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CHAPTER IV: Azerbaijan’s response to external factors

Once negotiations over the Nabucco project are seen as an element of Azerbaijan's strategic and foreign policy it is easy to see how Azerbaijan was able to play off one country against the other. This chapter will look at the various positions that Azerbaijan took with reference to other countries as part of the Nabucco project. The main rational behind all negotiating positions was the Azerbaijan’s long term national interests. The Azerbaijani government calculated how far accomplishment of Nabucco project would ensure the long term national interests in terms of both selling its own natural gas resources and increasing its strategic value. This is the key aspect that governs Azerbaijan’s relations with neighbouring energy rich as well as transit countries. There are two aspects to this relation; Competition and Co operation. There are no permanent friends or permanent enemies. Azerbaijan has always followed its own interests and this was true of the Nabucco project also. In this chapter I will look at how Azerbaijan’s decisions on the Nabucco pipeline project has been influenced by consideration of external factors.

Importance of Azerbaijan’s strategic location and energy

resources for the EU, and inconsistent EU backing

Before going into the details on EU support for the Nabucco project, a brief glance at the natural gas sector of Azerbaijan and the general gas pipeline politics in the region, and the EU’s approach thereof is looked at. In order to comprehend what role Azerbaijan played in Nabucco, it is necessary to understand Azerbaijan’s strategic value as well as important energy resources for the EU who looks for the diversification of its energy supply sources. This is the most important element in the relationship between the EU and Azerbaijan.

Azerbaijan is also rich with the natural gas resources. But, prior to 2006 Azerbaijan was gas importer country. Gas boom in Azerbaijan started in 2007 with the production commencing at Shahdeniz⁸² field. The average gas production from Shahdeniz was supposed to be around 304 billion cubic feet (Bcf) per year and plus 45,000 barrels of condensate per day.⁸³ Azerbaijan has the enormous reserves of gas with proven natural gas reserves at roughly 35 trillion cubic feet (Tcf) as of January 2014. Most of these located in Shahdeniz field. The discovery of Absheron and the Umid fields between 2010 and 2011 raised this figure up by 15 Tcf. However, the problem of how feasible it is to extract this gas remains, and therefore they are not yet considered as reserves.

The country imported its gas from Russia until 2007, when it became an exporter of natural gas.⁸⁴ Most of Azerbaijan's natural gas goes to Turkey, and some to Greece through the Turkey-Greece inter-connector. The Gazi-Magomed-Mozdok pipeline supplies Russia, and a small volume of natural gas goes to Iran via the Baku Astara pipeline. Iran ships natural gas to Nakhchivan, an Azerbaijani enclave situated between Iran and Turkey. Enclave is completely dependent on Iran for its natural gas supply. In 2013, Azerbaijan exported about 240 Bcf through South Caucasus Pipeline.

BP, the operator of the development, estimates that Shah Deniz field has an estimated 40 Tcf of natural gas in place. It is located on the deep water shelf of the Caspian Sea, in water depths of up to 1,600 feet. According to BP, the field produced about 346 million cubic feet per day of natural gas and about 53,740 bbl/d of condensate in 2013. In 2012, Azerbaijan produced 607 billion cubic feet (Bcf) of dry natural gas and consumed 379 Bcf. Once Shah Deniz field is fully developed, it is expected to have a peak capacity of 565 Bcf (in addition to the 315 Bcf in Phase I), making it one of the largest gas development projects anywhere in the world.

The discovery and development of Shah Deniz gas field, together with commissioning of the South Caucasus Pipeline (SCP) has transformed Azerbaijan's natural gas sector, allowing country to become a natural gas net exporter. The Azeri-Chirag-Guneshli (ACG) complex and Shah Deniz fields produce most of the natural gas in Azerbaijan. Both crude oil and natural-gas from the ACG fields and from Shah Deniz are processed at the Sangachal Terminal. The terminal then ships these hydrocarbons through the South Caucasus Pipeline for export. And in 2007 Azerbaijan began to export natural gas to Turkey, Georgia and Greece, which means Azerbaijan has become net gas exporter from being the net importer in 2007.⁸⁵ Discovery of huge gas resources in Shah Deniz made it clear that during the further exploration and development of the field, Azerbaijan will need a pipeline transferring the gas resources to EUrope. Basically that is how the idea of Nabucco born. Azerbaijan plays a key role in the Southern Gas Corridor, as it will be the initial source of gas. Nabucco was not only thought for the Azeri gas, it was also counted for the Central Asian gas resources. That means, Azerbaijan can benefit from it also a future transit country for gas deliveries from Turkmenistan. Georgia, on the other hand, is also relevant as a transit country on route to the West, be it to Turkey or via the Black Sea.

As Shah Deniz gas field is very important for the any gas pipeline starting from Azerbaijan, it is crucial to provide brief information on this field. The contract between Azerbaijani government and several transnational oil companies such as BP, TPAO, NICO, Lukoil in 1996. It took exactly ten years to make it operational.⁸⁶ The driving force for the development of gas fields in Azerbaijan is the attractiveness of EUropean market. EU is desperately looking for new sources of oil and gas to diversify the supply sources of energy. In this sense, the Southern Gas Corridor is very important, and projects like Nabucco and TAP are/were supposed to be key part of this corridor. Below brief information about the different gas corridor of EU will be provided. Moreover, main projects which are part of the Southern Gas Corridor will be discussed briefly.

EU has opted for pipeline corridor system since it is much more cost effective than bringing in gas through tanker. There are three large import corridors that bring in gas into Europe. They are (1) from Russia (Eastern Gas Corridor), (2) from Norway (Northern Gas Corridor) and finally, from North Africa (Western Gas Corridor). There are plans to set up a fourth corridor, namely the Southern Gas Corridor will transport natural gas to Europe. A small but growing share of gas imports reaches EU in liquid form by sea (LNG)⁸⁷.

The Nabucco pipeline would have carried natural gas from Caspian region and the Middle East to South East Europe and to the Italy, Austria, and Southern Germany. Oil and gas companies began to invest in individual projects at the beginning of the 2000s, but the Southern Gas Corridor, as overarching project, emerged most solidly in a decision of European Parliament and the Council of September 2006, coded as “NG3”⁸⁸. That showed a clear support of EU for the project. Finally, in a second review of the energy strategy, EUropean Commission categorized the – meanwhile also called – “Southern Gas Corridor” as a Community priority.⁸⁹ It was especially through the Russian-Georgian war of August 2008 and the Ukrainian-Russian gas crisis of January 2009 that the Southern Gas Corridor and its key project, Nabucco Pipeline, became a central component of a European debate about diversification especially from the dependence on gas deliveries from Russia.

From the point of view of EUropean Commission, the Southern Gas Corridor comprises all those projects that originate in the Caspian region or the Middle East, regardless of the fact whether the gas transit is conducted to a great extent on Turkish territory (Nabucco, Trans-Adriatic Pipeline (TAP), Interconnector Turkey-Greece-Italy (ITGI)) or via the Black Sea (Azerbaijan-Georgia-Romania Interconnector (AGRI), White Stream).

Table 1. Components of Southern Gas Corridor

Source: Meister Stefan and Marcel Vietor, 01/11/2011 South Caucasus:20 Years of Independence, From: https://dgap.org/en/think-tank/publications/further-publications/southern-gas-corridor-and-south-caucasus, Accessed on 13/11/2014

EUropean Union supported all projects that comprised the Southern Gas Corridor. It contributed more than 20 million EUR to Nabucco, ITGI/IGB, TAP and White Stream through its program for Trans-European Energy Networks (TEN-E); and another 200 and 145 million EUR respectively were set aside for Nabucco and ITGI/IGB by EUropean Energy Program for Recovery (EEPR). However, Nabucco was supported politically by EU.

In general, although expressing its clear support for the Nabucco Project, the political cuts and divides in the EU have been also evident in backing for this project. As EU lacks a common foreign policy or common energy policy different countries have supported different projects. Thus, Bulgaria, Romania, Hungary and Austria supported Nabucco pipeline, at the same time they supported the rival South Stream project. Though Germany did not want to grant Nabucco any financial support initially at the negotiations for European Energy Program for Recovery at the beginning of 2009, it supported the project politically, mostly as a result of pressure from the German energy company RWE. However, support was not exclusive, since other German energy companies supported competing projects such as TAP and South Stream. Italian companies were part of South Stream and ITGI, Hungarian companies of Nabucco, South Stream and AGRI, Greek companies of ITGI and South Stream. That proves quite much how there were different interest groups that did not go in line with the EU common energy policy.

In addition to such cross linking patterns of support there are also other factors. Support for heavy infrastructural projects such as pipelines is political decision, especially if they cross politically unstable regions such as the Caspian area and the Middle East. The ideal solution would be for EU to develop a common energy and security policy but that is unlikely, at least in the near future.

In January 2011 European Commission President, José Manuel Barroso, and President of Azerbaijan, Ilham Aliyev signed joint declaration on gas delivery for Europe. Commenting on the signing of joint declaration Reinhard Mitschek, Managing Director of the Nabucco Gas Pipeline International GmbH stated that:

“The Joint Declaration on strategic gas supplies to Europe is of particular importance as it seals the bond between the EU nations and a close neighbour and strategic partner. Building on the Intergovernmental agreement, which was signed by the governments of the Nabucco transit countries in July 2009, the Joint Declaration serves to pave the way to the full implementation of Nabucco, by providing a firm political basis for gas supply from Azerbaijan. The joint declaration highlights in point five the importance of the Southern Corridor which is a strong encouraging political signal for producers and gas buyers. Nabucco as flagship project is the most advanced pipeline project in the Southern Corridor and is designed to meet the needs of the growing future gas markets.”⁹⁰

However, the U.S. and the EU did not show decisiveness beyond signing papers for the Nabucco pipeline. Even after Nabucco reduced to Nabucco-West, these two important actors did not show a firm support for the Nabucco-West. Instead they announced that they are indifferent for Nabucco-West and TAP projects. But it was clear that Shah Deniz consortium was going to choose only one of these options which were supposedly best served Azerbaijan’s national interest, taking into account political condition, and they finally chose TAP, not the Nabucco-West. And Azerbaijan was complaining about such a stance of the EU. Comparing options of Nabucco-West and TAP, then Azerbaijan’s Energy Minister Natig Aliyev stated that "I consider that Nabucco West is the best option from all points of view...It has a big capacity, big diameter, and it gives us the opportunity to deliver gas to east and central Europe. It's a more reliable market for Azeri gas."⁹¹ In terms of EU’s diversification policy, Nabucco-West was supposed to be preferred over TAP.

During the Southern Corridor forum held in Baku in May 2013, complaining about the decreasing EU backing and EU Commission’s inability to secure required funding for the Nabucco-West project, the vice-President of SOCAR Elshad Nasirov stated that “Europeans and Americans could easily have financed the Nabucco project a few years ago, at a cost equivalent to that of a few weeks of military operations in Iraq for example”.⁹² Elshad Nasirov was quoted saying that “"if the EU has not found the means to implement this project, we would not argue with the opinion of the EU about how the interests of European countries are protected. We will not argue with the EU, but we can confirm the fact of inability of the EU and member countries to find ways to build a pipeline."⁹³ It is to argue that Azerbaijan with its capacity, certainly, cannot plan and construct big energy projects on its own; Azerbaijan needs support from main players such as EU for financing and implementation of the projects. TANAP project is a good example for that; in this case Azerbaijan has done it together with Turkey.

Let it be TAP or Nabucco-West or Nabucco, they all meet Azerbaijan’s basic national interest; that is to sell its upcoming gas resources to the European market, this is minimum what Azerbaijan wants. Such an approach of indifference made Azerbaijan to opt for TAP in 2013. That way Azerbaijan chose an option which did not risk its national interest anyway, but at the same time it did not serve the best of EU energy policy. Because TAP will not target the countries that are most dependent on Russian gas imports, but Nabucco-West was supposed to do so.

In his interview to the Romanian news site HotNews, the European Commissioner for the Energy Gunther Oettinger satated that Azerbaijan’s decision to opt out for TAP was purely commercial decision; he noted that “...in my view the decision is based on commercial deliberations, to put it bluntly:  money talks.  In fact, Italy is a large, rich market with little real competition at the end of a shorter pipeline, compared to many fragmented small markets along the route of Nabucco West, a longer more costly pipeline. In addition, in Austria, there is a hub, developed in the past few years, that consistently drives down prices.”⁹⁴ That shows how EU energy commissioner and SOCAR official have different beliefs in the failure of the Nabucco West. That was back in 2013. However, despite the fact that classic Nabucco pipeline is gone, there is enough capacity to save the Nabucco-West which is very crucial for certain EU members such as Bulgaria, who is 80% dependent on Russian gas imports.

Loss of Nabucco as well as South Stream put Bulgaria into difficult situation. That is why countries like Bulgaria have been intensifying negotiations with Azerbaijan over future gas transfers as there are hopes for new gas explorations in Azerbaijan. After meeting with the Azerbaijani President Ilham ALiyev, the Bulgarian Prime Minister Boyko Borissov stated that “we want to revive the Nabucco project, more specifically the stretch that goes through Bulgaria. Our country is an extremely loyal EU member and has implemented all legal requirements of the Third Energy Package, unlike many other countries. Therefore, together with President Aliyev, we will present the revival project to the European Commission”. On his part President Aliyev pointed out that “we think that we can unite TAP and Nabucco. It is not important what you call this route. Our main goal is that the volumes of Azeri gas enter Europe...the more EU countries receive our gas, the better for all.”⁹⁵