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Dec 7, 2006 | 04:55 GMT

3 mins read

Azerbaijan: Energy Independence from Russia

Summary
Azerbaijan will cease exporting oil to Russia via the Baku-Novorossiysk pipeline Jan. 1, 2007, Azerbaijani Prime Minister Artur Rasizade said Dec. 6. Russia earlier indicated that it would significantly reduce its natural gas exports to Azerbaijan and double the price. Azerbaijan, however, has little to fear from the changes since it is well on its way to becoming the first former Soviet state to escape energy dependence on Russia.
Azerbaijan will cease exporting crude to Russia via the Baku-Novorossiysk pipeline, Azerbaijani Prime Minister Artur Rasizade said Dec. 6, confirming a previous announcement by President Ilham Aliyev. This follows a Nov. 22 announcement by Russian state-controlled natural gas monopoly Gazprom that it will reduce natural gas exports to Azerbaijan from 4.5 billion cubic meters to 1.5 billion cubic meters and increase natural gas prices from $110 to $230 per 1,000 cubic meters. The move, however, only will serve to make the energy sector of Azerbaijan — already the most energy-independent of the former Soviet states — even more independent from Russia. Azerbaijan enjoys plentiful energy supplies. Since Soviet times, however, its export routes were oriented toward Russia, something which has limited post-Soviet states' options. Moreover, Soviet-era emphasis on oil meant Azerbaijan had to import natural gas to generate electricity. To remedy this situation, the Baku-Supsa oil pipeline to the Black Sea was launched in 1999, but its capacity is limited to 115,000 barrels per day (bpd) and congestion in the Bosporus and the Dardanelles hampers transport beyond the Black Sea. In July, the Baku-Tbilisi-Ceyhan oil pipeline was finally launched, transporting crude directly to the Mediterranean with a capacity of 1 million bpd. And the South Caucasus natural gas pipeline — which transports supplies from the giant Shah Deniz deposit in the Caspian Sea to Turkey — is due to come online by Jan. 1, all but making up for the lost Russian supplies.
In 2006, Azerbaijan began receiving tremendous profits from its energy sector, and its economy is slated to grow at an unprecedented rate. Since Azerbaijan is no longer dependent on Russia for import or export of energy supplies, the country has decided to stop exports to Novorossiysk as a retaliatory measure for the Russian reduction and price increase of natural gas, and simply because it can. The Baku-Supsa line is shorter and terminates in Georgia, with which Azerbaijan has expanded its energy cooperation in spite of a Russian blockade of the Black Sea state. Moreover, the customs tariff for shipping crude to Novorossiysk is $2.05 per barrel, but only 41 cents per barrel to ship to Supsa. While Baku-Supsa is currently undergoing maintenance, Baku-Novorossiysk has seen some additional transit, but the shorter and cheaper Baku-Supsa pipeline will resume operation and regain Azerbaijan's business. The Azerbaijani crude shipped to Novorossiysk also will find new customers in Ceyhan. Although Azerbaijan has gotten away so far with untangling its energy ties from Russia, Baku is not going to push its luck. It is remaining friendly to Moscow while welcoming foreign energy companies, such as BP, which operates much of Azerbaijan's energy infrastructure. Russia will certainly be upset by the loss of income from Baku-Novorossiysk's operation, but it will not miss the crude supplies and will earn a greater profit from the natural gas Gazprom no longer exports to Azerbaijan. Russia will not want Azerbaijan's newfound independence to set an example for other former Soviet states, particularly the Central Asian countries that are expanding energy cooperation with China. And Moscow has one last big pressure mechanism on Baku — preventing Azerbaijanis working in Russia from transferring remittances home. While Moscow might ultimately resort to blocking these remittances, as it has with Georgia, this lever will not suffice to turn Azerbaijan back toward its former ruler.

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