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Azerbaijan Shifts its Energy Priorities, CU Issue 55, November 23, 2009

For all the talk of Turkey moving away from Europe, the real story of a Western ally slowly turning East has been ignored. In recent weeks Azerbaijan has undertaken a series of moves which could, in the long term, lead to the loss of EU access to Caspian gas and a major reorientation in the region’s geopolitics.

If this occurs then Europe and Turkey will only have themselves to blame. Europe has repeatedly failed to make progress on the Nabucco project, which would carry Caspian and Middle Eastern gas to the heart of Europe and partially liberate it from reliance on Russian gas. This hugely expensive and ambitious project required firm political and financial commitments which Brussels has not delivered. Instead, individual European governments have been successfully courted by Russia’s Gazprom for its rival South Stream pipeline under the Black Sea. Turkey’s obstructionism and failure to acknowledge the links between energy and conflict-resolution in the region make it also responsible.

The Nabucco problem has been one of demand – insufficient commitment by the EU – but also one of supply. The only confirmed source of gas is Azerbaijan. Other possible suppliers – Iran, Central Asia, Iraq, and Egypt – have their own specific problems.

Now it looks as if even Azerbaijan is starting to slip away. In June, Azerbaijan’s state energy company SOCAR signed a deal with Russia’s Gazprom. The quantities involved (500 million cubic metres (mcm)) were insignificant, but this was a warning shot to Brussels and Ankara to hurry up with Nabucco. In November Baku has upped the stakes by making some serious overtures elsewhere.

Firstly, SOCAR signed a deal with Iran, promising over 500mcm a year from 2010 (Press TV, November 12). Like the Gazprom deal, this is another placeholder, since the amounts involved are negligible. The significance is political: the agreement holds open the possibility of increasing the contracted amount in years to come. Iran is also a pariah in the West, and expanding energy ties with it is a clear message from Baku. Secondly, Azerbaijan agreed to ship 7 to 8 billion cubic meters (bcm) of its gas annually via tankers in a compressed form to Bulgaria, bypassing Turkey (Eurasia Daily Monitor, November 16).

Shortly afterwards, Baku made its bluntest threat yet. “If Europe takes too long putting together a solution, then all the gas in the Caspian will go to Asia,” said a SOCAR official. “It’s more serious than it seems” (Bloomberg, November 19). China – which has been hungrily expanding its energy presence in Central Asia recently - is the obvious target market. Currently, the infrastructure to send Azerbaijani gas to China does not exist. But SOCAR’s threat seems to be genuine.

Ironically, the main obstacle to Azerbaijani gas heading east is also the main obstacle to Nabucco. A Trans-Caspian Pipeline (TCP) between Turkmenistan and Azerbaijan, long in the planning, is still far from being built. Russian and Iranian objections are partly responsible; so is a recent dispute between Ashgabat and Baku over the ownership of disputed gas fields. Turkmenistan has even threatened to take Azerbaijan before a court of international arbitration.

Alarmed at the prospect of losing Turkmen gas for the foreseeable future, the US has taken the unusual step of offering to mediate in the dispute (APA, November 18). If the dispute is resolved and a TCP is built, it may ultimately be used to send Azerbaijani gas east, not Turkmen gas west.

Why the sudden activity by Baku? Partly, the moves are designed to call Europe’s bluff and provoke it into action on Nabucco. Unfortunately, Brussels doesn’t seem to have heard the message. The timing of the moves, however, indicates at a deeper and more alarming reason: growing disenchantment with Azerbaijan’s longstanding ally, Turkey.

For years Ankara has obstructed Nabucco by insisting on preferential price tariffs and a share of the allocated gas for its own domestic market. Negotiations have continued for some time, and Baku was willing to politely discuss the issue – up to a point. This changed when Turkey’s government decided to press on with normalising relations with Armenia, before any progress has been made on the Nagorno-Karabakh conflict between Armenia and Azerbaijan. Turkey’s decision has been widely viewed in Azerbaijan as a betrayal of the fraternal relationship between the two countries, and prompted Baku to take an increasingly tough stance on gas negotiations. Ankara needs Nabucco to fulfill its goal of being a regional energy hub, and appears unwilling to back down. Whilst previously the disagreement was largely commercial, Baku’s fury over the ‘Armenian thaw’ has made the pricing dispute extremely political.

There is a very real risk that the sense of inertia created by these obstacles will finally kill off Nabucco’s prospects. Although a deal with Turkey will almost certainly be struck in the end, the long-term damage will have been done.

The implication could well be Azerbaijan’s gradual shift away from the West’s geopolitical orbit. The role of oil and gas pipelines in tying states together is sometimes overstated but, in the long run, Baku could find itself closely linked with Moscow and Tehran through commercial relationships. Oil and gas underpin Azerbaijan’s economy: its energy ties inevitably influence its foreign policy.

As always in the Caspian region, business is politics. The tension over Nabucco has been building for some time, but the immediate trigger of Azerbaijan’s energy shift was the Turkish decision to negotiate with Armenia without progress on Karabakh. Unless Ankara alters its position, there is no reason to doubt that Azerbaijan’s long-term gas strategy will change.

Policymakers in Brussels and in Washington should acknowledge the dangers involved and commit themselves to resolving this situation through serious, frank dialogue with Ankara and Baku. Failure to act now will have severe consequences for energy security, and geopolitics, in the long term.

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