Energy Strategy of Azerbaijan amidst Global Instability

The energy transportation corridors have been the priority on the agenda of Azerbaijan since its independence. The Aliyev’s National Oil Strategy set a number of priority tasks: the first was to attract investments and introduce modern technologies, the second to build the pipelines that would be the property of Azerbaijan. That was a very pressing issue as due to the Nagorno-Karabakh dispute about the territory that comprises 20% of what is considered by Baku as occupied, the pipelines used by Azerbaijan to transport its oil were either in Georgia, Turkey or Russia.

Oil and Gas Pipelines in Azerbaijan

Azerbaijan oil is transported westward by three pipelines: Baku-Tbilisi-Ceyhan (BTC), Baku- Supsa and Baku-Novorossiysk.

The BTC pipeline has been transporting the Caspian oil from the Azeri-Chirag-Guneshli fields to the Turkish port of Ceyhan on the Mediterranean coast since its official opening on

July 13, 2006. The BTC is 1,773 km long and passes through the territory of three countries: Azerbaijan (449 km), Georgia (235 km) and Turkey (1,059 km). So far, the annual volume of oil transported via the BTC is 1.2 million barrels or 50 million tons. The pipeline is designed for 40 years of uninterrupted operation with the capacity of 1 million barrels of oil per day at normal load.

The oil produced in the Azeri oil fields is not enough to ensure the profitability of the pipeline. For example, during 2014, more than 5 million tons the oil transported via the BTC belonged to the third parties. Therefore, it is extremely important to attract some oil from Kazakhstan. Kazakhstan is currently exporting its oil to the West via the Caspian Pipeline Consortium (CPC) and the Russian port of Novorossiysk as well as the Transneft system. On June 16, 2006, President Nazarbayev signed the agreement on Kazakhstan's joining the BTC. Under the agreement, Kazakhstan oil from Aktau is delivered by tankers to Baku via the Caspian Sea and is transported further by the BTC.

The Baku-Supsa pipeline was put into operation on April 17, 1999. The pipeline was built within the Azeri-Chirag-Guneshli project framework. Its length is 837 kilometers and the diameter is 530 mm. The pipeline begins in the Sangachal terminal and extends to the Georgian terminal of Supsa. The pipeline is operated by BP. The Baku-Supsa pipeline’s capacity is 145,000 barrels per day with a possible increase to a maximum 600,000 barrels per a day.

The Baku-Novorossiysk pipeline transports the Caspian oil to the Russian port of Novorossiysk on the Black Sea. Since 2008, the controlling block of stock belongs to the Russian Transneft selling the oil under the Novorossiysk Urals brand. In January 1997, Russia and Azerbaijan signed the agreement that determines the amount and timing of the oil pumping and Azerbaijan undertook the obligation to transport 2.5-2.7 million tons of oil per year. The pipeline is 1,330 kilometer long, 231 of which pass the territory of

Azerbaijan. In Russia, the pipeline goes through Dagestan and Chechnya. The pipeline capacity is 2.55 million tons of oil per year.

Gas Pipelines in Operation

Currently, there are three active pipelines: the South Caucasus, Gazi-Magomed-Astara-Abadan and Mazdok-Makhachkala-Gazimagomed.

The South Caucasus gas pipeline or the Baku- Tbilisi-Erzurum was opened on Martch 25, 2007. The diameter of the pipeline is 42 inches and the length is 970 kilometers. In South Caucasus gas pipeline transports the gas produced in Shah Deniz.

Pipelines Projects

Azerbaijan is the only country able to launch the exploitation of the Southern Energy Corridor that includes three projects: the expansion of the South Caucasus gas pipeline, the Trans Adriatic Pipeline (TAP) and the Trans-Anatolian gas pipeline (TANAP).

The project aimed at the expansion of the South Caucasus gas pipeline started officially

on December 17, 2013. The project’s estimated outcome by 2018 is 16 billion cubic meters of gas per year, 6 billion of which will be delivered to Turkey and 10 billion will be exported to Southern Europe. The total cost is $735 million. The aim of the project is to build 428 kilometers of pipes in Azerbaijan and Georgia as well as to reconstruct 59 kilometers of pipes in Georgia. The construction works began in January 2015 and are to be completed by the end of 2016 in Georgia and year later in Azerbaijan.

Azerbaijan and Turkey signed the memorandum of understanding to establish the consortium to build a new pipeline to supply Azeri gas to Europe in December 2011. The pipeline, known as the Trans-Anatolia Gas Pipeline (TANAP) has the length of about 2,000 kilometers and will transit gas through Turkey from the Georgian to the Bulgarian border. The exact route has not been determined but the cost is estimated at $6.5 billion. The pipeline capacity on the first stage of

exploitation is expected at 16 billion cubic meters per year, 6 billion of which will be delivered to

the Turkish consumers and the remaining volume will be exported to the European countries. The second phase of the project is to be completed in 2023. The estimated increase in capacity is up to 24 billion cubic meters per year. The third stage, which ends in 2026, means even higher increase up to 31 billion cubic meters per year. The first

gas transfer is scheduled for 2018. 58% stake in the TANAP project belongs to the SOCAR, the Turkish BOTAS holds 30% and BP has 12%.

The Trans Adriatic Pipeline (TAP) is to transport gas from the Caspian region to Southern Europe. The 520 kilometers of the pipes will go through Greece, Albania, Adriatic Sea, and Italy. The estimated capacity of the pipeline is 10 billion cubic meters per year with maximum possible increase up to 20 billion. The total cost of the project is estimated at 4-5 billion Euros.

It is very important to remember that the projects above are very geopolitically loaded. As for Azerbaijan, all projects in the energy sector have exclusively economic viability. The major interest of Baku is to avoid oversupply on the European market that may lead to price drop. Europe is moving away from nuclear energy and relies on environmentally friendly fuel, which is natural gas. Due to increasing demand for gas in Europe there is a room for Azerbaijan that is not going to compete with other traditional suppliers.

The crisis over Ukraine has made Russia divert the routes of gas supplies. The talks about the Turkish Stream through the Black Sea resumed. It should be noted that this change is only in the supply routes and will not affect the volume of the gas that has been prepaid and will be delivered to the same consumers. In these new realities, Turkey could become a major energy hub. That is in the interests of Azerbaijan because Turkey is its strategic partner and big investor ($ 20 billion until 2019). The Turkish Stream will not affect the price of gas supplied from Azerbaijan to Turkey either. The demand in Turkey is only to increase; currently it imports gas from Azerbaijan, Russia and Iran. Azerbaijani gas is the cheapest, while Russia and Iran are not planning to reduce the price.

Azerbaijan is closely following the negotiations on the Iranian nuclear issue. The sanctions against Iran are very likely to be lifted. It means a completely new situation on the world energy market. Azerbaijan considers transporting Iranian gas to Europe and, in the context, the Southern Energy Corridor is the only supply route available to Iran. However, it may take five or six years. Just in time for the scheduled start-up of the Southern Energy Corridor. Turkmenistan is also likely to join the Southern Energy Corridor across the Caspian Sea.

Given the variety and scale of the present and future projects, it is important to consider the following challenges:

  • shale gas: there are plenty of speculations about the shale gas revolution. In the meantime, the USA is not willing to share the technology. The shale gas revolution in the United States changed its energy policy. The discourse shifted from the "energy security" to the "energy independence";
  • arctic oil and gas: the vividly increasing tensions among the Nordic countries imply the competition for the huge energy reserves of the Arctic that may be exploited in two or three decades.

In conclusion, it is important to emphasize that the situation evolves very rapidly and each state must be ready for the challenges. Thus, it is vital to have the infrastructure and to develop the non-oil sectors of the economy to provide for the favorable conditions for sustainable and stable development.

Year: 2015
City: Almaty