Azerbaijan: Pumping oil and gas

Azerbaijan, with its natural resources, is vital to easing Russia’s
grip on the EU’s energy – if new supply lines can get up and running.
Mark Leftly reports from the capital, Baku, on the power plays that
make this small country one of the most important in the world

Sunday, 21 March 2010
Independent/UK

A chill wind blows in from the Caspian Sea, bringing with it a faint
but distinctive stench of oil. At the front of the brutalist Dom
Soviet building, where once a statue of Lenin stood, the Azerbaijan
flag ripples in time with each passing gust.

Baku, the capital of Azerbaijan, is booming: gross domestic product
growth was more than 9 per cent last year; the hundreds of big, shiny
commercial and residential buildings under construction are a result
of its oil and gas wealth. Prince Andrew has visited the city often
over the past six years, as he tries to promote British business
interests in the region.

The capital is also at the centre of one of the most important
geopolitical issues of modern times, the security of the European
Union’s energy supplies. Azerbaijan, with the BP-led Shah Deniz-2
field, is expected to be the major natural-gas supplier to the Nabucco
pipeline, which will run 3,300km from Erzurum, Turkey, to Austria.

Nabucco is strategically vital as it will ease Russia’s grip on the
supply of natural gas into Europe. More than half of the EU’s gas
supply comes from Russia, Norway and Algeria. The need for alternative
supplies intensified in 2009, when Gazprom, Russia’s state energy
company, cut off the gas to Ukraine on New Year’s Day, following a row
over price.

However, the Nabucco project, which is due to start construction next
year and deliver gas three years later, is besieged by problems over
cost projections, transit issues and even war.

In the Minister’s lair

Natiq Aliyev, Azerbaijan’s Industry and Energy Minister, stands by his
country’s flag in his ludicrously vast office in the Dom Soviet, now
also known as Government House. He immediately sets out the EU’s
difficulties: "Europe’s reserves of gas and oil in the North Sea
especially have declined. Maybe in 10, 20 years if Europe has no more
significant discoveries, the current reserves will be over."

The EU wants Nabucco, which has six shareholders including Germany’s
RWE and Hungary’s Mol, to provide 31bn cubic metres of gas. It is
estimated that the Shah Deniz field can only provide about a quarter
of this amount.

The success of the pipeline, then, will be based on the participation
of other gas-rich countries. "I think in a few years, when the Iran
and Iraq situation is more stable politically, we will be able to
implement the Nabucco project very speedily," says Aliyev, who is
clear that the current timetable cannot be met.

"I don’t think construction will be in one or two years. Countries
like Iraq, Iran and Turkmenistan need to join this project." The
project website admits that it would like to source gas from Iran "at
a later point in time", while "it remains to be seen if also gas from
Iraq will be linked with the Nabucco pipeline system".

Richard Morningstar, the US State Department’s special envoy for
Eurasian energy, seemed to rule out Iran’s potential involvement last
year, the argument over the Middle Eastern state’s nuclear programme
still too fierce. Iraq’s prime minister, Nouri al-Maliki, has
expressed interest in supplying gas.

One big hurdle was cleared last year when an intergovernmental
agreement was signed in Ankara between Turkey and EU member states.
The Turkish parliament recently ratified the document, which provides
a legal framework for the construction and operation of the pipeline.

"It was a positive step … not the last step," argues Aliyev. "We
don’t know yet who the territory [on which the pipeline runs] belongs
to – are they government territories, the private sector’s?" Aliyev
points to the complexity of land negotiations for the shorter
Baku-Tbilisi-Ceyhan pipeline. There were more than 1,000 landowners,
including farmers and government bodies, involved in Azerbaijan alone.

There have also been disagreements between Azerbaijan and Turkey, some
of which are politically motivated. Turkey’s relations with Armenia
have started to thaw, angering an Azerbaijan that is still formally at
war with its neighbour over the disputed (and Armenian controlled)
Nagorno-Karabakh region.

More directly, there is still some dispute over how much it will cost
Azerbaijan to transit gas through Turkey. Taner Yildiz, Turkey’s
Energy Minister, did say earlier this month that his government had
offered Azerbaijan transit fees at lower than market price, though the
government in Baku remains unconvinced.

"How are we going to supply Nabucco if we have no right of transit in
Turkey?" asks Aliyev, rhetorically.

Socar to go

Elshad Nassirov, the vice-president of the State Oil Company of
Azerbaijan (Socar), is also a senior official of the country’s
football federation.

He smiles that it was his decision to commission the 3.5 metre bronze
statue of Tofik Bakhramov, the Azerbaijani linesman who allowed Geoff
Hurst’s dubious second goal in the 1966 World Cup final, which now
stands outside the national stadium.

The statue was partly a humorous gesture, built when England were
drawn in the same 2006 World Cup qualifying group as Azerbaijan.
However, this sense of humour has brought Nassirov all sorts of
problems.

He joked at a conference last year that Azerbaijan could always send
its gas east to China if the EU did not want it. Technically, this
would require only a 180km pipeline across the Caspian Sea to
Turkmenistan. But Nassirov insists that he was simply teasing his
audience and not making a veiled threat. "For us, the priority is the
European market," he says. "The very best thing about the European
market is that it is a free market price, not dependent on a decision
in Brussels."

Nassirov giggles that he didn’t expect his joke to "ignite so many
furious responses". However, the misinterpretation of his aside only
goes to show just how worried European states are about where they get
their gas from.

He points out that there are options for the EU besides Nabucco: the
520km Trans Adriatic pipeline, connecting Greece and Italy, and the
$2.8bn Turkey-Greece-Italy scheme.

"They are cheaper, that’s the positive side," says Nassirov. "The
negative side is that they lack the EU support of Nabucco and their
markets are not as diverse as Nabucco."

The EU does seem committed to the Nabucco project, but it will have to
ensure Azerbaijan’s support if it is to be more than a dry, empty
pipeline.

Once again, this small country of nine million people finds itself one
of the most important places on Earth. Truly the mecca of the energy
industry, it was in Baku that the world’s first oil well was drilled
in 1848.

The second oil boom of the post-Soviet period has already given the
country extraordinary wealth, the state oil fund having nearly $11bn
of assets.

And now Azerbaijan is gaining political might, Baku’s decisions are
affecting the energy security of almost an entire continent.