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Energy-rich Azerbaijan appears to be quietly backing the idea of tightened international sanctions against its southern neighbour, Iran. But it seems that Baku won’t profit from a potential European Union oil embargo against Tehran.
The EU has stated that it will impose an oil embargo on Iran starting July 1, unless Iranian officials open up the country’s nuclear program to more expansive international oversight. Azerbaijan, as a major oil and natural gas producer in the Caspian Basin, would seem poised to capitalize on any move to cut off Iranian exports. Yet industry insiders in Baku point out that Azerbaijan’s energy production is peaking, and a majority of its supplies are already allocated to current customers.
A senior manager for the State Oil Company of the Azerbaijani Republic (SOCAR), the most influential player in Azerbaijan’s energy industry, told EurasiaNet.org that the conglomerate has not held internal discussions about altering its oil export strategy in the event of EU sanctions against Iran. He added that changes are not expected. “I do not think Azerbaijan would change anything in its export strategy since we already export most of our oil to European markets,” said the manager, who spoke on condition of anonymity.
In general, the topic of Iranian sanctions is a sensitive one in Baku. The government has not released any official comment on recent EU and US embargo initiatives. But in the Caucasus, what is left unsaid can often be more important than what is said.
Baku in the past has criticized sanctions against Iran, which is home to a sizeable ethnic Azeri minority. Over the past month, though, tensions with Tehran have soared over alleged Iranian hacker attacks, an alleged plot against the Israeli ambassador to Baku and the killing of an Azerbaijani writer, Rafiq Tagi, for making comments considered offensive by conservative Muslims.
Those tensions may not surface in any public declaration of Azerbaijani support for the embargo against Iran, but Baku’s stance “will be more pro-Western on this issue,” predicted Elhan Shahinoglu, director of the non-governmental Atlas think-tank.
Washington appears to be treating Baku’s reticence on sanctions as a good sign. US Deputy Chief of Mission to Baku Adam Sterling told reporters on January 30 that the United States “constantly consults with Azerbaijan, and we understand the special position of Azerbaijan” on Iran, the 1news.az news website reported.
Those remarks echoed statements made by US Deputy Assistant Secretary of State Eric Rubin, who held mid-January talks on Iran with President Ilham Aliyev and senior government officials in Baku. “Azerbaijan is with us,” Rubin said at a January 19 news conference, referring to international efforts to prevent Iran from developing a nuclear weapon.
How Baku will show its support for the US embargo campaign remains unclear, but moving in to grab Iran’s lost European oil markets – which accounted for roughly 20 percent of Tehran’s annual oil production -- does not appear to be among the likely scenarios.
Fifty-five percent of Azerbaijan’s 40.2 million tons of exported oil in 2011 went to Europe. Italy, Austria, Germany, the Czech Republic and Switzerland, a non-EU member, were the main customers.
The bulk of production (78 percent) comes from the Caspian Sea fields of the Azerbaijan International Oil Company (AIOC) consortium, a group, led by BP, that also includes SOCAR. The Azerbaijani conglomerate itself produces about 16 percent of the country’s annual output from its own fields. The rest comes from a number of smaller companies.
While Azerbaijan has underlined its interest in increasing exports to European gas markets, oil is a different story. Even if Azerbaijan decided to increase its oil exports to take advantage of a potential rise in EU demand, its oil production has peaked, leaving little ability to increase output or explore new markets, said Baku-based energy expert Ilham Shaban.
Oil production levels in 2011 dropped by just over 9 percent to 45.4 million tons from a 2010 peak of 50 million tons per year. “This year, the government forecasts a tiny increase of just 1.3 percent,” Shaban said.
“Unlike Iraq, … or Russia and Kazakhstan, which also are able to increase production, Azerbaijan cannot do that, even if the price of oil seriously increases [and] Europe needs more oil,” Shaban said. Output is expected to decrease after 2016 or 2017, he added.
Economist Natik Jafarly agreed with Shaban’s assessment, noting that if Azerbaijan’s oil production actually decreased in 2011 when prices were high, a potential Iran embargo later this year would make little or no difference for Azerbaijan’s export capacity.
“The most affected [European country] is Greece, which imported one-third of all of Iran’s exports to Europe. But Greece’s consumption is not so high and could be easily substituted by Azerbaijani, Iraqi, Russian or any other oil supplies,” said Jafarly, who heads the Society of Economic Bloggers in Baku.
Greece’s annual demand for 2.5 million tons of oil “could be easily fulfilled by any large oil exporting country,” Shaban agreed. Azerbaijan would gain little from offering to meet that demand, said Jafarly. “It is a matter of a few additional tankers.”
While increasing its own EU-bound energy supplies seems unlikely, Azerbaijan could nevertheless benefit as a transit nation. If an embargo against Iran takes hold, the Central Asian states of Kazakhstan or Turkmenistan could fill the void. If that happens, oil exports could potentially transit the Caspian region via Azerbaijan to Georgia’s Black Sea ports. In 2011, Azerbaijan earned $53 million from the transit of oil from Kazakhstan and $12.8 million from oil coming from Turkmenistan, according to the State Statistics Committee. “Of course, the transit revenues are much smaller than the profit from exporting its own oil, but, still, it is a possibility,” said Jafarly.
Turkmenistan’s export plans are always difficult to predict. Kazakhstan, meanwhile, has given no indication that it might increase production, in the event of an embargo against Iran. In 2011, though, Ambassador Serik Primbetov commented that an increase in the transit of such oil via Azerbaijan should not be expected before 2016 or 2017, when production at the Kashagan mega-oil field is slotted to get underway.
By. Shahin Abbasov
Shahin is a contributor to ISN Security Watch