Thursday, 26 November 2009


Published in Analytical Articles

By Gulmira Rzayeva (11/26/2009 issue of the CACI Analyst)

Due to its own energy resources and its indispensable geographic position between the oil and gas reserves of the Caspian Sea, Iran and Central Asia, Azerbaijan is successfully pursuing a diversified energy security strategy. It seeks to develop alternatives for delivering its gas to Russia and Iran along with an alternative route transporting gas to Europe through the Black Sea ports. By diversifying its own energy routes and markets, Azerbaijan is increasingly contributing to global energy security.

Due to its own energy resources and its indispensable geographic position between the oil and gas reserves of the Caspian Sea, Iran and Central Asia, Azerbaijan is successfully pursuing a diversified energy security strategy. It seeks to develop alternatives for delivering its gas to Russia and Iran along with an alternative route transporting gas to Europe through the Black Sea ports. By diversifying its own energy routes and markets, Azerbaijan is increasingly contributing to global energy security.

BACKGROUND: Turkey and Armenia recently signed the long awaited protocols on normalizing relations with strong support from the United States, the European Union and Russia. The international community sees the normalization of relations as being of short-, medium- and long-term benefit for the region. However, from Azerbaijan’s perspective, the developments rather risk increasing instability in the region. Turkey’s intention of rapprochement with Armenia has been viewed with apprehension in Azerbaijan. Baku is seeking to convince the international community, and especially the EU, that an opening of the border and a restoration of diplomatic relations will encourage Armenia will toughen its stance in the Nagorno-Karabakh negotiations once it is rid of its regional isolation. At the current stage of the Turkish parliamentary discussions on the protocols, Ankara has more leverage than ever before to pressure Yerevan on these issues.

Moreover, the Turkey-Armenia rapprochement has brought another point of contention between Turkey and Azerbaijan onto the agenda: the transit an price of natural gas. Ankara’s stance has provided Azerbaijan with an incentive to work intensively on its diversification policy and consider additional transit routes to the one through Turkey.

The Baku-Tbilisi-Erzurum gas pipeline is a major channel for delivering natural gas from Azerbaijan to Georgia, Turkey and on to Europe, which also holds great potential for supplying Caspian gas to the Nabucco pipeline. Since the launch of the BTE, Azerbaijan has negotiated transit prices with Turkey, which are up to 70 percent more expensive than the world market price. Meanwhile, Azerbaijan has been selling Turkey gas at a “political price”, which has generally been far below the price Turkey pays for Russian gas – Azerbaijan receives US$120 per thousand cubic meters compared to a world market price of around US$400 currently. Negotiations on the transit fees have been ongoing since 2007 but no agreement has been reached so far.

As a result, Azerbaijan is envisaging new transit routes to European states through Georgia to the Black Sea ports. However, at the same time it works on developing options for delivering its hydrocarbons to Russia and Iran, as there are no transit states between these countries.

It should be noted that over-dependence on any country for key oil and gas supplies implies risks of disturbances to national energy security. Overt energy dependence is thus problematic, but many European states depend heavily on gas imports from Russia. Diversified gas supply sources are usually viewed as key to achieving energy security. The same goes for supplier states in need of reliable, solid, and stable markets and transit states to deliver their gas safely. Russia, for example, puts huge effort into the diversification of its energy exports routes (with priority to China), thus weakening the Russian-European energy interdependence. Azerbaijan has been pursuing its own diversified energy policy to secure its gas and oil exports in case of unexpected problems with the existing pipelines.

IMPLICATIONS: By starting to sell low volumes (0.5 bcm a year) of gas to Russia at a lucrative price from 2010 onwards (with a possible increase in the future) Azerbaijan is questioning the Nabucco project, planned to alleviate to a very limited degree Europe’s dependence on Russian gas. In doing so, it weakens not only Turkey’s position as a major transit state for delivering Azerbaijani and Central Asian gas to Europe but also undermines EU and U.S. interests in reducing Europe’s dependence on Russian gas. Russia is actively pursuing a policy of diversification through purchasing additional volumes of gas from Azerbaijan as well as from Turkmenistan, Kazakhstan and Uzbekistan in order to keep its position as the prime gas supplier to the European market. In addition, Turkey – primarily a transit state – also pursues a policy of diversification by participating in the South Stream sub-sea pipeline, a joint project between Gazprom and ENI.

In July 2009, Turkey officially agreed with Russia for South Stream to be constructed through its territorial waters entirely bypassing Ukraine, thus reducing Kiev’s ability to interrupt Russian gas transit. Furthermore, Turkey’s consent was of crucial importance for Russia since Turkey is also a key partner in the rival Nabucco pipeline, which is being developed and pursued with support from the EU. These two projects are generally believed to be not only competing with one another, but also mutually exclusive.

In this regard, Azerbaijan is a perfect source for the Nabucco pipeline. Its geopolitical position allows direct access to a supply route bypassing Russia, and it is situated to constitute both a transit and a supplier state. Eventually, the realization of the Nabucco project would be very difficult without Azerbaijani (and later Turkmen) gas. Therefore, Azerbaijan would be undermining the project if it sold its entire gas production to Russia. Apparently, Russia envisages a clause concerning the Shah-Deniz 2 reserves, while Turkmen gas exports currently remain largely under Russian control. In addition, Azerbaijani reserves could be easily delivered to Europe through the newly constructed South Stream pipeline, rather than through Nabucco. On the other hand, access to the production of the Shah-Deniz-2 block is of crucial importance for the rationale of the Nabucco project. This might be considered Azerbaijan’s main trump card. 

However, Turkey’s position on the transit conditions for delivering Azerbaijani gas to the European market causes serious obstacles to Azerbaijan and the Shah-Deniz consortium, which signed a contract in 2006 to develop the Shah-Deniz-2 gas block.

The other possible option for Azerbaijan to diversify its energy markets is Iran. Summing up Azerbaijan’s options for diversifying its energy routes, President Ilham Aliyev recently stated that, as Iran is a big energy consumer, which buys its gas from Turkmenistan, why should it not buy its gas from Azerbaijan? There are no transit states between the two countries and there is an available pipeline from Astara to Iran.

In the case of Iran two questions arise: first, whether Iran is able to offer Azerbaijan a competitive price for its gas, and second, whether Iran would buy Azerbaijani gas only for its domestic consumption, as there is the possibility that Iran could re-export the gas to other countries. If Iran would choose the option of transporting Azerbaijani gas through its territory for re-export, this would opens up new, large and lucrative markets for Azerbaijan. Among other big markets in the region such as Pakistan and Afghanistan (though these are the least stable countries of the region), the most attractive one seems to be the large and growing Indian market. There has been talk of building a gas pipeline from Iran to India through Pakistan, a project that would connect the Middle East and Southern Asia. Azerbaijan could potentially join this project. This scenario is feasible but relatively remote.

CONCLUSIONS: Azerbaijan is located at the crossroads between Europe and Asia, enjoying an indispensable geographic position between the oil and gas reserves of the Caspian Sea, Iran and Central Asia. It is perhaps unsurprising that Azerbaijan finds itself at the center of gas diplomatic maneuvering these days. Its hydrocarbon reserves make it not only a strategic transit state but also a reliable supplier. A successfully implemented diversification of its energy security strategy will increase Azerbaijan’s role as a stabilizer in the region. It already contributes considerably to the energy security of neighbor states, especially Georgia and Turkey. However, by diversifying its own export routes and markets, Azerbaijan increases its role in both regional and global energy security.

AUTHOR’S BIO: Gulmira Rzayeva is a Research Fellow at the Foreign Policy Analysis Department, Center for Strategic Studies under the President of the Republic of Azerbaijan.
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