Azerbaijan’s ongoing dispute with Turkey about transit terms and revenues for natural gas heading to Europe across Anatolia, as well as uncertainties about the Nabucco pipeline project, have compelled highest-level officials at Azerbaijan’s State Oil Company (SOCAR) to publically consider the option of exporting hydrocarbons eastward, potentially to China and other East Asian markets. However, as Baku would have to surmount significant hurdles to make that proposition a reality, it remains to be seen whether a reorientation of Azerbaijan’s energy posture is in the cards, or whether this is just rhetoric to spur the development of Western-oriented projects. That said, the prospect of increased Azerbaijani gas exports to Russia and Iran supplanting westward flows should not be ruled out.
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BACKGROUND: Since independence from the Soviet Union, Azerbaijan’s energy policy has largely been Western-oriented. Former president Heydar Aliyev’s energy and foreign policies were closely linked. Their common objective was to bolster Azerbaijan’s independence and diversify its international links away from Russia and the post-Soviet space, to Western and world markets. The “Contract of the Century” to develop Azerbaijan’s Caspian hydrocarbons and the construction of the Azerbaijan-Georgia-Turkey (AGT) projects, including the famed Baku-Tbilisi-Ceyhan (BTC) oil pipeline, were keystones in an energy posture that not only afforded land-locked Azerbaijan the opportunity to export its natural resources, but did so in a way that allowed Baku to garner new international partners and greater independence of action in Eurasia and on the world stage.The logical continuation of this trend was to do with Azerbaijan’s gas what had been done with its oil. The European Union’s vision of a Southern Corridor for energy would link EU consumers to Azerbaijan and potentially other Caspian producers of natural gas through Turkey and Georgia. The most discussed project of this Corridor was and is still the Nabucco gas pipeline, which would link Turkey’s border with Georgia to Austria’s European gas hub at Baumgarten. However, the geopolitics of gas are very different from those of oil, and power politics in Eurasia have drastically altered from those of the late 1990s when BTC was on the table.
The Southern Corridor faces a number of challenges: slow-motion progress on Nabucco due to political and commercial concerns, competition from Moscow-backed projects such as the South Stream and Nord Stream pipeline projects, and lackluster diplomatic support from the EU itself. However, the most pressing obstacle at the moment is the dispute between Baku and Ankara regarding transit revenues and gas pricing for Azerbaijani gas transiting Turkey to fill another Southern Corridor pipeline: the Turkey-Greece-Italy Interconnector.
This frustrating picture recently compelled highest-level SOCAR officials to publically air the option of exporting gas eastward, across the Caspian to China. SOCAR’s President, Rovnag Abdullayev, said on November 20 that Azerbaijan is seriously considering exports to China as part of the country’s energy diversification strategy. This is a direct message to the Nabucco consortium and Western companies and governments involved in the development of the Southern Corridor to step up their game and achieve results, such as a coordinated strategy with Turkey, along with project financing and comprehensive and clear offers to producers such as Azerbaijan. Also speaking in mid-November, SOCAR Vice President Elshad Nassirov could not have put it more clearly: “If Europe takes too long putting together a solution, then all the gas in the Caspian will go to Asia. It’s more serious than it seems”.
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IMPLICATIONS: The situation is undoubtedly serious, but can Azerbaijan reorient its energy strategy in the face of Western reticence? The China National Petroleum Corporation is set to finish its record-setting pipeline across Central Asia to Turkmenistan early next year, four years ahead of Nabucco’s unlikely stated completion date of 2014. At first blush, it would seem that if SOCAR concentrated its resources on building a Trans-Caspian pipeline heading eastward, it could begin exporting to Chinese consumers. However, both technical and geopolitical obstacles outweigh those facing the Southern Corridor.
First, the feat of extending China’s pipeline, already set to be the longest in the world, across the Caspian, would approach the impossible given technical restraints on the length, capacity and complexity of natural gas pipelines. The project would almost certainly not be cost-effective, especially as it would also have to include a segment across Turkmenistan. Other less likely options through Iran or Kazakhstan are even more far-fetched. Second, the ongoing dispute between Baku and Ashgabat about the Serdar/Kyapaz gas field in the Caspian rules out serious Azerbaijani-Turkmen energy cooperation until it is resolved. Finally, such a reorientation would mean that Azerbaijan would give up its strategic position in terms of Eurasia’s energy geopolitics. At the moment, it stands not only as a formidable producer country, but as a gateway for the West to Kazakh oil and Turkmen and potentially Uzbek gas. That advantage would be reversed if Baku looked to Beijing.
Far more likely is the prospect of Azerbaijan increasing its gas exports to Russia and Iran in response to a sagging Southern Corridor. Russia’s state-controlled gas monopoly Gazprom has offered to import all of Azerbaijan’s remaining gas reserves for Russian consumers and for further export at inflated prices to EU countries. As part of an agreement signed in June, Azerbaijan will begin to export 500 million cubic meters of gas to Russia. This is a small but symbolic amount, and the option of export increases was part of the agreement. At the same time, demand for gas has increased in Iran, even as it has ebbed in Europe due to the global economic downturn. With support from either of its large neighbors, it is likely that it would be simpler for Azerbaijan to drastically increase the capacity of North-South pipelines to Russia and Iran, rather than contribute to the Southern Corridor. Baku’s decision not to do so yet has been due to diversification of links in its foreign policy as much as in its energy decisions.
These realities, as well as others suggest that SOCAR may be overplaying its hand by publically airing the prospect of gas exports to China. While progress may be slow, the dynamics of the Southern Corridor are changing rapidly. Due to two of the Nabucco consortium’s companies recently investing in gas production in northern Iraq, it seems increasingly likely that the pipeline’s first gas will come from the Middle East, not the Caspian region. While the plan is still to link Azerbaijan’s Shah Deniz II gas into Nabucco’s first phase (to fill about half of the pipeline’s eventual capacity), more supplies may well be available from gas-rich northern Iraq in five years’ time, and the possibility that Egyptian gas could be linked to Nabucco is increasingly gaining credence after it was first mentioned publically by Cairo this July.
Finally, while demand for natural gas in Europe is set to increase significantly in four to five years, Caspian decision-makers should not underestimate the market-changing force of unconventional gas development, for which there are serious prospects within the EU. It is telling, for example, that ExxonMobil has chosen to invest in unconventional gas development in Hungary, but has conspicuously ignored the Eurasian pipeline game. Unconventional gas development has already drastically altered the North American market, to the point that Liquefied Natural Gas (LNG) projects globally have already been reoriented toward the European and East Asian markets. In short, while it remains supremely important for European energy diversification, Caspian gas is no longer the only game in town.
CONCLUSIONS: Unless Baku chooses to invest heavily in a complete reorientation of its energy and foreign policy, Azerbaijani natural gas exports to China do not seem a likely prospect in the near or middle term. Western decision-makers, however, should be cognizant of the relative ease with which Baku could increase energy cooperation with Russia and Iran. That said, if the Nabucco project continues its Middle Eastern reorientation and unconventional gas development in Europe picks up, Caspian gas and Azerbaijan’s strategic position could become less salient for EU decision-makers. SOCAR has and should continue to have major leverage over the construction of Nabucco and the direction of the Southern Corridor, but time is not on Azerbaijan’s side.