP increased
its stake in the consortium to 34%, becoming the largest auctioneer
in the consortium and thus, the operator of the project.72 After the
merger of BP and Amoco, Lukoil in 2003 also sold its share to
the Japanese company Inpex and a number of other changes listed
the members of the consortium and their share of participation as
following: SOCAR (Azerbaijan) 11.6%, British Petroleum (UK)
35.7%, Chevron (U.S.)11.28%, Inpex (Japan)10.9%, ExxonMobil
(U.S.) 8.00%, Statoil (Norway) 8.563%, Itochu (Japan) 4.2%, ONGC
(India), 2.72%, Turkish State Oil Company (Turkey) 6.75%.73It
is noteworthy that the changes in the consortium took place quite
rapidly. It is related to the strategic plans of the each company by
themselves, some of whom preferred to get momentary profits
��
Günün Olayları, 12.04.1995, http://www.haberkazani.com/kazandan-12-nisan-1995-gundemi.html.
��
Thomas De Waal, ibid, p��
р��
. 172-173.
72 Steve Le Vine, The Oil and the Glory: The Pursuit of Empire and Fortune on the Caspian Sea, Random
House, New York, 2007, p.352.
73 State Oil Company of Azerbaijan Republic, Projects, http://www.socar.az/projects-en.html.
25
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
without going into the production process.
Other Energy projects developed after the independence of
Azerbaijan and their significance
As it’s already been noted, the Contract of the Century was a political
rather than economic decision. The interest of Western countries
in Azerbaijan increased afterward, which made balanced foreign
policy viable and enabled the country to take a more independent
course of action. There was political stability in the country for the
first time in many years. Azerbaijan soon signed the second contract
to develop the promising Shah-Deniz field in order to strengthen the
ongoing process. It is worth noting that the Shah-Deniz field was
discovered in 1976.74 However, due to lack of necessary technology
and financing, the project was not implemented during the Soviet
period.
Shah-Deniz is a maritime deposit, which was explored by BP
on August 1999. It is curious that instead of the expected oil, a
large volume of gas was discovered in the field. Nevertheless, the
significance of this discovery gained momentum only after a certain
period of time. The reason was that the availability of natural gas was
not considered as significant as it is today. It is noteworthy that this
was the biggest discovery of deposits so far since the disclosure of
the BP gas field of Prudhoe Bay in Alaska in 1970. Total reserves are
estimated at 1.2tcm of natural gas and 240mln t of gas condensate.
Shah-Denizis located 70 km from Baku in a southwestern direction
at a depth of 50 to 600m, occupying a total area of 860km2 with the
prospect of finding additional hydrocarbon reserves in the deeper
horizontal layers.
74 Rovshan Ibrahimov, Azerbaijan Energy Strategy and the Importance of Diversification of Exported Transport Routes, // Journal of Qafqaz University, 2010, No 29, p.27.
26
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The PSA on Shah-Deniz field was signed between the Azerbaijan
government and foreign energy companies on June 4, 1996.75 For the
purpose of the development of the field, a consortium was created
which includes the following companies with the statutory share
of: SOCAR (10%), BP (25.5%), Statoil (25.5%), Iranian OIEC
(10%), Russian / Italian joint company (10%) and TPAO (9%). The
development of the field under the framework of Stage-1 was already
initiated. During the PSA period, Stage-1 reserves were projected
at 178bcm of gas and 34mln t of gas condensate. At its production
peak, the development is expected to achieve production average
rates of 8.4bcm of gas per year and 2mln t/a of condensate. The
full production potential of the field is about 16bcm/a, which can be
reached through development stages ahead.76 The significance of the
Shah-Deniz field is that it is the closest gas field to Europe among
those in Eurasia. In particular, the countries in the southern part of
the EU are going to import gas from the fields through Turkey.77
Azerbaijan has signed more than 30 agreement son production
sharing since the signing of agreements on the Azeri-ChiragGuneshli and Shah-Deniz. If we analyze all the contracts, it is
possible to see the trends that have had an impact on this process.
Using its experience of previous agreements, the Azerbaijan
government and SOCAR signed as many as five PSA’s in 1997.
Consortia have been established for the fields of Lankaran-Talysh,
Yalama/D-222, Absheron and Oguz. In the period between the 19982000 Azerbaijan participated in creation of six more consortiums
to develop offshore fields located in the Azerbaijani sector of the
Caspian Sea. Meanwhile, all agreements signed by Azerbaijan in
��Ф.Асим, Азербайджан Все Активнее Внедряется На Грузинский Рынок, 26.04.2011, http://www.
zerkalo.az/rubric.php?id=32208.
76 Tamam Bayatly, BP Current Development, First Pipe for B-T-C Pipeline Arrives in Baku, Azerbaijan
International, Spring 2003, p. 72.
��Турецко-Греческий Межправительский Договор о Строительстве Газовoго Трубопровода, www.
caspian.ru.
27
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
2000 covered only on shore fields.78
The agreements signed in the period 1998-2000 had a curious
development. For instance, contrary to the “Contract of the Century”
and the Shah-Deniz consortiums, the share of SOCAR in the
following contracts increased significantly, sometimes reaching 5060% of production sharing. This trend stems from the fact Azerbaijan
had strengthened its position in political terms upon signing the two
major contracts. This led Azerbaijan to carefully examine subsequent
agreements in terms of economic and commercial appropriateness.
The Azerbaijani government and SOCAR would benefit from the
development of the deposits as it would be able to finance much of
its participation in projects and, therefore, expect higher returns in
the long term.
Another trend observed in the later contracts was that Azerbaijan
began to enter into consortiums with other European and Asian
companies alongside American and British companies. The main
reason for this step lay under Azerbaijan’s desire to create a balance
between companies from different countries. In this case, it is also
possible to minimize the from political disagreements with any
country or company.
The fate of many of the contracts was not as successful as the
“Contract of the Century” and the Shah-Deniz field. Development
of many contracts was suspended immediately after following the
drilling of the first wells. The results of these wells did not confirm
the presence of commercially attractive hydrocarbon reserves. It is
also should be noted that the exploration works in many wells were
carried out in times when oil prices on the world markets reached
their bottom in the range of $8-12 per barrel. In such circumstances,
to conduct exploration and manufacture of hydrocarbons offshore
deposits were not a commercially attractive business.
78 State Oil Company of Azerbaijan Republic, Projects, http://www.socar.az/projects-en.html.
28
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The attractiveness of these fields once again received an attention
with the increase in oil prices on the world markets. However,
there was an indication of a new trend: a financially stronger and
experienced SOCAR now prefers to conduct exploration and
development of the most attractive fields independently. SOCAR has
already rejected offers from several companies to participate in the
development of shallow Gunashli field. The national company wants
to carry out work on this promising structure by itself. Meanwhile,
SOCAR announced the opening of a new gas field in Umid at a depth
of 6500m on November 2010.79 It is assumed that the gas reserves in
the Umid are about 200-300bcm. SOCAR plans to begin exploration
and development of other promising structures such as Babak.
According to experts, it is expected that in the Babek field natural
gas reserves may be twice more than in Umid.80 In addition, SOCAR
plans to develop, Absheron, Shafag-Asiman, Nakhchyvan, Oghuz,
Zafar-Mashal, and fields. The development of some structures in the
shallow waters of the Caspian Sea are also underway..81
Besides the low oil prices, there was another reason for the
suspension of the development of offshore fields in early stages,
the unresolved legal status of the Caspian Sea and its delimitation.
The problem with the status of the Caspian Sea emerged after the
collapse of the Soviet Union, when the shore of the Caspian Sea
was shared by four independent new states - Russia, Azerbaijan,
Kazakhstan and Turkmenistan. Previously, the relationship of the
Caspian Sea between the Soviet Union and Iran was determined
by agreements of 1921 and 1940. The first differences between the
riparian countries appeared in 1991, as their national interests were
at stake. Azerbaijan and Kazakhstan argued for a sectoral division of
�� H.E., SOCAR заявила об открытии крупного газового месторождения “Умид” в Азербайджане,
24.11.2010, http://www.1news.az/economy/oil_n_gas/20101124043856510.html.
��Салаева Алена, Месторождение «Бабек» вдвое больше «Умид», 25.11.2010,
http://www.1news.az/economy/oil_n_gas/20101125105006328.html.
81Салаева Алена, В перспективных планах SOCAR – доразведка и разработка структур «Карабах» и
«Ашрафи», 18.01.2011, http://www.1news.az/economy/oil_n_gas/20110418125617656.html.
29
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
the Caspian Sea, as they were interested in the speedy development
of hydrocarbon fields located in the sea bed.82 It is worth noting
that the sectoral division of the Caspian Sea was formulated in the
Soviet era in 1970. Caspmorneft was created in the same year, and
then the USSR Ministry of Petroleum Industry was charged with the
exploration, development and production of oil in all sectors of the
Caspian Sea.83 Russia and Iran, whose the main reservoir of energy
concentrated away from the Caspian Sea, more concerned about
security issues. Moreover, both countries were against the presence
of third countries in the Caspian Sea, primarily the United States.
Therefore, they opposed the exploitation of offshore oil and gas fields
until the status of the Caspian Sea was determined, which served
as a barrier to participation of the foreign companies. Turkmenistan
is not so much interested in the development of its offshore fields,
because of the low viability of transporting energy resources via the
Caspian Sea to Western markets. However, a number of issues have
led to a cooling of relations in the form of disagreements between
Azerbaijan and Turkmenistan in the mid-1990s. The controversy
began with a definition of Azerbaijani debt for natural gas imported
from Turkmenistan. But the main reason for the actual break-up
was determining the ownership of offshore an oil field on the border
of both countries called Kapaz (Azeri name) or Sardar (Turkmen).
Azerbaijan signed an agreement with Russian companies Lukoil
and Rosneft to create a consortium for the development of this
field in 1997. However, after the intervention of Turkmenistan,
the consortium did not operations. In turn, Turkmenistan signed a
contract with Mobil. However, this company also was unable to get
to work due to the uncertainty of the ownership of this deposit. As
relations deteriorated, Turkmenistan withdrew its ambassador from
��Ровшан Ибрагимов, Статус Каспийского Моря и Проект Набукко: Развитие Отношений Между
Азербайджаном и Туркменистаном, 30.04. 2008,
http://www.eurasianhome.org/xml/t/expert.xml?lang=en&nic=expert&pid=1541, 18.04.2008.
�� История Развития Нефтяной Промышленности,
http://www.azerbaijan.az/portal/Economy/OilStrategy/oilStrategy_02_r.html.
30
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Baku and applied a visa regime with Azerbaijan.84
Another disagreement on the Caspian Sea took place between
Azerbaijan and Iran on August 22, 2001. An Iranian military naval
vessel prevented a BP research ship from conducting an investigation
in the southern part of the Azerbaijani sector of the Caspian Sea in
order to determine the presence of hydrocarbon reserves in promising
fields, Araz, Alov and Sharg and forced the ship to leave.85 Iranian air
craft also violated the air border with Azerbaijan on a daily basis and
conducted flights over its territory. Iran suspended operations only
after Russia and Western countries provided support to Azerbaijan,
as well as the participation of 10 Turkish military fighter aircraft F-5
on parade in Baku.86 Nevertheless, research has never been resumed
in these fields.
Despite such difficulties, Azerbaijan still has a potential for
development and exploitation of its own energy deposits. There are
231 prospective structures found both onshore and offshore, and
prepared for drilling and exploration respectively, 38.1% on the
land, 61,9% in the Azerbaijani sector of the Caspian Sea. As a result
of researches in the deep drilling structures, shows that 25.1% of
fields potentially big and Azerbaijan has already identified 69 fields,
including those 42 in onshore and 27 offshore.87
Azerbaijan energy transportation strategy
and its implementation
After getting Western companies involved in the exploitation of
��Ровшан Ибрагимов, Статус Каспийского Моря и Проект Набукко: Развитие Отношений Между
Азербайджаном и Туркменистаном, ibid.
��Ровшан Ибрагимов, Статус Каспийского Моря и Проект Набукко: Развитие Отношений Между
Азербайджаном и Туркменистаном, ibid.
�� Svante E. Cornell, ibid, 332.
�� Баку и Нефть. Современность, ibid.
31
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
oil and gas deposits, one of the main objectives was to create transport
corridors for the export of energy resources from Azerbaijan to the
world markets. Azerbaijan, which has no exit to the open sea, could
solve this problem only by constructing a pipeline. A transport route
ought to be developed with the purpose of exporting “early oil”
from the Azeri, Chirag, Guneshli fields for the end of the 1990s.
The term of “early oil” means crude oil produced at the Azeri,
Chirag, Guneshli fields that do not require extra costs to build the
infrastructure for proper operation. At the same time, taking into
account that the main oil production from oil fields is expected only
in 2005, it was necessary to ensure steady revenue for Azerbaijan—
after the collapse of the Soviet Union—under conditions of serious
economic problems. The first batch of oil was planned to be shipped
in the fourth quarter of 1997 from Chirag-1 platform for which it
was necessary to build a pipeline with a transmittance of not less
than 5mln t/a.88
The U.S. was interested in reducing Russia’s influence on the
successful development of energy projects in Azerbaijan and
in the Caspian Sea region. Because of this, the U.S.
government strongly supported the construction of a new export
pipeline. This could be achieved by constructing an alternative
pipeline going through Russian territory - a Baku-Novorossiysk oil
pipeline - or a transport corridor through the territory of Georgia - a
Baku-Supsa pipeline.
In October 1995, President Clinton sent the former U.S. presidential
adviser on national security, Zbigniew Brzezinski, to deliver a
personal letter to Azerbaijani President Heydar Aliyev in Baku.89The
purpose of the visit was to receive support from the Azerbaijani
government for the Baku-Supsa pipeline project. In general, such
��Ильхам Алиев, Каспийская нефть Азербайджана: Москва, Известия, 2003.
89 Jofi, Joseph, “Pipeline Diplomacy, The Clinton Administration`s Fight for Baku-Ceyhan”, WWS Case Study, 1/99http://wws.princeton.edu/cases/papers/pipeline.pdf
32
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
a decision of the Azerbaijani government would mean abandoning
Russia`s requirement to export all Azeri oil only via the Russian
territory. At that time, President Aliyev held meetings with the
Russian delegation who insisted on making commitments only
in favor of Russia, in parallel with the negotiations that he had
with Zbigniew Brzezinski.90 However, Azerbaijan wasn`t against this
proposal because of the strained relationship with Russia, accusing
this country of support of Armenia in the Nagorno-Karabakh conflict.
As a result, Azerbaijan had no interest in complete dependence on
the will of its northern neighbor in the matter of oil exports, which
would represent not only economic, but also political significance.
Furthermore, it would be wrong to choose a single destination
for exports of the “early oil”. Georgia, at that time, was very unstable
due to internal strife and separatist movements. Such a situation in a
neighboring country is fraught with high risks. Azerbaijan could not
allow its political and economic stability to depend on the situation
in Georgia. At the same time, taking into account that this project
was proposed by the U.S., Azerbaijan also didn’t want to deny its
desire, especially at the time when relations between the two states
were starting to develop. Therefore, Azerbaijan didn’t want to spoil
relations with either the U.S. or with Russia, because it did not serve
its national interests.91
As a result of negotiations, the Azerbaijani government and
the consortium agreed to build pipelines simultaneously in two
directions: first across Russia—the Baku-Novorossiysk pipeline in
length of 1,347 km of which 231 km travels through Azerbaijan with
the transport capacity of up to 6 million tons of oil per year. Oil is
transported by tanker from Novorossiysk across the Black Sea and
then through the Turkish Straits to the ports of the Mediterranean
��Збигнев Бжезинский, Еще один шанс. Три президента и кризис американской сверхдержавы, 2010,
http://uchebnik-besplatno.com/uchebnik-geopolitika/konfrontatsiya-proshlyim.html
91 Daniel Yergin, The Quest Energy, Security, and the Remarking of the Modern World, The Penguin Press,
New York, 2011, p. 56.
33
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Sea. The second direction was the Baku-Supsa oil pipeline route;
917km long of which about 492km passes through the territory of
Azerbaijan. The pipeline capacity is about 5.5-6mln t/a. Oil tanker
shave to be shipped to ports in the Mediterranean Sea from Supsa
port similarly.92
The rationale for construction of two pipelines at the same time for
a relatively small amount of “early oil” was the desire of Azerbaijan
to reduce its possible economic dependence on Russia. It was clear
that Azerbaijan could not refuse to take a northern direction and it
would be necessary politically. Simultaneously, Azerbaijan and the
consortium members did not want to depend on one direction. As
a result, it became necessary to build a second pipeline bypassing
Russia. That was the Baku-Supsa oil pipeline, which provided
access for Azerbaijani oil to European markets, bypassing Russia.
For the first time one of the republics of the former Soviet Union put
an end to Russia’s monopoly in pipeline transport.93 Construction
of the Baku-Supsa pipeline has allowed Azerbaijan to implement
the diversification of transport routes. This enabled Azerbaijan to
conduct more independent foreign and energy policies. The creation
of alternative transport routes for energy exports turns out to be the
main policy of Azerbaijan. The growth of oil production from Azeri,
Chirag, Guneshli necessitated building the main export pipeline.
One of the reasons was the limited volume capacities of the existing
two pipelines: a total transport capacity of Baku-Novorossiysk and
Baku-Supsa was not more than 11mln t/a. However, Azerbaijan was
projected to ship at least 20mln t/a of oil starting from 2005.
Additionally, the Novorossiysk and Supsa oil tankers had to
travel through the Turkish straits of Bosporus and Dardanelles,
but for security reasons limitations were placed on the passage of
tankers. The straits are the boundary between Europe and Asia,
92 Rovshan Ibrahimov, ibid, p. 25.
93 Rovshan Ibrahimov, Azerbaijan: Happiness is the Availability of Export Corridors, ibid.
34
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
connecting the Black Sea and the Mediterranean. The length of the
straits between the two seas is about 30km. Like a river, the Straits
have bends in 12 locations. The bottleneck passage is Kandilli, with
a width of 700m, in which oil tankers must carry out the navigation
at an angle of 45 degrees. Yenikova is an even more complicated
location where the vessel has to be rotated at an 80 degree angle.
Thus, on average, only 12 tankers can pass through the straits in a
day.94
Legal status on the passage through the straits is determined in
the Monteux Convention signed on July 20, 1936. According to
convention, the passage of commercial vessels of all nations through
them is free.95 Moreover, Turkey has a limited right to adjust the
passage of vessels in order to increase the level of security. The
Turkish megalopolis, Istanbul, is located on shore of these straits
with population of more than 15mln people. Risks for this city are
increased as much as intensifies. In January 1994, Turkey prepared
a new proposal for the security of straits and offered them to the
Committee on Safety at Sea International Maritime Organization of
the UN. After processing a number of standards from the committee,
the Turkish proposal was accepted in May 1994. Regulation on
navigation in the area ofthe Turkish Straits and the Marmara Sea
came into force on1 July 1994.96 The majority of large oil companies
voluntarily recognized the new rules of passage through straits made
by Turkey.97 Russia also had to adopt the new standards.
The annual volume of oil that can be carried through the straits
was then is in the range of 200mln t. Approximately 50,000 vessels
pass through these straits every year, including thousands of tankers
�� Steve LeVine, ibid, 350.
��Конвенция о Режиме Проливов 20 Июля 1937 г., Монтре (Швейцария), статья 2, 23.01.2008,
http://law7.ru/base42/part2/d42ru2878.htm.
��Андрей Болдырев, Российско-турецкие отношения и Конвенция Монтрё, 13.02.2010,
http://journal-neo.com/?q=ru/node/84.
97 Brenda Shaffer, Energy Politics, Philadelphia University of Pennsylvania Press, 2009, p.100.
35
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
filled with oil.98 In this case, transport through straits would have put
Azerbaijan oil exports in jeopardy if Novorossiysk or Supsa had been
selected as the main port for oil exports.99 In addition to the Azeri
oil transported from Novorossiysk, Kazakhstani oil is also exported
from Russia. Furthermore, 210 accidents of varying severity took
place near Istanbul in the Bosporus Straits between 1 May 1982 and
October 18, 1994.100 The situation was physically impossible for the
export of such quantities of oil through the straits. In this case, there
was a need for a pipeline bypassing the Turkish straits.101
As a result, it became
necessary to build a
pipeline to bypass the
straits with access to the
Mediterranean. Such a
corridor was the BakuTbilisi-Ceyhan with the
volume of more than
50mln t/a. Initially the
proposal to build this
pipeline was made in 1992 by Turkish President Ozal and President
Elchibey. Finally, on November 18, 1999 during the OSCE Summit
in Istanbul at the Palais des Chiragan, the presidents of the U.S.,
Azerbaijan, Turkey, Georgia and Kazakhstan signed a document
confirming the support of these states for the construction of
the Baku-Tbilisi-Ceyhan.102This agreement had a great strategic
importance. Thereby it obtained political support from the US,
which contributed to the decision of two tasks: first and foremost,
the companies involved in the consortium also had to support the
option chosen by the politicians. The second important factor was
98 Brenda Shaffer, ibid, p. 100.
99 Steve Le Vine,ibid, p. 350.
100 Битваза Рынок // CaspianEnergy, № 5, сентябрь-октябрь 2004.
101 Rovshan Ibrahimov, Azerbaijan: Happiness is the Availability of Export Corridors, ibid.
��
Steve Le Vine, ibid, p. 356.
36
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
that it managed to balance the demands of Russia, who wanted the
Baku-Novorossiysk pipeline to be chosen as the major export route
for Azerbaijani oil.
Construction of the pipeline was soon started Members of the
consortium building the pipeline and their shares were distributed
as follows: BP (34.76%), SOCAR(25%), Statoil (8.71%), Unocal
(8.90%), TPAO (6.87%), ENI (5%), Total Fina Elf (5%), Itochu
(3.40%) and Amerada Hess (2.36%).103 Construction of the pipeline,
stretching more than 1,730km, was begun in 2002 and completed
in 2005. Azerbaijan was able to abandon the use of the BakuNovorossiysk pipeline by December 2006 when Russia demanded
Azerbaijan use the pipeline fully or pay for the transportation of
5mln t/a.
Construction of the Baku-Tbilisi-Ceyhan pipeline has allowed
states of the Caspian region to gain access to alternative ways of
pumping oil to the word markets. In addition, this route will give
EU countries an alternative to Russian and Middle Eastern sources
in oil imports. By the end of October 2008, Kazakhstan oil was
transported via Baku-Tbilisi-Ceyhan pipeline and the Turkmen oil
transport began in June 2010 The Baku-Tbilisi-Ceyhan oil pipeline
was transporting oil from Kazakhstan’s Tengiz oil field, operated
by company Tengiz Chevroil. But because of the inconsistency
of conditions for transportation, oil flow was discontinued in the
beginning of 2011. In the same year, 1.27mln t of Turkmen oil was
transported through the BTC. Transportation of Turkmen oil via the
BTC is part of the contract among SOCAR Trading, the Dragon
oil and other companies producing oil in Turkmenistan. SOCAR
Trading buys oil from producers in Turkmenistan and transports it
across the Caspian Sea to Baku. And then, BTC Co exports those
quantities of oil via the Baku-Tbilisi-Ceyhan.104
��
Баку��
��
-��
Тбилиси��
-��
Джейхан��
-��
Хроника��
��
проекта��
// CaspianEnergy, № 3, June-August, 2002.
��Ф. Асим, Азербайджан Успешно Осваивает Свои Нефтегазовые Месторождения, 09.04.2011,
37
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The implementation of the Baku-Tbilisi-Ceyhan oil pipeline also
made it easy to construct the Baku-Tbilisi-Erzurum gas pipeline
along the same route. The pipeline links to markets in Georgia and
Turkey and it carries the Azerbaijani gas from the Shah-Deniz field.
Construction of the pipeline was started on February 27, 2003105and
ended in 2007. The first Azerbaijani gas was exported to Greece via
this pipeline on November17, 2007.
At the same time,
Azerbaijan signed a
memorandum with
Russia on the supply
of Azeri gas to Russia
via
the
existing
Baku-Novo Phila on
March 27, 2009 in
order to ensure the
diversification
of
exports of natural gas. Since January 2010, Azerbaijan began to
export natural gas to Russia.106 In the first stage of gas exports, the
export volume amounted to 500mcm according to a supplementary
agreement to the contract for the purchase and sale of natural gas
in September 2010 - during the visit of President Medvedev to
Baku. In line with this, Azerbaijan is obliged to increase natural
gas supplies to Russia up to 3bcm/a, with a further opportunity to
increase exports.107 Furthermore, Azerbaijan also intends to export
its gas south to Iran. A contract supplying up to 1bcm of gas to this
country was signed in January 2011.108
http://www.zerkalo.az/2011-04-09/economics.
105 “Shah Deniz Aspires to New World Record”, Caspian Energy, No 1,Fevruary-Mart, 2005, 32.
��Ровшан Ибрагимов, Визит Медведева в Баку - дань новой традиции и интересы в газовом секторе,
08.09.2010, http://www.1news.az/authors/ribrahimov/20100908025800033.html.
��
Ровшан Ибрагимов, Визит Медведева в Баку - дань новой традиции и интересы в газовом секторе,
08.09.2010, http://www.1news.az/authors/ribrahimov/20100908025800033.html.
108 Zulfugar Agayev, Nasseri Ladane, Azerbaijan Signs Gas Supply Contract with Iran Before EU Visit,
http://www.bloomberg.com/news/2011-01-12/azerbaijan-signs-gas-supply-contract-with-iran-before-eu- visit.html.
38
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Azerbaijan attaches great importance to the security of energy
exports to the world markets. To this end, the state follows an active
policy of diversification of transport routes. One such project is
the AGRI, which was designed to create an alternative corridor for
the export of Azerbaijani natural gas. This project was initiated on
September 14, 2010 during a Baku meeting of the presidents of
Azerbaijan, Georgia and Romania and in the presence of the Prime
Minister of Hungary. The parties signed a memorandum to establish
a joint company to determine a route for the export of natural gas
from Azerbaijan though Georgia to the Black Sea and then up to the
Romanian port. It is assumed that the natural gas produced in Baku will
be delivered by pipeline to the Georgian port of Kulevi, where the gas
must be processed in a compressed or liquefied gas (CNG, LNG), and
transported by tankers to the Romanian port of Costanza. According
to initial estimates, the approximate cost of the project is estimated at
$4 to $6bln. The reason for the need to develop alternative approaches
was inconsistency over the price of gas and the conflict over transit
shipments that arose between Azerbaijan and Turkey at the beginning
of 2008. Recently, Turkey has revised its energy policy, according to
which Turkey plans to become a regional energy terminal. The country
is hoping to purchase gas from Azerbaijan at a reduced price and resell
it at market prices on European markets. The territory of Turkey is the
only area through which Azerbaijani gas was exported to European
markets and this was jeopardizing Azerbaijan’s natural gas exports.
Therefore, the reason in proposing this project is to reduce unwanted
consequences.
SOCAR
According to the constitution, all natural resources in the territory of
this country belong to the state.109In this case, the transfer of ownership
109 Without prejudice to the rights and interests of any individuals and legal entities natural resources belong
39
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of natural resources, including hydrocarbons and natural or legal
person in accordance with the constitution is considered impossible.
As noted earlier, management and development of energy resources
in Azerbaijanis conducted by the Azerbaijan State Oil Company. The
company, on behalf of the government of Azerbaijan, is involved in
signing contracts with foreign companies to establish a consortium
and to develop oil fields. SOCAR was established on 13 September
1992, by Presidential Decree No. 200 by merger of Azerbaijan’s
two state oil companies, Azerneft and Azneftkimiya.110Azerneft was
created after the Bolshevik revolution through the nationalization of
the Azerbaijani oil industry. During the Soviet period, Azerneft was
incorporated into the new Azerbaijan Oil Industry Ministry (1954–
1959). In August 1970, it was renamed back to Azerneft.111
SOCAR has two refineries, located in Baku: Azerneftyag and
Azerneftyanachag with a total processing capacityto 22-24mln
t/a.112 In addition to these, the company owns a number of properties
building trusts, vehicles, automation and integrated installation,
research and design institutes. The company employs about 60,000
people, SOCAR controls about 6,800 oil wells on land and 1,400 at
sea, an oil fleet of over 300 vessels, 6 floating oil drilling platforms.113
It should be noted that in the Soviet times, Azerbaijan explored
for oil in the territory of the former Soviet Union and in the other
states. The company recently started independently operating its own
fields, and now intends to elevate its activities to the international
level with its tremendous experience and high-level specialists. The
company is not limited to the extraction and export of their own
resources, while it actively involved in the energy markets in the
region of the Black Sea.
to the Republic of Azerbaijan, the Constitution of the Azerbaijan Republic,12.11.1995, article 14.
110 History of SOCAR, http://www.azerbaijan.az/portal/StatePower/Committee/committeeConcern_01_e.
html, 18.04.2011.
111 About SOCAR, http://www.socar.az/about-en.html.
��
O��
i��
l andGas��
in Azerbaijan, http://www.azerb.com/az-oil.html.
��
Баку и Нефть. Современность, ibid�
��
��.
40
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
SOCAR acquired nearly 100 hectares in the Kulevi Terminal
located on the shores of the Black Sea. In addition to that, the Georgian
government added further 200 hectares to the territory of the terminal.
Moreover, the terminal started operation in 2007. Currently, the
power of the transshipment of the Kulevi terminal is 10mln t (2mln
t of oil, 3mln t of diesel, 4mln t of fuel oil). It’s planned to increase
the handling capacity of the terminal to 20mln t, and the tank fleet to
380 thousand cm.114 In addition, SOCAR established SOCAR Energy
Georgia Company, which has opened petrol stations in the Georgian
territory. The company also intends to build refineries on coast of
the Black Sea in the future with the possibility of exporting oil to the
Black Sea littoral states.
At the same time SOCAR is the main distributor of natural gas
in Georgia. SOCAR Georgia Gas Company which is a subsidiary
company of SOCAR Energy Georgia was declared the winner
of the tender for the privatization of distribution companies in
the gasification of the country in reference to the order of the
President of Georgia on May 13, 2008. The conditions of the
tender included the gasification 30 cities and districts. Agreement
for the purchase of regional distribution companies was signed
on December 26, 2008 in Tbilisi, between Rovnag Abullayev, the
president of SOCAR, and Lasha Zhvania, Georgian Minister of
Economy. Georgian gas networks have been under the jurisdiction
of SOCAR Georgia Gas since February 10, 2009. Currently, over
150 thousand users and subscribers indifferent regions of Georgia
get gas which dispensed by SOCAR.115SOCAR provides 70-75%
of the gas market in Georgia and virtually controls the gas system
of the country completely.
114 State Oil Company of Azerbaijan Republic: Transition from National to Transnational Company or
Demand of Time?, 18.02.2007,http://www.turkishweekly.net/columnist/2487/state-oil-company-of-azerbaijanrepublic-transition-from-national-to-transnational-company-or-demand-of-time.html.
��
Дочерняя структура Госнефтекомпании Азербайджана (ГНКАР) – ООО « ��
SOCARGeorgiaGas�»
продолжает работы по газификации населенных пунктов Грузии, 04.02.10, http://www.oilru.com/
news/160555.
41
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
SOCAR also has increased its activity in Turkey. SOCAR
President R. Abdullayev and chairman of the Turkish oil company
Turcas Erdal Aksoy signed a protocol on establishment of a joint
company in December 2007. With more than $5bln of investment
planned to spend on the joint venture, SOCAR Turcas Energy.
Rovnag Abdullayev said that the company intends to sell oil and
gas in the Turkish market. One of the milestone events in this
regard was SOCAR Turcas and Injaz alliance acquisition of 51% of
Turkey’s largest petrochemical company Petkim. SOCAR intends
to increase the income of this company from $1.9bln to $4bln by
2015.Atthe time of the acquisition, the production capacity of
Petkim was 3.2mln t/a. This will rise to 6.3mln t by 2015. Currently,
the domestic need of Turkey’s petrochemical production is $6.1bln,
and this demand will continue to grow at 11-12% annually. Today,
Petkim production covers about 25% of the market in Turkey.116
During the visit of President Ilham on October 25, 2011 a ceremony
was held in Izmir laying the foundation of a new oil refinery, with
a projected capacity of production up to 10mln t/a of oil. Thanks
to the investment in this company, SOCAR’s market share in the
Turkish chemical industry will increase from 25% to 40%.117
SOCAR is actively developing its relations with other countries
in the Black Sea region, too. The company opened its first petrol
station in Ukraine in 2011, with plan to increase their number to
30 by the end of 2011.118 In addition, SOCAR plans to open 300
petrol stations in Romania in the next 3 years.119 Thus it is obvious
that SOCAR is not going to limit their activities to exploration
and production of hydrocarbons in Azerbaijan. The company has
��
ГНКАР Намерена Приобрести Нефтеперерабатывающий Завод в Европе, 25.09.2008,
http://www.1news.az/economy/20080925104535367.html.
��
Ф. Асим, ГНКАР Собирается Приобретать НПЗ в Европе, 27.09.2008,�http://www.zerkalo.az/rubric.
php?id=36347.
��
SOCAR��
��
открыл 5 АЗС в Украине, 19.01.2011,
http://www.1news.az/economy/oil_n_gas/20110119043532267.html.
��
ГНКАР Откроет в Румынии Около 300 Бензоколонок,��
02.04.2011,http://www.1news.az/economy/
oil_n_gas/20110402124523008.html.
42
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
transformed into an integrated company with activities in all areas
related to energy. It increasingly manifests itself abroad, inaugurating
different projects in the Black Sea region. SOCAR understands that
Azerbaijan’s resources are limited and, therefore, it is pursuing a
policy that will ensure the production of petrochemical products
and its sales in international markets even after Azerbaijan energy
resources lose their significance. Thereby, SOCAR will be able to
increase revenues from energy as well as make efficient use of its
potential.
In addition, SOCAR does not limit its activities only to the Black
Sea region, but is actively creating relations with the countries of
Europe, Africa, Middle East and Asia, ega subsidiary of SOCAR
Trading opened an office in Singapore in order to enter the crude
oil markets of Asia. With this kind of representation, SOCAR is
trying to increase its share of its presence in the Asian markets and
it does so with long-term contracts.120For instance, SOCAR together
with Aurora Progress began the construction of an oil storage and
terminal capacity of 645,000cm of oil storage in Fujairah (UAE)
in order to ensure an uninterrupted supply of oil to Asian markets
and expand trade in the strategic product in the gulf. The terminal
in Fujairah includes 20 reservoirs and has the capacity for handling
gasoline, naphtha, middle distillates and other oil products.121
In 2011, SOCAR acquired core asset structure of the Swiss
«Esso Switzerland», which had belonged to Exxon Mobil. The
deal amounted to $330mln. As a result of the transaction, SOCAR
received a network of 170 petrol stations, enterprise management
pipelines and terminals, as well as the unit dealing with marketing
activities for the implementation of the management of petroleum
products in Switzerland, companies involved in aircraft refueling
��
А. Фатулла, Благоприятный год для нефтяников, 14.01.2012,http://www.zerkalo.az/2012-01-14/
economics/26344p2-socar
��
Нефтяной терминал SOCAR��
��
в ОАЭ является стратегически важным проектом, 03.05.2011, http://
www.trend.az/capital/energy/1870251.html
43
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
and refueling vehicles using liquefied petroleum gas.122
Another priority in energy policy for Azerbaijan is to create
an infrastructure for oil exported from Central Asia, in particular
Kazakhstan. For a quite long time, Kazakhstan exported its oil extracted from the Tengiz oil field - through Azerbaijan via railways
to Georgian Black Sea ports. However, the volume transported on this
route was not sufficient. Azerbaijan interests to Kazakh oil, which
mainly comes from the Kashagan field, transporting it via the BakuTbilisi-Ceyhan pipeline. Kazakhstan is interested in diversifying its
export corridor to the west. Currently, the export is carried out through
Russia to Novorossiysk. Given the limited export capacity of existing
pipelines and the challenges faced by tankers passing through the
Turkish Straits, there is a need for the use of corridors with access to the
Mediterranean Sea. As a consequence, during the visit of Azerbaijani
President Ilham Aliyev to Kazakhstan on 7-8 August 2007, SOCAR
and Kazakhstan’s KazMunayGas signed an agreement on strategic
cooperation in the oil and gas industry and a memorandum on mutual
cooperation on the Trans-Caspian project. According to the agreement,
both countries will establish a transport corridor through which the
crude oil produced at Tengiz and Kashagan will be transported from
Eskene in Kuryk, and then shipped across the sea to Baku by tankers.
Thus, a large amount of oil is predicted to come to Sangachal and
��
Ростислав Белый, Азербайджанская Госнефтекомпания приобрела активы в Швейцарии, 02.07.2011,
http://www.profi-forex.org/news/entry1008129356.html
44
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
from there transported via the Baku-Tbilisi-Ceyhan oil pipeline to the
Mediterranean Sea. It is expected 20 million tons per year of Kazakh
oil be transported at the initial stage of this agreement.123
State Oil Fund of the Azerbaijan Republic
Unregulated growth of revenues from sales of energy resources
and improvement of macroeconomic indicators could adversely affect
the economy of Azerbaijan. Therefore, it was necessary to create a
mechanism that would allow use of oil revenues for economic and
social development. One such mechanisms was the creation of the oil
fund, which would accumulate income and realize the transformation
of non-renewable resources in renewable energy, by insertion of oil
revenues in the financial arrangements.124For this purpose, the State
Oil Fund of the Azerbaijan Republic (SOFAZ) in accordance with the
Presidential Decree 240 dated December 29, 1999 “On Establishment
of the State Oil Fund of the Republic of Azerbaijan”.125 President
Heydar Aliyev opted to have direct control over the newly established
institution. This circumstance has been the topic of disagreement with
the IMF because the organization believed that management of the
funds would be controlled, not by the executive, but by the legislature
organ.126The main reason for this decision by Heydar Aliyev was to
prevent unauthorized expenses of the Fund.
Azerbaijan used the experience of similar structures in other
countries, the and recommendations of international financial
��
Ровшан Ибрагимов, Влияние возможной реализации трубопроводных транспортных проектов в
Каспийском море на изменение геополитической и геоэкономической ситуации в регионе,
Международные Исследования, Общество, Политика, Экономика,Журнал, No 3/4 (8/9) 2011, 96.
124 Sergey Mahnovskiy, Natural Resources and Potential Conflict in the Caspian Sea Region, Faultiness of
Conflict in Central Asia and the South Caucasus: Implication for the U.S. Army, ed. Olga Oliker, Thomas S.
Szayna, Rand Arroyo Center, Arlington, 2003, 140.
125 SOFAZ: History and Philosophy, http://www.oilfund.az/en/content/2.
126 Sergey Mahnovskiy, ibid, 141.
45
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
institutions, in addition to taking domestic circumstances and current
needs into consideration in the establishment of SOFAZ. One of the
challenges is to ensure an optimal balance between monetary means
used for the needs of today’s generations and the accumulation of
a reserve for future generations. It is worth noting that the fund’s
investment portfolio reached over $34bln by 2012. 49.80 % of the
funds are denominated in US dollars, 40.55 % in Euros, 5.02 % -in
British pounds, 2.35 % in gold and est.127 SOFAZ assets as of 1
January 2013 amounted to $34.129bln. SOFAZ revenues for 2013
are estimated at 11.482bln AZN with expenses at 13.403bln AZN.128
As the accumulation proceeds from the sale of oil on the world
market, along with savings in the fund, these funds were used in
solving social and economic problems. Major investment funds
represents pending in large infrastructure projects. For instance, in
the early years of the fund President of Heydar Aliyev, allocated
funds to improve the social conditions of refugees from Armenia
and internally displaced persons. The conditions were unbearable
and therefore required immediate solution. First and foremost, it was
necessary to begin construction of housing, as many refugees and
displaced persons were living in railway wagons and tent camps—
Galagaya was the last campground closed in 2007. The fund allocated
assistance to various regions of Azerbaijan to build new settlements
that required a supply of gas, electricity, water and other necessary
systems of social and technical infrastructure.
In addition, the Oil Fund has also allocated funds to finance the
equity of the Azerbaijan Republic in the construction of the BakuTbilisi-Ceyhan pipeline. It also funded the installation of a water
pipeline from the northern part of Azerbaijan, Ogus, to Baku in
order to improve the quality of the drinking water. In early 2011,
127 Azərbaycan Respublikası Dövlət Neft Fondu, New Baku Post, 06.02.2013, No 9.
128 Azerbaijani oil fund budget approved for 2013, 02.01.2013,
http://www.azernews.az/oil_and_gas/48154.html.
46
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
water started to supply the houses of Bakunians. Another important
project, implemented was the reconstruction of the Samur-Absheron
melioration system. The project envisaged the construction of water
channels Takhtakorpu-, a length of 111km and a capacity 40cm
water reservoir height and a Hydro Power Plant. As a result of these
projects, the supply of drinking water to Baku and Sumgait has
improved two-fold. Equally important, the fund also financed the
construction of the regional project, a new railway from Baku-TbilisiKars. In addition to funding the roads on its territory, Azerbaijan is
also provided a loan of Georgia. SOFAZ is also financing the share
of Azerbaijan in the construction of the Star oil refinery in Izmir,
Turkey and modern floating drilling complex in the Caspian Sea.
The Oil Fund has also been allocating funds for the formation
of the newly established capital of the Azerbaijan Investment
Company since 2006. The purpose of the investment company is
the contribution to the development of enterprises that operate in
the non-oil sector. Another important initiative that was funded was
the program, “Education of Azerbaijani youth abroad in the period
2007-2015” since 2008.
In addition to funding various projects, the Oil Fund makes a huge
amount of transfers to the state budget of Azerbaijan annually. These
transfers are important components of the budget of the Azerbaijan
Republic. The sum of transfers from the Oil Fund to Azerbaijan’s
budget was 6.480mln AZN for 2011.129This constituted more than
50% of the total revenues, which amounts to 12.061mln AZN.130 Its
traced the dynamics of growth of transfer sum from SOFAZ to the
budget of Azerbaijan Republic in following years. In 2012, transfers
amounted 9.905mln AZN.131 In 2013, transfers to the state budget
129 The currency of the Azerbaijan Republic. In recent years, its rate against the U.S. dollar was stable and
amounted for the date of 17.02.2013, 1.28 U.S. dollars per 1 Azerbaijani manat.
��
Алена Салаева, Проект Госбюджета Азербайджана на 2001 год Представлен в Милли Меджлис,
01.10.2011, http://www.1news.az/economy/banks_n_finance/20101001115507544.html, 26.04.2011.
131 SOFAZ 2012 budget approved, 30.12.11,
http://www.oilfund.az/en_US/news/730/100/SOFAZ-2012-budget-approved.asp
47
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
will consists 11.350mln AZN.132 Since the launch of the SOFAZ, its
expenditures amounted to 38.789bln AZN ($49,730bln). Transfers
to the budget reached to 35.085bln AZN ($44,980bln).133
It is worth noting that the Oil Fund has been actively involved
in the implementation of the Azerbaijan “Transparency Initiative in
Extractive Industries”. Azerbaijan was one of the first of the countries
to join the program in 2003. At that time, the initiative got 10 other
states members. This is a mechanism by which the Azerbaijani
government regularly reports on transparency. Azerbaijan is the
country that published the first-ever report on this initiative. Country
reports are posted on the official website of the organization ,where
anyone can easily get access to that information.134 On October
14-16, 2006, Norway conducted an International Conference on
this initiative in Oslo. The aim of the conference was to ensure
international support for transparency and coordination of the
initiative. At this conference, Azerbaijan was elected a member of
its international board.135
Dependence on oil
Azerbaijan’s economy has become increasingly dependent on
oil with the growth of revenues from the implementation of energy
projects. For instance, the share of oil revenues in the state budget
amounted to more than 60% in 2008, the figure was increased to 65%
in 2009.136 Simultaneously, the dependence of export of Azerbaijan
on the oil sector makes up 90%. The share of only crude oil in total
132 Azerbaijani oil fund budget approved for 2013, ibid.
133 Azerbaijan state budget’s SOFAZ dependency $ 45 billion oil money spent through state budget channels last
couple years, 28.01.2013, http://cesd.az/new/2013/01/azerbaijan-state-budget%E2%80%99s-sofaz-dependency/
134 Extractive Industries Transparency Initiative: Azerbaijan, http://eiti.org/Azerbaijan.
��
Государственный Нефтяной Фонд, ��
ibid�.
��
А. Азиз, В 2009 году зависимость бюджета от экспорта нефти усилится,
Газета Эхо, No 219, 27.11.2008.
48
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
exports of Azerbaijan in 2010 amounted to 86.53% against 81.57%
in 2009. In 2012, crude oil made 86.29 % of Azerbaijan’s export and
oil products made 5.0%.137
Growth in revenues made from energy exports could lead to
the “Dutch disease”. This effect was named after the Netherlands
entered the North Sea’s largest natural gas fields in1959. In the 70’s,
appreciation of the currency took place as a result of the booming the
energy sector of the economy of the Netherlands. The strengthening
of its real exchange rate against foreign currencies reduced the
competitiveness of other sectors of the economy. Unemployment
went up as a result of a reduction in production and export processing
industries, which also expressed its affect in increased imports,
decreased exports and gross domestic product.138
As can be seen from the above, a number of signs of Dutch
disease can be observed in the Azerbaijani economy. Azerbaijan’s
export of products of non-oil sector is less than 10%. Therefore,
the National Bank of Azerbaijan pursues a policy of supporting the
national currency of manat. Consequently, it is more expensive as it
is influenced by financial trends at the global level. The influence of
oil revenues on the economy was especially evident during the global
financial crisis which began in 2008. Because of this crisis, there was
a decline in the world economy, which led to a drop in oil prices to
$30.28 per barrel on December 23, 2008. Subsequently, Azerbaijan’s
state budget revenues totaled more than 10bln AZN in 2009, which
was only 84.4 % of the projected 12.18bln AZN amount.139
To prevent the Dutch disease and reduce the economy’s
dependence on the energy sector, Azerbaijan is taking a series of
137 Oil Keeps Dominant Position in Azeri Export as 92% of Total Export, 28.05.2012,
http://cesd.az/new/2012/05/oil-keeps-dominant-position-in-azeri-export-as-92-of-total-export-2/ 2003, p. 43.
138 Abraham S. Becker, Some Economic Dimensions of Security in Central Asia and South Caucasus,
Faultiness of Conflict in Central Asia and the South Caucasus: Implication for the U.S. Army, ed. Olga Oliker,
Thomas S. Szayna, Rand Arroyo Center, Arlington, 200343.
��
Зависимость Азербайджана от нефтяных доходов снизила уровень жизни населения, 20.08.2009,
http://novostink.ru/sng/11717-zavisimost-azerbajdzhana-ot-neftyanyx-doxodov.html.
49
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
measures for the development of other sectors of the economy such
as information technology, transport, agriculture and tourism.140One
of the alternative energy sectors considered is the development of
information technologies in Azerbaijan. In particular, it adopted
the state program of “Electronic Azerbaijan” for the advancement
of communication and information technologies in the years 20102012. An important point of this sphere is the intention of creating a
space program for Azerbaijan. Azerbaijan to launch its first national
satellite Azerspace in February, 2013. The approximate cost of
the project is $140-160mln. The project is financed entirely from
the budget of Azerbaijan. It is assumed that all costs will be paid
back within six or seven years after the in-orbit delivery. It is also
expected to create and develop the aerospace industry in Azerbaijan
by 2013. It is also planned to establish domestic production of
satellite components and training for the aerospace industry.141
The geopolitical position of Azerbaijan would allow the country
to become a transit corridor between Europe and Asia. Azerbaijan is
a member of several international transport programs such as the EU
funded TRACECA program, which includes an initiative to revive
the Great Silk Road, as well as a joint initiative with Russia and Iran,
a project of North-South. Azerbaijan has carried out construction
of the necessary infrastructure in order to turn the country into a
regional transport corridor. In particular, highway constructions
of the Silk Road to the border of Georgia, construction of a new
international trade sea port in Alat, thus increasing the volume of
transportation through the territory of Azerbaijan and Georgia.142
The Baku-Tbilisi-Kars railway is expected to transport more than
15mln t of cargo. The project that will link Baku to the Turkish city
��
Дж. Халилов, Уменьшить Зависимость Экономики от Нефти,
http://www.echo-az.com/index.php?aid=11222.
��
Шахин Аббасов, Азербайджан: Баку создает спутник в рамках развития национальной космической
программы, 26.11.2009, http://russian.eurasianet.org/node/30871.
��
Илаха Мамедли, Азербайджан на Пути Диверсификации,
http://btime.az/page.html?id_node=358&id_file=2284.
50
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of Kars, was designed to create a European rail route through the
South Caucasus and Central Asia which would connect with the
countries of the Far East.143It is worth noting that the railroad would
develop two-way freight. Azerbaijan also began construction of a
new international airport in Baku.
Agriculture is the main stay of the economy of Azerbaijan.
After the collapse of the Soviet Union, Azerbaijan reformed land
ownership. State and collective farms were eliminated and their
property was divided among the members of households. The Law
on Land Reform reflected the transfer of land to private ownership
which made Azerbaijan the first to do so among the countries of the
formers Soviet Union.144A state company, “Agroleasing”, involved
in the delivery, sale and lease of machinery, tools and assemblies for
various purposes, benefitted all branches of agriculture in October
2004. As a result of measures taken, the production of gross domestic
product in agriculture foe 2010 increased by 2,6 times, respectively,
in 2,3 times-in plant and in 3,1 times-in animal husbandry in
comparison to 2004.145
The country planned to increase the area of agricultural land per
capita of the country from three acres to 10 acres by 2025 in accordance
with long-term economic development strategy of Azerbaijan for the
years 2011-2025, prepared by the Ministry of Economic Development.
The projected increase is attributable in value to each hectare, with 0.6
thousand dollars in 2009 to 1,8 thousand dollars in 2025, an increase
in the share of organic agriculture in total crop area of 0.45 to a 10%
decline in the share of rural farm employment with 38,4% to 20%.146
143 Rovshan Ibrahimov, Baku-Tbilisi-Kars: Geopolitical Effect on the South Caucasian Region, 23.11.2007,
http://www.turkishweekly.net/columnist/2763/baku-tbilisi-kars-geopolitical-effect-on-the-south-caucasianregion.html.
��
Сельское хозяйство – один из не-нефтяных приоритетов экономического развития Азербайджана,
28.04.2011, http://www.1news.az/economy/20110428061049945.html
��
Исмет Аббасов: «В 2010 Году Производство Валового Продукта в Сельском Хозяйстве Возросло по
Сравнению с 2004 Годом в 2,6 Раза»,
08.05.2011,http://www.1news.az/economy/20110508012205324.html.
��
Ф.Камаллы, Как Обеспечить Продовольственную Безопасность, 07.05.2011, Как Обеспечить
51
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
In general we can say that the government’s action shave yielded
positive results. There is an increase in non-oil sector. For instance, for the
first time since August 2009 the growth of non-oil sector of Azerbaijan
was higher than the percentage growth in the oil sector in May 2010;
the non-oil GDP grew by 10.7% against the growth of total GDP by 2,7
% in September 2010. According to statistics of October 1, 2010, the
volume of non-oil GDP in Azerbaijan amounted to 12,394.8mln AZN,
which is 5.2% more than in January-September 2009 and non-oil GDP
was equal to 42.29%.147 In 2011, non-oil GDP grow first time exceed
oil GDP. GDP growth was 0.1% and was fully provided due to nonoil sector. While oil GDP decreased, the non-oil sector grew by 9.4%,
including agriculture by 5.8%, volume of services in communications
and information by 11.8 %, transportation by 3.6%.148 This trend
continued in 2012 and the growth of non-oil sector was 9.7%, its share
in GDP rose up to 52.7%. The volume services of communication and
information grew by 15.9%, transportation - by 3.5%.149This will let
to decrease the dependence of the Azerbaijani economy on oil. It’s
expected that in 2015, the oil sector share will make up only 29.3% of
overall GDP, while the share of non-oil sector - 61.3%.150
Conclusion
For last two hundred years, oil plays an important role in the
political, economic and social life of Azerbaijan. After the beginning
of industrial production of oil in Baku it began to create new social
relationships which influenced the statehood structure of Azerbaijan
Продовольственную Безопасность, http://www.zerkalo.az/2011-05-07/economics/19273-fao.
��
Илаха Мамедли, Азербайджан на Пути Диверсификации, ibid�
��.
148 GDP growth in Azerbaijan achieved due to non-oil sector in 2011, 17.01.2012,
http://pda.trend.az/en/1980826.html
149 Minister: Azerbaijan’s GDP grew by 2.2% in 2012, 15.01.2013,
http://en.trend.az/capital/business/2108430.html,.
150 This year Azerbaijan’s non-oil GDP to exceed its oil GDP first time in modern history, 11.10.2011,
http://abc.az/eng/news/58495.html
52
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
in the 20th century. It should be noted that only after gaining
independence, Azerbaijan was able to use their natural wealth in
own political and economic interests. After signing the Deal of the
Century and attracting foreign companies, it became possible to
produce oil at the Azeri-Chirag-Guneshli field. This event helped to
strengthen the state stability and economic condition in Azerbaijan.
With the development of transport corridors Azerbaijan also was
able to carry out a more independent foreign policy, built on national
interests. Azerbaijan managed to diversify its export transport routes
to the world markets. This fact has also become important for
European countries for providing the ability to import energy from
alternative sources. Thereby Azerbaijan became an active participant
in ensuring European energy security. With the development of gas
fields this role of Azerbaijan will be increasingly growing.
At the same time, Azerbaijan is developing its economic relations
with the countries of the Black Sea region, especially in the energy
sector. These relationships are not limited to oil and gas supplies,
but also a creation of the petrochemical infrastructure. This will
allow Azerbaijan to diversify its economy and increase its revenues.
This is a part of a strategy to diversify the economy of Azerbaijan.
Revenues from the energy sector also encourage the development
of other economic sectors, such as information and communication
technologies, transportation and agriculture.
The energy sector continues to play an important role in the
development of Azerbaijan. For a long time it was the key sector to the
country’s economy and now promotes development in other activity
areas. As can be seen, energy sector still play an important role in
providing political and economic stability and thus Azerbaijan will
continue to play an important role as an energetic actor in Eurasia.
53
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
54
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Gulmira Rzayeva
Leading Research Fellow
Economic Analysis and Global Affairs Department
Center for Strategic Studies of Azerbaijan
AZERBAIJAN AND ENERGY SECURITY OF EUROPE:_
BALANCING NATIONAL PRIORITIES AND
INTERNATIONAL COMMITMENTS
Introduction
The EU’s Southern Gas Corridor aimed to bring gas from
alternative sources and via alternative routes primarily from the
Caspian Region to the European markets, the biggest in the world.
The Eastern and Southeastern Europe is heavily reliant on Russian
gas deliveries. Thus, it detriment to sovereign and independent
policymaking of those states. The meaning of the secure energy
deliveries for those countries is economic lifeblood and the
reliance is fraught with putting at risk their national security and
economic development. The EU supported Southern Corridor, most
importantly, is directed to curtail Russian energy leverage over those
countries and open up the direct access for the landlocked Caspian
states, primarily Kazakhstan and Turkmenistan, to the European gas
markets.
After the signing of the Declaration on the Southern Gas Corridor
between EU and Azerbaijan in 2011, the role of the latter became
pivotal as it is the only gas supplier and anchor to open the Southern
Corridor at this stage. Also, the country is being considered as the
initiator of the transportation infrastructures along the gas value
55
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
chain. After the planned expansion, the South Caucasus Pipeline
(SCP) will be able to transport both Shah Deniz Phase I and II (SDI
and SDII) gas as well as gas volumes from so-called next generation
gas fields offshore Azerbaijan (additional up to 35bcm to be available
for export by 2025), but also those from Turkmenistan and possibly
Kazakhstan in long run.
Additionally, Azerbaijan initiated the Trans-Anatolian Natural
Gas Pipeline (TANAP), the strategically important dedicated
pipeline. This pipeline assigned to transport Azerbaijani origin gas
(also Turkmen and Iraqi on later stages once politically available)
throughout the Turkish territory to the EU’s borders. Azerbaijan will
be represented in the project via the State Oil Company (SOCAR)
that will be holding the majority stake of 51% (this stake to be
funded by the State Oil Fund of Azerbaijan (SOFAZ). Consequently,
Azerbaijan will invest the majority of the capital required, take
significant part of commercial and technical risks and keep the ability
to steer the pipeline’s timely development and implementation.
Further down to the European market there are two competing
pipelines leading to different destinations along the value chain:
Nabucco West (NW) and Trans-Adriatic Pipeline (TAP). The Shah
Deniz Consortium (SD) is expected to make a final decision on the
preferred route not before the end of Q2/2013. Prior to the final
selection the SDII consortium will finalize the ongoing Gas Sale and
Purchase Agreement (GSPA) with the potential buyers gas transit
agreements (GTA). Once the final selection made, SD consortium
is expecting that the final investment decision (FID) of one of the
above mentioned pipelines (in case of the positive selection) to
transport SDII gas to follow shortly thereafter (perhaps with certain
condition precedents), but before the SDII to be sanctioned by the
end of October 2013.
Two agreements were signed between SD partners and Nabucco
56
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
on 18 January, 2013: on the equity funding and on cooperation.
These agreements will enable to co-finance and co-manage the work
of NIC before the final decision made. The Nabucco International
Company (NIC) reports that the signed agreements relate to: close
cooperation in adjustment of schedule and works on projects
Nabucco West and SDII and co-funding of costs associated with the
further development of the Nabucco West; provision of totally 50%
equity stake for SOCAR, BP (BP to acquire 12%), Statoil and Total
in the new structure of NIC shareholders after positive selection. For
the SD partners this is the second such package of agreements, as
last summer the similar package has been signed with TAP already.
Nabucco West vs. TAP
The overall strategic value of the Southern Gas Corridor will be
determined once the SD consortium decides the ultimate destination
of the SD gas. The market destination and the timing is crucial.
According to SOCAR, when Azerbaijani gas deliveries to Turkey to
start by mid of June 2018 and following to the European Union (EU)
in the beginning of January 2019.
Also, given the fact of emerging of new gas sources including
unconventional gas, e.g. shale gas in USA and shipping those
liquefied volumes to Europe will lead to further tightening of gas
price competition.
By the geographic virtue, the companies of the countries like
Spain, Britain and France have already signed a sale-purchase
agreement with the USA to import LNG as much as 6bcm/a from
2016 onward. Italy has been developing the LNG infrastructures
with the additional capacity of 85bcm of gas in Trieste, Molcanfone,
Livorno, and Rosignano in the north of Italy and the LNG projects
with additional import capacity of 30bcm/a in Brindisi, Rovigo etc.
57
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
All those projects and infrastructure will increase potential import
capacity of Italy up to 200bcm/a once realized, whereas the country’s
current gas demand is about 85bcm/a.
Despite the fact that the Italian market can be oversupplied in
midterm perspective, no doubt TAP has advantages and strengths. With
initial capacity of 10bcm/a and 42” diameter pipeline will be less costly
than Nabucco West. Also, in compare to NW, TAP has less complex and
cumbersome management structure. However, the most importantly is
the size: volume and diameter (48” or 56”); as the only size is the matter,
positively influencing the economics of NW.
Difference in diameter of both projects cause to additional 500
million dollar investment in the NW project. The position of BP, the
operator of the SDII project is that why the SD consortium should
pay additional $500mln if the 42” diameter is more than enough to
transport the SD gas to the market. It is in the EU’s interest to build
a scalable pipeline to deliver gas from other alternative sources such
as Iraq, Turkmenistan (might be Kazakhstan), Cyprus and Israel. But
the question is why the SD consortium should take all the risks in
case if the gas from those sources will not be available.
The another question raising is that if SD partners will be ready
to depend on merely a few country markets namely Italy, Greece
and Albania if they have an option to market their gas in multiple
country markets with further potential to cover Balkan countries that
are heavily in need of diversification that NW suggests? Technically
TAP is capable to offer an opportunity to access the Balkans with
the Ionian Adriatic Pipeline and Greece-Bulgaria interconnector and
even to the countries bordering with Italy to the North. However
these additional regional connections are not part of TAP’s current
proposal and have no ready sources of financing. Balkan market is of
strategic interest to Azerbaijan given the higher gas price and great
diversification potential of the market.
58
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The pipeline itself can be financially attractive to SD partners,
however the market that it is targeting is risky and has no strategic value
in compare to NW that offer more value in terms of diversification
of the market that almost completely reliant on one supplier. For this
reason alone, NW benefits from accumulation political support from
Brussels and Washington. For latter, most critically, diversifying
the Central European market with the help of already existing and
planned interconnectors linking the countries along the NW route
will give those states an ability to strengthen negotiation position
with Russia as a result of introducing international competition in
the region, “reduce supply disruption threats, and bolster internal
stability of NATO allies1”.
Last December, US congress even went further in its support for
NW publishing its report “Energy and Security from the Caspian to
Europe”, prepared for the use of the Committee on Foreign Relations
of the U.S. Senate, which is warning SD partners and recommends
to the State Department that if the project of the U.S. preference that
“must substantially contribute to the Europe’s energy security” is
not selected by the SD consortium, SDII might not enjoy the same
sanction exception that SDI does. This is due to 10% stake of Iranian
NIOC at the project. SDII and ancillary projects sanctions exception
“will be based on compelling benefits for U.S. national security
interests2”.
According to the paper “Nabucco West offers the most meaningful
advance in two key objectives: prompt delivery of gas to multiple allies
in desperate need of diversification and scalability to accommodate
larger gas supplies to the region in the future”. Putting to an end the
“coercive pressure brought by Russia against its allies in Central and
South Eastern Europe are of an order of magnitude greater”.
1
“Energy and Security from the Caspian to Europe”, http://www.foreign.senate.gov/publications/download/energy-and-security-from-the-caspian-to-europe
2
“Energy and Security from the Caspian to Europe”, http://www.foreign.senate.gov/publications/download/energy-and-security-from-the-caspian-to-europe
59
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The rivalry between U.S. and Russia dividing and controlling
the energy rich countries, transportation routes and lucrative energy
markets as during the Cold War is still continuing in the 21st century
but in another shape as per “Great Game” theory. For Russia,
as energy producing country is extremely important to sell its
hydrocarbon resources to the countries it has an ability to influence
upon. With making those countries’ energy security almost entirely
reliant on Russia, it gives Moscow a leverage to make them fall into
the sphere of its influence by strengthening its negotiation position
with the help of bargaining chip. This is perceived by the U.S. as a
threat to its national interests in the region.
Picture 1. Caspian Poker (source: “Welt” Journal)
The U.S. as hydrocarbon producer and consumer state, is mainly
interested that those energy dependent allies to import hydrocarbons
from the U.S. controlled sources, such as MENA, the Caspian,
Europe, trying to leave no chance for Iran (under sanctions) and
Russia (with alternative supply routes) to be able to make those
importer countries vulnerable.
60
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Azerbaijan is the best positioned to ensure energy security of the
U.S. allies such as Turkey and nations in eastern and Southeastern
Europe and Balkans, all are either U.S./NATO allies or enter into the
spectrum of U.S. sphere of influence, and to be a part of a broader
Euro-Atlantic Energy Security concept. It have been playing a
crucial role in implementing U.S.-EU energy strategy by realizing
BTC oil project and is continuing of doing so with the Southern Gas
Corridor project.
However, it is quite logic to assume that Baku would expect
more political support from U.S./EU to solve its number one foreign
policy priority issue of Nagorno-Karabakh in return to restore its
territorial integrity from the occupation.
Nabucco West and its shareholders
In December last year German RWE – one of the main driver of
the Nabucco (West) project withdrew from the project. This fact once
more demonstrated that the management structure of the consortium
is extremely unwieldy and the partners, specifically initiator of
the project, Austrian OMV, must realize that such cumbersome
management is putting the realization of the project at a big risk. As
it has not been possible to sign the Cooperation Agreement (CoA)
and Equity funding Agreement (EFA) between NW and SD members
since June last year till 18 January, the date when the Agreements
was signed, one can conclude that there were also significant issues
and split of the opinion on share allocation between NW and SD
consortium among Nabucco shareholders.
According to publicly available information, SD was demanding
51% stake at the NW consortium to be able to make and conclude
corresponding decisions in case NW consortium fails to deliver
necessary progress in timely fashion. The reason that SD wanted
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
to get majority of share might be that it was not confident whether
NW shareholders will be capable to make the project happen, to
invest the capital required and to make the necessary commercial
and strategic decisions.
Although almost all NW consortium partners were agreeing for
such a share allocation, OMV was reluctant to loose an opportunity to
control and make decisions. The position of OMV is understandable,
since once the CoA and EFA would enter into the force under 51%
- 49% proportion, the views of current NW shareholders could be
overvoted. However, the lack of the NW project progress resulted
in share dilution by Hungarian partner FGSZ starting last summer.
Also, some other NW partners would be happy to sale certain portion
of their shares either to SD members or a third party.
According to publicly available reason of why RWE decided to
withdraw is that it was not possible for the company to meet its
commercial objectives3. However, apparently there are also other
reasons such as different views and long lasting dispute with OMV
over a number of issues of how to progress the project, but also
the link from Baumgartner to Landzhot to connect Baumgarten
with RWE owned transport system Net4Gas. Further reasons are
indeed might be of financial nature forced by the nuclear phase-out
in Germany.
Moreover, because of the above mentioned financial difficulties
RWE is now selling its asset for the amount of €7bln and doing
headcount reduction.
This is another reason why the Net4Gas, RWE’s wholly owned
gas transport system in Czech Republic is scheduled to be sold in
2013. Earlier, RWE was aiming via Baumgarten-Landzhot link to
connect its Net4Gas system to bring the Caspian, e.g. Azerbaijani
3
“Nabucco says Check-Austrian Transit Survey Completed”, Bloomberg, http://www.bloomberg.com/
apps/news?pid=newsarchive&sid=aZSykMGpEc80
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
gas to Germany, which is in line with German government strategy
to diversify the source of gas4.
South Stream vs. NW: Market share or volume substitution?
Despite the fact that Gazprom’s export to Europe was significantly
increased in 2011 after the falls during the financial downturn the
company could not repeat this success in 2012. According to the
Energy Ministry of Russia, gas export to Europe decreased by 8.7%
in 2012 to 186bcm5. Earlier, Gazprom reported that in first half of
2012, the gas sales to Europe dropped by 10% and to CIS countries
by 29%6. This followed by decline in production in 2012 to 655bcm
(662bcm in 2011), whereas Gazprom’s own production dropped by
5.1% to 483bcm.
The export and production forecast for current 2013 year are
not much optimistic and so sounds Mr. Miller, expressing just his
hope that the company will be able to keep the level of 500bcm
of gas production in 2013 and for that will refrain from increase
of investment programs for the current year7. Earlier, Russia’s top
gas producer Gazprom has cut gas production targets for 2013 and
2014 due to dwindling demand. According to the head of Gazprom’s
production department, the company was about to produce 541bcm
in 2013, rising to 548bcm in 20148. This is down from previous
forecasts of 549bcm for 2013 and 570bcm in 2014.
According to Business Monitor International’s latest projections
4
“Nabucco says Check-Austrian Transit Survey Completed”, Bloomberg, http://www.bloomberg.com/
apps/news?pid=newsarchive&sid=aZSykMGpEc80
5
“Gazprom reports weakening European gas sales amid economic slowdown”, http://www.mrcplast.com/
news-news_open-229012.html
6
“Gazprom reports weakening European gas sales amid economic slowdown”, http://www.mrcplast.com/
news-news_open-229012.html
7
“Russia’s Gazprom sees 2013 gas output at 500 Bcm, roughly flat on year”: report, Platts, http://www.
platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/8997445
8
“Ukrainian equipment producer dashes Gazprom production plans last winter”, Kyiv Post, http://www.
kyivpost.com/content/business/ukrainian-equipment-producer-dashes-gazprom-produc-1-128108.html
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
show that overall gas output rising to 724bcm by 2016 - dependent
on growth in European demand and opportunities arising in Asian
markets.9 The EU gets 25% of its gas from Russia. Management of
the Russian monopolist is confessing that the reason of decrease in
choosing Russian gas by the European gas consumer companies and
in export capacity to the European market is competition. During last
few years the number of the companies that are ready to transport
gas based on the price fixed to gas indexation and spot market price
is increasing.
The decline caused by not only financial crises in Europe and
the Euro zone, but also as Europeans used cheaper alternatives such
as liquefied natural gas (LNG) and spot market supplies. For the
years of 2009-2011 the number of re-gasification plants as well as
liquefaction plants in Europe had been rapidly increasing and it is
expected that by 2014 majority of the coastal states across Europe
will be covered by a few LNG infrastructure. Currently some
are under implementation, others are planned: The EU’s current
regasification capacity of 150bcm looks set to double by 2020.
This is one of the most important goals for the EU to develop
LNG infrastructure and build the terminal in each costal state (Italy,
Netherlands, France, Ireland, Germany, Poland, Spain, Croatia,
Cyprus, Turkey, and Lithuania)10. This has been also included into the
Trans European Energy Network Policy (TEN-E) to cover Europe’s
increasing demand for natural gas. In a fact, some of those terminals
are being built to ensure energy security of Central Europe and lessen
the vulnerability and reduce dependence on Gazprom by transporting
already re-gasified gas from coastal to the land locked states. For that,
an ambitious TEN-E policy of the EU to connect all the European
states with gas pipeline interconnectors by 2014 is being implemented.
9
Russia Oil & Gas Report, Business Monitor, http://store.businessmonitor.com/em/oilgas/russia.html
10 T E N - ENERGY Priority Corridors for Energy Transmission, Prepared for the European Commission,
http://ec.europa.eu/energy/infrastructure/studies/doc/2008_priority_corridors_for_energy_transmission-natural_gas.pdf
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Poland, which is also exploring for shale gas hopes to open a
5bcm/a LNG import terminal mid-2014. The LNG terminal at
Świnoujście, near the German border in the northwest, should
improve diversity of supply and reduce dependence on Russian
imports.
Needless to say that increasing
LNG capacity in receiving terminals
across Europe offers a number of
security-of-supply benefits for the
Union, notably lower natural gas
prices, more readily available gas
on the European gas markets, and
adding diversity of the source to the
EU’s gas supplies.
During a period of 2009-2010
with increasing LNG capacity in
receiving terminals in North-West
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Europe and straitening the link between US and EU gas hub prices
giving European consumers a chance to benefit from the cheap-spot
traded gas. In the same years sharp fall in spot prices occur and
spot gas prices were some 25% lower than oil-indexed gas during
this period. Although this trend and correlation between EU and
US gas price was terminated in April 2010 because of unforeseen
high-demand. However, beginning from 2011 the price difference
became major trigger for price revisions throughout the Europe, the
core market for Russian gas exports.
Many European gas consumers have been already urged to move
away from 100% of oil indexations price, i.e. certain gas-indexed
component in long term contracts, including at least 10-20% of spot
prices to the contracts with Gazprom. The spot prices in overall
European market are increasing very fast – 30-40% per annum.
As this was unacceptable for Gazprom, the cases were taken to
the arbitration by the European gas buyer companies with positive
outcomes for those companies in most of the cases. That resulted that
some companies were granted discounts for gas price. According to
MorganStanley Press Italian Eni and Edison, German E.ON (RWE
is still in Arbitration process with Gazprom), French GdF Suez,
Austrian Ecogas and a number of others were granted between 10%
and 20% spot market price included to the contract in 201111.
However, in his latest discussion paper entitled “Pricing the
“Invisible” Commodity” Sergey Komlev, Contract Structuring and
Pricing Director of Gazprom Export, arguing that the modified model
of price, which envisions long term contracts linked to gas indexes
and hub pricing is not reliable for buyers and workable for suppliers if
they must maintain flexibility in uninterruptible contract. This means
that traders of spot gas, mainly LNG, at hubs have certain volume of
gas on certain price trading based on short term contracts signed for
11 “Pricing the “Invisible” Commodity” Sergey Komlev, Gazprom Export, http://www.gazpromexport.ru/
files/Gas_Pricing_Discussion_Paper_Komlev_GPE_Jan_11_2013_FINAL127.pdf
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
the period of no more than 1-3 months ahead and cannot guarantee
additional volume of gas for mid-term if needed. This makes buyers
uncertain and vulnerable for future suppliers. For example, Qatar
that has been exporting to the European market 17.4 % (37bcm) of
LNG per annum, recently announced that it will decrease the export
volume of LNG to the European direction for 40% and re-direct
those volumes to the Japanese market due to lucrative price for LNG
in Asia12.
The growth dynamics of LNG supplies offers new opportunities,
such as access to the global market. The advantage of exporting gas
as LNG is receiving access to the world market.
According to BP, LNG trade will gain a larger role in the longterm perspective. LNG production will grow by 4.3% per annum,
accounting for 15.5% of global gas consumption by 2030,” BP
Energy Outlook 2030 says13. Also, the U.S. bank JP Morgan analysts,
global LNG growth averaged approximately 15 percent in 2011.
According to some analysts, bull case scenario, LNG demand in
Europe will grow from 68mln tons per annum in 2013 to 72mln tons
in 2014, 78mln tons in 2015, 86mln tons in 2016, 94mln tons in
2017 and 99mln tons per annum in 201814.
The strong pressure from the customer side will be continuing
further enabling disappearing gas glut on the European gas market
in the medium term and narrowing gap between oil-indexed
and spot prices. This will make a position of Gazprom quite dire
from commercial view point, lowering net back margin for the
gas. This would be even more painful for Gazprom from now
on as the production from the newly developed fields such as
12 LNG export Destinations are being diversified, Arab News, http://www.arabnews.com/lng-export-destinations-are-being-diversified-says-qnb
13 BP Energy Outlook 2030, January 2013, International Energy Agency, http://www.bp.com/liveassets/
bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2011/STAGING/local_assets/pdf/BP_World_Energy_Outlook_booklet_2013.pdf
14 OilCapital analytical daily news portal
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Bovanenkovskoye, Far East F.D., Urals F.D, Siberian F.D etc. is
forecasted to be growing in long term perspective and this gas will
not be cheap.
For example, according to the Gazprom Export report for 2012,
gas production from Bovanenkovskoye field that will be transported
to the European markets via the South Stream pipeline will cost
Gazprom $150/1000cm15. Add to this the transportation cost of the
gas from Far East to the Black Sea coast with the distance of more
than 3000km, the construction of and transportation it via South
Stream further to European inland, taxes etc. The most expensive
gas for Gazprom will be re-export of Central Asian gas that Gazprom
buys for the price of $260/1000cm16.
According to the Russian Central Dispatching Department of
Fuel Energy Complex (CDU TEK) starting from 2009, Russia
has been producing less gas than U.S. for 3 years in row. This is
mainly because U.S. has been increasing its shale gas production
from year to year starting from 2000. One of the main options of
diversification of supply sources of the European Union apart from
the Southern Corridor is imports of relatively cheaper LNG from
U.S. Those countries that by geographic virtue have opportunity to
import bigger volume of LNG will be better off in terms of assuring
their supply and overall energy security and less vulnerable in
terms of national security than those of land-locked. However here
will work more the rules of commerciality and economics rather
than politics.
On the other hand, the “war between Asia and Europe for LNG”
which started in 2011 is continuing and results are not the best for
Europe, as the most volume of LNG is actively flowing toward
Asian markets. Just to compare: Japan – the biggest LNG importer
in the world, has signed a LNG import contract for the volume of
15
16
Gazprom Annual report 2011, http://www.gazprom.com/f/posts/55/477129/annual-report-2011-eng.pdf
Skolkovo Moscow School of Management
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
11.5mln ton/a, other Asia-Pacific states for contracted 20mln ton,
whereas the EU - for just 3.1mln ton. The Asian energy market is
the most lucrative LNG market in the world as it guarantees high
netback margin to the suppliers. The average price for LNG at the
European trading hubs is $310-350/1000cm, whereas in Japan,
Korea and China the price is $500/1000cm17. The rapidly growing
economies of the Asian countries and the nuclear disaster in Japan
opened a new niche for the LNG imports. The more Europe is trying
to decrease the price for energy in the internal market, the more the
market becoming less attractive to the LNG suppliers.
The situation with the US LNG to Europe is no more consolatory.
It is expected that the export of the US LNG to Europe and elsewhere
will start in 2016. Spanish NGFenosa and Total has already signed
sale and purchase agreement with the US company ChaniereEnergy
and will import 5bcm/a starting from 2016.18 However, so far, among
nearly 20 submitted proposals on the LNG terminal construction to
the FERC regulator of the Energy Department, only the project of
Sabine Pass of the Chaniere Energy has received the approval. And
all its future capacity has been already contracted. The buyers are
Korean Kogas, Indian Gail, Spanish NGFenosa, French Total and
British BG Group. Given the price difference of LNG in the Asian
and European market, US profit for export of LNG to Asia will be
$200, whereas to Europe – $150. Furthermore, the most profitable
export market for US would be Latin America where net back margin
for LNG would be $280 because of the short distance and high price
for gas.
As such, given the price differences in the different regional market
one can conclude that if even the Energy Department will approve
other proposals for LNG export facility construction with the total
17 Platts LNG Daily Publication. Available on subscription
18 “Cheniere and Total Sign 20-Year LNG Sale and Purchase Agreement for LNG Exports from Sabine
Pass”, Press Release: Cheniere Energy Partners, http://finance.yahoo.com/news/cheniere-total-sign-20lng-133000762.html
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
capacity of 110mln ton per annum, this gas will flow to the Asian
or neighboring South American direction rather than European (with
small amount shipped to Europe). The rationale here is rules of
economics would be prevailing rather than anything else.
Just to strengthen the argument above: According to the estimates
of WoodMckenzie published in May 2012, the rapidly growing
Asian LNG market is able to import not only all the non-contracted
gas volumes but also can import all the US LNG export potential19.
The European gas demand will not grow as rapidly as the Asian.
According to the World Energy Outlook 2012 of IEA, compound
average annual growth rate of the EU gas demand from 2010 to 2035
will be 0.7% from 569 to 669 bcm respectively. Moreover, average
annual natural gas demand growth rate in Europe has been declining
for the period of 2010-2015 for 19 bcm, from 569 bcm to 550 bcm
respectively.
19
Platts LNG Daily and Monthly Publication. Available on subscription.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Source: CERA (Chart: The demand outlook has been reduced
because of the weak economy, the European Union’s 2020 targets,
and low coal prices)
The South East European gas markets and the Balkans that both
Nabucco West and South Stream are targeting are not big enough
and it is expected that the average annual gas demand growth rate
will be very slow for the period of 2018-2035.
It is widely believed among experts that the South Stream will
not increase the Russian gas import volume to the region but reroute the same volume of gas flowing currently through Ukraine and
partly Belorussia. At the summit in Brussels in December, Moscow
asked that Brussels grant the South Stream the “Trans-European
Network” status and declaring it as the “Project of Common Interest
(PCI)”, which would exempt it from key limitations imposed by the
European Union’s Third Energy Package, which will take effect in
March 201320. The EU legislative framework could require Russia
20 “EU readies ‘pragmatic’ answer to Putin’s energy agenda”, Euractiv, http://www.euractiv.com/energy/eureadies-pragmatic-answer-puti-news-516727
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
to allow other producing nations, such as Azerbaijan, access to its
pipeline network to export natural gas to European customers. It
could also legally require Gazprom to divest itself of the majority
share of the pipelines. The European Union refused from altering the
legal status of the South Stream pipeline, instead trying to spur the
development of alternative pipeline infrastructure namely Nabucco
that would allow the continent to diversify away from Russian
natural gas.
However, both Nord Stream and South Stream will increase
Russian export capacity to Europe from approximately 140bcm/a to
more than 300bcm/a, making Russia to fill the capacity as operating
the half empty pipelines is not commercially viable. The market will
not be able to absorb 40-60bcm/a.
Consequently, in order to keep the market and to safe existing gas
sales and purchase contracts with potential transit countries in the
Balkans, Russia offered gas price discounts and development aid in
its effort to edge out the Nabucco West project. Bulgaria got 11.1%
discount for gas from Gazprom from April till December 2012 and
22% for the year if 2013. It is obvious that in return Russia will get
go-ahead with Front End Engineering Design (FEED) in Bulgaria.
Turkey first refused to sign an agreement to permit South Stream to
pass its territorial waters, however after Russia made a 15% discount
($400/1000cm)21 for the gas for Turkey, the permission was given
next day. Serbia signed a new sale and purchase agreement for 5bcm
with Gazprom for the period of 10 years (Gazprom delivered to
Serbia 1.4bcm in 2011). However, according to the Serbian Energy
Minister, the price is high and requested that the price of the Russian
gas to be reduced from the current $470/1000cm to $420/1000cm in
201322. In 2013 Serbia got 12% discount from Gazprom.
21 “UPDATE 2-Turkey, Russia reach South Stream gas deal”, Reuters, http://www.reuters.com/article/2011/12/28/turkey-russia-southstream-idAFL6E7NS0LU20111228
22 “Srbijagas agrees 10-yr gas import deal with Gazprom”Reuters, http://www.reuters.com/article/2011/12/21/serbia-gazprom-gas-idUSL6E7NL4H320111221
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Bulgaria, the prospective South Stream transit country that
received the most significant incentives from Russia, is still one of
the shareholders of the competing pipeline. However, during the
Nabucco Political Committee meeting in Bulgaria’s capital Sofia,
executive director of Bulgarian Energy Holding stated that Bulgaria
will set up a project company to build the first section of the Nabucco
gas pipeline, consisting of a pipeline that will connect Turkey’s
national gas grid with Bulgaria’s. According to that it is planned
to build 225km pipeline section to link Marmara in Turkey with
Lozenets in Bulgaria23. The estimated cost of this pipeline section to
be €300mln of which the EU pledged to pay €200mln.
Russia has reacted to concerns that it was using its natural gas
leverage over Europe to further its political ambitions in the region
- especially in Central Europe. Gazprom knew that diversification
efforts in its main consumer markets could damage it, so it offered
discounts and further cooperation throughout the gas value chain
to consumer countries. Gazprom management and Moscow
perfectly understand the recent developments at the market and
have to adjust their energy strategy towards the European Union
accordingly. Otherwise the monopolist’s outdated energy policy
towards the market can be fraught with the threat of loosing market
share gradually to new suppliers. As a part of such a timely strategy
Gazprom has made a significant discount for almost all its customers
in Europe from 5% (to Romania) to 27% (to Poland) for the year
of 2013. This will cause a significant drop of price for long term
contracted gas with oil indexation in Europe that paradoxically can
lead to the raise of spot hub price of LNG. In its effort to retain
market share in Europe, Gazprom also began to move away from its
practice of indexing natural gas prices to the price of oil.
Gazprom understands that the South Stream project has
23 Nabucco Says Has ‘A Lot to Negotiate’ Over Shah Deniz Accord, Bloomberg, http://www.bloomberg.
com/news/2013-01-10/nabucco-shah-deniz-have-a-lot-to-negotiate-dolezal-says-1-.html
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
weaknesses such as lack of political support of the EU that repeatedly
saying that the project is not a “strategic priority” of the block and
faces a pressure European anti-monopoly policy of the third energy
package. Furthermore, Gasport’s gas price in almost all its markets
is the highest those countries pay for gas as a result of long term
contracts fixed to oil indexation. It is becoming unacceptable for
them, especially now when the financial crisis affected almost all the
European economies.
On the other hand, Gazprom absolutely understands that if
it continues to sell the gas based on the oil indexation long-term
contracts it would mean losing its dominant positions in the South
East and Central European markets in the competition with the gas
coming from alternative sources, in this case the Caspian, i.e. SD
gas. The net cost of the SDII gas production and transportation is
much lower than those of South Stream gas due to the location of the
field and transportation (depending on the pipe diameter and volume
the transportation costs vary) distance.
The strength of Gazprom is that unlike the SD consortium
it already present on the market and has gas sale and purchase
agreements in place with respective national majors on hand. Some
of them have already agreed to prolong the expiring(ed) contracts. If
some European countries are reluctant to sign a supply contract with
South Stream consortium or have an agreement but delay the goahead with feasibility studies and FEED of South Stream, they are
getting good incentive from Russia to give the green light. Russia
uses its traditional style of solving the issue, using gas price leverage.
Consequently, strength of Azerbaijan and SD consortium is the
political support of the EU which considers the Southern Corridor
as its “strategic priority” and Nabucco West “the project of common
interest” doing its utmost best to implement that Corridor and
it is the real contributor to the diversification of the gas source
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
providing the energy security of Europe. Additionally, the country
is bearing in wider understanding the bill at amount of $40-45bln
(up to $30bln the upstream CAPEX and by further $10-15bln for
transport infrastructure) to implement the whole value chain from
the wellhead up to the consumer.
However, SD consortium lacks signed gas sales and purchase
agreements with potential buyers and it has not yet secured the
markets for its gas. Furthermore, the gas volume that SD consortium
is going to penetrate the market is just symbolic (10 bcm/a for
Europe and another 6bcm/a committed for Turkish market) in
compare with Gazprom gas (130bcm/a). Even by adding volumes of
next generation gas fields in Azerbaijan, SOCAR understands that it
would be extremely difficult to penetrate the Eastern and Southeast
European market due to Gazprom’s strong presence there.
So, is it market sharing or volume substitution?, without being
an expert in philosophy, it will be possible to answer the question
soon once gas sales and purchase contracts within SD II project to
be signed.
Conclusion
Each of stakeholders in the Southern Corridor is acting according
to its strategic interest in the project and how it can be benefited.
For Brussels and Washington “to focus the Alliance to address
energy security, that is most likely to spur conflict and threaten the
well-being of alliance members” is the priority issue in the project.
This mega and multi-billion project gives both of them the historic
opportunity to change the geopolitical map.
The position of the stakeholders on two major market destinations
and the midstream projects that will transport the gas to the market is
split and commercial attractiveness and strategic value of the market
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
is set to be the main criteria. Both projects must be commercially
attractive to SD consortium to gain financing and both projects can
certainly meet this requirement.
Some SD partners are more favoring TAP mainly referring to the
commerciality of the project. Other SD partners are favoring NW
referring to the strategic value of the market.
The gas demand expected to recover beyond Baumgarten (e.g.
Germany and France; also there are swap options for Benelux
countries and even to reach fully liberalized UK market), where new
gas could be absorbed. However, as RWE withdrew and Azerbaijan
missed the opportunity of physical delivery of its gas directly to
German market; with all kind of advantages, but also of securing
Germany’s greater involvement and support in political matters. At
the very moment, none (out of RWE) of current potential gas buyers
for Azerbaijan also the Caspian gas is interested in bringing that
new gas beyond Baumgartner. Furthermore, very recently another
German company Bayerngas announced it is ceasing negotiations
with NW to join the consortium due to the progress in the negotiations
with Gazprom.
Given the above mentioned, for now the market that NW is
targeting (the countries along the route of Nabucco) is considered
to be the most reliable at the moment as these countries are eagering
the diversification of the gas source. However other similar project
Russian South Stream is targeting the same market and it is remaining
to see whether it will be volume substitution or market share. In the
country markets where gas demand will grow rapidly market share
by SD gas is possible supplying additional volumes to meet the
demand. In the country markets where gas demand will have a little
growth, such as Italian market volume substitution is possible, i.e.
those countries will lessen their import from Russia and substitute it
with SD gas.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The European Union, despite concerns over Russia’s dominance
of its energy sector, has not implemented a meaningful diversification
scheme to supply piped natural gas from the Caspian Sea to Southern
and Central Europe. The Southern Gas Corridor and the development
of multiple projects for the importation of liquefied natural gas mean
the European Union can still strengthen its negotiation position with
Moscow.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
78
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Dr. Jarosław Ćwiek-Karpowicz is the Assisting
Professor at theInstitute of Political Science, University of
Warsaw.
He also coordinates the Program for Eastern and South-Eastern
Europe in the Polish Institute of International Affairs (PISM)
THE IMPORTANCE, ROLE AND PLACE OF AZERBAIJAN_
IN THE EU ENERGY SECURITY
Despite all innovations related to using of renewable sources of
energy, it is widely known that fossil fuels will remain dominant
in the short- and mid-term perspectives. Nowadays, they account
for more than three fourths of global energy mix and in the next
decade their share will be probably on the same level. Among them
crude oil and natural gas,as a widely used and globally traded energy
resources which reserves are unevenly distributed, are responsible
to great extent for energy security in the world. Therefore relations
between the European Union, one of the biggest oil and gas
consumers, and Azerbaijan, an energy supplier, located not very far
from the EU, draw special attention of many policy-and opinionmakers in Europe.
In recent years, the EU’s external policy has been focused very
much on strengthening energy links with exporting countries from
the post-Soviet area. The EU, which includes the most developed
economies of the world and has very limited access to oil and gas
reserves, has to secure large energy supplies from different sources at
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
reasonable and stable prices in order to sustain economic performance
and growth.Also, for Azerbaijan, intensification of energy contacts
with the EU gives an opportunity not only to get hard currency, but
also modernize its economy. This article describes the development
of the EU-Azerbaijan energy relations. It examines energy needs and
potential of these two partners and identifies their main interests.
It sums up the main challenges, chances and obstacles for the EU
and Azerbaijan related to strengthening their energy cooperation and
illustrates perspectives on development of their energy policies in
the near future.
Uncertain EU’s energy demand
The European Union is one of the leading consumers of energy
resources in the world. Its lucrative market remains attractive to
many energy exporters, especially those who depend on energyborn revenues. The EU consumes 1 825mln t of oil equivalent,
whichmakes up 16% of the global energy mix.1The EU’s economy is
based on crude oil and natural gas; however in some member states,
such as France or Sweden, nuclear power is a significant source of
energy generation, while in others such as Poland coal is the most
popular energy resource.
The economic crisis in many European countries, as well as the
increase of energy efficiency in the most developed EU economies
has caused significant decrease of crude oil consumption. In last five
years this number reduced from 722mln to 645mln t/a.2 This fall was
observed mainly in the “old” EU member states, while in many “new”
European countries, oil consumption remains at the same level. In
contrast to predictions of European countries’ decreasing demand
1 European Commission, Energy Production and Imports 2011, http://epp.eurostat.ec.europa.eu/statistics_
explained/index.php/Energy_production_and_imports (accessed: 13 August 2012).
2 British Petroleum, BP Statistical Review of World Energy, June 2012, http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481 (accessed: 11 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
for crude oil, projections show a stable increase in demand on the
Asian continent, first and foremost in China. While in 2008 crude
oil consumption in China consisted of only about half of European
demand, between 2015 and 2020 this country will probably consume
more oil than all EU member states.3
Coming to natural gas, many European countrieshave ambivalent
feelings toward the future role of this fossil fuel in their energy
mixes. For some EU members, gas is still the most convenient bridge
between the carbon-intensive past and de-carbonised future, while
for others it is more of a source of security concerns. Nonetheless,
European gas demand and reliance on imports will be growing in the
coming years and decades, but not as fast as expected a few years
ago. According the International Energy Agency nowadays the EU
consumes around 535bcm of gas, and after 15 years this number
may increase to 600bcm; however there are estimates which show
less than 500 bcm of gas per year.4Therefore the EU gas market
development is well characterized by theIEA as “unprecedented
uncertainty”.
Expectations of growing energy production in the EU
The European Union is not well-endowed with oil and gas. It
possesses less than one per cent of global crude oil and natural gas
proven reserves. The discovery of the hydrocarbon offshore fields
under the North Sea in the 1970s has led to the development of gas
markets in the United Kingdom, Netherlands and Denmark. These
countries are still the most important EU producers; however,their
reserves are expected to be finished soon. Except for the recent
discoveries of offshore fields in Cyprus, the other EU member states
have a very narrow gas production base.
3 International Energy Agency, IEA World Energy Outlook2010, Paris 2010, pp. 638-640 and 669-673.
4 European Commission, EU Energy trends to 2030 – Update 2009, http://ec.europa.eu/energy/observatory/
trends_2030/doc/trends_to_2030_update_2009.pdf (accessed: 14 August 2012). .
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Growing production of shale gas in North America seriously
affected international markets in 2009 and gave the United
States, the world’s largest consumer of gas, the position of largest
producer as well.There are diverse estimates of non-conventional
gas reserves outside North America, with no reliable data on the
economic feasibility of production. So far, all have been based on
theoretical modeling using American experience as an analogy,
with limited hard geological data. In April 2011 the U.S. Energy
Information Administration published an initial assessment of world
shale gas resources outside the United States.5 The total technically
recoverable reserves were estimated at 187tcm, with the largest
potential expected in China, the U.S., Argentina, Mexico, South
Africa, Australia, Canada, Libya, Algeria and Brazil, followed by
few European holders – Poland, France, Sweden, Austria, Germany
and Ukraine. What is interesting, non-conventional reserves are
more greatly distributed all over the world than proven conventional
reserves, which are highly concentrated in a few countries; however,
in Europe they look relatively modest.
Table 1. Natural gas reserves and production in the world (2011)
Country
1
Russia
Iran
Qatar
USA
Turkmenistan
Algeria
Australia
China
Norway
Proven reserves of
conventional gas
(tcm)
Reserves of
non-conventional
gas (tcm)
Production
(bcm)
2
44,6
33,1
25,0
8,5
7,9*
4,5
3,8
3,1
2,1
3
24,5
6,5
11,5
36,0
2,3
4
607,0
151,8
146,8
651,3
59,5
78,0
45,0
102,5
101,4
5 Energy Information Administration, World Shale Gas Resources: An Initial Assessment of 14 Regions
Outside the United States, http://www.eia.gov/analysis/studies/worldshalegas/ (accessed: 16 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Canada
Kazakhstan
Libya
Azerbaijan
Netherlands
Brazil
Mexico
Argentina
UK
Ukraine
Poland
South Africa
France
2,0
2,0
1,5
1,4
1,1
0,5
0,4
0,3
0,2
0,2
0,1
0,0
0,0
11,0
8,0
0,5
6,5
19,0
22,0
0,6
1,2
5,3
14,0
5,1
160,5
19,3
4,1
14,8
64,2
16,7
52,5
38,8
45,2
18,2
4,3
0,0
0,0
Sources: BP Statistical Review of World Energy 2012, Energy
Information Administration 2011.
* This figure doesn’t consider the Gaffney Cline & Associates’
(GCC) gas reserve assessment of Turkmenistan carried out
in 2011. According to this assessment, the overall reserves of
Turkmenistan raised up to 26.2tcm
It is highly unlikely that the EU might become a world-class
gas producer, although its technically and economically available
reserves might significantly improve its position vis-à-vis the
current gas suppliers, among them Russia. Even if shale gas is not
going to change the whole EU gas sector, it may become a gamechanger in Central Europe, with unconventional exploration and
production rising in the region, particularly in Poland. This is the
first European country actually pursuing a practical program of shale
gas development.6The success or failure of the Polish efforts might
significantly influence the course of events and determine the future
of the shale gas sector in Europe.
In the EU,the shale gas debate is peculiar in that it oscillates
between euphoria and total rejection. For opponents, shale gas has
6
M. Krutikhin, “Shale Gas in Europe: Another Myth or Real Mccoy?”, Energy Security Forum, 2011,
vol. 3, http://www.esc.mfa.lt/index.php?593848391 (accessed: 20 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
serious environmental constraints, i.e. related to the risk of water
contamination cause by chemicals used in the process of hydraulic
fracturing. For supporters, shale gas is perceived mainly as a chance
for strengthening the EU’s energy security and competitiveness of
its gas market, despite the fact that costs related to initial production
are much higher than in case of exploration of conventional natural
gas fields. Both views are well presented in the public debate,
although especially fierce critics seem to be making ideological,
and hence categorical, judgments despite an absence of adequate
scientific studies, credible geological data or environmental impact
assessments, let alone economic feasibility studies.7
Main challenges for the EU’s energy security
Due to limited oil and gas reserves, the EU is highly dependent
on energy imports. Its oil import dependency is estimated at 85%,
while natural gas import dependency is approximating 65%.8 These
numbers, according different estimations, will even increase in the
future, which is not optimistic taking into account fluctuation and
instability in energy productivity at the world. The majority of oil
and gas producing countries are authoritarian regimes – they very
often have nationalistic resource policies and use energy as a foreign
policy tool, a real challenge for the EU’s peaceful identity.Moreover,
the sharp increase of energy demands in the developing Asian
countries has significantly squeezed the energy security margin of
the EU, which sees itself as the pioneer of sustainable development
and a green economy.
The EU borders on four regions – Russia, Norway, Middle
East/North Africa and the Caspian – that are well-endowed with
7
E. Wyciszkiewicz (ed.), Path to Prosperity or Road to Ruin? Shale Gas Under Political Scrutiny, Polish
Institute of International Affairs, October 2011.
8 European Commission, Energy Production and Imports 2011, http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/Energy_production_and_imports (accessed: 13 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
oil and gas; however, it is not able to fully use the proximity of
these energy-rich regions in its energy trading. The EU does not
enjoy government-backed energy diplomacy and promotes energy
projects not as effectively as does the US, Russia or China. The EU’s
weakness is most pronounced in the Caspian region, where other
actors have managed to contract most of the oil and gas volumes
that Central Asian states produce, eliminating them as an alternative
source of supply for the EU.9
EU strategy in the gas sector
The EU’s energy strategy is aimed at satisfying three major goals
of energy security: security of supplies, economic competitiveness
and environmental protection. What adds to these goals the most
is multiplication of energy corridors and interconnections, as well
as creation of a unified legal regulatory framework in energy trade
based upon secure free competition. Therefore the EU’s energy
policy is based on the principles of diversification and liberalization.
Inrecent years, the EU has been trying to get better access to
Caspian gas. After the Russo-Ukrainian gas conflict in 2009, the
European Commission initiated the Southern Gas Corridor project as
the fourth major gas supply route into the EU, aimed at diversifying
the routes and sources of gas imported into Europe. This project is
crucial, taking into account the projected drop in gas production in
Norway and the new EU member states’ unwillingness to boost their
dependence on Russian gas imports. The pipelines built as part of the
project were meant to facilitate the import of gas from Azerbaijan
and Turkmenistan, as well as from the Middle East (Egypt and
Iraq), not excluding Iran in the future.Since the very beginning, the
Southern Corridor has been seen as a posing a challenge to Russian
interests. Moscow has therefore been impeding the implementation
9
F. Proedrou, EU Energy Security in the Gas Sector. Evolving Dynamics, Policy Dilemmas and Prospects, Burlington 2012, p. 43.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of this project, first of all through proposals of alternative pipelines
– at the beginning the Blue Stream 2, and later on the South Stream.
Russia also offered to buy all gas from the Shah Deniz field in
Azerbaijan, which for the time being is the only secure source of gas
for the Southern Corridor. These efforts have so far produced limited
results, as the construction of South Stream has not begun yet and
Azerbaijan is still interested in exporting its gas to the EU.10
For external energy suppliers,the EU’s endeavors to liberalize
the EU gas market has enormous significance. To date, these efforts
have resulted in the elimination of gas re-export bans from long-term
contracts, the introduction of the obligation to make transmission
infrastructure accessible to third parties, and the legal separation
of production, distribution and transmission. The entry into force
of the EU third energy package means that the member states must
implement one of the three unbundling options: full ownership
unbundling; the independent system operator; or the independent
transmission operator. The new regulations are applicable not only
to EU-registered businesses, but also to third-country companies
operating in the EU market.11The liberalization of the EU gas market
is the most contentious issue for non-EU gas suppliers. For example,
the unbundling principle means the forfeiture by Gazprom not only
of control over certain gas pipelines in the EU territory, but of their
ownership as well.12
The shale gas revolution in the United States and the gas glut on
the global markets encouraged European customers to put pressure
on the largest gas exporters to renegotiate their contracts in line
with plummeting spot price. It also increased the popularization of
10 A. Jarosiewicz, Southern Gas Corridor managed by Azerbaijan and Turkey, “OSW Commentary”, 18
July 2012, p. 2.
11 European Parliament, Directive 2009/73/EC of the European Parliament and of the Council of 13
July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/55/
EC, OJ L211, 14 August 2009.
12 J. Ćwiek-Karpowicz, “Russia’s Gas Sector: In Need of Liberalisation in the Context of Shale Gas
Revolution and the Energy Relations with the European Union”, Journal of East-West Business, 2012, vol. 18, nr 1.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
gas liquefaction technology in Europe. Among Central and Eastern
Europe countries, which depend to a large extent on Russian gas
supplies, Poland is the first state which has built a LNG terminal
and plans to open it in mid 2014. These activities have met with
strong support of the EU, which is interested in developing liquid
spot markets.13
Dealing with stagnation in the EU’s oil sector
The sources of crude oil supply to the EU are quite well diversified.
The EU members get their oil from different destinations through
tankers coming through the North Sea, Black Sea, Baltic Sea and
the Mediterranean, as well as through the Druzhba pipeline system.
Although no exporting country has a dominant position in oil import
to the EU, there are some member states, mostly from the Central
and Eastern Europe, which do not have a well-diversified portfolio.
Their main oil supplier is Russia. Poland receives almost 90% of
crude oil from this exporter; however due to the oil terminal in
Gdansk and developed domestic pipeline system, Poland’s import
dependency does not immediately threaten its energy security, as
this country is able to receive all crude oil by tankers from other
destinations than Russian one.
The economic crisis has influenced the EU’s oil sector. It has
reduced the capitalization of many European refineries, mainly due
to overcapacity and a decline in demand for oil products, resulting
in low margins. Faced with a multitude of challenges, European
refineries remain attractive for Russian oil companies suffering from
insufficient capacity and seeking refining assets in Europe to boost
the value of their crude supplies. Between 2008 and 2011 Lukoil, the
biggest private oil company in Russia, acquired 60% of the ISAB
refinery in Sicily from Italy’s ERG and a year later bought 45%
13 European Commission, Energy infrastructure priorities for 2020 and beyond - A Blueprint for an integrated European energy network, COM(2010)0677, Brussels 2010, pp. 33-34.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of the Vlissingen refinery in the Netherlands from Total. In 2010
Russian state-owned company Rosneft agreed to buy Venezuelan
PDVSA’s stake in a German refining venture. Rosneft’s first major
asset purchase in Europe allowed the Russian company to gain a
12% stake in Germany’s largest refinery, Miro in Karlsruhe, about
a 19% stake in the PCK refinery in Schwedt (which is supplied
by Russian oil through the Druzhba pipeline), a 12% share of the
Bayernoil refinery in Neudstadt and half of the Gelsenkirchen
complex. Recently, Russian private oil company, Gunvor, one
of the world’s largest oil traders, bought the Petroplus refinery in
Germany’s Ingolstadt.14
In order to provide a direct and cheap supply of crude oil to the
EU market, Russian authorities are trying to reduce the country’s
dependence on transit countries by increasing the importance of
their own terminals on the Baltic Sea. The first element of this
strategy was the launch of the Baltic Pipeline System (BPS) in
December 2001. The project became a commercial success—a new
Russian oil terminal in Primorsk reached a capacity of 70mln t in
2007, whichat that time represented one third of the total Russian
oil exports. In June 2009, Russia began to construct a second trunk
line of the system (BPS 2) running from the Unecha junction of the
Druzhba pipeline, near the Russia-Belarus border, to the Ust-Luga
terminal on the Gulf of Finland. BPS 2 was completed in March
2012 with the initial capacity of 30mln t/a of oil. In the near future,
Russia is going to gain a surplus oil transport capacity, namely
due to the BPS 2, which will give it more room to manoeuvre in
conducting its energy-related foreign policy. Although the volume
of Russian crude oil transported by the Druzhba pipeline to the
Central and East European states has decreased in the last few
years, it seems unlikely that the whole system will be closed soon.
14 W. Kononczuk, Russia’s best ally. The situation of the Russian oil sector and forecast for its future,
Centre for Eastern Studies, June 2012, p. 36.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
The longest pipeline in Europe certainly will operate; however,
Russian companies will be delivering more crude oil to the largest
oil refinery in Poland (Plock and Gdansk) and to eastern Germany
(Schwedt and Leuna) by tankers using the oil terminals in Gdansk
and Rostock. Problems may occur with the Czech and Slovak
refineries which have limited access to the sea ports in other
countries.15
Azerbaijan’s potential in the energy supplying
Azerbaijan is a significant energy player in the world markets.
This countryopened its doors to the international oil investors in
1991 and has noticed positive results. Azerbaijan is one of a few nonOPEC states that has increased its conventional oil output. Although
it commands less than one per cent of the global proven reserves
of crude oil and natural gas, due to low domestic consumption
and developed energy infrastructure, Baku is able to export quite
a significant amount of fossil fuels. In last five years Azerbaijan
produced 40-50mln t of crude oil and consumed only 3-4mln t/a,
which allowed them to be one of the leading crude oil exporters in
the world.
After the collapse of the Soviet Union, Azerbaijan rebuilt its
oil industry almost at the same time as other post-Soviet energy
producers. While in Russia the energy boom occurred at the
beginning of 2000’s, in Azerbaijan it took place a little bit later.
In 2000-2004 this country still produced only 15mln t/a of crude
oil, and from 2005 to 2010 increased this volume up to 50mln t.
The beginning of the global economic crisis in 2008-2009 has not
hampered the growth of oil production; however in 2011 this sector
reduced speed by 10%.16What is worse, the IEA projects the gradual
15 See more: J. Ćwiek-Karpowicz, “Russian Energy Policy Towards the European Union in the Context
of the Economic Crisis”, The Polish Quarterly of International Affairs 2011, vol. 20, nr 1, pp. 30-47.
16 British Petroleum, BP Statistical Review of World Energy, June 2012,
http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481 (accessed: 11 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
decline of output after 2020; however, the long-term production
potential could be bolstered by the resolution of disputes over the
Azerbaijan’s maritime borders.17
In 2006, due to the discovery of natural gas at the offshore
Shah Deniz field, Azerbaijan ceased importing gas from Russia
and became a net exporter. Nowadays it produces around 15bcm/a
and exports almost half of this volume, mainly to Turkey, Iran and
Russia.18 Although the current proven reserves are 1.4tcm, the
country’s gas production has been held back by uncertainties on gas
trading with Europe. The IEA therefore projects a modest increase
in Azerbaijan’s gas production to 2015 and significant growth
beyond 2020 (also, according to SOCAR-2025 strategy). In 2018
the Shah Deniz Phase II gas should be flowing. Additionally, the
Azeri government is planning to launch the Umid and Babek fields
which are already explored by SOCAR.
Table 2. Gas production in the Caspian states (in bcm)
1
Azerbaijan
Kazakhstan
Turkmenistan
Uzbekistan
Total
Share of world
1990
2
10
7
85
41
143
6,9%
2000
3
6
12
47
56
121
4,8%
2011
4
15
19
60
57
151
5,1%
2015
5
20
47
85
72
224
6,3%
2020
6
36
49
104
70
260
6,8%
2025
7
43
55
110
70
278
6,9%
2030
8
49
61
119
69
298
6,9%
2035
9
49
68
128
69
315
6,9%
Sources: IEA World Energy Outlook2010, p. 525.
Prospects for the EU-Azerbaijan energy cooperation
The demise of the Soviet Union and the division of its mineral
wealth among a few states created serious expectations within the
EU for accessibility of gas from multiple suppliers and through
17 International Energy Agency, IEA World Energy Outlook2010, Paris 2010, p. 503.
18 British Petroleum, BP Statistical Review of World Energy, June 2012, http://www.bp.com/sectionbodycopy.do?categoryId=7500&contentId=7068481 (accessed: 11 August 2012).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
many energy corridors. These hopes, in reality, turned out to be quite
difficult to realize. So far, geography determines the flow of energy,
as only Azerbaijan located on the west bank of the Caspian Sea, has
become a supplier of the EU gas market via Georgian and Turkish
territories. Other Caspian energy exporters have to deliver gas either
via the Russian pipeline system or a new-opened route to China.
In the Caspian crude oil supply to Europe, Azerbaijan plays also
a very decisive role as both a producer and transit state. Azerbaijan
has enough oil transportation capacity in place and a strategic
question is how to use this infrastructure when oil production in this
country begins to decline. Azerbaijan has already become a transit
country for Kazakh crude oil and the South Caucasus is an important
strand in Kazakhstan’s own vision of multiple export routes for oil.
The routes to European markets via Azerbaijan and Georgia are
important export options for Kazakhstan’s oil, as its production
capacity may increase significantly over the next decade. There are
no decisions yet whether the existing Baku-Tbilisi-Ceyhan pipeline
would expand or a new pipeline from Baku to the Black Sea would
be constructed for Kazakhstan’s projected increase in oil output.
However, additional export capacity was offered by Russia, which
has already constructed the BPS 2 and decided to enlarge the TengizNovorossiysk pipeline (Caspian Pipeline Consortium).
For the EU’s benefit, as well as for the improvement of
Azerbaijan’s and Kazakhstan’s position on the energy markets, these
two states should perceive themselves not as competitors but rather
as states with common interests. Closer cooperation between Baku
and Astana in oil sector would be welcomed by the EU member
states interested in diversifying their oil import portfolio. The return
to the original direction of the flow through the Odessa-Brody
pipeline in 2010 has opened the possibility of bringing Caspian oil to
refineries in the Czech Republic, Slovakia and Hungary, and raises
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
the potential for bringing it to refineries in Poland and Germany
(after a pipeline extension to Plock and Gdansk).
There are also positive signals related to the realization of the
Southern Gas Corridor. In October 2011, Baku and Ankara overcame
a political impasse and reached agreements on the transit and supply
of Azerbaijani gas to Turkey. In June 2012 these two countries signed
an agreement on the construction of the Trans-Anatolian gas pipeline
(TANAP) and by the end of the year, a feasibility study should be
carried out by their companies. What is not decided yet is which
of the European pipelines TANAP should be linked to. Therefore it
is uncertain whether the Azerbaijani gas will reach Central Europe
through Nabucco West or whether it will be delivered to Southern
Europe along the Trans-Adriatic route. The final decision made by
Azerbaijan will be based more on the country’s plans to buy some
assets in the European states, rather than on the price offered for the
gas.
In reality Azerbaijan and Turkey are becoming key players
in the implementation of the Southern Gas Corridor who have
strengthened their position in the relations with the EU. What
may affect the appearance of the fourth gas corridor to Europe are
Russia’s measures taken in order to impede this project and hinder
EU-Azerbaijan gas cooperation. For sure the TANAP agreement,
which is the crucial element of the implementation of the Southern
Gas Corridor, threatens Russia’s economic and political interests
both in the EU and in the Caucasus. Therefore, Moscow will be
much more determined in speeding up its effort on the South Stream
project as well as in using some political pressure on Azerbaijan.
The EU, which is focused on the diversification of gas sources and
supply routes, should be more engaged in the implementation of the
Southern Gas Corridor and closer cooperation with the states and
companies involved in the construction of this project.
92
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Andrey Semenkovsky
Head of the Department at the Council of
National Security of Ukraine
UKRAINE-AZERBAIJAN COOPERATION STATUS AND
PROSPECTS IN THE ENERGY SECTOR
Today, all the required legal and political prerequisites are in
place for the fruitful development of mutually beneficial cooperation between Ukraine and Azerbaijan. The existing contractual legal
framework of bilateral documents signed by Ukraine and Azerbaijan covers 127 agreements, protocols and declarations, including 21
international documents, 55 intergovernmental documents, and 51
interagency documents /1/.
The basic policy documents include the Treaty on Friendship and
Cooperation, dated 9 December 1992 and the Treaty on Friendship,
Cooperation and Partnership, dated 16 March 2000, outlining the
main directions, forms and methods of cooperation between these
two countries. The Declaration on Friendship and Strategic Partnership between Ukraine and the Republic of Azerbaijan signed on 22
May 2008 establishes the strategic level of cooperation between two
states. In addition, the Joint Ukrainian-Azerbaijani Intergovernmental Commission for Economic Cooperation has been set up for activity coordination in 1997.
Moreover, when the President of Azerbaijan, Ilham Aliyev, visited Kiev in 2008, the two heads of state created the Council of Presidents of Ukraine and Azerbaijan. The first meeting of the Council
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
of Presidents, during which the Action Plan for Azerbaijan-Ukraine
Cooperation was signed, was held in April 2009 in Baku. As of today, there have been nine meetings of the Joint Intergovernmental
Commission and three meetings of the Council of Presidents of
Ukraine and Azerbaijan.
Bilateral trade trends demonstrate the potential for significant
development of mutually beneficial cooperation between Ukraine
and Azerbaijan. For example, according to the State Statistics Service of Ukraine, in 2005 the volume of trade in commodities between two countries totalled $317.3mln, while in 2010 it went up to
$1,519.3mln, almost a fivefold increase.
At the same time, Ukrainian exports of goods to Azerbaijan increased 2.1 times (from $290.4mln in 2005 to $610.8mln in 2010),
the Azerbaijani export of goods to Ukraine totalled a 33.8 (!) time
increase (from $26.8mln to $908.5mln respectively). The growth of
Azerbaijani exports to Ukraine was mainly due to increasing fuel
and energy supplies, mostly oil and oil products, the share of which
in the structure of Azerbaijani export to Ukraine increased from
30% in 2005 (the volume of supplies was $8mln) to 96.6 % in 2010
($878mln).
Positive trends have also been observed in service trade, the total
volume of which increased from $16.2mln to $44.2mln or 2.7 times,
from 2005 to 2011. Services delivered by Ukraine to Azerbaijan
increased from $10.7mln. to $29.4mln or 2.7 times, in this period,
while the services delivered by Azerbaijan to Ukraine increased
from $5.5mln to $14.8mln.
In 2011, the bilateral trade decrease (by $171.8mln or 11%) due
to reduced Azerbaijani export to Ukraine (compared to 2010 to
$269.2mln, or 29.6%) was recorded, while the Ukrainian goods supplies to Azerbaijan were still growing (by $97.4mln or almost 16%
respectively).
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
In 2011, the key items of Azerbaijani export to Ukraine were still
fuel and energy products covering 93% of the total import supplies.
As for Ukrainian exports to Azerbaijan in 2011, the leading positions
were traditionally held by metallurgical (46.6% of total exports), agricultural (24.8%), and engineering products (11.5%).
In view of the fact that in 2011 the fuel and energy resources were
contributing about a half of the total trade turnover between Ukraine
and Azerbaijan, we’d like to stress a special role of these products
in bilateral trade and overall relations between Ukraine and Azerbaijan. At the same time, the analysis of national interests declared by
the parties allows one to conclude that today’s cooperation between
Ukraine and Azerbaijan in the energy sector complies with all of the
principles of the strategic partnership.
Based on the complementarities of available energy potential and
the joint interest of Ukraine and Azerbaijan in the energy diversification, the Ukraine-Azerbaijan Memorandum on Cooperation in Oil
and Gas Industry was signed on 24 March 1997 /2/ to set the following covenants:
– mutual political support to extend Azerbaijan’s export opportunities of oil transit to Europe through the parties’ territories;
– creation of favourable conditions in the parties’ territories for
transit, transportation, handling, storage, loading, unloading and
transfer of hydrocarbons, derivatives and goods required for their
production;
– encouraging participation of businesses and organizations in hydrocarbon resource exploration, development, production, refining, transportation, and marketing projects implemented in the
parties’ territories on terms agreed by the Parties.
However, in late 90s the issue of oil transportation has been serious political issue for Azerbaijan /3/. For instance, Russia signed a
joint agreement with Oman, Kazakhstan and eight Western oil com95
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
panies to build the $1.2bln new pipeline (Caspian Pipeline Consortium, CPC) from
Source: East and Azerbaijan International Journals
the Kazakh Caspian coast near Atyrau to Novorossiysk demanded
that to be transported via this route. On the other hand, Turkey contributed ($250mln) to the rehabilitation of the pipeline from Baku to
the Georgian port Supsa, but also provided its territory for the main
oil pipeline from Baku to the Turkish port of Ceyhan.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
As a result, leadership of the Azerbaijan Republic faced the need
to make a compromise decision establishing that exports from the
State Oil Company of the Azerbaijan Republic (SOCAR) are to be
supplied to the Russian port of Novorossiysk (around 3mln t), and
the Azerbaijani oil owned by Western companies are to be exported
via the pipeline to the Georgian port of Supsa (capacity of 7mln
t/a), and via the new oil pipeline following the Baku-Tbilisi-Ceyhan
(BTC) route.
Despite the decision on construction of the Baku-Tbilisi-Ceyhan
oil pipeline with up to 50mln t/a capacity was adopted in 1994; the
project’s practical implementation was not begun until April 2003. In
addition, up until the beginning of the construction, the Azerbaijani
side did not exclude the oil supply routes to the European markets
through the Ukrainian territory. In particular, it was demonstrated by
the Agreement on Principles of Cooperation in Oil Industry between
the Cabinet of Ministers of Ukraine and the Government of the Republic of Azerbaijan signed on 3 June 2004 /4/, where the Parties
agreed to:
– provide, within available capacity of oil transport facilities and
sites, necessary conditions for the safe, efficient and smooth transportation of oil via territories of these countries, including oil of
third parties and through transit;
– provide a regular exchange of information on the current and future capacity of oil transport facilities and sites in these countries.
In addition, the Azerbaijani side has agreed to provide an opportunity to buy oil in the volumes necessary for Ukraine, on the
commercial and a non-discriminatory basis, for use in Ukrainian
pipelines. In turn, the Ukrainian side agreed to allow the transportation of Azerbaijani oil through the territory of Ukraine via the
main oil pipeline system on a commercial and non-discriminatory basis;
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
– develop scientific, technical and investment cooperation, as well
as promote favourable conditions for implementation of joint
projects in the area of construction, reconstruction and operation
of oil transport facilities and sites, including the third party territories.
For its part, with regard to prospective resources of the Caspian
region, the Odessa-Brody oil pipeline with around 9mln t/a capacity
was built in Ukraine in 2001. It was planned to extend it to Gdansk
(Poland). Doing so, the pipeline could become a strategic corridor
for oil transportation to Eastern Europe, and further onward to the
Western Europe.
The Odessa-Brody pipeline and its planned extension into Poland
(source: Window on Heartland)
We would like to stress that these plans of Ukraine were supported by the European institutions. In particular, in September 2002
the Vice-President of the European Commission Loyola de Palacio
called the Odessa-Brody pipeline a “European Project”, and the
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
EBRD’s President Jean Lemierre announced his readiness to finance
the construction extension to Gdansk. On 13 May 2003, the European Union gave the Odessa-Brody pipeline a high priority as the
European Oil Transportation Project.
At the same time, strategic importance could be gained by the
Odessa-Brody-Gdansk project only if supported by Azerbaijan.
However, after a launch of the Baku-Tbilisi-Ceyhan pipeline in
July 2006, it turned out that oil from Azerbaijan’s oil fields was not
enough to ensure its profitability. Therefore, it was critical for Azerbaijan to ensure its participation in loading of the Kazakh pipeline
which exported its oil through the pipeline of the Caspian Pipeline
Consortium (CPC) and the Novorossiysk Port (Russia), the Transneft
system, which also is linked to CPC system transporting Kazakh oil
from the giant Tengiz field.
On 16 June 2006, the President of Kazakhstan Nursultan Nazarbayev signed the treaty on joining his country to the pipeline project which arranged tanker transportation of Kazakh oil from Aktau
to Baku across the Caspian Sea and its subsequent transportation via
the BTC pipeline. At the first stage, Kazakhstan was planning to load
the BTC with 7.5-10mln t/a of oil.
On 24 January 2007, the Kazakh National Company “KazMunaiGaz” signed with SOCAR the Memorandum of Understanding
to create the Kazakh-Caspian Oil Transportation System /5/ which
made it possible to export oil from the Kashagan and Tengiz giant fields through the Caspian Sea to the world markets westwards
in particular to Europe via Eskene-Kuryk-Baku-Tbilisi-Ceyhan
route. Initially, the pipeline system to ship 25mln t/a of oil, and then
increase the amount to 38mln t/a. Design, construction and commissioning of the project had to be confined to production start at
Kashagan.
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Kazakhstan’s Kashagan oil field is set to make its first deliveries
to markets in 2013 after years of delays, with large-scale exports
expected from the middle of the year. The start-up of the field, one
of the world’s largest, has been delayed since 2005 due to cost overruns and disputes with authorities over taxes. Production rates are
initially expected to be very modest after the field starts operations
by mid 2013.
Some oil will flow through existing pipelines via Russia to Black
Sea ports, some will be transported by Kazakhstan’s shipping firm
Kazmortransflot via the Caspian Sea also for delivery to Black Sea
or Mediterranean ports. Kazmortransflot is in discussion over a contract to ship oil from Kashagan in 2013... It is about 1-3mln t out of
the overall output of 3-7mln t.
The consortium that operates the field is aiming to produce
around 300,000 barrels per day in the initial test phase of operation
at the field, eventually increasing to more than 1mln barrels per day
in 2018-2019.
If the field reaches output of 7 million tonnes next year it would
be equal to 140,000 bpd, enough to supply a mid-sized European
refinery.
Under those conditions, Ukraine had no option but to use the
Odessa-Brody oil pipeline to pump Russian oil (of Lukoil) in reverse (to the Black Sea) flow. In such a case, considering the fact
that the Kazakh oil is cheaper than Russian oil, the Ukrainian side
announced that even if the Odessa-Brody pipeline to not become the
Odessa-Brody-Gdansk line, Ukraine is ready to build an oil refinery
in Brody for processing of the Caspian oil delivered via the pipeline.
Moreover, to secure the strategic European orientation of oil
flows, Azerbaijan provided certain amount of so called technical oil
to fill the pipeline making sure the infrastructure could be used in
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
averse mode. As mentioned, this arised from the strategic, but also
commercial reasons as SOCAR was eyeing refining (and enter into
the oil products distribution in the region) asset on Ukrainian territory.
Currently, their number of SOCAR petrol stations in Ukraine
steadily increasing. In addition, since Turkey has monopolized (due
to the BTC pipeline) the Azerbaijani oil transit options to the world
markets, the opportunity of transporting oil via the Odessa - Brody
pipeline is in line with the Azerbaijani policy of export routes and
markets (via asset ownership to utilise the synergy effects) diversification.
A practical opportunity to confirm mutual interest in the Ukrainian pipeline comes after the signing of the Agreement on Measures
to Promote Cooperation in Oil Transportation through the Ukrainian Territory signed by the Cabinet of Ministers of Ukraine and the
Government of the Republic of Azerbaijan in January 2011. According to this Agreement /6/, the Ukrainian side committed to ensuring Azerbaijani oil transportation via the Ukrainian main pipeline
system with regard to their transport capacity in the following directions and volumes:
– Mozyr (Belarus) - 8.12mln t/a;
– Slovakia-Czech Republic-Hungary - up to 5mln t/a;
– JSC “Galychyna”, JSC “Naftokhimik Prykarpattya”- 3mln t/a.
At the same time, Ukraine agreed to establish 50% port fee discount for the Azerbaijani oil ships docking at the “Yuzhniy” marine
oil terminal near Odessa for cargo operations.
In early 2011, for the first time the Odessa-Brody pipeline was
used to pump Azerbaijani oil to Belarus in the course of its swap deal
with Venezuela whose oil has been supplied to the US market on
behalf of Azerbaijan. In just two months of 2011 it was proposed to
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
pump about 4mln t of the Azerbaijani oil via the Ukrainian pipeline.
Despite the fact that at present Belarus refuses to buy Venezuelan oil
because of more lucrative offers made by Russia, this event is very
important for Azerbaijan in terms of trying out new routes and oil
export operations.
Therefore, at the 9th meeting of the Joint Intergovernmental
Azerbaijani-Ukrainian Commission for Economic Cooperation held
on 21 April 2011 in Baku the Parties stated that in view of the Odessa-Brody oil pipeline averse mode to be provided by the Ukrainian
side.
However, a while ago on 11 May 2007 the presidents of Poland,
Ukraine, Lithuania, Georgia and Azerbaijan, and the special envoy
of the president of Kazakhstan agreed on the construction of a pipeline linking existing pipeline with Gdansk. On 5 June 2007, at the
Gdańsk meeting the intergovernmental working group of the project
agreed to expand the composition of shareholders of SARMATIA
sp.z.o.o. by companies from Azerbaijan, Georgia and Lithuania. According to the agreements between the companies, Ukrtransnafta,
PERN, SOCAR and GOGC will each own 24.75% of the shares,
while Klaipedos Nafta will own 1% of shares. On 10 October 2007,
the agreement forming a pipeline consortium was signed by the
presidents of Poland, Ukraine, Lithuania, Georgia and Azerbaijan at
the energy security conference in Vilnius.
to:
Based on the agreement in Baku, Azerbaijan and Ukraine agreed
- promote cooperation to put the EAOTС on the list of key projects under the Eastern Partnership Initiative, as well as give it the
status of a Project of European Interest, which are important factors
to secure necessary additional EU funding;
- continue cooperation between the SOCAR and the NJSC “Naf102
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
togaz” to develop the Euro-Asian Oil Transportation Corridor
project under SARMATIA International Pipeline Company and
encourage its implementation;
- recommend that the SOCAR and the OJSC “Ukrtransnafta” initiate preparation, under SARMATIA International Pipeline Company, of the draft multilateral intergovernmental agreement to
support the EAOTС project for its further consideration by the
project member governments;
- cooperate on fulfilment of agreements on project implementation, in particular, adoption of a final decision by the government
of Poland to support the project and the subsequent conclusion
of necessary agreements between the governments of Poland and
Ukraine;
- provide maximum assistance to ensure supplies of the Azerbaijani oil to the Ukrainian refineries, as well as its transit through
the Ukrainian territory to third countries in accordance with provisions of the Agreement on Measures to Promote Cooperation
in Oil Transportation through the Ukrainian Territory signed by
the Cabinet of Ministers of Ukraine and the Government of the
Republic of Azerbaijan.
When considering potential suppliers of the Azerbaijani fuel to
the Ukrainian market, it is necessary to keep in mind that oil produced in Azerbaijan is divided between the International Oil Companies (IOCs) and SOCAR. In these conditions, the rights to handle
oil and choose its transportation routes is possessed by both Azerbaijan (SOCAR) and the foreign oil and gas companies based on the
economically viable route.
Due to the quite highly developed export infrastructure of the
Azerbaijan Republic, exporters take advantage of the sufficient mobility and flexibility in choosing oil transportation routes. Today, the
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diversified pipeline system allows shippers to pump oil through the
Baku – Novorossiysk oil pipeline and the Baku – Supsa pipeline to
the Black Sea ports of Russia and Georgia. The Baku-Tbilisi-Ceyhan pipeline facilitates oil delivery directly to the Mediterranean,
avoiding the bottleneck in the Bosporus and Dardanelles Straights.
Experts believe that the Odessa-Brody pipeline is currently not attractive to the Western companies.
Unlike the Western companies, Azerbaijani government should
be interested in reliable alternative transport corridors for its energy
supplies. The fact that the Odessa-Brody-Gdansk pipeline is still important for Azerbaijan is proven through the statement of the Azerbaijan’s Minister of Industry and Energy N. Aliyev /7/ who believes
that Baku cannot solve the problem of insufficient oil transportation
infrastructure availability while entering the European markets without using the Odessa-Brody pipeline. In experts’ opinion, the Caspian region will face this problem in 2013. Per the estimated data,
given the Caspian oil extraction increases to 100mln t by 2015 and
to 150mln t by 2025, the annual capacity of the main oil pipelines
should increase by at least 80mln t compared to the existing capacities of oil pipelines.
Despite any interest of the EAOTC parties and the completion
of the feasibility study to extend the pipeline to Gdansk, Poland has
not made a final decision on the issue yet. In view of this, the Polish President Bronislaw Komorowski articulated a basic condition
for participation in the project, which is the “economic benefit” and
guaranteed oil supplies via the Odessa – Brody pipeline /7/. In its
turn, Baku is still refraining from signing the intergovernmental
agreement with Ukraine to ensure the oil pipeline loading.
The Ukrainian side has repeatedly stressed the need for these issues to be resolved as soon as possible. In particular, on 2 April 2012
the Ukrainian Prime Minister Mykola Azarov gave an interview to
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
the Azerbaijani news agency “Trend” /8/ and said that in February
2011 the Azerbaijani oil pumping via the Odessa-Brody pipeline to
transport it to Mozyr Refinery in Belarus was only 4mln t, 10 times
less than the maximum designed capacity of the Euro-Asian Oil
Transportation Corridor. He also welcomed any activity of the State
Oil Company of Azerbaijan Republic (SOCAR) in Ukraine. In January 2011, SOCAR opened the network of petrol stations in Ukraine
and is planning to increase their number to one thousand. According
to the Ukrainian prime minister, his country is the first Eastern European country, where SOCAR has been running its bunker business
since August 2011, e.g. by delivering services of refuelling ships in
the Dnepr aquatic area.
In addition, the Ukrainian Prime Minister stressed Ukraine’s interest in construction of an oil refinery complex on the Black Sea
shore for the Azerbaijani oil processing, as well as the conduct of a
survey and exploration activity in the prospective hydrocarbon areas
of Azerbaijan by “Naftogaz”.
Natural gas supplies are of particular importance for both Ukraine
and Azerbaijan. The only difference is that Ukraine is interested in
import diversification, while Azerbaijan has a stake in diversifying
the routes of export from the country. On the other hand, Ukraine is
interested in full loading of the existing infrastructure for transportation of natural gas to the European markets, while Azerbaijan is
looking for the opportunities and available capacity to transport its
gas to solvent consumers. Today, the outlined interests are still not
implemented in the required scope in both countries.
As was already mentioned, Ukraine has been buying almost all
imported gas from Russia in recent years. In addition, Russia’s monopoly position makes it possible to sometimes force Ukraine into
paying unreasonable prices, which adversely affects the competitiveness of Ukrainian products in the world market.
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However, the Russian strategy/plan? to build new pipelines bypassing Ukraine may deprive the Ukrainian government of available
South Stream (source: Offshore Energy Today)
levers to counteract Russian pressure, and the reduction of natural gas supplies via the Ukrainian gas transit system may lead to
non-profitability of its work. In total, all these circumstances form a
real threat to Ukraine’s national security.
For example, the cost of the Russian natural gas for Ukraine in
2012 was in average around $425/1000cm, which is higher than in a
number of European countries further westerds Ukraine. Considering that, Ukraine concluded with German company RWE mid-term
gas supply agreement to deliver up to 5bcm/a based on the spot
price. The delivery started last November via Poland for the price of
$380-390/1000cm, but also Slovakian route is being reviewed.
However, after the commissioning of the new Russian pipelines
(primarily, the Baltic Pipeline System and Nord Stream), the Russian energy transit volume via the territory of Ukraine began to de106
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
cline steadily. In particular, in 2006 the Ukrainian transit pipelines
pumped about 33mln. tonnes of oil and 128.5bcm of gas, but in 2010
the transited oil amounted as low as 20.1 million tonnes (17.8 million tonnes in 2011), and the transited natural gas totalled 98.6bcm
(194.2bcm).
In turn, Azerbaijan has been exporting its gas to the Georgian
and Turkish markets since 21 March 2006, after completion of construction of the South Caucasus Pipeline (SCP) also known as BakuTbilisi-Erzurum gas pipeline. However, as distinct from oil plans,
successfully implemented by Azerbaijan due to tanker shipments
and the Baku-Tbilisi-Ceyhan pipeline, the Azerbaijani gas is mainly
sold to the neighbour states at prices set by the latter ones.
Because of disagreements on prices, tariffs, transit conditions,
and gas supply volumes between Azerbaijan and Turkey in 2008,
the launch of the second phase of the Shah Deniz /9/ gas field has
been delayed, and on March 27, 2009 Gazprom and SOCAR signed
a contract on supply of the Azerbaijani gas to Russia via the Baku
- Novo Filya gas pipeline (a part of Azerbaijan’s gas transportation
system of about 200km running from Baku to the Russian border
along the Caspian Sea coast).
Since January 2010, Azerbaijan launched gas exports to Russia.
Initial supply volume totalled 500mcm/a. In September 2010, during
the visit of the former Russian President Medvedev to Baku, the protocol defining the annual gas export volume was signed. This document stipulated the annual gas supply increase up to 2bcm/a to Russia
with the possibility of a further increase. In January 2011, Azerbaijan
and Iran also signed an agreement on supply up to 1bcm/a of gas with
a potential further increase. Despite these agreements, gas exports to
Russia and Iran are not real alternatives for Azerbaijan, which is interested in exporting its gas to the European markets directly and maintaining the balance of its relations with Russia and Iran.
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However, to achieve this goal, it considers creation of a transportation corridor alternative for Russia, Iran and Turkey. One option
was the White Stream project: the pipeline had to be laid under the
Black Sea to Ukraine and Romania. At the same time, among all
potential partners of Azerbaijan in the oil and gas industry, Ukraine
has the highest advantage to provide solvent energy consumers and
technically advanced integrated gas and oil transportation system
with the largest gas storage facilities in Europe.
White Stream gas pipeline project
Moreover, at the 5th Georgian International Oil, Gas and Energy Conference GIOGIE 2006 held in Tbilisi, a new project of construction of the gas pipeline linking gas fields in Azerbaijan to the
European states through the Georgian territory was presented /10/.
Completion of the feasibility study of the project envisaging natural gas supply from Azerbaijan through Georgia to the Ukrainian
gas transport system and onward to Europe was scheduled for the
end of 2006. According to preliminary estimates, the steel pipe diameter would be 24”, and the pipe length under the Black Sea to
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
approximately 650km. Unfortunately, despite these circumstances
and expected natural gas extraction increase in Azerbaijan, no documents for implementation of this specific project has been signed
until 2011.
The reason behind might be that Azerbaijan too much relied on
sooner realisation of the Nabucco project. The planned 3,300km
long gas pipeline, which was initially designed as 56” pipeline to
transport 31bcm/a. It aimed to transport gas from not only of Azerbaijan, but also of Turkmenistan and Iraq to the European markets.
Preparation for its construction started in 2002. It was planned to
start the pipeline construction in 2011 and finish it in 2014. As of
today, the Nabucco project concept wise significantly changed, i.e.
became shorter (Nabucco West – 1300km only) having its start point
in Baumgarten and terminating on Bulgarian-Turkish border. Also,
operation date seems to be postponed now to 2018/19 as according
to SOCAR, the first gas from Azeri Shah Deniz Phase II development will hit EU border in Q1/2019.
According to experts, the main reason for the project implementation delay is insufficient volume of the Azerbaijani natural gas to
load an European pipeline and absence of secured volumes from
Turkmenistan (and Iraq in long run).
The resource base of Nabucco West or its competitor TAP (TransAdriatic Pipeline) will be not only SDII gas, but also other Azeri
origin gas from so called next generation fields offshore Azerbaijan.
SOCAR is planning to produce 50-60bcm/a by 2025 of which 7080% to flow for export.
In these uncertain conditions, investors refused to finance the
project which will cost about €14bln, according to recent estimates
by BP, double the original figures (€7.9bln which is estimate of
2010). At the same time, Russia has started active preparations to
construct the Nabucco rival, the South Stream, which is to be laid
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
under the Black Sea, from the Port of Dzhubga to the Bulgarian Port
of Varna. Furthermore, its two branches to run through the Balkans
to northern Italy, although the exact routes have not been approved
yet. According to the plans, construction of the gas pipeline should
start in late 2012 and finish in 2015. The planned annual capacity of
the South Stream is 63bcm of natural gas. The estimated project cost
was initially €8.6bln, however current overall investment for full
version is varying in the range of $28-32bln.
At the same time, the main proclaimed purpose of the South
Stream construction was diversification of supplies of Russian natural gas to Europe and reduced dependence of suppliers and customers on transit states, in particular, Ukraine and Turkey. However, the
discovery of new fields and natural gas extraction increase pushed
Baku to a more intense search for new options of independent gas
supplies to end-users, rather than waiting for protracted negotiations
on the Nabucco project.
One of the solutions to Azerbaijan’s problem is creation of an
infrastructure for LNG exports from the Georgian ports, particularly
to Ukraine and Romania. In this respect, on September 14, 2010
the Presidents of Azerbaijan, Georgia and Romania, in the presence
of the Prime Minister of Hungary, signed the Memorandum on the
Joint Company Establishment to Determine the Options of Gas Export via the Black Sea from the Georgian Port of Kulevi owned by
SOCAR to the Romanian Port of Constanta /9/.
According to this project, known as “Azerbaijan, Georgia, Romania Interconnection” (AGRI), Azerbaijani natural gas could deliver
via the pipeline to the Georgian Port of Kulevi and then liquefied to
be transported by LNG vessels to the Romanian Port of Constanta.
The approximate cost of the project estimated at €4-6bln.
A bit later, in January 2011, at the World Economic Forum in
Davos, in the presence of the Presidents Ilham Aliyev and Viktor Ya-
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
nukovych, the Memorandum on Cooperation to Organize the Supply
of Liquefied Natural Gas to Ukraine was signed by the Cabinet of
Ministers of Ukraine and the Government of the Republic of Azerbaijan /12/. According to the Memorandum, the cooperating parties
agree to take into account:
– Azerbaijani information on plans of implementation of the AGRI
project envisaging preparation of a feasibility study which includes, among other things, studying options of gas supply from
Azerbaijan to the Black Sea, its liquefaction, transportation by
sea, re-gasification and delivery to the Romanian and other EU
consumers;
– Ukrainian information on plans for construction of the liquefied
gas re-gasification terminal on the Black Sea shore in Ukraine
and purchase of the liquefied gas from Azerbaijan in the following volumes:
o up to 2bcm in 2014;
o up to 5bcm in 2015;
in the subsequent years - an amount to be determined by the estimated capacity of the re-gasification terminal in Ukraine.
Also, the parties agreed to provide the necessary assistance to
their economic entities by running a mutually beneficial activity in
their territories in relevant sectors of the oil and gas industry covered
by this project implementation, as well as giving mutual support to
the extension of Azerbaijani gas export opportunities and development of the Ukrainian transit infrastructure which also makes it possible to receive the liquefied natural gas in its territory.
One should note that after signing of this document, Ukraine
started active preparation to implement construction of the liquefied
natural gas reception marine complex (LNG terminal) nearby Odessa. As of today, the Spanish company Socoin has prepared the termi-
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
nal construction feasibility study. According to the Ukrainian Prime
Minister M. Azarov /13/, the project implementation was supposed
to start by the end of 2012. It was planned that after completion of
the first stage, by the end of 2014, Ukraine to be able to receive the
liquefied gas of up to 2bcm/a. In one year the volume to increase to
5bcm, in three years it to reach 10bcm.
However, for this purpose Azerbaijan should construct a branch
pipeline to the Black Sea coast, and the LNG terminal should be
built in Georgia for the natural gas liquefaction. The Azerbaijani
decision-makers, when considering possible alternatives of laying
new pipelines, preferred the Trans Anatolian Natural Gas Pipeline
(TANAP) gas pipeline construction to ensure the Azerbaijani gas
transportation to Europe via Turkey. According to the agreement
between Azerbaijan and Turkey signed in July 2012, the pipeline
construction scheduled to start in the Q4/2014 and be completed in
36 months. Implementation of this project will allow Baku to export
annually 16bcm at the first stage, 20bcm at the second stage and up
to 24bcm at the third stage /14/.
Source: TANAP
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
Parallel to that, Turkey has invited Qatar to invest in the construction of a new LNG plant in Turkey. According to that, the facility is
planned to be built on the coast of the Gulf of Saros in the northern
part of the Aegean Sea. The plant’s capacity is expected to reach up
to 6bcm/a of liquefied gas.
Saros Bay or Gulf of Saros (Turkish: Saros Körfezi) is an inlet of
the northern Aegean Sea located north of the Gallipoli Peninsula in
northwestern Turkey (source: google)
Although, Ukrainian officials stating that the project of the LNG
terminal in Ukraine has no direct connection with the Turkish project, the former is ready to consider its participation in the construction of the Turkish LNG terminal at the entrance to the Dardanelles.
In addition, the Ukrainian side offered assistance to Turkish partners
in the construction of large underground gas storage facilities, since
the existing ones do not meet the needs of this country.
Ukraine also takes into account the EU’s interest in this project
because, due to the TANAP’ future integration with the NabuccoWest pipeline, its members are able to buy Caspian gas directly on
the EU’s South-eastern borders. Also, Ukraine can get some benefit from its construction, as it gains of the opportunity to use gas
from this pipeline to cover own needs. At the same time, the planned
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ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
pipeline’s weak link is a growing dependence on supplies through
Turkey which gets, besides the control over the Bosporus and Dardanelles, additional influence on energy supplies to the EU states.
In these conditions, Ukraine has confidence in prospective demand for its pipelines from the EU and Caspian states. Ukraine’s
priority in further development and expansion of the Ukraine -Azerbaijan strategic partnership, which is still the joint participation in:
– creation of new transport corridors and upgrading of the existing
European and Euro-Asian transport corridors from Ukraine and
Azerbaijan to Asia and other versa towards the Western Europe;
– increasing the oil and natural gas supplies to the interested consumers by means of combining resource and transport potential
of the two countries;
– establishment of favorable conditions for economic entities of the
parties, including by improvement and harmonization of transport tariffs, simplification of the customs procedures for transportation of freight via the Euro-Asian Transport Corridor by all
transport means;
– upgrading the existing and construction of new refining capacities in the territories of two states.
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RESOURCES
1.Сайт Посольства Украины в Азербайджанской Республике (Стан договірноправової бази. Договірно-правова база) http://www.mfa.gov.ua/azerbaijan/
ua/32042.htm
2.Меморандум між Україною і Азербайджанською Республікою про
співробітництво в галузі нафтогазової промисловості
http://zakon2.rada.gov.ua/laws/show/031_077
3.Елхан Полухов «Контракт века» (Проблема в исторической ретроспективе)
http://poli.vub.ac.be/publi/crs/rus/R02-005.html
4. Угода між Кабінетом Міністрів України і Урядом Азербайджанської
Республіки про принципи співробітництва в нафтовій галузі http://zakon2.
rada.gov.ua/laws/show/031_049
5.Нефть пойдет в обход России
http://www.tek.ua/news0$n!358411.htm
6. Угода між Кабінетом Міністрів України та Урядом Азербайджанської
Республіки про заходи, які стосуються розвитку співробітництва в сфері
транспортування нафти територією України http://zakon2.rada.gov.ua/laws/
show/031_101
7.Реверса не будет
http://www.ukrrudprom.ua/digest/Reversa_ne_budet.html?print
8.Сотрудничество Азербайджана и Украины развивается в духе стратегического
партнерства – Інтерв’ю Прем’єр-міністра України Миколи Азарова
Азербайджанському інформаційному агентству “Trend”, від 2 квітня 2012
року http://www.kmu.gov.ua/control/publish/article?art_id=245093629
9.Ровшан Ибрагимов Транспорт энергетических ресурсов странами,
лишенными выхода к открытым морям (на примере Азербайджана)
http://www.ca-c.org/c-g/2011/journal_rus/c-g-1-2/07.shtml
10.Европейский газопровод для Азербайджана http://4vlada.net/politika-i-biznes/
evropeiskii-gazoprovod-dlya-azerbaidzhana
11.Россия победила в гонке газопроводов
http://vz.ru/economy/2008/2/6/143029.html
12.Меморандум між Кабінетом Міністрів України та Урядом Азербайджанської
Республіки про співробітництво в організації постачання зрідженого
природного газу на територію України
http://zakon2.rada.gov.ua/laws/show/031_084
13.Украина и Азербайджан расширяют стратегическое партнерство http://www.
azarov.ua/event/ukraina/Ukraina-i-Azerbajdzhan-rasshiryayut-strategicheskoepartnerstvo-.html
14.Aзербайджан и Турция подписали соглашение о TANAP
http://azeritoday.com/archives/36640
115
ENERGY AND AZERBAIJAN: HISTORY, STRATEGY AND COOPERATION
ENERGY AND AZERBAIJAN:
HISTORY, STRATEGY AND COOPERATION
editor Rovshan Ibrahimov
SAM Center for Strategic Studies. Baku, Azerbaijan, AZ 1005
M. Ibrahimov str. 8
Tel: (+994 12) 596 82 41
Fax: (+994 12) 437 34 58
E-mail: [email protected]
Web: www.sam.gov.az
© SAM Center for Strategic Studies, 2013.
116

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