The competition among European actors hunting for Azerbaijani gas has intensified. Political and commercial actors backing various gas pipeline projects for transporting Azerbaijani gas to Europe are aware that the State Oil Company of Azerbaijan (SOCAR) has to make a final decision by October 2011, while Azerbaijan keeps them guessing. During the Caspian Energy Dialogue held on July 15, SOCAR’s head Rovnag Abdullayev stressed that all European gas pipeline projects have been under consideration. Nevertheless, it seems that two such projects are in a highly favorable position to transport Azerbaijan’s gas to Europe. The Nabucco and ITGI consortiums have made new proposals to Azerbaijan in order to persuade Baku of the attractiveness of their projects.

BACKGROUND: European interest in Caspian gas was revived in 2006 when the Russian-Ukrainian gas crisis rung the alarm bell and highlighted the importance of a diversified energy policy. The second Russian-Ukrainian gas crisis in 2009 confirmed the “wisdom of this policy”, as put by one European diplomat, because it “badly harmed” the reputation of both actors as reliable partners for Europe.

Under these circumstances, Azerbaijan has become the major attraction for Europe in the post-Soviet space, being the only country fulfilling all their criteria: a net gas exporter with a small domestic consumption, situated on the route of the EU-backed Southern Gas Corridor, while also capable and willing to export its gas to Europe. The gas relationship between Europe and Azerbaijan started delicately with reciprocal and cautious diplomatic visits for exploring the prospects for cooperation and in order to avoid angering Russia. In January 2011, Baku signed a Joint Declaration with Brussels on the construction of the Southern Gas Corridor, which could be considered the official institutionalization of Azerbaijan’s gas relationship with Europe. Azerbaijan nevertheless had to choose between at least four alternative, and partly competing, official gas transportation projects named Nabucco, Italy-Turkey-Greece Interconnector (ITGI), Azerbaijan-Georgia-Romania Interconnector (AGRI) and Trans Adriatic Pipeline (TAP).

The Nabucco gas pipeline project was the most well known owing to its geopolitical and strategic implications, promising to bring a significant amount of gas to Europe, contributing to diversifying its energy routes and suppliers, and diminishing Russia’s energy monopoly. The euphoria around Nabucco started to vanish after the construction of the pipeline had been delayed repeatedly. Initially scheduled to start in 2012 with the first deliveries expected by 2015, the implementation has been postponed for several reasons. These problems were related to a lack of financial resources available to the Nabucco consortium quoted to between € 7.9-13 billion, difficulties in Azerbaijan’s energy dialogue with Turkey, and insufficient gas reserves in Azerbaijan to provide the 31 bcm requested by the Nabucco pipeline. However, while the Nabucco project was for a period deemed locked and frozen, it has recently taken significant and promising steps forward.

Firstly, in January 2011 the European Investment Bank confirmed its readiness to provide €2 billion for the Nabucco project while in March the European Commission decided to offer €200 million to the Nabucco consortium from the €1.5 billion allocated for projects aimed at improving the EU’s energy infrastructure. Secondly, on March 4 the Turkish parliament ratified the Nabucco intergovernmental agreement which was signed in July 2009 between Turkey and the other four transit countries – Austria, Bulgaria, Hungary, and Romania. Thirdly, on March 10, one of the Nabucco project’s shareholders, Germany's RWE Supply & Trading, signed a memorandum of understanding with Azerbaijan to develop the Nakhichevan field in the Caspian Sea. The future gas production will probably be destined for Nabucco and will thus alleviate any doubts that the project is short on suppliers. RWE also proposed to SOCAR to extend Nabucco from the Georgian-Turkish border to Baku. In June 2011, a consortium spokesman stated in Baku that the consortium had already conducted pre-engineering of a gas pipeline extension from the Georgian-Turkish border to Baku. Accordingly, the capacity of this “connecting strip” at 30 bcm corresponds to the capacity of Nabucco itself. Finally, on 8 June the legal framework for the Nabucco pipeline was finalized through the signature of the Project Support Agreements (PSAs) between the Nabucco consortium and five transit countries.

Nabucco thus has important advantages over its European competitors. However, the smaller ITGI project appears to gain traction, due to its lower cost and capacity (11.5 bcm; €1.5-2.5 billion) which makes it appear more realistic, and the already existing interconnector between Turkey and Greece commissioned in 2007. Moreover, the CEO of DEPA, one of ITGI’s shareholders, has recently proposed SOCAR to participate in the privatization of the Greek state-owned company. This could be considered a strategic move that SOCAR will likely be considering seriously, since the company has become interested in playing a more active role on the European energy markets. 

IMPLICATIONS: Both proposals seem highly favorable to Baku, which according to an Azerbaijani expert is “happy and relaxed.” Baku can be “happy” because it has many aspirants fighting for its gas, and “relaxed” because unlike in the 1990s, none of these projects is vital or crucial for its survival. Baku has so far successfully implemented its slogan of “happiness is multiple pipelines.” Azerbaijan has diversified its gas export routes delivering gas by the Northern route to Russia and by the Western route to Georgia and Turkey, along with exports to Iran to supply the Nakhichevan exclave. Today Azerbaijan has many options; it “could even sell its gas to Russia if Moscow pays the European price,” as a member of Azerbaijan's parliament has suggested. Nevertheless, Azerbaijan has already decided to deliver its gas to Europe and paid its “ticket” of 2 bcm of gas to Russia, in the words of one European Ambassador in Baku.

Today Nabucco and ITGI both fully fill Azerbaijan’s commercial and political criteria and appear to be considered by Azerbaijan’s decision makers. But what will happen if Baku decides to go for both projects? Vitaliy Beylarbeyov, the deputy vice-president of SOCAR, stressed that the new version of Nabucco (the extension to Baku) together with the ITGI gas pipeline project has chances to become a “regional mega-project.” It would not be Azerbaijan’s first participation in the construction of a “regional mega-project,” considering the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzurum pipelines, which changed the regional energy map.

The idea of merging the Nabucco and ITGI projects has been discretely promoted over the last months by European officials and experts. Joschka Fischer, the former German foreign minister and RWE consultant for the Nabucco consortium strongly advocated the “integration” of European projects (Nabucco+ITGI/TAP) at the 2011 Gas Conference in Vienna. If the Nabucco and ITGI pipelines merged, the Southern Gas Corridor could be built in two phases. Phase I would supply the pipeline running from Turkey to Italy via Greece with the gas volumes from the Shah Deniz-2 field. Phase II would consist in creating a spur from the main pipeline north to Austria following the original route of Nabucco. The later could be supplied with gas carried from other Azerbaijani fields and/or the involvement of a second supplier after 2020.

CONCLUSIONS: Regardless of the final decision, recent advances suggest a positive sum game in economic, political and strategic terms for both Europe and Azerbaijan. On the one hand, Europe will enhance its energy security and will be less vulnerable to Russian gas disruptions and Moscow’s use of its energy might to pursue political goals. Moreover, it will consolidate the political unity and solidarity among EU member states. On the other hand, Azerbaijan will make important economic and strategic gains by transporting its gas to European markets. Apart from the enormous gas revenues that are expected to pour into Azerbaijan’s budget, SOCAR could penetrate the EU energy markets and increase its presence for a long period of time. This would bring Azerbaijan closer to Europe economically, but also politically. Finally, there is a geopolitical aspect related to the regional balance of power. By the construction of a new pipeline to Europe, Baku will strengthen its partnership with the EU and NATO member states and deliver a new message to its neighbors stating that Azerbaijan is not alone: it has friends and allies far beyond the Caucasus.

AUTHOR’S BIO: Inessa Baban is a PhD candidate at Paris-Sorbonne University.