Publication: Eurasia Daily Monitor Volume: 3 Issue: 38

Russian President Vladimir Putin visited Baku this week to officially open the “Year of Russia in Azerbaijan” celebration. But it is safe to assume that it was not the issues of cultural exchange between the two former Soviet republics that dominated the agenda during the talks between Putin and his Azeri counterpart, Ilham Aliyev. At the center of the two leaders’ discussions most likely were the looming crisis over Iran’s nuclear program, the recent failure of the latest round of top-level talks on the Karabakh settlement, and last but not least, Azeri-Russian energy ties. The growing diversification of Caspian energy transportation routes is bound to dramatically affect the region’s overall geostrategic equation.

Azerbaijan is a country famously blessed with hydrocarbon riches. But so far, Azerbaijanis have received most of their gas supplies from Russia and exported much of their oil through Russia’s territory. This situation is going to change soon.

Azerbaijan’s own Caspian Sea reserves provide 5 billion of the 12-14 billion cubic meters of its annual gas consumption, with the rest coming mainly from Russia. At the end of 2005, Russia’s state-controlled energy monopoly Gazprom, pursuing what its managers called a “market-oriented policy,” raised fuel prices for most Commonwealth of Independent States customers, including the clients in the South Caucasus. On December 21, 2005, Azerbaijan signed a new agreement for 2006 under which Gazexport, Gazprom’s export arm, would supply 4.5 billion cubic meters of gas at the new tariff of $110 per 1,000 cubic meters. Afterwards, President Aliyev told journalists, “We simply had no other way out.” But he added that the country was looking for alternative sources of gas, including Iran.

Indeed, one day before the new contract was signed with Gazprom, Aliyev met his Iranian counterpart, Mahmoud Ahmadinejad, at a ceremony to inaugurate a pipeline supplying Iranian gas to the Nakhichevan region — an Azeri exclave separated from the rest of the country by Armenian territory. Iranian gas supplies to Nakhichevan are expected to leap from last year’s 52 million cubic meters to 250 and eventually 500 million. Azerbaijan also intends to buy one billion cubic meters of Iranian gas in 2006, further reducing Baku’s reliance on Russian gas.

But there are three Caspian energy transportation projects that Moscow eyes with particular wariness. The first is the Baku-Tbilisi-Erzurum gas pipeline with an annual capacity of 20 billion cubic meters. According to Turkish Prime Minister Recep Tayyip Erdogan, the construction of this pipeline will be completed by the end of 2006. When the new pipeline does come on line, it will both satisfy Azeri domestic demand and export fuel from the Shah Deniz field in the Caspian to Turkey and beyond. “Starting from next year, Azerbaijan will stop buying Russian gas,” Rasim Musabekov, a Baku-based political analyst, said in a recent interview with the Kreml.org website.

Second, January’s “gas war” prompted by Gazprom’s aggressive pricing policies appears to have revived interest in the currently frozen Trans-Caspian pipeline project that was strongly supported by the United States. The project’s objective is to link Central Asia’s vast gas reserves to the West while bypassing Russia. The plan was abandoned due to disagreements between the project’s participants over the prices for Turkmen gas and quotas for Azerbaijan to use the pipeline’s network. But now, with Brussels joining Washington in the determination to break Gazprom’s monopoly on the deliveries of Central Asian fuel, the Caspian venture may finally get off the ground.

Remarkably, Russia’s top energy official was quick to dismiss the Western-backed Trans-Caspian pipeline project as premature. Russian Industry and Energy Minister Viktor Khristenko, who accompanied Putin to Baku, said that the as-yet-unresolved issue of the division of the Caspian Sea between the littoral states would be a major stumbling bloc for the realization of the project. “Resolving the issue of a trans-Caspian system, including the construction of a pipeline, will be possible only after agreeing to a clear understanding of the status of the Caspian,” Khristenko told reporters in Azerbaijani capital.

Finally, the Baku-Tbilisi-Ceyhan oil pipeline is becoming operational this year. Talking to journalists in Baku, the Russian energy minister specifically noted that his country transported 4.1 million tons of Azeri crude through its Novorossiysk pipeline last year. But quite symptomatically, on the very day Putin arrived in Baku, Azerbaijan’s Energy Minister Natig Aliyev announced that the first tanker filled with Azeri oil pumped through the BTC pipeline would sail from Turkey’s Mediterranean port of Ceyhan at the end of May. According to Azerbaijan’s top energy official, while the pipeline will primarily carry crude from the Azeri-Chirag-Guneshli field, it will also carry 500,000 barrels of oil a day from Kazakhstan’s giant Kashagan oil field in the Caspian Sea. With the BTC coming on line, the volumes of Azeri oil transported via the northern route are likely to drop sharply.

These major shifts in the ways Caspian hydrocarbons are delivered to global markets significantly diminish Russia’s leverage over Azerbaijan and consequently, increase the range of Baku’s foreign policy options. No matter how good Azeri-Russian relations may be, argues the analyst Musabekov, “Azerbaijan will not sacrifice or ignore, just to please Moscow, the other, no less important, geopolitical vectors,” – namely, relations with Europe, Turkey, and the United States.

(Kommersant, Vremya novostei, Kreml.org, February 22; Nezavisimaya gazeta, Gazeta, AP, AFP, February 21)