Caspian oil and gas: High hopes for a tough neighborhood

Azerbaijan has long been seen as a strategic gateway to vast oil and gas resources in the Caspian region and a source of energy security for Europe but has yet to live up to its promise as a bulwark against the influence of Russia and OPEC in the region.

Oil companies and politicians coined the term “contract of the century” to describe the 1994 deal to develop the giant oil complex Azeri-Chirag-Offshore Gunashli, which led to the construction of the BTC pipeline to the Mediterranean.

Azeri crude, produced by a BP-led consortium, has lately offset Libyan shortfalls. But the BTC pipeline operates at just two-thirds of capacity as expected volumes from across the Caspian have failed to materialize.

And this month’s launch of gas supplies from Azerbaijan’s Shah Deniz field to Europe via the audacious-sounding Southern Corridor may fall short of expectations.

The route offers an alternative for at least one country that relies on Russia for gas: Bulgaria. But opinion varies on whether southern Europe needs extra gas; and the volume involved, at 10 Bcm/year, is barely 2% of current EU gas demand.

That may disappoint those like former US diplomat Matthew Bryza who see the Southern Corridor as a tool for pressuring the EU’s largest supplier. Providing competition for Russia’s Gazprom is “to me the greatest goal of all of energy security in this part of the world,” Bryza, who served on the National Security Council and as US ambassador to Baku, said recently in Baku.

He explained Azerbaijan’s significance as “a successful example of a Muslim-majority country, a tolerant society, a secular society, succeeding at a very difficult piece of real estate: the only country that borders both Russia and Iran.”

PRAGMATISM TRUMPS POLITICS

But the pronouncements of post-Cold War politicians have since been tempered by the more pragmatic approach taken by oil companies, who have favored alternative routes to ship their crude, bypassing the BTC pipeline.

In terms of providing energy security, Kazakhstan’s Kashagan field is now producing over 300,000 b/d after early problems, its Chevron-led Tengiz field has reached 660,000 b/d and the giant Karachaganak field is producing around 250,000 b/d. But Azerbaijan may not benefit much.

For years executives claimed the BTC pipeline would carry not only Azeri crude but be a route for Kazakh supplies. But non-Azeri volumes have been modest; Tengiz crude hasn’t been shipped through the pipeline in more than two years.

BTC’s presence has instead spurred Russia to develop the rival CPC pipeline from Kazakhstan to the Black Sea. CPC has become the route of choice, and Chevron has discussed an expansion beyond its capacity of 67 million mt/year (nearly 1.5 million b/d).

Some still believe Kazakh crude will one day be transported through Azerbaijan in significant volumes.

“Don’t ask me when, but it will happen someday,” Eni’s Central Asia executive vice president Luca Vignati told S&P Global Platts in May. “Very deep” discussions have been underway between Azerbaijan and Kazakhstan on the topic, he said.

In theory, BTC is attractive as it avoids the Black Sea and Bosporus and the need for value-reducing shipments through China or Russia. But without a pipeline across the Caspian, regular larger-scale shipments from Kazakhstan through Azerbaijan may not materialize.

Some port construction is underway, but the largest vessels Baku can handle can only carry 13,000 mt of crude (180,000 barrels). And the oil majors may be wary of spills in the highly sensitive enclosed sea.

“I don’t see any incentive for BP to beat the bushes looking for additional volumes to put through BTC,” one regional source said.

CASPIAN DELINEATION

Hopes have been lifted by plans for a first-ever treaty between all five Caspian states on the sea’s status, to be signed probably in August. This might enable construction of a gas pipeline from Turkmenistan to supplement Shah Deniz volumes. But three decades after the Soviet collapse the agreement is still unlikely to delineate the Caspian, and prospects for an oil pipeline remain remote.

Azerbaijan, then, is proving less efficient than some hoped. And despite an economic transformation, security in the region remains a worry.

A bloody conflict with Armenia over Azerbaijan’s autonomous territory of Karabakh that was unleashed by the Soviet collapse remains unresolved; Azerbaijan claims to have mounted an offensive in the Nakhchivan region in April, two years after some 200 people were killed in renewed fighting.

And at the centenary of the first Azerbaijan Democratic Republic, political uncertainty also persists. The ability of countries in the region to smoothly hand power from one leader to the next remains in doubt; the suppression of dissent under President Ilham Aliyev, who inherited his post from his father in 2003, may be storing up trouble.

Baku’s seafront now hosts Formula 1 motor racing each spring; a far cry from the early post-Soviet years. But behind the facade questions remain.