WHY IS AZERBAIJAN SO IMPORTANT TO EUROPEAN ENERGY SECURITY?

09:00 05 June in ARTICLES, In English

ACRE Baku Summit 2018 – Building a Shared Future

Mehmet Öğütçü

We should neither overestimate nor underestimate Azerbaijan’s significance to Europe’s energy security. It is clearly a gateway not only to Europe, but also to Russia, Iran, Turkey and Central Asia in energy. It also connects China to Europe through Central Asia and Turkey and reaches the Gulf through Iran.
Azerbaijan is politically aligned with the West but also engaged pragmatically with Russia, Iran, Israel and China. Since independence Baku has sought to maintain a multi-vector foreign policy, seeking a clever balance in its foreign policy between Russia, Iran and the West.

Energy matters a great deal
As the lynchpin for the EU’s Southern Energy Corridor, the country is presently the only westward route for Caspian hydrocarbons, which breaks Russia’s former imperial monopoly on access to world export markets, with the Baku-Tbilisi-Ceyhan (BTC), Baku-Tbilisi-Erzurum (BTE) and Trans-Anatolian Pipeline (TANAP) oil and gas pipelines. This position confirms what Azerbaijan’s former President, Heydar Aliyev, famously said: “happiness is multiple pipelines”.

With its proved 2.5 trillion gas reserves Azerbaijan and the Shan Deniz II (SD II) consortium is targeting to penetrate the European market when SD II will come on stream within the Southern Gas Corridor project.* However, in order to get the gas to Europe (irrelevant of which pipeline), a transit agreement has been concluded between Ankara and Baku. Ankara’s main concern was not to repeat the mistakes it made with the transit agreement with BTC by not taking into account some price fluctuations linked to the purchase of Azerbaijani oil.

Azerbaijan also has the potential to be a key transit state for Turkmen gas. Turkmenistan’s proven natural gas reserves are slightly more than those of Saudi Arabia (7.5 trillion cubic meters) and Ashgabat has sought to diversify its gas exports in all directions, including to the European market. Contrary to popular belief, Russian import of Turkmen gas is less than 10 bcm per year, with China now taking much more than Russia. Depending on what China is contracted to take in the next 10 years (which is still unclear), Turkmen reserves could be sufficient to support the Southern Gas Corridor with a minimum of 30 bcm of gas.

The Russians are far from happy with any Trans-Caspian supplies, claiming that the EU should not meddle in Russia’s backyard and that the EU is totally ignoring the legal, environmental and geopolitical situation of the Caspian. In short, Russia and Iran still insist it is not possible to construct such a pipeline until there is a final agreement by all Caspian Littoral States on the concerns which they have raised.**

THE COUNTRY IS PRESENTLY THE ONLY WESTWARD ROUTE FOR CASPIAN HYDROCARBONS, WHICH BREAKS RUSSIA’S FORMER IMPERIAL MONOPOLY ON ACCESS TO WORLD EXPORT MARKETS

Can Turkey be transformed into a regional energy centre?
Turkey is key, as a consumer and transit country, to Azerbaijan’s ambition to become connected to European energy markets. It is also a major supporter of Azerbaijan’s security vis-à-vis Russia, Armenia and Iran.

TANAP, as the front-runner of the ambitious Southern Gas Corridor, will carry the first substantial volume of gas from the Caspian basin to the high value EU markets via Turkey. It substituted the dead-born Nabucco project, which failed to converge the interests of producers, transit countries and consumers. The 16 bcm of gas that will flow from Shah Deniz-2 (6 bcm for Turkey and 10 bcm for Europe) is a miniscule amount for the overall European gas demand, but the potential is there for TANAP to serve as a magnet to attract further volumes from both Azerbaijan (i.e. Absheron, Umit and Nackchivan gas fields), Iran, Turkmenistan, KRG of Iraq and Eastern Mediterranean.

Being a regional energy hub is not having pipelines criss-crossing your territory and oil tankers sailing through your congested Bosphorus and Dardanelles. In order to become a genuine hub, there has to be (i) strong demand growth in both Turkey and Europe, (ii) adequate levels of production in the surrounding regions, (iii) necessary legal and institutional framework and enforcement mechanisms, (iv) trade financing institutions, and (v) “soft power” diplomacy to inspire a collaborative approach to foreign and security policy, rather than confrontational actions.

More collaborative thinking, depoliticised dialogue and business engagement will be needed with major players if we are to develop win-win propositions for all parties and avoid confrontations.

Prospects for the Common Future

Energy security remains on top of the EU leaders’ strategic agenda because it is critical to ensure that (i) supplies to households are not disrupted in freezing winters, (ii) industry can flourish and be internationally competitive, (iii) the EU cannot be blackmailed in vital foreign and security policy questions, and (iv) climate change policies can be factored in.

The EU has many options to do what’s required in this regard. One of them is to open a non-Russian energy corridor from the Caspian region first and then possibly from Iran, Iraq’s Kurdish region and East Mediterranean in addition to the new LNG infrastructure.

European energy strategy is in the process of changing in accordance with world trends including green energy and climate goals. Azerbaijan, through the SGC will be one of the contributors to European gas security.

Successful completion of the SGC requires strong political and economic commitment. While more attention was paid to rapid implementation of the BTC and BTE pipelines, it looks as though less attention drew into the SGC.

This vacuum could well be filled with Russia’s TurkStream. Despite the fact that many question marks remain over different aspects of TurkStream, Russia is clearly very motivated to complete this project as quickly as possible, and definitely ahead of the first gas
arriving from the SGC. The TurkStream, with its huge throughput capacity, could be a serious blow for both TANAP and TAP pipeline. Ultimately, Moscow would like SGC to fail in order to maintain its hold over the European market.

The fine print in this matter does not particularly affect TANAP itself, but also could lead to the possible removal of the need to import Turkmen, Iraqi Kurdish, Iranian and East Mediterranean gas to fill TANAP (Azerbaijan’s own reserves are small in the long term).

Energy is not simply a commercial commodity for Azerbaijan and European countries to fuel their developmental needs, ever-demanding economic machine, but it is a “soft-belly” and represents a vital security matter, linked inextricably to the global system. It is not only energy supply security that EU, Azerbaijan and Turkey strive to achieve through the diversification of energy sources, fuels and economy, but also the attraction of massive international capital into major energy projects that are high on agenda.

“THE DECISION OF THE AZERBAIJANI GOVERNMENT AND OF THE AZERBAIJANI PRESIDENT IS KNOWN. THERE ARE MANY WAYS TO TRANSPORT THE MAIN OIL TO THE INTERNATIONAL MARKET. BUT FOR AZERBAIJAN – THE ONLY, ONLY ONE – THE MOST BENEFICIAL AND THE MOST RELIABLE IS VIA BAKU-GEORGIA-TURKEY TO JEYHAN” [a Mediterranean port of Turkey] President Heydar Aliyev

 

* A $45 billion integrated project, it is one of the most complex gas value chains ever developed, stretching over 3,500 kilometres, crossing seven countries, involving more than a dozen major energy companies, and comprising several different energy projects. Labelled by some as the future multi-source superhighway, the SGC includes three major pipeline projects: the expansion of the South Caucasus Pipeline through Azerbaijan and Georgia; the construction of the TANAP across Turkey from Turkish-Georgian border to Turkish-Greek border; and the construction of the TAP through Greece, Albania and into Italy.

** Nevertheless, Azerbaijan has taken a cautious and well considered approach with its leadership stating “according to the European Energy Charter, we are an open transit state, and the infrastructure independent states want to build across their shared border is their own bilateral business. We have already stated our readiness to discuss this issue”.