The Crimean crisis and energy ramifications for Azerbaijan

The Crimean crisis and energy ramifications for Azerbaijan

The Kremlin’s partition of Crimea from Ukraine has put other states along Russia’s “near abroad” on edge. But while most of Russia’s neighbors seem to be worried about becoming Vladimir Putin’s next target, one state, Azerbaijan, stands to benefit, at least over the longer term, from the sudden turn of events. 

The Crimean crisis has revived fears among European Union states over their dependency on Russian natural gas imports, as well as the reliability of Ukraine as a transit state. This, in turn, is giving greater impetus to energy diversification projects across Europe, creating an opportunity for Azerbaijan to capitalize on its role as an alternative energy supplier at the head of the Southern Corridor energy route. 

Azerbaijan already plays an important role as a regional supplier. In 2012, Azerbaijan exported 24 million tons of oil and 7 billion cubic meters (bcm) of natural gas, primarily via the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum pipelines, respectively. Azerbaijan also has plans to significantly increase its natural gas exports once the Shah Deniz II gas field comes online in 2017-2018. That will mean an additional 10 (bcm) of Azerbaijani gas heading to Europe. 

While the opening of Shah Deniz II can certainly fill Baku’s coffers, the existing export arrangement falls short of maximizing Azerbaijan’s earnings potential. The pivotal movement for Baku, at least prior to the outbreak of the Crimea crisis, came in June of last year, when a consortium developing the Shah Deniz field ended the long-running competition over export routes by choosing the Trans-Adriatic Pipeline (TAP) project over the more ambitious Nabucco West initiative. Azerbaijan had been genuinely interested in developing Nabucco West, but Russia managed to undermine the project by negotiating lower natural gas prices with several Central European countries along its route, including Bulgaria and Hungary. Russia also got these countries to sign onto its own pipeline project known as South Stream, further compromising the attractiveness of Nabucco West. 

In the end, Azerbaijani officials felt compelled to go with the more modest TAP pipeline, with its 10 bcm pipeline capacity, compared to that of the 23 bcm-capacity Nabucco West. The TAP route, which goes through Turkey and Greece to Italy, avoided Central Europe altogether and the potentially lucrative market it offered to Azerbaijan. 

The rapidly widening rift between Russia and the West over Ukraine has given new life to Azerbaijan's role as an alternative energy supplier. The EU has already frozen negotiations with Russia over South Stream in order to "take into account broader political developments, including the Crimea crisis," EU Energy Commissioner Günther Oettinger said. On March 21, Paolo Scaroni, head of the Italian energy firm ENI, a 20 percent shareholder in South Stream, went even further; “I don't know if South Stream will ever be built.” 

If South Stream does indeed head south, Azerbaijan is well situated to fill the resulting export void. The fracture in EU-Russian relations not only provides greater momentum for TAP, but also larger energy projects down the line, potentially even the revival of some form of the Nabucco project. "If before the EU limited its support to important strategic projects like Nabucco by statements only, now it will have to act in a way to facilitate the materialization of those projects," according to Gulmira Rzayeva, an Azerbaijani energy analyst.

While new opportunities may be opening, Azerbaijan needs to move carefully. Aggressive action could invite Russian retribution. Moscow has proven that it is willing to disrupt energy supplies in order to advance its interests -- not only in Ukraine, but also in neighboring Georgia during the 2008 war. Yet, if the past is any indicator, Azerbaijani officials are capable of finessing the energy export issue. Baku has already shown that it can find the balancing point amid competing geopolitical interests, as Azerbaijan supplies energy not only to Turkey and the West, but also to Russia and Iran.

Ultimately, the Ukraine crisis provides both risks and opportunities for Baku. The odds seem much better today than just a month ago that Baku, given its strategic location and energy resources, can emerge in a stronger energy-export position in the coming months and years.



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