Jeremy Tamanini

Georgetown School of Foreign Service

Geopolitical uncertainty has combined with oil and gas resources and the imperatives of geography to shape Azerbaijan's foreign policy.  The country's current boom represents the coming together of instability in the Middle East and the isolation of Iran, Western efforts to limit Russian control of energy supplies to Europe, and infrastructure developments like the BTC and BTE pipelines.  But even as Azerbaijan benefits from that, Baku has acknowledged the dangers of both the so-called Dutch disease and future declines in production at its major fields and adopted domestic policies designed to limit the impact of these developments. 

But Azerbaijan is a small country surrounded by large neighbors and influenced by even larger powers, and as a result, geopolitics and the increasingly complex network of powers and institutions in the Caspian region are going to have important, and not always complementary, roles relative to Azerbaijan.  Responding to those challenges is a central task for Azerbaijan's foreign policy.

The Multiple Pipelines Policy pursued at the beginning of the Bush administration in 2001 confirmed what the previous Clinton administration had already revealed: The United States was prepared to act to undermine Russia's growing energy monopoly in Europe.  Backing the construction of the BTC and BTE pipelines would lay an alternative route for Caspian oil and gas to traversing Russia, Azerbaijan's neighbor to the north.  In a similar vein, building ties in the Caspian could undermine the growing threat the United States associated with the Islamic Republic of Iran, Azerbaijan's neighbor to the south.  

If geopolitical calculations and resource locations converged almost perfectly over the last decade to create the foundations for a period of unprecedented economic growth, supply-side vulnerabilities, including a decline in the production of its fields, almost certainly means that it will be forced into greater cooperation with its immediate neighbors whatever the preferences of its elites and of outside powers. 

Moscow has recently demonstrated that it understands this trend and has been developing its own policies in ways consistent with it.  In May 2007, for example, the Russian Federation reached an agreement with Turkmenistan, Kazakhstan and Uzbekistan on a new gas pipeline to Russia, a move potentially designed to undermine the viability of a Trans-Caspian gas pipeline to Azerbaijan (Leonard and Popescu 2007, p. 18).  In a further indication that Russia will continue to buy Central Asian gas to augment its own supply and weaken prospects for a Trans-Caspian project, Russia agreed to pay 50% more for Turkmen gas in late 2007. [1] Turkey responded in early 2008 to this geopolitical challenge by arranging for the reopening of a Turkmenistan embassy in Baku (see Daly 2008).  

With regard to oil, Moscow has moved in a similar way, this time with Kazakhstan.  In contrast to Azerbaijan where the ACG fields are expected to decline in a few years, Kazakhstan's Kashagan project is expected to increase production for many years to come, with production in 2020 projected to be four million barrels a day, a four-fold increase from today's output (Nanay 2005, p. 142).  Despite the presence of American firms in Kazakhstan like Exxon Mobil and Chevron, the Russians have aggressively pursued deals with Kazakhstan and made a requirement of production sharing agreements that oil extracted as part of a Russian-Kazakh partnership be shipped through the Russian pipeline system.  One such arrangement, concluded in 2005, confirmed a production-sharing agreement on Kazakhstan's Kurmangazy offshore field, including ten years for exploration and 45 years for extraction (Socor 2005).  Because development of the Kashagan field has predominantly Western investors, its oil would have been a likely target for Azerbaijan and a future Trans-Caspian link, although another delay in production here to 2011 combined with continued Russian pressure in favor of the Caspian Pipeline Consortium (CPC) through Russian territory leaves in doubt the fate of the Trans-Caspian oil pipeline, and the levels of Azerbaijani oil supply. 

Consequently, Azerbaijan must also navigate an ever more complex challenge: geopolitical uncertainty.  With Russia's strategy of linking its energy sector and foreign policy and Iran's isolation from the West, the geopolitical equation in the Caspian has been relatively stable over the past five years.  But what would happen if that stability ended?  On the one hand, growing Western demand coupled with a Russian triumph in gaining more control of oil and gas resources east of the Caspian could force greater acceptance of Russia's dominance in this area, perhaps in a trade-off for greater liberalization of Russia's energy sector.  That would alter Azerbaijan's role in the region significantly, as its geographic advantages would no longer be paramount.  But on the other hand, similar demand-side considerations coupled with future political developments in Iraq could moderate the US position towards Iran, thereby undermining Azerbaijan's geographic advantages by providing an alternative route for Central Asian resources to the West.

To limit the impact of either of these developments, Azerbaijan should more aggressively support the proposed Nabucco pipeline.  Backed by the US and EU as an alternative source to natural gas supply from Russia, Nabucco would connect the BTE pipeline in Ezurum, Turkey with Eastern Europe and Austria.  Construction of this route would bolster EU ties to the Caspian as a source for natural gas and apply indirect pressure for a Trans-Caspian gas connection to augment supply from the second phase of Azerbaijan's Shah Deniz field.  Despite enthusiasm from the US and EU, the Nabucco project has not gained the momentum many expected, at least in part because of Russia's greater success in pushing the South Stream gas pipeline, which in theory would compete directly with Nabucco and extend Russia's dominance as a gas supplier to the EU while lessening its dependency on Ukraine as a transit country.  

Moreover, Baku should invest its capital to gain a stake in both upstream and downstream projects where a longer-term presence will grant leverage in decision-making around supply routes.  The State Oil Company of Azerbaijan Republic (SOCAR) is a suitable vehicle for doing that and indeed has already started down this path.  In addition to opening European offices in 2007, SOCAR has invested in renovated export facilities at the Georgian Black Sea port of Kulevi and participated in the privatization of the Georgian gas industry.  Furthermore, SOCAR has extended its stake in the Turkish economy, obtaining a majority stake in the Turkish petrochemical firm Petkim.  Strategic investments like this not only build a market for future Azerbaijani gas exports in transit countries like Turkey but they reinforce multilateral alliances like GUAM of which Azerbaijan is a member.  For example, a recent meeting between Azerbaijan's Ilham Aliyev and Ukrainian President Viktor Yushchenko resulted in plans to construct a modern oil refinery in Ukraine.  Developments like this coupled with possible SOCAR plans to build its refining capability in Central Europe could further reinforce ties with Georgia, Ukraine and Moldova, the other members of GUAM (Ismayilov 2008b).  While there have been limited examples of SOCAR investments in Central Asia so far, these existing investments should serve a model for how SOCAR could approach a future stake in the region. 

And finally, Azerbaijan should approach negotiations with Turkmenistan over the Caspian delimitation with Nabucco in mind and continue to consider ways that existing infrastructure from Shah Deniz can be employed to build Turkmenistan's stake in a Trans-Caspian link.  In particular, reaching a resolution on ownership of the Kapaz / Serdar field would be a constructive step in the relations between the two countries, and, given its proximity to Azerbaijani fields with significant infrastructure, an opportunity for collaboration between the two (Ismayilov 2008a).  Already, signs suggest greater alignment between the two countries; on the same day of Turkmen President Gurbanguly Berdymukhammedov's first official visit to Baku, SOCAR announced delivery of equipment to a Turkmennefgaz oil rig in a Turkmen-controlled section of the Caspian Sea (Ismayilov 2008a).  Such improvements in political relations should facilitate future collaboration between SOCAR and Turkmenistan's growing energy sector.

Maintaining strong ties to the United States and the EU will remain an overarching characteristic of Azerbaijan’s foreign policy.  Yet there is a downside to big power allies that they can limit a state’s control to influence and shape geopolitical developments in its neighborhood.  Acknowledging the long-term nature of ties to the EU and United States, Azerbaijan’s ability to counter this geopolitical uncertainty is to pursue localized policies that reinforce the interests of both Azerbaijan and its larger Western allies.  Following this direction, Azerbaijan increases the probability that longer-term developments will serve its interests, in addition to creating greater alignment between its foreign policy and that of its allies.

 

References

Daly, John (2008). “Turkey Emerges as Mediator in Turkmenistan-Azerbaijan Dispute,” Eurasia Daily Monitor, 23 January, available at: http://www.jamestown.org/edm/article.php?article_id=2372743, accessed 12 June 2008.   

Ismayilov, Rovshan (2008a). “Azerbaijan Sees Positive Signs for Energy Partnership with Turkmenistan,” Eurasia Insight, 29 May, available at: http://www.eurasianet.org/departments/insight/articles/eav052908.shtml, accessed 12 June 2008.  

Ismayilov, Rovshan (2008b). “Socar’s Westward Expansion Could Hamper Russia’s Caspian Plans,” Eurasia Insight, 4 February, available at: http://www.eurasianet.org/departments/insight/articles/eav020408.shtml, accessed 12 June 2008. 

Leonard, Mark and Nicu Popescu (2007). A Power Audit of EU-Russia Relations, European Council on Foreign Relations.

Nanay, Julia (2005). Russia and the Caspian Sea Region, in Kalicki, Jan H. and David L. Goldwyn (2005). Energy and Security: Toward a New Foreign Policy Strategy, The Johns Hopkins University Press.

Socor, Vladimir (2005). “Major Russia-Kazakhstan Oil Production-Sharing Agreement Signed”, Eurasia Daily Monitor, 7 July, available at: http://www.jamestown.org/edm/article.php?article_id=2369982, accessed 12 June 2008. 

Note

[1] BBC News, “Turkmenistan Gas Price Rises 50%”, November 28, 2007, available at: http://news.bbc.co.uk/2/hi/europe/7116218.stm, accessed 12 June 2008.