BAKU BANKS ON INDEPENDENT ENERGY POLICY
Rovshan Ismayilov

EurasiaNet, NY
Dec 13 2006

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.

Editor’s Note: Rovshan Ismayilov is a freelance reporter based in Baku.
From: Baghdasarian