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Analysis of Azerbaijan’s energy policy

This part of the thesis will locate the pipeline negotiations in the context of Azerbaijan’s overall strategy to make clear how negotiations were subordinate to broader foreign-policy and strategic goals; how are the national interests of Azerbaijan met with the failure of Nabucco. It will explore why other countries need Azerbaijani gas, and how this weakness is used to push forward Azerbaijani goals.

What is evident here is that the key element of Azerbaijan's energy policy is the supply of natural gas to European markets through the Southern Corridor. This is extremely significant as the Southern Corridor is the only westward route for exporting hydrocarbons from the Caspian. Important to add unlike Turkmenistan and Kazakhstan, China is not an option for Azerbaijan. Azerbaijan’s independent energy policy and its geopolitical location make it, though a small state by international standards, a major player in the Caspian region when it comes to energy supplies to the European market. ⁶⁵ This will especially hold true if projects such as Trans-Caspian is realized.

While pipelines are economically feasible, they carry a political risk as they lead to long term links and mutual interdependency between suppliers and consumers. As can be seen in the complicated negotiations that surrounded the Nabucco project, Azerbaijan has tried to reduce the risk through a variety of strategies, including playing one country against the other, balancing its interests between its two powerful neighbors, Russia and Turkey, and its main costumer the European Union.⁶⁶ Thus, it has balanced its political interests along with its economic interests. This has been a crucial element in the way priorities in energy projects, especially long term energy projects, have been defined.⁶⁷

In other words, Azerbaijan has not openly and directly confronted Russian energy interests during the Nabucco negotiations; Azerbaijan has announced its interest in Nabucco project, however made it clear that enabling the other gas recourses, especially Turkmenistan’s, available for the project is very crucial. It was clear for Azerbaijani government that the possible other sources of gas for Nabucco are still uncertain, and in such a situation the best strategy for Azerbaijan was to follow the developments. It is clear that Azerbaijan alone cannot go ahead with the implementation of Trans-Caspian gas pipeline, which was supposed to be one of the main sources of the supplies for the Nabucco project. First Azerbaijani government decided to see the required available sources and infrastructure for the Nabucco pipeline.

This is particularly true of long term energy projects. This strategy is also goes well with the nature of the gas market. Unlike oil supplies that can be sourced from other countries, once the necessary infrastructural elements are in place it is not easy to switch. There are other vulnerabilities, such as the need for transit states that can easily be put under political or economic pressure, high costs, long gestation periods, geographical constraints, and unlike oil, where alternative sources can be found in a few weeks, it will take years to restore gas supply if a transit state disrupts the flow. Moreover, natural gas markets are still regionally fragmented and such markets have a long way to go before they are efficiently transformed.⁶⁸

Increasing investments in the natural gas sector, the development of new transit lines, and an increasing dependence of Southern and Eastern European states on Azerbaijani gas have been the guiding policy of Azerbaijani energy policy especially in the transit of natural gas.⁶⁹ The challenges that Azerbaijan faces are many. It is a landlocked country. There are other key players such as Russia, Turkey and Iran, all of whom do not want to the emergence of Azerbaijan as a major player. Transportation is limited, transit lines have to be built. The Azerbaijani response to these challenges can be summarized as trying to acquire a majority stake in the pipelines, a diversification of pipeline routes by developing multiple options, and finally pursue a free market policy with international players like British Petroleum. Since 1995 BP have been invested in Azerbaijan in form of FDI 34 billion US dollars, which shows long term investment interest of BP in Azerbaijan.⁷⁰

There are external factors that play an important role too. Europe’s natural gas supplies, especially in recent years through the development of a southern corridor of gas from the Caspian region as an alternative to Russian natural gas, has been a focal point of U.S. energy policy in Europe and Eurasia. Current geo political trends mean that the demand for Azerbaijani gas is likely to rise. These include rising global demand and competition for energy resources from emerging economies such as China and India, persistent instability in energy producing regions such as the Middle East, a fragmented internal European energy market, and a growing need to shift fuels in order to address climate change policy. All of this has made energy supply security a key concern for European nations and the European Union (EU). One of the key elements of the EU’s energy supply strategy has been to shift to a greater use of natural gas⁷¹ of which Azerbaijan is a key supplier; diversification of supplies sources is very important in this sense. This makes it, in spite of its relatively small size, a key player. Azerbaijan’s natural gas production from the Shah Deniz field is expected to keep on increasing, the scale of which is not only expected to make the country self-supporting in natural gas but also to result in substantial export revenues and position the country as a major gas exporter from the Caspian basin. The economic potential of Azerbaijan's resources are not in question. The proven and potential reserves in the Azerbaijani sector of the Caspian Sea are potentially equal to North Sea resources. However, it is not easy. Long-distance transnational pipelines are central to energy security.⁷²

Another factor is Russia. Europe’s natural gas consumption is projected to grow even as its own domestic natural gas production has declined. Current trends predict that Europe will continue to depend on Russian gas. For example, as domestic fossil fuel production continues to decline fast, especially in Denmark and the Netherlands, gas imports in Europe are expected to increase between 2020 and 2030, according to the International Energy Agency.⁷³ Moreover, at present The EU is the largest energy importer in the world, importing more than half (53%) of the energy it consumes.  The EU needs to actively boost its engagement with producer, transit and consumer countries and adapt quickly to changing global markets, the report maintained.⁷⁴

Increasing economic activity and the EU s ambitious plans mean that the demand for natural gas will continue to go up. However, Europe’s dependence on Russia as a supplier is likely to grow. Given current geo political tensions and Russia's willingness to use gas as a political weapon, the EU is keen on exploring alternative sources for its natural gas needs. The EU itself is divided on the question. It is uncertain whether Europe as a whole can, or is willing to replace a significant level of imports from Russia. Some European countries that feel vulnerable to potential Russian energy supply manipulation may work harder to achieve diversification than others.⁷⁵ One solution to this problem, a solution that the EU would be eager to adapt is a pipeline that bypasses Russia, which is what the Nabucco pipeline was. Europe s aim in the Caspian is to preserve the security of European energy supplies and prevent the monopolization of oil resources by any one powerful country. ⁷⁶

Azerbaijan has shrewdly exploited this need with ad hoc alliances. Stedman's concept of alliances where he argued that a successful strategy depends on the ability to create an external coalition for peace, the resources that the coalition brings to its responsibility, and the consensus that the coalition forms about the legitimacy (or lack thereof) of spoiler demands and behavior can easily be adapted to Azerbaijan's long term strategy.⁷⁷

Azerbaijan has continued to keep a close alliance with Russia and Turkey even as it is a key U.S. and European ally.  Its natural gas reserves, estimated at 30 trillion cubic feet, are relatively small compared to its Central Asian counterparts. Nevertheless, Azerbaijan has been able to leverage its resources substantially due to its key geographic location and reputation as a reliable partner.⁷⁸  Azerbaijan also is a transit hub in an evolving geo-strategic and geo-economic system that stretches from Europe to the South Caucasus and Central Asia. As a result of the confluence of both Azerbaijani and EU interests, especially the possibility of giving Europe another route to transport Caspian energy supplies to European member states, especially those who are mostly reliant on Gazprom, Russia’s state-owned monopolistic company. Given all these factors, a trans-Caspian pipeline carrying natural gas to Azerbaijan, Georgia, Turkey and then to Central Europe.⁷⁹ It is important to state that Azerbaijan has already been transporting Kazakhi oil through its Baku-Tbilisi-Ceyhan oil pipeline to the European market; and Kazakhstan is interested to increase its supplies through this route as Azerbaijan’s own oil production has been declined in the last years; and that has made more free space for the Kazakhi oil supplies to be sent to westward from Azerbaijan.

Furthermore, Azerbaijan is also becoming very important transit country for the Silk Road railway connection between China and Turkey which is supposed to further connected with Europe; and will take Chinese goods to Europe and European goods to China.⁸⁰ Most importantly the transport period is shortened more than twice in comparison to the transport through Seas. It should be noted that the test container train has been already carried first cargo successfully.⁸¹ Once this road starts normal functioning, it will substantially contribute to the Azerbaijan’s importance as a transit corridor between the Europe and the Asia.

Though a small state, the confluence of these factors give Azerbaijan an advantage.  All of this makes Azerbaijani gas supplies important to the EU. The Nabucco pipeline project that Azerbaijan supported initially at first, but then become less pressing for its implementation and came up with alternatives, which can be seen as a part of this diversification strategy.

Throughout the negotiations around Nabucco and TAP projects, Azerbaijan put its national interest forefront; and choosing TAP served that end in a best way. Firstly, Azerbaijan did not make Russia enemy for uncertain gains; instead Azerbaijan took a ‘relative gain’ from choosing TAP project. Indeed with its limited capability, that was the best Azerbaijan did. Secondly, expansion of other projects, such as Nabucco-West, can be still revived and if this happens Azerbaijan will take its benefit as well.