Baku Banks on Independent Energy Policy

As winter approaches, Azerbaijan appears to be strengthening its support for Georgia in the South Caucasus' ongoing chess game of energy alliances, despite a reported earlier overture by the Kremlin for cooperation. A December 1 order by Azerbaijani President Ilham Aliyev that the Azerbaijani government consider suspending the country's use of a Russian-run pipeline to transport Azerbaijani oil to overseas markets – a sign Baku wants to be an independent energy player.

The order came in response to an announcement by Gazprom that it would increase gas prices for Azerbaijan in 2007 from $110 to $230 per 1,000 cubic meters. The Russian supplier would also cut the volume of supplies exported to the South Caucasus state from 4.5 billion cubic meters (bcm) to 1.5 bcm. Azerbaijani officials have indicated that Baku is disinclined to buy any gas at all from Russia in 2007 at Moscow's proposed price.

Gazprom representative Sergei Kupriyanov stated that the 1.5 billion cubic meters "will fully meet Azerbaijan's needs because the country will increase its own gas production next year." Kupriyanov said that Azerbaijan is getting ready to become a gas exporter. "We are not against competition with Azerbaijan, but we are not going to support this competition. It does not make sense," he said.

Aliyev directly linked his decision with Gazprom's plans. Gazprom's price hike and its reduction in gas exports to Azerbaijan will require the Caspian Sea state to make use of additional energy supplies to keep its electric power stations running this winter, he said.

While the economic loss to Russia from Baku severing this relationship would not be large – about $25 million per year in transit fees are collected from the 1.5 million tons of Azerbaijani oil that pass through Russian territory -- the diplomatic fallout could be more severe.

The fact that the order came on the eve of Russian Prime Minister Mikhail Fradkov's December 4 visit to Baku was interpreted as a sign that Azerbaijan is priming for a long-term deterioration in its relations with Moscow, local experts believe. In early November, President Aliyev reportedly rejected a proposal by Russian President Vladimir Putin to take part in a "coordinated policy" for energy exports to the West, emphasizing that Baku wanted an independent policy line, according to the influential Russian newspaper Kommersant.

The proposal has been widely interpreted as a request for Azerbaijan to side with Russia in its dispute with Georgia, Ukraine and Belarus over Gazprom's efforts to increase gas prices. In this game of strategy, commented one analyst, Azerbaijan's state interests would be better served if Baku aligned itself with Georgia.

"Ilham Aliyev has shown that he is unhappy with Russia's pressure and he does not have plans to coordinate Azerbaijan's energy policy with Moscow," commented Rasim Musabekov, an independent Baku-based political analyst. "And this is a justified decision: [any] energy blockade and crisis in Georgia will have a negative impact on the national interests of Azerbaijan."

By damaging its relations with Georgia, Azerbaijan would lose its only non-Russian-controlled energy transport corridor to the West, Musabekov said. "All of Azerbaijan's strategic energy projects such as BTC [Baku-Tbilisi-Ceyhan oil pipeline], Baku-Supsa [oil pipeline] and the South Caucasus [gas] pipeline run through Georgia. Another large regional project, the Kars-Akhalkalaki-Tbilisi-Baku railroad, is in the works," he said. "Therefore, stability in Georgia and relations with this ally are of even greater importance for Azerbaijan than relations with Russia."

After meeting with President Aliyev on November 28 at the Commonwealth of Independent States summit in Minsk, Georgian President Mikheil Saakashvili announced that Azerbaijan will render "brotherly assistance to Georgia in the winter." Georgia has refused to pay increased prices for Russian gas – $230 per 1,000 cubic meters, up from $110 per cubic meter – saying that the price hike is politically motivated. Georgia's arrest of Russian military officers on charges of espionage this September led to a complete shut-down of transportation and communication links between Georgia and Russia, the withdrawal of Russian embassy staff from Tbilisi, and the deportation of hundreds of Georgian citizens from Russia. [For background see the Eurasia Insight archive].

How Russia will respond to Aliyev's order is uncertain, although analyst Musabekov dismissed the possibility that sanctions similar to those imposed against Georgia could come into force. Baku's negotiations with Armenia over the breakaway Azerbaijani region of Nagorno-Karabakh are a more likely area for pressure, he added. [For background see the Eurasia Insight archive].

Whether Azerbaijan will be able to cope with reduced gas supplies from Russia and still supply Georgia with increased Azerbaijani gas for 2007 remains unclear. Russia provides gas for thermoelectric power stations that meet up to 90 percent of the country's power needs. By buying gas from Russia at relatively cheap prices, Azerbaijan has been able to export its natural resources at market prices and make a good profit. A deficit in the country's energy balance will mean that that it will have to reconsider this strategy.

"Azerbaijan itself will need additional volumes of gas in 2007. Besides, Baku has to buy Russian gas for $230 per 1,000 cubic meters," commented Ilham Shaban, editor of the Turan-Energy daily bulletin. "It means that the export of its own gas to Georgia for a lesser price will mean a straight loss for Azerbaijan." Although the precise proposed price has not yet been specified, Georgia hopes to buy gas from Azerbaijan at less than the $230 charged by Gazprom.

To sort out the muddle of gas supplies and demand, the energy ministers of Georgia, Azerbaijan and Turkey met in Tbilisi on December 8. Georgian Energy Minister Nika Gelauri told reporters after the talks that "[a] great step forward" had occurred. "[T]he ministers have agreed that part of Turkey's share in the Shah Deniz gas will be divided between Georgia and Azerbaijan," Black Sea Press news agency reported Gelauri as saying. The timing of deliveries and the volume of gas supplies from Azerbaijan to Georgia in 2007 are expected to be negotiated in a meeting in Baku the week of December 17.

How much gas Georgia will actually seek from Azerbaijan is a critical factor. Tbilisi is also negotiating with Iran for gas supplies to Georgia in 2007 to make up for any loss of Russian gas, if price talks between Georgian energy distributors and Gazprom fail. Technical problems connected with transporting large volumes of Iranian gas via Azerbaijan are one obstacle for this gas source, however. Strong misgivings expressed by the US ambassador to Georgia recently about a Georgia-Iran energy pact could pose a more difficult problem. If an agreement cannot be reached with Tehran, Tbilisi could turn to Baku and Turkey to make up the difference via Shah Deniz, an option favored by Washington.

For now, though, the start date for exports from the Shah Deniz gas field remains a riddle. British Petroleum, the project's operator, began gas production at Shah Deniz in early November, and has stated that it is ready to start exports at any time. The Azerbaijani government has not commented on a start date. The South Caucasus Pipeline, which will carry the gas to Turkey via Georgia, remains incomplete on Turkish territory, though it is already able to transfer supplies to Georgia. [For background see the Eurasia Insight archive].

Regardless of the outcome, energy analyst Shaban believes that Azerbaijan itself will not suffer an energy crisis this winter. The State Oil Company of Azerbaijan (SOCAR) has promised to increase its own gas production in 2007 up to 2 billion cubic meters, he noted. The company has stated that Azerbaijan could also buy an additional 1.5 to 2 billion cubic meters of gas from the Shah Deniz gas project that Turkey has said it is unable to accept in 2007.

"That means that Azerbaijan might receive up to 4 billion cubic meters of gas additionally in 2007, and this volume would cover the 3-billion-cubic-meters reduction in the gas supply from Gazprom," Shaban commented.

Nonetheless, reduced gas supplies from Russia and an increase in Russian gas prices could pose a burden for Azerbaijan's residential and commercial consumers. As of January 1, 2007, residential gas prices could double, the pro-opposition news agency Turan reported an unnamed government source as saying.

"It is already clear that Russia will double the gas price for Azerbaijan next year. Before we [the government] supplied part of the gas imported from Russia to the population for $55 for 1,000 cubic meters. But now we have to reconsider the price and increase it," said the source, the agency reported on November 29.