Baku’s energy bargaining chips

Victoria Panfilova, columnist for "NG", exclusive to VK


Azerbaijan is expanding its functions in the global energy schemes. Known as a supplier of oil and gas, the country is now ready to become also the largest transporter of Central Asian energy resources. In particular, Baku will sign a contract with Astana about pumping Kazakh oil via Azerbaijan. The adviser of the Kazakhstan National Committee of World Petroleum Congress Ardych Durdu told this to the author. The decision to co-operate is due to the fact that Kazakhstan is preparing to launch the development of one of the largest oil fields - "Kashagan". "For carrying out the project a special agreement with Azerbaijan should be signed. Parties to the contract may be the governments of the two countries, as well as national energy company "KazMunaiGas" and SOCAR”, Durdu said.


Negotiations on the topic of energy transit through the territory of Azerbaijan began a few years ago. Moreover, in 2009, an agreement "On the use of the Azerbaijani infrastructure to transport Kazakh oil" was signed. However, all the arrangements were somewhat abstract because of inaccessibility to the resources of "Kashagan". For this reason, the Kazakh authorities permanently postponed the date of the beginning of field development. Now, according to Ardych Durdu, all the difficulties are overcome, and the first oil from "Kashagan" may come to global markets at the end of this year. "The peak of production from the field of "Kashagan" will be in 2021 – the field will produce up to 1.5 million barrels of oil per day. The project cost is estimated at $ 100 million”, Kazakh consultant said.


The main export route of Kazakh oil will be the "Baku-Tbilisi-Ceyhan" pipeline, with a capacity of 60 million tons of oil a year. "When the company enters the maximum level of production, the existing pipelines will not be enough. Therefore, a new project is already being discussed - "Kazakhstan Caspian Transportation System" (KCTS), which includes the construction of the pipeline "Eskene-Kurik" and the creation of the Trans-Caspian system (Kuryk-Baku) with access to Georgia and from there to Turkey. In addition, the transfer of oil from Kazakhstan to Azerbaijan will be carried out by tankers with a capacity of 43,000 tons”, Ardych Durdu said. However, the issue of the "Baku-Tbilisi-Ceyhan” oil pipeline is not so simple.



Transporting Kazakh oil depends on transport and energy policy of Azerbaijan. On the one hand, Azerbaijan is trying to diversify its transport and energy projects, because there are financial resources for that. On the other hand, of course, it takes into account its own interests. "A lot of talk in the press was caused by the reluctance of Azerbaijan to pump its oil through the Baku-Novorossiysk pipeline, but few know that Azerbaijan, instead of the claimed 5 million tons, pumped no more than 1.5 million tons. The reason is that the Azerbaijani oil is much better and more expensive than the Russian one. At the terminal in Novorossiysk it was mixed with the Russian, and the output gave something average in quality and price. Baku demanded compensation from Moscow for the loss in value and also proposed the establishment of Novorossiysk "bank of oil," i. e., samples to compare the quality of oil pumped through the pipeline and shipped from the terminal. However these proposals did not satisfy the Russian side, and the termination of the agreement was announced", the researcher of the Baku Center for Economic Research Gubad Ibadoglu told the author.


According to him, a similar problem may occur with the Kashagan oil. Gubad Ibadoglu recalled that a few years ago Baku suggested Astana to build in Azerbaijan a refinery for the oil from Kashagan. However the Kazakh side has refused, because in the future it would have to constantly pay Azerbaijan for this service. Astana decided to build a refinery in the territory of Kazakhstan. Last month, during the visit of British Prime Minister David Cameron to Kazakhstan, the opening ceremony of the plant "Bolashak" in Atyrau built with the help of British experts and investment was held. However, the issue is still on the agenda. Although there is still no oil from Kashagan, there is also no matter of dispute between Azerbaijan and Kazakhstan. The essence of it may be that if the Kashagan oil does not meet the requirements of the Azerbaijani side, the Kazakh side will have to choose a different version of its exports. In fact, Azerbaijan categorically does not want to "spoil" a reputation of its high quality oil mixing it with others. Thus, if the Kashagan oil purified by "Bolashak" does not satisfy the criteria of Baku, it will not be transferred to the Baku-Tbilisi-Ceyhan oil pipeline. It will be delivered to Baku by tankers, and then by rail to Georgian ports and then to Turkey. In this case, the key issue of further negotiations between the parties will determine the volume of transit of Kazakh oil via Azerbaijan.


Responding to the question whether it is possible for transporting Kazakh oil, particularly from Kashagan, to build a pipeline under the Caspian Sea, which might be cheaper than shipping it by tankers, Kazakhstan consultant Ardych Durdu said, "The Caspian Sea is the area where the borders of five states meet; between them there are some contentious issues. While the conflict is unresolved, such projects should not be initiated – they can meet categorical protests of neighbors. In addition, the tectonic structure of the seabed is very complicated, so building pipelines is expensive and dangerous – there is too much risk. Therefore the transport of oil will be carried out only by means of flotation. "


The desire of Azerbaijan to participate in the global energy projects is understandable. However, in this view, the question of its relationship with Russia arises, which fervently watches such projects and is ready to see the infringement of its national interests at the slightest occasion. In addition, the contradictions in the energy line between Baku and Moscow have already emerged in the suspension of Azeri oil transportation via the Baku-Novorossiysk pipeline.


"Having achieved a certain degree of financial independence, Azerbaijan is trying to build with Russia equal partnerships relations, and Russia seems to begin to realize that it can and should cooperate with Azerbaijan and not try to suppress it". A striking example of this is the choice of the gas pipeline route to Europe. After all, there were alternatives in the form of Nabucco-West, but in the end the Trans Adriatic Pipeline (TAP) was chosen. Azerbaijan, by and large, did not care, but for Russia it was a good gift, because this route is not competing with any Russian project”, Gubad Ibadoglu said.


Recall that in late June, a consortium to develop the "Shah Deniz" announced choosing of the TAP project as a route for transporting its gas to European markets. Through the TAP gas pipeline the gas will go from the Caspian region to Greece, Albania and across the Adriatic Sea to southern Italy, and from there, perhaps to Western Europe. Nabucco West competed with the TAP.

"The State Oil Company of Azerbaijan Republic (SOCAR) expects to acquire 20% of equity in the construction of TAP», the head of SOCAR Rovnag Abdullayev said. According to him, Azerbaijan signed a temporary shareholders' agreement within the TAP project, and it participated in its financing. Now, after choosing the TAP, Baku wants to become a major participant in this project. "It is expected that SOCAR, BP and Total will receive 50% of equity in the TAP, of which 20% will go to SOCAR, 20% will be the share of BP and 10% - of Total», Abdullayev said. According to him, the shareholders' agreement with a consortium of TAP will be signed before the end of this year. SOCAR President also added that by the end of 2013, contracts will be signed for the sale of gas to customers in Europe. "We have chosen the markets and received confirmation from the customers of the gas. Work on the contract for the sale of gas is already underway. It must be signed by the end of this year ", he said.


Another important project of SOCAR may be the joint development of fields both in Azerbaijan and Russia - together with "Rosneft", both in the Caspian Sea and on land, Rovnag Abdullayev declared. These questions were discussed at the beginning of July by the head of "Rosneft" Igor Sechin and the President of Azerbaijan Ilham Aliyev. Russian expert, senior researcher at the Analytical Center of Moscow State Institute of International Relations Leonid Gusev told the author that in the Azerbaijani-Russian relations the process of improving began evidenced Sechin's visit to Baku and the signing of the agreement on cooperation in the development of the field "Shah Deniz-2". "Russia has quite calmly reacted to the TAP project - our analysts have estimated that if the pipeline is built, then about 10 billion cubic meters of gas will be transported through it, and the Russian side is not so much concerned about it. But the "victim" in competition with it, the Nabucco-West project, ran counter to the plans of "Gazprom" and sometimes forced the Russian side to worry. And, of course, we know that between TAP and Nabucco-West Azerbaijan chose a project that is not contrary to the interests of Russia, which is important”, Gusev said. It is important that Baku and Moscow realized: the cooperation between Russia and Azerbaijan in the energy sector is beneficial to both countries, and as a result, there is a thaw in the tense relations between the two states.