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Politkom.ru, Russia
Nov 7 2012
The Oil and Gas Factor in the Karabakh Conflict: New Trends
by Sergey Minasyan, candidate of historical sciences and head of the
Caucasus Institute Department of Political Studies, Yerevan, Armenia
[Translated from Russian]
At a government meeting on 10 October 2012 Azerbaijani President Ilham
Aliyev was sharply critical of the Azerbaijan International Operating
Company (AIOC) headed by British Petroleum - the operator for the
development of the main Azerbaijani oilfield, Azeri-Chirag-Guneshli
(ACG). In the Azerbaijani president's words, because of crude mistakes
made by the consortium in recent years oil production from this field
has started to decline sharply, as a result of which Azerbaijan has
suffered a revenue shortfall of more than $8 billion. Oil production
in the Azerbaijani sector of the Caspian is declining for the second
year in succession already (beginning in 2010), but this is the first
time that the top leadership of Azerbaijan has reacted so sharply to
this trend. It looks as if this factor will have quite a serious
impact not only on the financial and economic situation and the
prospects for political stability in Azerbaijan but also, in the more
or less foreseeable future, on the policy that official Baku is
pursuing in the Karabakh conflict.
It is no secret that right now Azerbaijan's main financial-economic
and also, to some extent, geopolitical resource in implementing its
policy in the Karabakh conflict is specifically its significant
revenues from the production of Caspian fossil fuels (oil and gas).
They give the Azerbaijan military-political leadership hope of
achieving a fundamental advantage in the military-technical sphere and
the stepping up of the arms race, of funding major regional projects
in circumvention of Armenia, of carrying out investments or even overt
corrupt financial injections in third countries, and of taking other
steps having the objective of achieving a self-beneficial change to
the processes surrounding the Karabakh conflict and compelling the
Armenian side to make unilateral concessions. Simultaneously the oil
factor also increases Azerbaijan's geopolitical significance in
regional and even world players' calculations.
Overall assessments of Azerbaijani reserves of oil and gas on the
Caspian continental shelf vary depending on the political leanings of
researchers, and it is very hard to get an objective idea of
Azerbaijan's real fossil fuel potential. In any event it has to be
noted that the reserves of oil and gas in the Azerbaijani waters of
the Caspian are extremely significant, although not unlimited.
However, Azerbaijan's policy, which is based on oil and gas revenues,
is encountering a number of serious problems.
First, oil and gas are not a guarantee of either stable economic
growth or the political development of exporting countries,
particularly if these countries have only little experience of state
building and are taking their first steps along the road of democratic
transition and the formation of institutions of civil society. It is
no coincidence that there is even the term "the oil curse," which
characterizes pretty accurately the extent of the economic, social,
and political problems and difficulties that arise when a country is
swamped by a flood of money from the sale of natural resources. These
problems are the dark side of the facade of oil exporting countries'
economic well-being. In history there have been dozens of examples of
countries in whose fate an insidious and even fatal role has been
played by the availability of rich natural resources (primarily oil
and gas) - from Nigeria to Mexico, and from the Habsburgs' Spanish
Empire (in that case it was cheap silver from mines in the Spanish
colonies in America) to the USSR. The Azerbaijani economy's excessive
dependence on revenues from the sale of energy resources (which,
according to various assessments, account directly or indirectly for
85 per cent of budget revenues and 92 per cent of exports) represents
a very serious and chronic threat to the country's stable
socioeconomic and political development.
On the other hand, by now it is becoming clear that the volumes of
their own oil and gas previously announced by the Azerbaijani
leadership were significantly exaggerated. According to calculations
by a number of experts, the main developer of fossil fuels in
Azerbaijani waters of the Caspian - AIOC - has evidently already
reached its peak production from the main oilfield,
Azeri-Chirag-Guneshli. And this happens not in 2013-2015, as the
Azerbaijani Government had previously announced (which was not
disputed by AIOC's principal operator - the British company British
Petroleum), but as early as 2010. Currently oil production in
Azerbaijan (allowing for the Azerbaijan State Oil Company SOCAR's
reserves) will decline gradually by approximately 10 per cent a year
from maximum levels of production in excess of 50 million tonnes of
oil in 2010 (and around 45 million tonnes in 2011) right down to an
annual production level of approximately 20 million tonnes by as early
as 2018-2019. AIOC is planning some stabilization of the decline in
oil production by commissioning the new West Chirag platform in this
same ACG field towards late 2013 or early 2014, but it will have an
active operating life of only 4-5 years and will only make it possible
to maintain a minimal level of industrial development at this field by
2020.
Naturally, Azerbaijan also has the potential to definitely increase
its opportunities for producing energy resources after the
commissioning of the second stage of its main gas field, Shah Deniz.
But the unenviable fate of the widely hyped Nabucco gas pipeline
(which was previously seen as the main infrastructure project for
delivering Azerbaijani gas to the European market) shows that the
advertised reserves of gas in Azerbaijan were also significantly
overstated. The potential revenues from exporting gas from this field
will in no way be able to offset the declining revenues from the
country's exports of its oil.
Even by the most optimistic estimates, in the event that second-phase
industrial development begins at Shah Deniz, Azerbaijan's gas exports
from this field may total no more than 8-10 billion cubic meters a
year. Factoring in the theoretically maximum possible price for gas,
the revenue from developing this gas field may total no more than $4
billion a year, which does not compare with the current levels of
revenue from Azerbaijan's oil imports (approximately $15-20 billion a
year). We would remind you that currently the maximum market price for
gas exported by Azerbaijan is paid by Gazprom - something like
$220-240 per 1,000 cubic meters, whereas Azerbaijan supplies gas to
Turkey in Georgia for a significantly lower price.
That said, it is necessary to take into account the fact by 2017, when
deliveries of gas from the second phase of Shah Deniz are scheduled to
happen (it is not ruled out that the project will not even have been
completed by then), the situation on the gas market may have altered
significantly and, as a result, the price of Azerbaijani gas will be
significantly lower. For example, in the words of Turkish Energy and
Natural Resources Minister Taner Yildiz, the Turkish energy company
BOTAS intends to abandon the principle of "Take or Pay" in purchases
of gas from the first phase of the Shah Deniz gas field, which gave
the Azerbaijani side more beneficial terms, by as early as 2013-2014.
In addition, new volumes of liquefied and shale gas may have appeared
on the European market by 2017, which could also lead to a global
reduction in prices on the general gas prices market.
Thus, although in the next few years the oil and gas factor will
retain its role as the main financial and geopolitical resource
supporting Azerbaijan's implementation of its policy in the Karabakh
conflict, nevertheless the potential and significance of this factor
will gradually decline. Naturally this cannot fail to have an impact
on official Baku's approaches in the Karabakh conflict - approaches
whose parameters, by all appearances, may be subjected to significant
adjustments.
[Translated from Russian]
Nov 7 2012
The Oil and Gas Factor in the Karabakh Conflict: New Trends
by Sergey Minasyan, candidate of historical sciences and head of the
Caucasus Institute Department of Political Studies, Yerevan, Armenia
[Translated from Russian]
At a government meeting on 10 October 2012 Azerbaijani President Ilham
Aliyev was sharply critical of the Azerbaijan International Operating
Company (AIOC) headed by British Petroleum - the operator for the
development of the main Azerbaijani oilfield, Azeri-Chirag-Guneshli
(ACG). In the Azerbaijani president's words, because of crude mistakes
made by the consortium in recent years oil production from this field
has started to decline sharply, as a result of which Azerbaijan has
suffered a revenue shortfall of more than $8 billion. Oil production
in the Azerbaijani sector of the Caspian is declining for the second
year in succession already (beginning in 2010), but this is the first
time that the top leadership of Azerbaijan has reacted so sharply to
this trend. It looks as if this factor will have quite a serious
impact not only on the financial and economic situation and the
prospects for political stability in Azerbaijan but also, in the more
or less foreseeable future, on the policy that official Baku is
pursuing in the Karabakh conflict.
It is no secret that right now Azerbaijan's main financial-economic
and also, to some extent, geopolitical resource in implementing its
policy in the Karabakh conflict is specifically its significant
revenues from the production of Caspian fossil fuels (oil and gas).
They give the Azerbaijan military-political leadership hope of
achieving a fundamental advantage in the military-technical sphere and
the stepping up of the arms race, of funding major regional projects
in circumvention of Armenia, of carrying out investments or even overt
corrupt financial injections in third countries, and of taking other
steps having the objective of achieving a self-beneficial change to
the processes surrounding the Karabakh conflict and compelling the
Armenian side to make unilateral concessions. Simultaneously the oil
factor also increases Azerbaijan's geopolitical significance in
regional and even world players' calculations.
Overall assessments of Azerbaijani reserves of oil and gas on the
Caspian continental shelf vary depending on the political leanings of
researchers, and it is very hard to get an objective idea of
Azerbaijan's real fossil fuel potential. In any event it has to be
noted that the reserves of oil and gas in the Azerbaijani waters of
the Caspian are extremely significant, although not unlimited.
However, Azerbaijan's policy, which is based on oil and gas revenues,
is encountering a number of serious problems.
First, oil and gas are not a guarantee of either stable economic
growth or the political development of exporting countries,
particularly if these countries have only little experience of state
building and are taking their first steps along the road of democratic
transition and the formation of institutions of civil society. It is
no coincidence that there is even the term "the oil curse," which
characterizes pretty accurately the extent of the economic, social,
and political problems and difficulties that arise when a country is
swamped by a flood of money from the sale of natural resources. These
problems are the dark side of the facade of oil exporting countries'
economic well-being. In history there have been dozens of examples of
countries in whose fate an insidious and even fatal role has been
played by the availability of rich natural resources (primarily oil
and gas) - from Nigeria to Mexico, and from the Habsburgs' Spanish
Empire (in that case it was cheap silver from mines in the Spanish
colonies in America) to the USSR. The Azerbaijani economy's excessive
dependence on revenues from the sale of energy resources (which,
according to various assessments, account directly or indirectly for
85 per cent of budget revenues and 92 per cent of exports) represents
a very serious and chronic threat to the country's stable
socioeconomic and political development.
On the other hand, by now it is becoming clear that the volumes of
their own oil and gas previously announced by the Azerbaijani
leadership were significantly exaggerated. According to calculations
by a number of experts, the main developer of fossil fuels in
Azerbaijani waters of the Caspian - AIOC - has evidently already
reached its peak production from the main oilfield,
Azeri-Chirag-Guneshli. And this happens not in 2013-2015, as the
Azerbaijani Government had previously announced (which was not
disputed by AIOC's principal operator - the British company British
Petroleum), but as early as 2010. Currently oil production in
Azerbaijan (allowing for the Azerbaijan State Oil Company SOCAR's
reserves) will decline gradually by approximately 10 per cent a year
from maximum levels of production in excess of 50 million tonnes of
oil in 2010 (and around 45 million tonnes in 2011) right down to an
annual production level of approximately 20 million tonnes by as early
as 2018-2019. AIOC is planning some stabilization of the decline in
oil production by commissioning the new West Chirag platform in this
same ACG field towards late 2013 or early 2014, but it will have an
active operating life of only 4-5 years and will only make it possible
to maintain a minimal level of industrial development at this field by
2020.
Naturally, Azerbaijan also has the potential to definitely increase
its opportunities for producing energy resources after the
commissioning of the second stage of its main gas field, Shah Deniz.
But the unenviable fate of the widely hyped Nabucco gas pipeline
(which was previously seen as the main infrastructure project for
delivering Azerbaijani gas to the European market) shows that the
advertised reserves of gas in Azerbaijan were also significantly
overstated. The potential revenues from exporting gas from this field
will in no way be able to offset the declining revenues from the
country's exports of its oil.
Even by the most optimistic estimates, in the event that second-phase
industrial development begins at Shah Deniz, Azerbaijan's gas exports
from this field may total no more than 8-10 billion cubic meters a
year. Factoring in the theoretically maximum possible price for gas,
the revenue from developing this gas field may total no more than $4
billion a year, which does not compare with the current levels of
revenue from Azerbaijan's oil imports (approximately $15-20 billion a
year). We would remind you that currently the maximum market price for
gas exported by Azerbaijan is paid by Gazprom - something like
$220-240 per 1,000 cubic meters, whereas Azerbaijan supplies gas to
Turkey in Georgia for a significantly lower price.
That said, it is necessary to take into account the fact by 2017, when
deliveries of gas from the second phase of Shah Deniz are scheduled to
happen (it is not ruled out that the project will not even have been
completed by then), the situation on the gas market may have altered
significantly and, as a result, the price of Azerbaijani gas will be
significantly lower. For example, in the words of Turkish Energy and
Natural Resources Minister Taner Yildiz, the Turkish energy company
BOTAS intends to abandon the principle of "Take or Pay" in purchases
of gas from the first phase of the Shah Deniz gas field, which gave
the Azerbaijani side more beneficial terms, by as early as 2013-2014.
In addition, new volumes of liquefied and shale gas may have appeared
on the European market by 2017, which could also lead to a global
reduction in prices on the general gas prices market.
Thus, although in the next few years the oil and gas factor will
retain its role as the main financial and geopolitical resource
supporting Azerbaijan's implementation of its policy in the Karabakh
conflict, nevertheless the potential and significance of this factor
will gradually decline. Naturally this cannot fail to have an impact
on official Baku's approaches in the Karabakh conflict - approaches
whose parameters, by all appearances, may be subjected to significant
adjustments.
[Translated from Russian]