Azerbaijan's Position in Europe's Energy Diversification Plans

7 MINS READFeb 22, 2011 | 14:16 GMT
The European Union reportedly is in discussions to get two "southern corridor" pipeline projects to merge. The discussions come just a few months before Azerbaijan, a country crucial to any such projects, is expected to announce which supplier will get the rights to its Shah Deniz II natural gas field. Azerbaijan supports the merger idea — and any other southern corridor energy projects — because any southern pipeline project will depend on Azerbaijan. The country's geographic position and natural gas supplies will give Azerbaijan more leverage over all players in the region — the West, Russia, Turkey and Iran.
The European Union is pushing for a merger of the Nabucco and Interconnector Turkey-Greece-Italy (ITGI) natural gas projects to secure supplies from Azerbaijan to Europe, Reuters reported Feb. 17. Media citing unnamed EU industry and political sources reported — and a Nabucco spokesman confirmed — that the European Commission is urging representatives and stakeholders of both of these projects to merge their operations to keep costs down and make the project technically and commercially viable. This is not the first time such an idea has been proposed, but this push comes as Azerbaijan is expected, within the next few months, to announce which supplier and project will get the rights to its Shah Deniz II natural gas field. These interrelated developments shed light on the technical and financial impediments to these future energy projects, though the central player, Azerbaijan, will continue its strategy of supporting all projects in order to gain political and economic leverage over the West, Russia, Turkey and Iran.

Azerbaijan's Strategic Position

Azerbaijan plays a key role in any European plans to diversify energy supplies away from Russia, whose natural gas constitutes roughly a quarter of European energy consumption. That is because these so-called southern corridor projects that the Europeans are pursuing, meant specifically to avoid Russia and its transit system, must involve Azerbaijan in one way or another. Whether using Azerbaijan's natural gas production or transiting natural gas from Central Asian states like Turkmenistan via the proposed Transcaspian pipeline, any potential natural gas projects must go through Azerbaijan. Only natural gas from Iran or Iraq might be accessible without traversing Azerbaijani territory, though the political situation in both countries makes this scenario unlikely in the near term. Several such southern corridor projects have been proposed or discussed among the Europeans. Of these, the most ambitious project is Nabucco, which has an estimated cost of $10.5 billion, a capacity of 31 billion cubic meters (bcm) per year, and would take Azerbaijani natural gas across Turkey into southeastern Europe and on to Austria. There is also the ITGI pipeline, with an estimated cost of $3.4 billion and a capacity of 11.8 bcm a year, which would connect Italy with the Greek, and therefore Turkish, natural gas network. The most recent southern corridor project that has been proposed is the Azerbaijan-Georgia-Romania Interconnector pipeline, with a $3 billion to $7 billion estimated cost and 7 bcm capacity. The project would involve transporting Azerbaijani natural gas via pipeline to a liquefied natural gas (LNG) export terminal on the Black Sea coast of Georgia and then shipping it via tanker to an LNG import facility on the Romanian Black Sea coast. While these are the main projects being discussed, there are also some smaller proposed projects, such as the Trans-Adriatic pipeline and White Stream, an underwater pipeline across the Black Sea, though these have not had the political and financial impetus as the previously mentioned projects.

Impediments to Southern Corridor Projects

Many of these projects, particularly Nabucco, have been met with countless summits and much fanfare as the answer to Russia's firm energy grip on Europe, which Moscow has used to gain substantial political leverage. However, all of these projects face significant impediments. From a technical perspective, it is very difficult and costly to build pipelines across the mountainous terrain of eastern Turkey or under bodies of water like the Adriatic Sea, and all of these projects would need to traverse one or the other. Also, the slated completion date — around 2015 for most projects, which just happens to be the completion date for South Stream, another Russian rival project — is all conjecture at this point. Finally, and most important, none of these projects is actionable without a reliable source of natural gas. This is where Azerbaijan comes in. However, all of Azerbaijan's natural gas is currently contracted out to its immediate neighbors: Turkey, Russia, Iran and Georgia. This is why Azerbaijan's Shah Deniz II natural gas field on the Caspian Sea is crucial to the Europeans' energy plans: It is projected to increase Azerbaijan's output considerably, from roughly 10 bcm currently to 25 bcm once the field comes online, with most of the natural gas from Shah Deniz II available for export. However, the natural gas produced by this field is not expected to come online for years; in fact, it was recently pushed back to 2017-2018 due to price rows between Azerbaijan and Turkey. Therefore, all of the projects are effectively competing with each other for limited supplies. This is why Azerbaijani state energy firm SOCAR's announcement of which supplier gets rights to the field, expected in June, is so important. According to Italian energy firm Edinger, approximately 20 international energy companies are competing for Shah Deniz II natural gas. This puts into context the recent reports of a merger between Nabucco and ITGI, showing that stakeholders of both projects could believe that combining the two plans may be the only way for either project to be realized. This merger would see the projects combined and built in two phases — first the "Southern Corridor Phase I" to Greece and Italy, then a "Southern Corridor Phase II" that would spur north to Austria. But this is not the first time such a plan has been proposed with little subsequent movement, and there are substantial reasons for this. Even if the two pipelines merge, it is unclear what exactly the route of the new pipeline will be to Europe. And if the southern phase is built first to countries like Greece and Italy, this will leave precious little supplies for Central European countries such as Poland, which have been most active in pushing for diversification away from Russia. Also, the question of Iraq's possible participation in Nabucco, while still likely years away from being answered, could provide additional natural gas supplies for southern corridor projects and therefore weaken the need to merge Nabucco and ITGI.

The Politics of Energy Projects

Despite all of these impediments, Azerbaijan has done everything in its power to hype these projects, as can be seen in Azerbaijani President Ilham Aliyev's recent statement that "Azerbaijan supports all southern gas corridors." Azerbaijan uses such projects, no matter how unrealistic, as a geopolitical strategy to get political and economic leverage with all players, including the West, Russia, Turkey and Iran. This exploitation could be seen when Russia offered to pay Azerbaijan above-market prices for all of its natural gas so that the Europeans could not use it. Also, Azerbaijan has floated the AGRI project specifically to pressure Turkey, which would not be involved as a transit state in AGRI, to get better pricing deals out of Ankara. With all of these projects, Baku is making sure it has an alternative for each interested country. This is not to say Azerbaijan has free rein; Baku has constraints of its own. Azerbaijan is under pressure from Russia, which has significant levers in Baku it can use to prevent Azerbaijan from considerably altering the regional energy landscape. Also, Russia has often shown interest in playing the price game to make sure no one gets cheaper natural gas from Azerbaijan. Baku is also under pressure from the United States and the Europeans to follow through with projects to decrease the West's dependence on Russian energy. Therefore, the Azerbaijanis' goal is to not go below the price the Russians demand from Europeans. If they can do so, they can both earn more money and not upset Russia. After that, Baku does not really care which project — Nabucco, ITGI or both — gets the natural gas, though creating and supplying the projects is easier said than done. It is within this environment that Azerbaijan will continue to maneuver to play its strategic position to its geopolitical benefit.

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