Full title here in all caps in a format

MASARYK UNIVERSITY

Faculty of social studies

Department of International Relations and European Studies



Failure of the Nabucco Pipeline Project

The role and interests of Azerbaijan
Master‘s Thesis
Elgun Jafarov
Supervisor: Mgr. Jan Osička, Ph.D.

UČO: 404865

Study Field: PL – EUP

Year of Enrollment: 2012 Brno, May 2016

I hereby declare that this thesis I submit for assessment is entirely my own work and has not been taken from the work of others save to the extent that such work has been cited and acknowledged within the text of my work.

Date: 08 May 2016 Signature

ABSTRACT

The collapse of the Nabucco gas pipeline project which was to carry Azeri gas to Europe in 2014 demonstrates how small states have a major impact on the geo politics of oil and gas supply. When the Nabucco natural gas pipeline project started, the successful completion of the Baku-Tbilisi-Ceyhan oil pipeline seemed to prove that pipelines could be independent of politics. That project too had raised doubts. The failure of the Nabucco project is a case of how a small state was successful in playing big powers against each other. This thesis argues that Azerbaijan uses energy policy as a tool to achieve broader strategic and foreign-policy aims, and that was why it played a major role in the dismissal of Nabucco as a valid natural gas project. Using neo-realism as a lens it tries to understand how Azerbaijan used the project to project its capabilities/power to protect its national interests. In doing this it showed that in contrast to the Great Game theory, small states are not mere pawns but can be active players in global geo politics. In other words, small states have agency. As the only available independent gas supplier in the region, Azerbaijan had a big say on the decision making in terms of choosing the countries through which the gas would pass and how it should be delivered to Europe. Often scholars argue that it is big states like Russia or USA or EU who decide on the big projects. The role of small countries like Azerbaijan is overlooked. In fact, by playing one country against the other, Azerbaijan was able to achieve its strategic goals. How and why Azerbaijan chose the failure of Nabucco is an interesting question. And I believe this calls for a more insightful look, and this is the topic of this thesis In this research, besides Azerbaijan, other actors such as Russia and EU will be also investigated but only in how they relate to Azerbaijan. This thesis will also look at the failure of Nabucco and how Azerbaijan's preference for other projects impacted the energy supply diversification policy of EU countries such as Bulgaria, Romania and Greece. It will also look at prospects for the revival of Nabucco.

ACKNOWLEDGMENTS

I would like to thank my family who supported me to study at the Masaryk University. For me it would not have been possible to study abroad without their full support. I would also like to thank my friend Francis who helped to improve the wording of the thesis. Additionally, I would like to thank Agshin Umudov, who was my lecturer at Qafqaz University, for sparing his time to discuss my thesis subject with me.

TABLE OF CONTENTS

ABSTRACT 3

ACKNOWLEDGMENTS 4

TABLE OF CONTENTS 5

LIST OF TABLES 6

LIST OF MAPS 7

CHAPTER I: Introduction 8

Methodology 22

CHAPTER II: Literature Review 26

CHAPTER III: Nabucco pipeline project 41

Project outline 41

Analysis of Azerbaijan’s energy policy 47

CHAPTER IV: Azerbaijan’s response to external factors 55

Importance of Azerbaijan’s strategic location and energy 55

resources for the EU, and inconsistent EU backing 55

Turkmenistan: Competition or Co operation? 66

Russian interests 73

Iranian interests 79

Turkish Interests 84

American interests 87

Summing up 91

CHAPTER V: Conclusions 93

BIBLIOGRAPHY 99

Appendix 106

LIST OF TABLES

Table 1. Components of the Southern Gas Corridor............................................47

LIST OF MAPS

Map 1. Nabucco Pipeline Project………………………………………………….….31

Map 2. Proposed Trans-Caspian gas pipeline………………………………………....59

CHAPTER I: Introduction

Azerbaijan is a republic in the Caucasus with 9.4 million habitants and shared frontiers with three powerful states, Iran, Turkey and Russia. However, by carefully balancing its interests and playing on differences the country has been able to influence geo political strategy far more than it should have been able to.¹ This chapter will, by putting the Nabucco gas pipeline project at the center of the analysis, look at how the country has been able to do this.

Azerbaijan is a young country born in 1991 following the fall of Soviet Union. Independence brought many burdens along with it, among them the need to build and develop the economy. Without a doubt promising natural mineral resources were available. But the geopolitical and economical conditions were not easy as Azerbaijan was in war with neighboring Armenia until May 1994; with higher inflation a destabilized country was not a perfect destination for the oil companies. However, power was quickly consolidated under the third President of Azerbaijan, Heydar Aliyev who had been leader of Soviet Azerbaijan from 1969 to 1982 and became the president of independent Azerbaijan from 1993 to 2003. However, countries like Azerbaijan have always been seen as pawns in an international game between big players.

Most of the theoretical literature on the subject follows the Great Game theory that emerged out of conflicting Russian and British interests in Central Asia in the 19^th century.² The original Great Game had control of territory as its aim. It is significant because it introduced the term “geo-politics” into political science. In a famous 1904 article, the British geographer Harold Mackinder argued that Russia's position in Eurasia made the country “the pivot region” of world politics. In a nutshell, Mackinder saw history as a struggle between land-based and sea-based powers. He saw that the world had become a “closed” system, with no new lands left for the Europeans powers to discover, to conquer, and to fight over without affecting events elsewhere. Sea and land-based powers would then struggle for dominance of the world, and the victor would be in a position to set up a world empire. In this system, small countries like Azerbaijan were seen as mere pawns. Today while control for territory is no longer central, control over resources and resource rich countries is.

According to this theory Azerbaijan should have been reduced to a satellite state. Azerbaijan had been dominated by external powers, especially by Russia for most of the last 200 years of its history, so its chances of crafting an independent foreign-policy were quite remote. However, small states can have much greater control over their destinies by playing off other powers against each other.³ Therefore, it is essential to look at Azerbaijani decision making from the viewpoint of Azerbaijani decision makers. Two things came together to make Azerbaijan, even though a small player, key in international geo-economic strategies. These are (a) its independence from Russia in 1991, after having been a part of the Tsarist Empire and (b) the discovery of huge natural-gas reserves on its offshore territory. Further, the start of negotiations with Turkmenistan that aimed at the creation of a legal framework for constructing the Trans-Caspian Pipeline, and several gas agreements such as Baku-Tbilisi-Erzurum have made Azerbaijan a major natural gas exporting country.

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. This makes Azerbaijan, though a small state by international standards, a major player in the Caspian region^.4 This thesis, by making negotiations over Nabucco, and closely examining the role that Azerbaijan played in it, will show how a small state, given the right resources and geographical positioning can have an influence that is far beyond its size in international negotiations.

Azerbaijan’s foreign-policy is driven by two factors (a) the dispute with Armenia over Nagorno-Karabakh (b) the need for energy security and independence. At the core of Azerbaijani foreign policy is the frozen conflict of Nagorno-Karabakh, a landlocked mountainous region that both Armenia and Azerbaijan claim. The land lies in the territory of Azerbaijan, but has an ethnic Armenian majority, backed by neighboring Armenia. A brief war fought from 1988 to 1994 ended with a truce that froze the dispute.⁵

After the Nagorno Karabakh war, and as a newly independent state, Azerbaijan had to secure its political independence and economic development amid complex geopolitics that reflected the conflicting interests of different stakeholders, while finalizing its oil and gas projects, particularly for pipeline routes. These stakeholders included multinational oil companies, Azerbaijan’s neighbors and the United States.⁶ These core elements are essential to understand Azerbaijan's policy. As a resource rich state Azerbaijan could use its oil and gas resources as an important policy instrument, as emphasized by the then-president of the State Oil Company of the Azerbaijan Republic (SOCAR), Sabit Bagirov: “The only way to accomplish improving Azerbaijan’s economic and political relations with the West was to resort to the ‘oil card’ and to offer the territory of Azerbaijan for the West’s new strategic routes to Central Asia.”⁷

This thesis argues that Azerbaijan uses energy policy as a tool to achieve broader strategic and foreign-policy aims, and that was why it played a major role in the dismissal of Nabucco as a valid natural gas project. In doing this it showed that in contrast to the Great Game theory, small states are not mere pawns but can be active players in global geo politics. In other words, small states have agency. As the only available independent gas supplier in the region, Azerbaijan had a big say on the decision making in terms of choosing the countries through which the gas would pass and how it should be delivered to Europe. It is usually big states like Russia or USA or EU who decide on the big projects; that is also exemplified in the case of Baku-Tbilisi-Ceyhan mega oil pipeline. The role of small countries like Azerbaijan is overlooked. However, the role and decisiveness of Azerbaijan in Baku-Tbilisi-Ceyhan oil and Baku-Tbilisi-Erzurum gas pipelines should be emphasized.

This thesis is a simple one. It tries to use neo-realism to explain Azerbaijan's position in the negotiations for the Nabucco project. While neorealist theory deals only with states, political scientists have been increasingly dissatisfied, especially given the rise of non state actors and the influence they have on state policy with such limitations⁸ .Some authors⁹ aim to expand regime analysis by challenging the main focus of such theories on states. Thus, the idea that neo-realism can consider only state-level interactions is increasingly outdated. This thesis will therefore recognize non-state actors as a key analytic tool.

The thesis adapts the idea of George and Bennett that the central question to ask of any case study is “What is this a Case of?” ¹⁰The answer in short is that this thesis tries to understand the Nabucco negotiations through the theoretical framework of neo-realism, in particular. In line with recent literature that looks at the role of non state actors in the indirect formulation of foreign-policy, and the considerable influence¹¹ that they have on state policy, it considers non state actors, especially capital¹², as a significant power element. The current thinking on states that relies on three geographical assumptions ‐ states as fixed units of sovereign space, the domestic/foreign polarity, and states as ‘containers’ of societies ‐ led into the ‘territorial trap’ that privileges state borders over everything else.¹³

Azerbaijan’s position in an international commodity chain such as Oil and Gas cannot be seen in isolation. It is precisely because Azerbaijan is a weak country that the external factors are important. The case is defined as (a) a weak country uses energy policy as a strategic tool (b) other players are seen in the framework of how their positions impact Azeri policy. There can be NO substantive analysis of Azeri policy without taking the position of the external players. Further, in an increasingly globalised world, there is a functional integration between internationally dispersed activities¹⁴ which is what Azerbaijan's positioning on the global oil and natural gas market is about. It is precisely because Azerbaijan is a weak country that the external factors are important. The case is defined as (a) a weak country uses energy policy as a strategic tool (b) other players are seen in the framework of how their positions impact Azeri policy. Therefore, Azerbaijan s oil policy cannot be seen in isolation. It is essential to take in the position of external players.

This is why this thesis will look at different aspects of the negotiating positions of the major players—Azerbaijan, Russia, EU, Turkey, Turkmenistan and the United States. Using neo-realism as a framework, Azerbaijan has protected its core national interests. Therefore, strengthening Azerbaijan’s independence and national security always has been at the core of Azerbaijan’s foreign policy despite some swings under four different presidents between 1992 and 2003. Its rich oil resources and relations with Western oil companies were an important policy instrument in achieving these foreign policy goals.¹⁵

This was evident in the policy that the first administration of independent Azerbaijan the A. Elchibey administration (1992-1993) followed. Azerbaijan began intense negotiations with Western oil companies, offering concessions. This resulted in two major oil concessions, with BP-Statoil in September 1992 and with Pennzoil-Ramco in October 1992 for the Chirag and Guneshli fields, respectively. Though these are oil companies, the basic elements of the strategy, playing off western states and western interests against Russian and Turkish interests, and doing the same for Russia and Turkey is a core element of Azerbaijan energy policy emerged. Especially Russia did not want American oil companies in Azerbaijan. It is significant that for these particular projects the American stake in the initial agreements was particularly important considering that Amoco had the largest interest, followed by Unocal. Russia was totally excluded from these contracts. Azerbaijan’s government thus fulfilled its strategic goals of strengthening the economic and political independence of the country.¹⁶

The same attitude is evident in the current administration. In his speech at the Munich Security Conference this year, the current president, Ilham Aliyev said, “This project must also be realized. It is a project of energy security, first of all. It should be treated as a project of national security of the countries involved. At the same time, taking into account our huge gas reserves we can incorporate countries which are not yet part of this Southern Gas Corridor, but part of Nabucco. We can incorporate them into our system. ¹⁷” What is evident here is a key element of Azerbaijan's energy policy---the diversification of its export options.

In practice this has meant making links with several countries at the same time and wooing one even as the relations with another don t work out. For example, in late 2009, as the delays became apparent in negotiations with Turkey over prices and transit of Azeri gas to Europe, the state oil company (SOCAR) concluded several agreements with Russia and Iran. It has explored the possibility of importing even larger volumes of Azeri gas, while Moscow has offered the possibility of buying all of Azerbaijan's gas. While maintaining close relations with Turkey, it has also looked at how to bypass Turkey by setting up liquefied natural gas (LNG) terminals on the Georgian and Romanian Black Sea coasts at an estimated cost of 6 billion dollars. .

One of the key arguments of this thesis is that Azerbaijan has always put its interests first, and its negotiations over the Nabucco pipeline demonstrated this. For example, during his visit to Turkey in early February 2010, the Iranian Foreign Minister, Manouchehr Mottaki, said that several European countries had approached Iran to sign import agreements and was an eager supporter of the Nabucco pipeline as this would enable Iran to access European markets.¹⁸ However, such strategy has its pitfalls, as it may not create the panic intended. For example, Turkey has instead of wooing Azerbaijan increased energy co-operation with Iran. In the fall of 2009, Turkey signed a controversial deal with Iran for the joint exploration of Iranian reserves and export of Iranian gas to European markets through Turkey.¹⁹

This approach is particularly evident in the case of gas. Gas is one area where European security is particularly vulnerable. Europe currently imports about two-thirds of the natural gas it consumes. In 2012, the main gas suppliers were Russia (roughly 23 per cent), Norway (roughly 22 per cent), and Algeria (roughly 9 percent). In addition, gas supplies are far more vulnerable than oil supplies that can be sourced from elsewhere even if primary supplies fail. Gas, on the other hand, is fixed to infrastructure in the form of pipelines or Liquefied Natural Gas (LNG) terminals, rendering short-term substitution extremely expensive, i.e. technically unfeasible.²⁰

This is all the more important in the context of uncertainty over gas supplies to Europe especially after the gas crises in 2006 and 2009. The worsening relationship between Russia and the EU also highlights the vulnerability of Central Europe. New projects such as Nabucco were meant to address this vulnerability. This is a vulnerability that planned projects such as Nord Stream, South Stream, Nabucco, the projects of liquefied natural gas (LNG) supplies or the North South Gas Corridor – which are crucial for the supply of natural gas supplies to V4 countries, i.e. to the Czech Republic, Poland, Hungary and Slovakia.²¹ On the other hand, this can also be used against the big powers.

However, this did not change Azerbaijan's strategy. Its long term plan is to get several countries to invest in the country, as this will strengthen its position as a country.²² The negotiation over the Nabucco pipeline can be seen only in this context, and not as an isolated instance. To put it in other words, negotiations over the Nabucco pipeline are part of a grand strategy. Thus, even if one particular pipeline does not work out, Azerbaijan is always looking for other options. As proved by Trans-Anatolian-Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP) projects. That is indeed core of the Azerbaijan’s energy strategy; to secure available alternatives.

The best proof that this is long term strategy and not short term and that it is across all sectors is that the same strategy has been adapted to the oil industry. When Azerbaijan became independent in 1991, it sought investment in its oil industry, newly freed from state control, from all over the world. Thus, the British and American companies, Amoco, later BP Amoco, BP, Exxon, and Chevron invested in Azerbaijan.²³ The Norwegian company Statoil, Japanese company Itochu and Inpex, Turkish TPAO all showed great interest in Azerbaijani energy resources.²⁴

Thus, Azerbaijan has secured latent “agreement” of Russia in certain projects like TAP. It has the support of Turkey. Western countries, especially the United States also have close relations with the Azerbaijan. At the core of this policy is an intense desire to strengthen Azerbaijani independence and national security. Thus, instead of being a pawn in a great game, Azerbaijan acts as its own agency and uses its energy policy as a tool to attain this. This, with minor deviations has been a constant in every administration from 1992. Again, this is why it is futile to try and look at the negotiations over Nabucco in isolation. The negotiations over the Nabucco pipeline were just a demonstration of the use of Azerbaijan's most powerful foreign policy tool, its stake in energy. Using its rich oil resources, and its gas reserves, Azerbaijan has been able to forge relations with several powerful countries. Unlike Turkmenistan or Kazakhstan, being free from Russian grip over energy transportation routes gave Azerbaijan a free hand to pursue independent energy policy.

A senior officer from the US Department of Energy emphasized Aliyev’s specific strategy as follows: “Azerbaijan’s strategy has been to bring in as many large companies from different countries as possible. So this is why you see first Amoco, now Bp-Amoco, Bp, Exxon, Statoil, Agip, just almost every major company. Almost every major company from major countries has a position in Azerbaijan. That was very purposeful because Aliyev’s strategy was to try to gain as much support for Azerbaijan and its development plans from as many countries as possible. Not just the US.²⁵”

In practice, the foundation of this strategy was set up on September 18, 1994, when so called ‘contract of the century’ was signed with major transnational oil companies such as BP to explore Azerbaijan’s oil wealth. The one of the many obstacles was how to transfer oil to the promising European market by-passing Russia. Keeping good relations with Russia, Aliyev’s administration pursued multi-vector foreign policy; meaning good relations with Iran, Russia, Turkey, USA and EU. Unlike Georgia and Armenia, Azerbaijan did not openly choose a foreign policy direction. Indeed it obviously has an impact also on the country’s energy policy. The country successfully solved the oil transportation problem by deciding over Baku-Tbilisi-Ceyhan (Azerbaijan-Georgia-Turkey) mega oil pipeline. This was followed by the construction of Baku-Erzurum (South Caucasus Pipeline) natural gas pipeline, transferring Azerbaijani gas to Turkey through Georgia.

These in turn freed Azerbaijan from Russian leverage on transportation of its resources to the West; in other words, Azerbaijan accomplished its energy independence fully, unlike many other Central Asian countries. Such independence encouraged country to take certain energy policy decisions independently.

By starting the Shah Deniz gas field in 2006, Azerbaijan became a net gas exporter. And the importance of gas resources of the country is going to replace that of oil for the coming years, as the Azerbaijan’s oil already peaked in 2012. However, major gas exploration still lies ahead and will be boosted with the realization of projects such as TAP and TANAP or Nabucoo, for which hopes revived after the Anti-Iran sanctions deal made in Lausanne on 2 April 2015.

Under complexities of the geopolitics, Azerbaijan has taken crucial decisions regarding energy policy. And decision on NABUCCO was a good example. For several reasons, the NABUCCO gas pipeline project stayed in a pipe. This master’s thesis is going to look at why Nabucco stayed so long under consideration; why did it fail; and what was the role of geopolitical considerations behind; and most importantly what role did Azerbaijan play in this. One of the main purpose of this research is to investigate the role of Azerbaijan’s energy policy regarding Nabucco and shed a light how small countries sometimes can play crucial role and become ‘game changer’.

With this research I intend to contribute to the literature on the energy policies of the small countries who usually seen as vassals of regional powers. Moreover, this research also aims at explaining why one project prevails over other; the important question here is: if the non-state actors also to blame for the failure? In other words, did stakeholders of Nabucco work effectively for making the deal happen?

This master’s thesis consists of the following chapters: Introduction; Literature Review; Methodology including definition of the Case; Analysis; and the Conclusion. In the introduction chapter, I introduce the study subject, provide the background information and explain the relevance of the research. In the second chapter, which is literature review, the main literature on the Nabucco pipeline project is discussed. Moreover, literature on the importance of small states is also referred. In the Methodology Chapter, the way how this research is carried out is explained. Besides, what method is used, what sources are used; what time-frame is looked at is discussed in this chapter.

Furthermore, in this chapter, there is a sub-chapter on the case. In other words, the case of Nabucco project is presented thoroughly in this part of the dissertation. Presentation of the chronology of the development of the event regarding the Nabucco pipeline, with a particular focus on Azerbaijan’ approach to it is presented. Such a historical tracing enables us to comprehend the role of Azerbaijan in the development of the Nabucco project. The fourth chapter will be the Analysis chapter. In this chapter the development of events around the Nabucco pipeline project is investigated. The steps taken by Azerbaijan are explained in detail. It is looked at how and why this project was failed; what were the reasons behind; and what role Azerbaijan played in that. The final chapter, namely fifth chapter is the chapter of conclusion and interpretations. Here the findings of the research are presented. And based on the facts already available and current politics in the region, possible implications for the near future are also discussed.