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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Azerbaijan, Russia Draw Closer Over Energy Ties

The implosion of the Soviet Union in 1991 produced three petro-states – the Russian Federation, Kazakhstan and Azerbaijan.

Of these, Azerbaijan has the longest history, having begun producing petroleum in the late 19th century. Since the USSR’s demise, Azerbaijan has adroitly developed its energy infrastructure output to the point where the U.S. government’s Energy Information Administration notes simply, “Azerbaijan is an important current and future supplier of both oil and natural gas… Oil and gas development and export are central to Azerbaijan's economic growth and the country is one of the Caspian region's most important strategic export openings to the West.”

Now, after more than two decades of independence, the State Oil Company of Azerbaijan Republic (SOCAR) and Russia’s largest oil company, Rosneft, have decided that the Caspian hydrocarbon pie is vast enough that they are to cooperate in exploiting it.

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Rosneft’s majority shareholder is the Russian government and  is now Russia's leading extraction and refinement company. Following a meeting earlier this month in Moscow with SOCAR President Rovnag Abdullayev, Rosneft President Igor Sechin said that Azerbaijan and Russia enjoy great prospects for a long-term cooperation in the oil sector. Following the meeting and a presentation about possible cooperation SOCAR noted in a press release, "The presentation opened the possibility of expanding cooperation between the two companies in Azerbaijan and Russia and in third countries. In particular, possibilities exist on ongoing and pending projects by the two companies."

The discussions represent a possible significant shift in the exploitation of the Caspian’s oil and natural gas reserves, as Azerbaijan over the past two decades has striven to export its energy reserves to Western markets rather than transit them primarily through the Russian Federation. Significantly, Azerbaijan was the first of the post-Soviet states to invite massive Western investment, with the result that, while SOCAR is responsible for producing oil and natural gas in Azerbaijan, operating the country's two refineries, running the country's pipeline system, and managing the country's oil and natural gas imports and exports, SOCAR produces less than 20 percent of Azerbaijan's total output, with the remaining 80 percent being produced by the BP-operated Azerbaijan International Operating Company (AIOC), a consortium of 10 mostly foreign petroleum companies that have signed extraction contracts with Azerbaijan.

The crown jewel of foreign investment is the $3.6 billion, 1 million barrel per day, 1,092-mile Baku-Tbilisi-Ceyhan (BTC) pipeline, which began operations in May 2005. BTC now supplies a million barrels per day to Western consumers, transiting Azeri high-quality crude from its offshore Azeri-Chirag-Guneshli fields to Turkey's deep-water Mediterranean terminus at Ceyhan. According to BP, since mid-2006, 1,447 tankers have been loaded at Ceyhan with a total of about 1,129 million barrels of crude oil transported via the pipeline. Since BTC began operating, Azeri exports have nearly tripled.

Other Azeri export pipelines include the 830 miles Baku-Novorossiysk pipeline, with a capacity of 100,000 bpd and the 145,000 bpd Baku-Supsa pipeline.

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So, how well are things going between Rosneft and SOCAR? The pair is discussing reviving and expanding transit volumes through the Baku-Novorossiysk pipeline, which ceased flowing two months ago because both sides were losing money on the deal -  there wasn’t enough volume for the Russians and the price for its oil was too low for the Azeris.

Needless to say, none of this is occurring in a political vacuum, and Moscow has a major trump card to play - armaments. Azerbaijan has begun receiving a billion dollars-worth of weapons it ordered from Russia in 2012, including 100 T-90C tanks and truck-mounted multiple rocket launchers, along with an earlier deal worth over $2 billion, which included S-300 air defense systems.

And why is Azerbaijan splaying out such vast sums of money on armaments? Well, for a start, there is its unresolved conflict with neighboring Armenia, and, to the southeast – Iran.

The fact that both Armenia and Iran enjoy close relations with Moscow has not precluded the Russian government from seeking closer energy ties with Azerbaijan’s vibrant hydrocarbon sector. But oil and armaments hardly seem a guarantor of regional stability, and for those with historical memories, the brief August 2008 armed clash between Georgia and Russia effectively boxed in Azeri oil exports, leading Baku to suffer a billion dollar loss in export revenues in less than a month. So, in the end, the only question for Baku and Moscow is whether making money is more important than political and military considerations. In the Caucasus, the answer to such a question is murky at best.

By. John C.K. Daly of Oilprice.com

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