Azerbaijan Goes From Strength to Strength - Maybe

The Soviet Union imploded peacefully in December 1991 and fifteen new nations lost no time in running for the exits.

Western capitalists, drooling at the vast potential opportunities unleashed by the USSR’s demise, quickly focused on energy assets, and those of the Caspian in particular. Their exploitation would require vast infusions of Western capital and expertise, as the Soviet Union was signally deficient in offshore hydrocarbon technology, receiving less than 2 percent of its energy from offshore production, which was centered on Azerbaijan.

Two decades later, the picture has changed beyond recognition. Five new nations rim the Caspian, as opposed to the USSR and Iran from 1917 to 1991. And post-Soviet nations Azerbaijan, Kazakhstan and Turkmenistan, for obvious reasons, are less inclined to heed Moscow’s dictates than before.
 
And Western nations?

Well, early on Western companies and their attendant governments realized that the prize was potentially gigantic, as the Caspian's 143,244 square miles and attendant coastline were estimated to contain as much as 250 billion barrels of recoverable oil, boosted by more than 200 billion barrels of potential reserves, along with up to 328 trillion cubic feet of recoverable natural gas, with conservative estimates valuing its reserves at over $12 trillion.

Seven years later the implosion of the USSR no less an authority than the American Vice President Dick Cheney opined, "I can't think of a time when we've had a region emerge as suddenly to become as strategically significant as the Caspian." Since 1991 the Caspian's percentage of global oil production has risen steadily to the point that supplying the world’s daily oil fix of approximately 86 million barrels per day (bpd), the five Caspian nations, led by Russia,  now account for 15.75 million bpd.

So, how much of this is available to the West?

O happy day! Nearly all of it!

Azerbaijan’s commitment to exporting to the West instead of feeding the post-Soviet Russian beast was proven by the construction of $3.6 billion, 1 million barrel per day, 1,092-mile Baku-Tbilisi-Ceyhan pipeline, which began operations in May 2005. The BTC transits high-quality crude from Azerbaijan's offshore Azeri-Chirag-Guneshli fields to Turkey's deepwater Mediterranean terminus at Ceyhan making everyone, from Azerbaijan thru Georgia to Turkey, happy along the way for revenues and transit fees, much to Moscow’s annoyance.

More recently, even better good news for Western energy companies, as the State Oil Company of Azerbaijan Republic (SOCAR) president Rovnag Abdullayev just announced that Azerbaijan's proven hydrocarbon reserves now total 4.2 billion tons of oil, with possible additional reserves bringing the total to 10 billion tons.

Far from the modest Soviet offshore efforts a mere two decades ago, Abdullayev added that Azerbaijan now has more than 40 structures offshore and onshore for drilling operations while SOCAR is refurbishing existing rigs in order to support efficient field development and optimize production.

While Baku’s fervent embrace of Western exports markets is currently an irritant to both Russia and Iran, the latter in particular, bereft of access to Western offshore technology due to more than 30 years of U.S.-led sanctions, the unresolved status of the final disposition of the Caspian seabed could yet unite Tehran and Moscow in opposing Azerbaijan’s expansion efforts.

Iran has already indicated its displeasure over Azerbaijan’s offshore Caspian expansion - on 23 July 2001, an Iranian warship and two jets forced a research vessel working on behalf of BP-Amoco to leave Azerbaijan's offshore Caspian Araz-Alov-Sharg field, which are 60 miles north of Iranian waters. Due to that pressure, BP-Amoco immediately announced it would cease exploration activities and withdrew the research vessels.

So, despite SOCAR’s happy gurgles about new reserves, the fact remains that both Russia and Iran, assiduously marginalized by Washington’s policies, are keenly watching Azerbaijan’s export policies and deepening relationship with the West.

If the two ever coordinate their policies to pressure Azerbaijan, then Baku’s golden energy eggs could tarnish rather quickly.

By. John C.K. Daly of  OilPrice.com