Energy in Azerbaijan

[Mher]

For a long time I've thought it would be important to have a thread on the state of Energy in Azerbaijan. I thought it was important seeing how their natural energy is the only thing keeping that artificial backward wasteland afloat. It composes a super majority of their GDP, and is the only leverage they have in the international sphere. Their vast superiority in GDP and defense spending is what limits Armenia's options so greatly, and what makes Armenia so short on options in foreign policy. After having done research for the past few months, and seeing how their oil is on the decline and their natural gas is on the rise, I thought it was a very good time to start a thread on the topic. I will post the most relevant articles and information I've found in recent months to try to put together the best estimate of the current energy situation in Azerbaijan, and what we can expect in the near future. Some of these articles might be repetitions of what I've posted in other threads in recent weeks.

[Mher]

Re: Energy in Azerbaijan

What Lies Ahead for Azerbaijan?
Thomas de Waal
October 7, 2013



Azerbaijanis will vote in a presidential election on October 9. The result is not in doubt. Everyone expects President Ilham Aliev to be elected for a third five-year term.

The question is, “What happens next?” It can confidently be said that Azerbaijan in 2018 will be a very different place.
De Waal is a senior associate at the Carnegie Endowment, specializing primarily in the South Caucasus region comprising Armenia, Azerbaijan, and Georgia and their breakaway territories as well as the wider Black Sea region.

Azerbaijan has come a huge distance from the war-torn, impoverished, newly independent state of the early 1990s. The last few years, following the inauguration of the Baku–Tbilisi–Ceyhan pipeline in 2006, have seen a dramatic rise in its prosperity. At $70 billion, Azerbaijan’s GDP is now more than twenty times bigger than it was in the mid-1990s. The country has also made its mark on the international arena in a variety of ways. It began a two-year term on the UN Security Council in January 2012 and staged the Eurovision Song Contest in the same year.

The next five years will pose a new set of challenges. The surrounding landscape—including energy supply and demand as well as Azerbaijan’s strategic priorities—is already changing. On the domestic front, the public is likely to grow more vocal about socioeconomic issues and political freedoms. The Azerbaijani leadership needs to respond and adapt with agility.
Strategic Priorities

Azerbaijan’s next phase of development, which coincides with Aliev’s upcoming third term, will be more of a challenge than those past. The country’s oil boom will come to an end, and it will make a bid to become a significant European gas supplier.

Baku’s foreign policy balances between its bigger neighbors, and energy is a key driver of its approach. Azerbaijan has cool relations with its southern neighbor, Iran, and a pragmatic relationship with Russia (President Vladimir Putin made a high-level visit to Baku in August). Azerbaijan also works hard to build relations with Western energy companies and Western governments based on its energy resources.

In 2018, the Trans Adriatic Pipeline (TAP), set to deliver at least 10 billion cubic meters of natural gas annually from Azerbaijan’s Shah Deniz field via Turkey to European states, is due to begin operations [Not nearly enough to make up for the oil loss, see explanation below]. By that year, Azerbaijan’s oil exports are projected to be in decline—indeed, they have already dropped from their peak in 2010.

The TAP project will make Azerbaijan an energy partner of the European Union. But in 2018, Baku’s strategic importance to the United States is likely to have dwindled. Azerbaijan is one of the key transit routes to Afghanistan, but by that year the U.S. withdrawal from that country will be complete. And Washington’s relations with Tehran are likely to improve, which means that the United States will be less focused on containing Iran via its neighbors, like Azerbaijan.

As former U.S. ambassador to Azerbaijan Richard Kauzlarich comments:

Changes in the regional security environment (with the withdrawal of Western forces from Afghanistan) and the global energy market (Azerbaijan faces a more competitive market for its gas and oil) mean that relative to a few years ago Azerbaijan is less significant. That means that Azerbaijan must establish a new framework for a positive relationship with the West and the United States as well as with its immediate neighbors.
Unresolved Conflict

Azerbaijan’s neighborhood will not change over the next five years. The essential contours of what is still the biggest long-term issue for both Azerbaijan and Armenia—the dispute over the territory of Nagorny Karabakh that is now twenty-five years old—will also remain.

Opinion polls suggest that the unresolved dispute is still overwhelmingly the number-one issue for ordinary Azerbaijanis. Almost twenty years after Azerbaijan suffered a traumatic military defeat at the hands of the Armenians, this dispute is also the most difficult to change. As one Western diplomat in Baku put it, “This is the one issue where President Aliev cannot afford to put a foot wrong.”

In recent years, the Azerbaijani government has increased its military budget to $4 billion a year with the stated aim of exceeding the entire Armenian state budget. President Aliev maintains that he desires a peaceful outcome to the dispute but that his country reserves the right to use force in the long run to reconquer lost territory. In the meantime, the ceasefire line, known as the Line of Contact, remains Europe’s most dangerous militarized zone. Each side has deployed more than 20,000 soldiers to face the other, there are frequent shooting incidents, and about three dozen people are killed each year. This is certainly not a “frozen” conflict.

With every year that passes it gets harder to make peace over Karabakh. Armenians get more accustomed to possession of the lands under their control and are more reluctant to make the land-for-peace deal that must lie at the heart of an agreement. For his part, the Azerbaijani leader has to deal with unrealistically high public expectations and a large constituency that favors going back to war. At the same time, all the outside powers are firmly committed to preventing a new and potentially disastrous conflict over the territory.

This means that the most likely scenario over the next few years is the continuation of the situation of no peace, no war—although the possibility of new fighting, caused either by miscalculation or by a political crisis, also grows stronger every year and must be taken seriously.
Opaque Politics

There are set to be ten candidates in the October 9 election, although only two are expected to gain significant numbers of votes: the incumbent president and the candidate of the united opposition. The fact that Aliev is running for a third term at all is a subject of controversy. Previously, Azerbaijan had a two-term limit for presidents, meaning that Aliev would have had to stand down this year. However, he organized a constitutional referendum in March 2009 that allowed him to run for a third consecutive term.

Azerbaijan’s opposition is notoriously poorly organized. Many of its leading figures are veterans of the short-lived Popular Front Party government of 1992–1993, whose public standing has declined over the years. The opposition briefly raised its game this year by nominating a highly respected figure, filmmaker Rustam Ibrahimbekov, to be its unified candidate. Ibrahimbekov, an acclaimed international artist who had been praised by Ilham Aliev and his father, has been especially critical of the current government for corruption and its human rights record.

In the end, Ibrahimbekov’s candidacy did not go forward, as he was barred from running for office because he had dual Azerbaijani and Russian citizenship. The filmmaker tried and failed to renounce his Russian citizenship in time to run for the presidency. Instead, the main opposition groups have nominated sixty-one-year-old historian Jamil Hasanli as their candidate.

Azerbaijan is not a democracy, despite holding elections. The opposition is operating in very difficult circumstances. Several activists have been arrested this year; opposition parties cannot hold rallies in central Baku and have limited access to airtime on television.

Over the last year the government has cracked down strongly on dissent. Two leading opposition politicians, Ilgar Mammadov and Tofiq Yaqublu, were arrested in February on dubious charges and are still in detention. Investigative reporter Khadija Ismailova, who has published articles on elite corruption in Azerbaijan, has been subjected to a campaign of intimidation.

Human Rights Watch recently released a report on the crackdown that concludes, “the government has been engaged in a concerted effort to curtail opposition political activity, punish public allegations of corruption and other criticism of government practices, and exercise greater control over nongovernmental organizations.”

Responding in early September, Elnur Aslanov, head of Azerbaijan’s Political Analysis and Information Provision Department of the Presidential Administration, rejected the report as politically motivated, saying Human Rights Watch was “working to the orders of various centers. The report does not mention even one of the recent achievements of Azerbaijan, this clearly demonstrates that the authors are fulfilling such orders.”

The October 9 poll will be observed by fewer international monitors than in elections past. A projected visit by a U.S. delegation to Azerbaijan, led by Deputy Assistant Secretary of State Thomas Melia, to monitor preparations for the vote was canceled at the request of the Azerbaijani authorities.

All this means that, although in the short term the opposition will do its best to protest the conduct of the election, in the coming years the main arena of political competition within Azerbaijan is likely to be among the ruling elite.

Former president Heidar Aliev ran Azerbaijan from the late 1960s to 2003, first as Communist Party boss, then as elected leader, with one interruption. He established a power vertical in which he personally oversaw every key decision and amassed enormous authority.

Under his son, president since 2003, the system is somewhat different. By claiming a third term as president, the younger Aliev will emerge more from under the powerful shadow of his father, who only served two terms. He will have a chance to move aside some of the powerful veterans of his father’s team, such as his seventy-five-year-old chief of staff, Ramiz Mekhtiev.

He will be unable to repeat the feat of total control exercised by his father because the immense increase in wealth over the past few years has empowered other individuals in the country. The political system is now more oligarchic, with powerful positions held by ministers, such as Kemaladdin Heydarov and Ziya Mammadov, who have economic and regional power bases.
The Views of the People

Public opinion is hard to gauge in a country such as Azerbaijan, but the available data suggest that the president retains popularity, while public discontent is directed more against the oligarchs.

A total of 83 percent of those questioned in fall 2012 for the Caucasus Research and Resources Center’s soon-to-be-released Caucasus Barometer poll said they trusted the president, fully or partially. A noticeably lower figure—49 percent of those questioned—said they believed they were being “treated fairly” by the government, while 39 percent disagreed with that proposition.

Outward displays of popular discontent have been sporadic. The early part of 2012 saw a number of disparate and seemingly unconnected protests by different groups in the Azerbaijani population. The demonstrations were mainly about socioeconomic issues or local problems. As Shannon O’Lear, an associate professor of geography at the University of Kansas, explains:

Public protests in Azerbaijan have focused, not entirely but to an interesting degree, on localized issues: a mosque closure, a relative of a local official not being detained after a traffic accident, merchants protesting an increase for stalls in the market, for example. There are also national-level issues that have motivated public dissent such as the unauthorized protest by a few dozen people in Baku in January of this year regarding the death of a soldier by hazing.

So, while people may not feel they are treated fairly by the central government, their grievances are not necessarily directed at the top leadership. O’Lear says this could either be “because other issues are more immediately relevant to people or because the Aliev reign appears to be too solid to threaten. People may be more likely to enact opposition through localized, tangible issues on which they feel they have a chance to make a difference.”

Observers of Azerbaijan, from different perspectives, agree that the public currently sees little alternative to the current ruling elite. Brenda Shaffer, a professor at the University of Haifa who specializes in Azerbaijan, argues that the Azerbaijani public has opted for the stability that the current leadership provides for them. She says, “In the post–Arab Spring world, most recognize that failed states are not good for human rights and that effective governance, even when flawed, is preferable to instability and lawlessness. In Azerbaijan, there is wide support for a gradual evolution of the political system and little attraction to rapid change or shifting ideologies.”

According to pro-democracy activist Hikmet Hajizade, “There can be no opposition in a system like that of [Leonid] Brezhnev’s USSR. There are only around 200 brave activists who have not been broken, who try to protest and who can be called dissidents . . . but there is no popular force behind them. The people have been lulled to sleep.”

This stability of course may change over the next five years. The key determinant will almost certainly be the economy.
Economic Prospects

After years of record growth, the main issue for Azerbaijan in the near future is whether its current economic model, which is heavily reliant on oil exports, is sustainable. (See “Answers in Depth” below for experts’ detailed answers to this question.)

Oil revenues from the Baku–Tbilisi–Ceyhan pipeline made Azerbaijan the fastest growing economy in the world between 2005 and 2007. But production is dropping (see figure 1). Speaking in Washington, DC, in September 2013, Gulmira Rzayeva of the Center for Strategic Studies in Baku said that starting in “2015–16 [oil production] will . . . be significantly declining.” Revenues reached a peak in 2010 and are slowly falling—though the State Oil Fund, created in 2001, is designed to protect the state budget against this decline.

The result of Azerbaijan’s upcoming presidential election is not in doubt. But the incumbent president will face a new set of challenges during his next five-year term.

A dip in the world oil price is more likely to have an economic impact on Azerbaijan’s oil-rich neighbors, Iran and Russia, than on Azerbaijan itself, argues Brenda Shaffer. If oil prices dive in the near future, Azerbaijan will be in relatively good shape because “it regularly bases its state budget on a price lower than the actual,” Shaffer says. Azerbaijan also “has a small population, so it can keep state services at a good level even when the oil price is lower. But oil-export-based states with large populations, such as Iran and Russia, will have a hard time maintaining social services stability when the oil price is low for a long term,” she adds.

[Mher]

Re: Energy in Azerbaijan

continued...


Yet even if Azerbaijan manages to cushion itself against the short-term effects of declining oil revenues, it still faces a new stark reality: the days of big, easy oil revenues are numbered. To meet this challenge, the plan over the next five years is for Azerbaijan to reposition itself as a major gas exporter.

For many years, the European Union had been pushing the Nabucco gas pipeline project intended to transport gas from Azerbaijan’s Shah Deniz field to the countries of Central Europe. Uncertainties about the commercial viability of Nabucco eventually led to the less ambitious but still significant TAP, which will begin in Greece then run through Albania and across the Adriatic Sea to Italy. According to Laurent Ruseckas of IHS Cambridge Energy Research Associates, the actual route of the pipeline is less important than the fact that there will now be a direct link from the Caspian Sea to Western Europe. “Development of Phase Two of Shah Deniz, as it proceeds, will make Azerbaijan into a significant gas producer,” he says.

At the same time, the Azerbaijan state oil and gas corporation, SOCAR, is expanding internationally so it can remain a player in European energy politics in the future. It is already a major economic investor in Georgia, and it has made a large investment in the Star oil refinery in Izmir, Turkey. SOCAR also recently bought a two-thirds stake in Greece’s gas distribution network.

The fact that TAP is more modest than Nabucco suggests it is better insured against fluctuations in European gas demand. The previous experience with the Baku–Tbilisi–Ceyhan pipeline is also encouraging for TAP’s prospects: in that case, as soon as the project was approved, both suppliers and customers factored it into their future plans and made it viable.

However, the world gas market is more volatile than the oil market, and revenues are lower. As Rzayeva said in September 2013, “If Azerbaijan was getting some $800 per 1,000 tons of oil, then it will only get $50 per 1,000 cubic meters of gas. If you take this comparison you can see what the difference is between oil and gas revenues for the country."

Other producers are on Azerbaijan’s heels, and its gas will have to compete against sources in Algeria, the eastern Mediterranean, and northern Iraq as well as liquefied natural gas (LNG) that is exported from further afield.

The longer oil and gas revenues continue to flow into Azerbaijan’s state budget, the more questions society will ask about how the new riches are being distributed. Corruption is already a major concern. A scandal erupted last year when a former university rector, who had fled to France, made damaging allegations about seat buying in parliament. And Azerbaijan ranked 139 out of 176 countries in Transparency International’s Corruption Perceptions Index of 2012, putting it on the same level as Russia.

O’Lear explains that based on the experiences of countries in similar situations, with economies overly reliant on oil exports, “an uneven distribution of oil rent benefits allows a political elite to rule without having to do the work of statecraft to build a foundation for a flourishing society.” She cautions, “If Azerbaijan continues on what would appear to be a similar path, the expectations of its populace will continue to go unmet.”
Looking Ahead

President Ilham Aliev is in a relatively secure position as he prepares to begin a third term. Azerbaijan is prosperous as never before, and the country has secured an important international gas deal that will connect the Caspian Sea and the European Union for the first time.

However, Azerbaijan’s political system remains worryingly closed and opaque, while the recent experiences of long-serving leaders in neighboring countries—Recep Tayip Erdoğan in Turkey and Vladimir Putin in Russia—show that standing still is not an option. The next five years will be a critical time for Azerbaijan to adapt and reform in order to meet a whole new series of economic and international challenges.
Appendix: Answers in Depth

In September 2013, Azerbaijan experts were asked, “Is the Azerbaijani economic model sustainable?” They responded:

Gubad Ibadoglu, member of the management board of the Economic Research Center

“In the short-term yes, but in the medium and long term there are fiscal risks.”

Richard Kauzlarich, former U.S. ambassador to Azerbaijan

“With stabilized or declining energy exports and the lack of any serious economic diversification into the non-energy sector, the current economic model is not sustainable. If the economic model is not sustainable, then the current political system—built as it is on corruption—will be stressed.”

Laurent Ruseckas, senior adviser at IHS Cambridge Energy Research Associates

“For five to ten years, probably; over the longer term, clearly not, since it is based on oil export revenues that decline over time. Azerbaijan is likely to emerge as a major gas exporter, and gas export revenues will help, as will condensate production from gas fields. But . . . it is very likely that, absent major increases in world oil prices, Azerbaijan faces a general trend of slow decline in hydrocarbon export revenues. As this gets reflected through less investment of oil money in the domestic economy, growth of the non-oil sectors—which has been pretty robust for the past few years—will presumably start to suffer.”

Brenda Shaffer, professor at the University of Haifa and visiting researcher at Georgetown University

“Over half of the revenue that Azerbaijan has accumulated from its oil exports has been saved in the national oil fund, thus with its relatively small population, Azerbaijan can weather changes in the oil price. In contrast to oil export, gas projects take a long time until they start showing profit, generally over a decade. However, the initiation of the new gas export projects will also generate economic activity and jobs. Shah Deniz has a large portion of gas condensate. The export of the gas condensate can generate immediate profits, while like all gas export projects, the pipeline exporting natural gas will take a long time to return a profit.”

http://carnegieendowment.org/2013/10/07/what-lies-ahead-for-azerbaijan/gpd3

[Mher]

Re: Energy in Azerbaijan

Azerbaijan Gas Production to Rise to 20 Billion Cubic Meters in 2015

December 5, 2013

Azerbaijan predicts the volume of gas production in 2015 at 20 billion cubic meters, Azernews reported on December 4.

The figure excludes the gas injected into reservoirs, Head of the Investment Department of the Azerbaijani Energy Ministry Ramiz Rzayev said.

The opportunities provided by the country's new gas condensate fields and the potential of prospective fields located in the Azerbaijani sector of the Caspian Sea create an optimistic forecast, Rzayev said.

He pointed to the prospects of some new fields in the Azerbaijani sector of the Caspian Sea, such as Absheron and Umid, and prospective sites at Shaxxx-Asiman, Zafar-Mashal, and Nakhchivan.

"The work carried out within the current projects and the assumptions related to prospective structures indicate that the potential for the Azerbaijani sector of the Caspian Sea will exceed our expectations", the article said.

Azerbaijan's proven gas reserves exceed 2.55 trillion cubic meters, while its anticipated gas reserves are estimated at 6 trillion cubic meters.

In the first eleven months of 2013, gas production exceeded 14.62 billion cubic meters of marketable gas, 1.9 percent more than the same period in 2012.

Gas production, excluding associated gas, amounted to 17.24 billion cubic meters in 2012, showing a 5.4 percent increase compared to 2011.

The gas condensate reserves of Azerbaijan's giant Shah Deniz field located in the Caspian Sea is estimated at 1.2 trillion cubic meters.

Azerbaijan's gas export potential is expected to reach 40-50 billion cubic meters by 2025.

http://www.oilandgaseurasia.com/en/news/azerbaijan-gas-production-rise-20-billion-cubic-meters-2015#sthash.Qn2ljmiU.dpuf

[Mher]

Re: Energy in Azerbaijan

Azerbaijani Prices For Gasoline, Natural Gas Rise Sharply

By RFE/RL's Azerbaijani Service

December 03, 2013
BAKU -- Azerbaijan's government has announced a sharp increase in the state-regulated price ceiling for gasoline.

The Tariff Council in Baku -- the state board that sets the maximum prices that firms can charge for certain commodities and services -- announced the decision at 10 p.m. on December 2.

With the rule going into effect at midnight, drivers across Azerbaijan effectively awoke on December 3 to gasoline price hikes ranging from 27 to 33 percent.

The council also increased the price of natural gas for industrial facilities, raising it from 42 manats ($53.50) per 1,000 cubic meters to 80 manats ($102).

No explanation was given by the Azerbaijani authorities.

But economist Rovshan Agayev, the deputy head of the Baku-based nongovernmental organization Public Union to Assist Economic Initiatives, says he thinks the decision may be related to an expected fall in state revenues due to decreasing oil production.

"Oil production is falling. The government's revenues from the oil sector will drop by 2 billion manats [about $2.43 billion] in 2014 compared to what it was this year," he said. "Apparently, the government wants to compensate for this lost revenue by raising prices."

The new price of gasoline now varies between 0.7 manats ($0.89) and 0.8 manats ($1.02) per liter, depending on the type of fuel. The previous price had been 0.55 to 0.60 manats.

A liter of diesel fuel is now 0.60 manats ($0.76), up from 0.45 manats.

Adil Amirov, a city bus driver in Baku, says that because of the system used by transit authorities to collect money from drivers each day, the gasoline price hike may force him to quit his job.

"If they don't decrease the amount of money we have to pay back [to the transit authority] at the end of the day, it won't be worth working anymore. Because of this price hike, we have to pay an extra 15 manats out of our daily earnings. [Before this price hike], we were only left with about 25 manats [about $30] per day," he says.

"I won't work for just 10 manats [$12] a day. Today, I am quitting unless they decrease the amount of money we must return. When gasoline prices go up, the cost of everything increases."

Some lawmakers in Baku are also objecting to the decision, saying the move will result in higher prices for many other goods and services.

Economist Agayev says he agrees that other price increases are likely.

"According to our analysis of next year's draft budget, the government plans to raise communal and fuel prices twice. That means prices for water, electricity, and natural gas also will rise," he says. "The government may achieve this according to a certain schedule -- not immediately."

The Tariff Council last announced a gasoline price increase in January 2007, raising the price ceiling by 50 percent.

That decision was announced before the end of the business day, resulting in a panic rush and long lines at gasoline stations as drivers tried to top off their fuel tanks.

http://www.rferl.org/content/azerbaijan-raises-gas-prices/25188225.html

__________________________________________________ ____________________________________________
Increase of fuel prices by Azerbaijani government boosted rise of food prices by 15-20%

“After Azerbaijani Tariff Council increased the prices of gasoline and oil products, an increase in prices of food is noticed in the markets and shops of Baku. Overall, price growth is mainly observed among agricultural products which are brought to the capital city from the regions of the republic,” Azerbaijani information portal Turan reports.

As it is stated in the article, the Azerbaijani State Statistics Committee presented their data and claimed that food prices in the country have already grown. According to their statistics, even before the rise of fuel prices, in November of 2013 the food prices have already increased by 1.4%. That price hike affected flour, rice, bread, pasta, beef, chicken, fish and meat products, milk and dairy products, eggs, butter, vegetable oil, pears, quince, pomegranates, potatoes, onions and garlic.

“Experts think that there will be an increase in prices in December. The reasons are considered to be the rise of gasoline prices and approaching New Year,” states Turan.

Note that Tariff Council of Azerbaijan starting from December 3 sharply increased the price of gasoline and diesel fuel by 27%-33% and the price of gas for enterprises became almost twice the former price. Earlier, in January of 2007 by the decision of Tariff Council of Azerbaijan the prices were again increased; the price of gasoline grew by 50%; price of electricity increased three times and the price of water became twice its former price. The fare of public transportation has increased by more than 30%.

Azerbaijani independent experts declared that the increase of fuel prices will generate growth in prices of food and other goods. On Sunday Azerbaijani opposition held a rally in Baku against rising prices. The protestants demanded the resignation of Azerbaijani government.

http://www.panorama.am/en/economy/2013/12/16/az-economy/?sw

[Eddo211]

Re: Energy in Azerbaijan

Good thread Mher

Do we know how much Israel or the West is helping in the use of the latest technologies in the discovery efforts going on as we speak to find new wells under the Caspian Sea? Apparently there is a good chance that reserves do exist however it takes state of the art technology and experienced personnel with advanced equipment to reach the gas/oil under the sea bed.

[Vrej1915]

Re: Energy in Azerbaijan

- Israel in not necessarily the best in the field of prospection.
- Yet, till now Israel is one of the major consumers of the Azeri oil, boarded by the BTC in Ceyhan (Kilikia), and the security of the pipe is indirectly a relative national security matter for them.
- Israel's interest went sharply lower toward azari, and more generally Caspian Gas(& oil), since they discovered Leviatan , supposedly huge Gas field offshore, between Israel and Cyprus (practically under Israeli control, thanks to turkish sword ratelling), in the Mediterranean. The explotation is supposedly close enough, to replace importance of Caspian Gas + relative peace in North Irak/Kurdistan, and its collaboration with Ankara makes cheap 'gray' oil very affordable for them in same Ceyhan.
- There have been no new discoveries in the Caspian, at least publicized. The famous ACG of Shah Deniz were already known since soviet geological studies. At that time, the soviets considered it hard to extract (lack of technology), and reserve.
- The only really 'new' discovery was Kashagan, in Kazakhstan's Northern shores, yet the earliness of the discovery (90-93), makes the genuine western input doubtful.
- The existence of hard to reach, 'expensive' fields might not be capital, if the price of the brent remains near the 100 $..., the real factor is the price of the barrel. A couple of years back, all the planing was of a min 80 $ a barrel, below the azari state budget would have been in deficit...
- We can trust BP's record, since Persia times in early 50's, as very disbalanced in favor of the company (=UK). Every 'surprise' cost will be for azarbaijan's expense..
- Paradoxically, the BTC played a major stabilizing factor, forbidding temptation for military adventure, willy/nilly, since BP could not afford any risk.
- If no major find, or if no Transcaspian pipe for oil (Kashagan/Kazakhstan, now probably less likely since the latter is reincorporated via CU into neo-CCP), or Gaz (Turkmenistan's, to divert from Chinese direction), the importance of the Kur valley's security will sharply go down from 2018/19, and on: that would mean, a war can be acceptable, from that point on, for the oil community...
- The potential ease of tension with Iran, may keep prices low enough, to make any incentive for new finds, less relevant. Paradoxically, that same element may take risks higher for us, for the previous reason.

[Eddo211]

Re: Energy in Azerbaijan

Thanks for the explanation Vrej.
It sure is a paradox for Armenia but it has to be good that no new reserves are available to them, that is at the end of the day as the saying goes.

[Mher]

Re: Energy in Azerbaijan

Azerbaijan's Chances in the Karabakh Conflict
Azerbaijan's Chances in the Karabakh Conflict

By Alec Rasizade | January 18, 2011 | 4:48 PM

In the 1988-1994 war between Azerbaijan and Armenia over the disputed territory of Nagorno-Karabakh, populated by Armenians but located within the Azerbaijan SSR, the latter lost 20 percent of its territory. Armenians established the Nagorno-Karabakh Republic (NKR) which declared its independence from Azerbaijan on January 6, 1992. The Caspian oil boom since 2005 has strengthened Azerbaijan’s hand in the conflict. However, this advantage is doomed to disappear in 2011-2019 with the dwindling of Azerbaijan’s oil reserves.



The Current Status of the Conflict

Since the death of Heydar Aliev in 2003, tensions between Armenia and Azerbaijan have taken a turn for the worse. His son, the new Azeri President Ilham Aliev, has threatened to resort to force to retake Nagorno-Karabakh and exchanges of fire along the frontline have increased. One explanation for this escalation is the rapid growth of Azeri defense expenditures, driven by the influx of petrodollars, which shifted the military balance in Azerbaijan's favor. Azerbaijan's defense budget alone, at US$3 billion, exceeds the whole state budget of cash-strapped Armenia.

On the other hand, Aliev’s threat of military buildup comes in the wake of Kosovo's declaration of independence from Serbia on February 17, 2008, which he fears could set a dangerous precedent for mutinous secession. This fear was reinforced by Russia’s subsequent recognition of Abkhazia and South Ossetia as independent states after the war with Georgia in August 2008.

Armenian President Sarkisian responded to Aliev's warnings on December 2, 2010 during the OSCE summit held in Astana. Sarkisian threatened to formally recognize the NKR as an independent state if Aliev tries to use force to win back the enclave and other Armenian-controlled territories around it, saying, "If Azerbaijan resorts to military aggression, Armenia would not have any other choice but to recognize the Nagorno-Karabakh Republic de jure and to invest all its capabilities into ensuring the security of the people living there... Nagorno-Karabakh has no future within Azerbaijan."

How real is the danger of resuming this war in Transcaucasia? The victorious Armenian side is quite content with the status quo in Karabakh where it had achieved all strategic goals prior to the 1994 armistice. (Armenian ideologues have lately started to talk about the return of Nakhichevan, the Azeri exclave within Armenia, but the Azeri status of this territory is protected by Turkey under the 1921 Treaty of Kars). The potential of the losing Nagorno-Karabakh Azeri side depends not only on its military buildup and patriotic bluster, but more on the civic morale and social welfare of its population, which is profoundly unwilling to wage a re-conquest of Nagorno-Karabakh given the present political situation and social injustice in Azerbaijan.

Azerbaijan’s Petrodollar Dependency

Modern Azerbaijan is a typical Middle-Eastern petrostate ruled by a classical Middle-Eastern despotia, where political (and economic) power is concentrated and inherited within the ruling family. The extended family includes, along with the kinsmen of Azeri president and his wife, the top bureaucrats who, apart from their government duties, run vast business empires in every industry and trade, and enjoy a virtual monopoly in their respective fields and import operations. The petroleum export operation belongs to the ruling family – a fact that has been clearly revealed in the series of Wikileaks of American embassy dispatches from Baku.

In 1994, Heydar Aliev gave the largest oil concession in the Azeri sector of Caspian Sea for 30 years to a Western consortium led by British Petroleum, which has persuaded Western governments to overlook the glaring violation of human rights, the poor imitation of democracy, and the egregious conflating of business and political interests in this petrostate for the sake of unhampered pumping of one million barrels of Caspian oil daily through a pipeline built in 2005. The family receives in return 15 billion to 20 billion petrodollars annually, which it mostly spends on prestigious construction projects and other grandiose displays of independence, such as the recently erected tallest flagstaff in the world, turning the city of Baku into a Dubai-style amassment of futuristic skyscrapers by demolishing European quarters built during the first Baku oil boom of 1907-1915 and brutally evicting its citizens from their privatized homes.

However, this second Baku oil boom of 2005-2013 is doomed to end in a few years without any significant economic achievement as all the petrodollar revenue is being spent in a construction frenzy on ostentatious "white elephants" without modernizing even the city's basic infrastructure, such as the water and sewage systems, let alone creating non-petroleum industries that might become useful in the future with the end of big oil. Almost all the factories and manufacturing plants, left over from the Soviet industrial past, have been grazed down to clear the ground for economically useless hotels and convention centers, magnificent mosques and shopping malls, and opulent office and residential buildings for Azerbaijan's new petrodollar elite. This leaves little room to live or work for the rest of population, which is emigrating in large numbers: presently 3 million of Azerbaijan's 9 million citizens live and work abroad.

Therefore, any speculation about Azerbaijan's prospects, both domestically and in Karabakh, is made simple by the country's complete dependence on these three oil fields: with their inevitable depletion Azerbaijan's economic strength will attenuate, which will in turn diminish its chances of resolving the Karabakh issue by force. The reserves of these fields are a state secret in Azerbaijan, but numerous foreign oil industry sources give evidence that, at the current rate of extraction, the three main fields will be depleted by 2019.



The End of Oil Boom

In 1992 the oil deposits of Azerbaijan were estimated at 7 billion barrels, 5 billion of which were under the Azeri-Chirag-Guneshli cluster. The total Caspian Sea reserves, including Kazakhstan, which possesses 80 percent of Caspian oil, were around 25 billion barrels. Since then, nothing new has been found in the Azeri sector of the sea, while the giant Kashagan oil field was discovered in the Kazakh sector. Suppose that during the 16 years since the signing of concession, the Consortium has been pumping half a million barrels of oil per day on average, i.e. 182 million barrels per year. (In fact, since 2005 the daily output has been 1 million barrels). Multiply that number by 16 years and it is evident that from its total stock of 7 billion barrels Azerbaijan has already pumped out about 3 billion, leaving only 4 billion barrels of oil.

Now generously presume the remains of Azeri-Chirag-Guneshli to be 3 billion barrels (of the initial 5 billion) and divide that by 365 million barrels a year: the resulting estimate gives only nine more years of production at one million barrels per day (which the Consortium plans to increase up to 1.2 million per day). Thus, it is easy to calculate the end of Azeri-Chirag-Guneshli in the year 2019. Given that 2010 was the peak year of Azeri oil production, the descent begins as of 2011. (The IMF predicts the beginning of descent in 2012). Of course, the output will not stop immediately, but its reduction by 10 percent a year will be a severe blow to this petrostate.

This is only my generous calculation; the real decline may be even steeper because Azeri officials routinely inflate their oil assets, which are mysteriously increasing instead of decreasing, in spite of the one million barrels pumped out daily. According to them, Azerbaijan's oil reserves rose last year to 923 million tons, an equivalent of 6.7 billion barrels. In other words, the stock of oil in Azerbaijan, after 18 years of extraction and no new discovery made, has declined by only 300 million barrels, which is Azerbaijan's production in one year. Where the output in the remaining 17 years has vanished to is unknown.

This same kind of overstatement pertains to Azerbaijan's natural gas resources, which the officials hope will replace the dwindling oil revenues. Gas reserves, however, are insignificant: Azerbaijan currently exports only 5 billion cubic meters (bcm) of gas to Turkey, hoping that the annual production from its Shahdenis gas field will double in the future, compared to the annual export of 70 bcm of Turkmen gas, 46 bcm from Iran and 350 bcm from Russia. Even gas-thirsty Ukraine, which is entangled in a gas-import dispute with Russia, produces 20 bcm of its own gas, compared to the 15 bcm produced in Azerbaijan, of which 10 bcm is consumed domestically.

Given this negligible volume of natural gas export and the certain end of big oil, the absence of real industrial production and manufacturing base in the post-petroleum era could lead to economic plight and public frustration. Azerbaijan has not developed any alternative source of economic income comparable to the current oil-export revenue. Moreover, instead of modernizing the Soviet-era industries, it has torn down the old factories and plants to clear the ground for office buildings and shopping malls, where the petrostate citizens were supposed to spend their petrodollars. However, Baku is neither a new Kuwait nor a new Dubai: its oil boom is to end within a few years. Yet the closed political system prevents a meaningful debate on post-boom challenges and breeds a sense of apathy and complacency.



The Futility of International Pressure

The international pressure which the Azeri government is trying to exert on great powers in resolving the Karabakh conflict by using its oil production as a foreign policy leverage is more important than the arms race. In 1994, Heydar Aliev hoped that the Western interest in energy resources would play in his favor on this issue. Composition of the Consortium, which included the European, American and even Russian companies, perfectly fitted into this strategy. However, Aliev's hope to relate oil development to the resolution of Karabakh conflict produced little effect. The only gain on this path was the softening in 2001 of Section 907 of the 1992 Freedom Support Act, which barred Azerbaijan from receiving American humanitarian aid until it lifts the economic blockade of Armenia.

Roughly speaking, the political clout of the one-million-strong Armenian community in the United States countervails the powerful big-oil lobby in Washington that promotes Azeri interests. Thus, the strategy of defeating Armenia diplomatically at the hands of oil-thirsty great powers has failed. Neither the European Union nor the United States have increased their support for Baku in the so-called Minsk process for settling the Karabakh conflict sponsored by OSCE. This strategic failure caused a reconsideration in Baku of the diplomatic impact of Azeri oil on the West, and both Alievs turned then to Moscow, trying to manipulate the United States and NATO by the Russian card.

Russia is still the strongest military power in the region, but its capacity to control events there is far weaker than most observers assume. Both the physical barrier of the Greater Caucasus range and the insurgency in its own turbulent North Caucasus reduce Moscow's ability to operate in the South Caucasus. To confront the growing political and economic influence of Turkey and Iran there, Russia if anything calls for the help of local Armenians, Abkhaz, Ossetians and others nations capable to maintain the Russian interests. The 2008 Georgian war and the renewal of Russia's military alliance with Armenia in August 2010 were both evidence of this. The calm reaction in the West to both events suggests that a dose of insignificance for Western strategic interests would be very healthy for Caucasian nations since it would allow the local governments to concentrate on solving their essential problems on their own.

Transcaucasia is indeed an important transport corridor for Caspian energy exports independent of Russia and Iran. But the romantic project of a new Silk Road stretching from Central Asia to Constantinople after the collapse of the USSR was unrealistic, unduly raising the hopes of small nations along the Road of becoming essential to the West, while antagonizing Russia and Iran. Also in the 1990s, Caspian enthusiasts in the West extravagantly believed that the oil reserves of Caspian Basin (allegedly 200 billion barrels) were equal to those of Mesopotamia and the Persian Gulf. Their claims later turned out to be exaggerated almost 10 times. Due to its impending economic and strategic insignificance to the West, Azerbaijan needs to become more realistic in its claim to Nagorno-Karabakh as its ability to persuade the great powers is set to wane synchronously with the depletion of oil reserves in 2011-2019.

http://hir.harvard.edu/azerbaijans-chances-in-the-karabakh-conflict

[Mher]

Re: Energy in Azerbaijan

Good thread Mher

Do we know how much Israel or the West is helping in the use of the latest technologies in the discovery efforts going on as we speak to find new wells under the Caspian Sea? Apparently there is a good chance that reserves do exist however it takes state of the art technology and experienced personnel with advanced equipment to reach the gas/oil under the sea bed.

Hey Eddo, thanks
I had to break apart my commentary because the response was too long with the article included

Above you see a an article that you might have seen on this forum before that holds some clues. Its a bit dated at 3 years old, but seeing how its from Harvard International Review and that all of its predictions have come true, I think it still holds a lot of water:


It really doesn't seem like there is any more oil in Azerbaijan. It's something the state has sort of come to realize and gently admit publicly. They have come to realize the oil is done, and they need to find something else. All the attempts made by multiple all powerful oil companies has come up empty. So it really looks like its end of the line, when it comes to oil.

In terms of natural gas, though things are a bit different, they still look fairly bleak for our enemy. I'll get into details in the following posts, but the overarching point is that natural gas is not nearly as valuable or stable in pricing to ever come even remotely close to replacing the golden age they had 2009-2012 they had in oil.