The U.S. Congress is considering new draft legislation that will significantly tighten the existing sanctions regime against the Islamic Republic of Iran. This legislation could, if adopted in its current language, have unintended and negative consequences for U.S. strategic interests, as well as energy security, in the Black Sea-Caspian region. The potential sanctions contradict the existing U.S. policy of developing multiple export pipelines, a policy promoted and implemented by several U.S. administrations in the 20 years since collapse of the Soviet Union. The new legislation may contribute to the redirection of Azerbaijani energy exports to the north, towards Russia, and to the east, towards China, and may help strengthen Gazprom’s position in the Caucasus.
BACKGROUND: In May 2011, the U.S. Congress introduced draft legislation designed to tighten the loopholes in the existing Iran sanctions regime and, for the first time, extend U.S. sanctions to joint ventures involved in the development of petroleum resources outside Iran. The House legislation (draft legislation HR 1905) amends the definition of investment in Section 113(11) of the existing Iran Sanctions Act to include a new subsection (D) which includes “The provision of goods, services or technology related to petroleum resources.” The definition does not limit the investment to projects in Iran, thus extending the applicability to projects outside Iran. The Senate version (draft legislation S 1048) extends sanctions to all joint ventures with respect to the development of petroleum resources outside Iran in which Iran is a substantial partner. The new legislation also aims to prevent the purchase of Iranian crude oil.
The draft legislation links the Iranian Revolutionary Guard Corps (IRGC) to all Iran-related energy activity both inside and outside Iran. In other words, any country or company doing energy-related business with Iran is also doing business with the IRGC, therefore facilitating the development of Iran’s nuclear capability.
This legislation presents particular political risks to the Shah-Deniz consortium in Azerbaijan, as well as to the investors, service companies and contractors for the project. The Iranian National Oil Company owns 10 percent of the Shah Deniz Consortium. Other shareholders include BP (25.5 percent), Norwegian Statoil (25.5 percent), Azerbaijani SOCAR (10 percent), Russian Lukoil (10 percent), French Total (10 percent), and Turkish TPAO (9 percent). The current production of the field is about 8 bcm of natural gas, which is exported by the Baku-Tbilisi-Erzurum pipeline (BTE), or by the South Caucasus Pipeline (SCP) to Georgia (2 bcm) and Turkey (close to 6 bcm). This pipeline and natural gas from the Shah-Deniz field has provided Georgia with a much needed alternative to Russian natural gas supplies and has helped Turkey diversify its supplies.
The second phase of development at the Shah-Deniz field will produce an additional 16 bcm to supply Turkey, as well as several potential consumers in the European Union, thus facilitating Europe’s energy security and diversification of energy supply. As of today, the Shah Deniz field is considered the only reliable source of natural gas for the potential Nabucco or ITGI pipelines.
IMPLICATIONS: By impacting the Shah Deniz Consortium, the draft legislation will have a significant impact on U.S. strategic interests in the Black Sea-Caspian region and will reverse many of the achievements of previous successful policies. Even if the U.S. legislation permits the development of Shah Deniz II, or if the project is legal and/or permissible under U.S. law, the Government of Azerbaijan and the Shah Deniz partners will experience intense scrutiny from Washington and political uncertainty over the course of the project, due to the connections this legislation establishes between them and the IRGC.
Over the last two decades, a combination of multiple factors has contributed to a large-scale development of energy infrastructure in the Caspian region. Geopolitical realities favored the westward orientation of oil and gas pipelines from the landlocked region. U.S. sanctions against Iran excluded Iran from the list of potential export routes for Caspian energy resources. The multiple obstacles created by the Russian state-owned energy monopolies, Transneft and Gazprom, prevented the easy transportation of energy resources to Western consumers, also making the Russian option unattractive. In addition, there was a clear desire of the U.S. and Europe to help the newly independent states of the former Soviet Union to build their own sovereign economies. As a result, the U.S. initiated a so-called Multiple Pipeline Strategy that envisioned the development of multiple new commercial pipelines crossing several countries, including Russia.
The close collaboration of the U.S., Turkey, Azerbaijan, Georgia, and Kazakhstan in the process of implementation of that strategy played a crucial role in building a strong economic structure between the Caspian and Black Seas and Mediterranean seaports. The construction of major oil and natural gas pipelines between Azerbaijan, Georgia, and Turkey solidified the region’s dramatic break from Russian energy dominance and political leverage.
This new legislation could have a significant negative impact on those strategic achievements. If those involved in the Shah Deniz consortium are targeted by sanctions, the energy flow from Azerbaijan may be redirected to Russia and eventually towards Asian markets. This will have substantial implications for European energy security and Georgian security. The emerging trends in the Caspian energy and export infrastructure development must also be taken into consideration. In 2010, two new pipelines were commissioned by Azerbaijan’s Caspian neighbor Turkmenistan; one pipeline going east to China (with a 30 bcm capacity), and the other going south to Iran (with a capacity of 20 bcm). Russia also managed to obtain a contract with Azerbaijan for the purchase of 2 bcm annually. These trends indicate new alternatives for the export of Azerbaijani resources, which will only be explored further if the new sanctions legislation is approved.
These developments need to be considered in the context of weakening strategic ties between the regional actors of the Black Sea-Caspian region which have for over a decade been constructed around the energy and transportation infrastructure. The current commitment to soft power on the part of both the EU and the U.S. cannot match the assertive political-military and energy policies of the Russian Federation in the region. The Shah Deniz project with its potential to supply European markets can boost relationships between the Caspian region and Europe, but events may take an opposite direction if the Consortium, its shareholders and contractors are targeted by sanctions.
CONCLUSIONS: Several factors have weakened the strategic position of the U.S. and the West in general in the Black Sea-Caspian region. These include the ongoing military operations in Iraq and Afghanistan; the global economic crisis; an expanded Russian military presence in Georgia; increased economic ties between Russia and Turkey that translate into greater political interdependency; a more significant Chinese economic and political presence in the region; and the internal dynamics of relationships between major regional actors including disagreements between Turkey and Azerbaijan over the Turkish-Armenian reconciliation process and natural gas pricing issues. This incomplete list of factors indicates the lack of a coherent strategy on part of the West for safeguarding vital interests in the region.
While intended to strengthen sanctions against Iran, the newly introduced draft legislations HR 1905 and S 1048 will likely weaken the positions of important Western allies in the Black Sea-Caspian Region significantly, and will force Azerbaijan to focus on expanding its energy partnerships with Russia, China, and even Iran. This outcome would further damage the long-term strategic interests of the U.S. and Europe, and prove detrimental to both European energy security and Georgia’s energy and economic independence. It is essential for the sponsors of the new legislation to reconsider the language of the drafts in order to protect the Shah-Deniz consortium from the negative impact of the extended sanctions against Iran.
AUTHOR’S BIO: Mamuka Tsereteli is Director of the Center of Black/Sea Caspian Studies at American University in Washington D.C.