Azerbaijan’s Energy Strategy: Source for Diversification ?

Azerbaijan’s Energy Strategy: Source for Diversification?

Oil and gas as the primary natural hydrocarbons will continue to be the topic of discussion related to the global economy and world politics. As such, the rest of the world sees countries with vast oil and gas re- serves as having a strategic advantage. It is not a surprise that energy expert Daniel Yergin described oil in his book The Prize, the Epic Quest for Oil, Money & Power, as a commodity in unity with national strategies and world policy. Azerbaijan is in a favourable position as it has sufficient oil and gas reserves. That is why Azerbaijan is also known as “the land of fire.” Azerbaijan is only one of the five Caspian Basin countries and three Caucasian countries, but it has an opportune and strategic location, linking Europa and Asia, which crucially enhances its geostrategic significance. Taking into consideration the importance of diversification for the EU’s energy supply and noting Azerbaijan’s transit function in the short term, it is not hard to predict the priority.

AZERBAIJAN’S NATURAL RESOURCES: The rich natural re- sources of Azerbaijan enhance the global significance of the country and are considered crucial in building internal and international economic relations. Overall, this contributes to world energy security. In accordance with a report by the US Energy Information Administration for 2013, Azerbaijan’s natural resources in the Caspian are an estimated 1.5 tcm (54 tcf) of gas and 6.8 billion barrels of oil. The total volume of hydrocarbons reserves of all the Caspian Basin countries combined, both on- and offshore, is approximately 48.2 billion barrels of oil and 113 tcm (3,990 tcf) of gas. It is believed that the Caspian Basin countries have now used approximately 20 percent of the reserves. Estimates say that the natural resources of these countries will be sufficient for the next 70 years. In light of this self-sufficiency and in- creasing world demand for oil and gas in the near future, we can easily say that the region and Azerbaijan can safeguard their significance in world energy security and diversification for a long time. Currently, the oil production of Caspian Basin countries is approximately 945,000 barrels of oil per day (bopd), 890,000 bopd – 94 percent – of which comes from Azerbaijan. It is also important to note that Azerbaijan has produced approximately 11.7 billion barrels of oil to date. This figure means that 39 percent of the total natural resources of the country have been used.

ENERGY STRATEGY OF AZERBAIJAN: As a resource-rich country, Azerbaijan should make progressively diversified and global decisions. First, however, the country’s internal economic and political interests should be taken into consideration. In other words, natural resources should be treated as a guarantor and important element of national security. If we want to analyse this point of view we should look at the following aspects of Azerbaijan’s energy policy: In 1994, bypassing Russia, Azerbaijan made an important decision by confirming its oil transportation to world markets through the Baku-Tbilisi-Ceyhan (BTC) oil pipeline. However, there were strong and real threats from neighbours Iran and Russia itself. The pipeline forms the political and logistical foundation for the transportation of the natural resources of the Caspian Sea, especially for Kazakhstan and Turkmenistan, to Europe via Azerbaijan. In December 2013, as in 1994, despite the risks, a second strategic decision was made for gas produced from the Shah Deniz II project to supply the European market through the Trans-Adriatic Pipeline (TAP). According to preliminary estimates, TAP will cost $2.2 billion. Azerbaijan is a sovereign country that owns an independent energy policy.

The most important tasks for the government are to ensure the efficient use of natural resources, form a diversified manufacturing environment making oil and gas revenues beneficial and moving forwards with a large portion of this. Azerbaijan will also play a big role in maintaining and improving Europe’s energy security in the future.

AZERBAIJAN WITHIN THE REGION: Certainly, Azerbaijan’s rich energy resources are becoming an important parameter for the formation of wider economic relations with neighbouring countries and ensuring the energy security of these countries. Considering the fact that Georgia and Turkey are the main transit countries for oil and gas to world markets, it should be noted that the two countries are direct partners in the strategic projects. In other words, this states that both countries make direct and indirect revenue, and, furthermore, it also has a positive impact on the overall development of the region. Additionally, increased funding opportunities of the State Oil Company of Azerbaijan Republic (SOCAR) over many years has allowed the company to make huge investments in many parts of the world, as well as in neighbouring countries, such as Georgia and Turkey. SOCAR is a well-recognised brand in Georgia and operates petrol stations. It has a subsidiary, SOCAR Energy Georgia.

ENERGY OPPORTUNITIES FOR GEORGIA: The price of gas ex- ports from Azerbaijan to Georgia is widely unknown. According to the Georgian minister of energy, Kakha Kaladze, it is crystal clear that Azerbaijan supplies gas to Georgia at sufficiently favourable terms. “I can say only that the price is favourable for us,” Kaladze said in a statement. In addition, he said that, “SOCAR is one of the largest companies in the Georgian market and also one of the major investors in energy and the social market.” At a glance, the Georgian economy benefits from Azerbaijani natural resources through revenues from transit, Azerbaijani investment, favourable rates for the import of oil and gas, a diversified energy sup- ply, energy security and increase trade with Azerbaijan. It is forecast- ed that Georgia will earn $6.5 billion worth of additional income over the next 40 years from the BTC project. For the record, first estimates were around $2.1 billion but the changed global oil price raised transit income. In addition, Georgia will have a 5-percent share of gas ex- port through the TAP project, which means 1 bcm (35.3 bcf) gas per year will be contributed to the country.

SOCAR IN GEORGIA: Around $18 billion will be invested in Georgia after the realisation the BTC, TAP and Baku-Tbilisi-Erzurum gas pipeline projects. Since 2006, SOCAR has invested $1.4 billion in different sectors of Georgia. On the basis of an agreement reached in 2013, SOCAR will build a plant for urea production in the country. The initial cost of the project is expected to be $1 billion and construction will start in 2014. SOCAR is considered one of the major companies in the Georgian energy industry. In 2012, after purchasing gas distribution company Itera Georgia, the gas supply in the whole territory of
Georgia has been carried out by the Azerbaijan company, with exception of Tbilisi. According to 2014 statistics, Azerbaijan’s share in the total gas import of Georgia is 67.2 percent.
In 2013, SOCAR was the biggest investor in Georgia and tax expenses of SOCAR Energy Georgia were $78.5 million that year. Between 2006 and 2013, the amount of tax contributed to the state budget of Georgia was $681.1 million. Currently, 106 petrol stations in Georgia are operating under the SOCAR brand.

As a result of close ties in the energy industry, Azerbaijan became the second-biggest trade partner of Georgia. Strategic ties were formed during the war in 2008 between Georgia and Russia. The difficulties of energy security for Georgia after the war were eliminated with Azerbaijan’s assistance. Therefore, it can be said that Georgia relies on Azerbaijan’s support in its energy supply.

TURKISH CONNECTION: Turkey is also an important partner of Azerbaijan. The shared Turkic origins and geostrategic location have allowed Azerbaijan and Turkey to forge close political and economic ties. Partnership in the energy industry is at the heart. Not only the BTC and South Caucasus Pipeline oil and gas pipelines, but also the Trans-Anatolian Pipeline that will be built in the near future will pass through Turkey. This, in turn, helps bring about global energy security. It is worthwhile to mention that the Trans-Anatolian Pipeline will allow for the transfer of Azerbaijani hydrocarbons output to Turkey as well as EU markets.

Turkey is considered one of the supporters of Azerbaijan’s energy projects from both a political and economic perspective. The country has been given a chance diversify its own gas provision to meet its own demand with the help of Azerbaijan’s natural resources. Also, Turkey’s transit position means its budget will benefit from these projects. The Turkish Petroleum Corporation earned $12 billion as a result of a $1.8-billion gas transfer through the BTC pipeline, in which TPAO holds a 6.5-percent share. More than 950 companies are operating in Turkey on the basis of Azerbaijan investment, but SOCAR is still the major investor in the country’s energy industry.

MAJOR INVESTOR: SOCAR’s investment in the energy industry of Turkey equals 82 percent of all Azerbaijani investments. In 2008, after purchasing 51 percent of shares in Turkish petrochemicals company Petkim, SOCAR realised its largest venture in Turkey. It is a 40-percent stakeholder in the $4-billion Star Refinery, currently under construction in Izmir province, and the main stakeholder in the Trans-Anatolian pipeline project. By 2018, investments made by SOCAR worldwide is expected to reach $20 billion. With investments in Russia, Kazakhstan and Turkmenistan, Azerbaijan’s natural resources have contributed to strategic collaborations, energy security and political stability in the region.

Vugar Bayramov is the chairman of CESD- Center for Economic and Social Development (, top think tank in Central Asia

May, 2014
Baku, Azerbaijan

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