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Baku's Position on Karabakh Will Weaken by 2019-20
3/9/2014 - 17:00
Petrostrategies, a French consultancy and think tank, published an
article on the recent Armenian-Azerbaijani escalation in its magazine,
"World Energy Weekly." The authors of the article highlight the
fragility of oil and gas pipelines stretching from Azerbaijan to
Europe. They also stress that Baku will be forced to resolve the
Nagorno-Karabakh problem one way or another by 2019-20 given the fact
that its net hydrocarbon revenues are going to continue to fall and
its capacity to purchase arms will also dwindle.
At the beginning of August, a 6-day micro-war took place between
Azerbaijan and Armenia, just a stone's throw from the Southern
Corridor that is used to export 37 million tons/annum of Azeri oil and
6 bcm/annum of Azeri gas. The event went unnoticed by the mainstream
press. The latter was more preoccupied by the (much bigger) wars that
are raging in Ukraine, Iraq, Libya and Syria. Yet it does highlight
the fragility of this Corridor, which is supposed to contribute to
Europe's energy security, and the implementation of which occupied the
efforts of western governments for almost a quarter of a century. This
is the second time in six years that hostilities have broken out in
the vicinity of these pipelines. The first of these was the war
between Russian and Georgia, in August 2008. This summer's micro-war
was not as long and bloody as the Russia-Georgia conflict. But it does
contain the seeds of a possible future larger-scale clash breaking out
in the medium term between Armenia and Azerbaijan if the necessary
steps to prevent it are not taken. And if war does break out, it is
almost certain that the pipelines of the Southern Corridor will not be
spared this time around.
The origin of the Armenian-Azeri conflict goes back to 1921. At the
time, within the framework of Stalin's policy of mixing nationalities
in the Caucasus, the Armenian region of Nagorno-Karabakh was
incorporated into Soviet Azerbaijan. In 1998, taking full advantage of
Gorbachev's Perestroika, Nagorno-Karabakh sought to exercise its right
to self-determination. Baku refused. The full-on war that was sparked
after the collapse of the USSR in 1991 led to the defeat of
Azerbaijan. The ceasefire agreement that was concluded in May 1994 has
not always been respected, but it had never been so badly violated as
it was this summer. At the end of July and beginning of August 2014
several thousand infractions were recorded. From August 1 to 6,
between 20 and 50 deaths (according to sources) were registered. On
August 7, the announcement of a mediation by Vladimir Putin eased the
intensity of the military clash. But on the same day, the Azeri
President, Ilham Aliyev posted nearly 60 messages on Twitter in which
he notably stated: "The war is not over. Only the first stage of it
is. But the second stage may start soon". The day before, he had told
his soldiers: "The fascist leadership, the military junta" is leading
"an Armenian state [that] was created on the historical Azerbaijani
lands" and "we, Azerbaijanis must and will return to these lands",
including the capital city, Yerevan, which he described as the ancient
Azeri (kingdom of) "Irevan khanate".
The meetings held between the Armenian and Azeri Presidents, in Sochi,
between August 8 and 10, under the auspices of Putin, should in
principle lead to a resumption of negotiations aimed at finding a
political solution to the conflict. But nothing guarantees a happy
outcome of these talks. Azerbaijan is demanding the re-establishment
of its "territorial integrity". The Armenians answer back that
historically, Nagorno-Karabakh has never been part of an independent
Azerbaijan. Strengthened by the huge purchases of arms it has carried
out in recent years, notably from Russia, Azerbaijan claims its can
destroy any given target in Armenia and it states that "the very
existence of the Armenian state can be open to question". For its
part, Armenia says it owns missiles that can hit targets 300 km into
Azeri territory.
In a rare occurrence in international relations, on August 4, the US
Ambassador to Yerevan and the Armenian Minister of Defense published a
joint press release in which they expressed "their deep concern for
the recent increase in tensions" and state that they "have explored
ways to de-escalate the situation". The US diplomat went as far as to
express "his condolences to the families of soldiers who lost their
lives during recent events". No initiative of this kind has been
undertaken by the US ambassador to Baku. It was thus made clear that
Washington held Azerbaijan responsible for the military escalade. The
US and Europe hailed the Russian mediation that led to a
de-escalation. But, unless a political solution can be found to the
conflict, Azerbaijan (which refuses the current status quo) risks
resuming hostilities over the medium term.
Time is running out for Baku which, over the next 5-6 years, is going
to lose its importance as an oil supply source. The production from
its three main fields (Azeri, Chirag and Deep Guneshli - ACG) did not
reach its target of 50 million tons/annum in 2011. Since then, it has
hit a ceiling of around 42 million tons/annum. In October 2012, Aliyev
publicly accused BP (the operator of ACG) of having lied to it. It
issued an order to the company to stabilize production. At best, the
latter could be maintained for another few years, but with a rise in
production costs, and therefore a drop in the State's revenues. A
total of 2.5 billion barrels have been produced on ACG to date. At the
current rate of 315 million barrels/annum, 70% of the ACG's original
proven reserves of 6 billion barrels will have been produced within
the next five years.
It is over the next five years that Azerbaijan is also going to
develop phase 2 of the Shah Deniz field, in order to supply 6
bcm/annum of gas to Turkey and 10 bcm/annum to Europe, as of 2019. At
least $56 billion will be invested in this project. This gas is going
to be transported via the same route as the current pipelines of the
Southern Corridor. In certain places, these run only 25 km away from
the front line with Armenia. They are therefore highly vulnerable.
Furthermore, Azerbaijan's relations with its main ally in the region,
Turkey, could change. When the Shah Deniz gas lines are built, Baku
will be completely dependent on Ankara for its oil and gas exports,
with the exception of small volumes sold via Georgia and Russia. On
the other hand, Ankara will be able to diversify its oil and gas
transits, thanks to additional volumes from Iran and Iraq. The new
'rapport de forces' that will then emerge between Azerbaijan and
Turkey could enable the latter to take its distance from Baku's
political stance (which it has unreservedly supported up to now) if it
deems this necessary for its national interests.
In other words, Baku had better solve the problem of Nagorno-Karabagh
one way or another by 2019-20. The closer it gets to this date, the
more its position will be weakened. Furthermore, its net hydrocarbon
revenues are going to continue to fall and its capacity to purchase
arms will also dwindle. Gas sales cannot compensate for the drop in
its oil revenues, as the investments required by Shah Deniz are very
high and gas prices usually suffer from a discount compared with oil.
Furthermore, the price of Shah Deniz 2 gas is indexed on the European
spot market, which up to now has been lower than the price of the
Russian or Algerian gas indexed on oil.
The recent micro-war has brought to light a complex political
equation. On the one hand, the Americans and Europeans designed the
Southern Corridor in order to enable the export routes for Azeri oil
and gas to bypass Russia. But on the other hand, the micro-war of
August 2014 illustrated that the Western powers need the Russians to
ensure the security of these pipelines, which are supposed to
contribute to the security of Europe's energy supply. The conflicting
parties also need the Russians. And this will remain to be the case
for as long as conflict zones subsist in the region... Thus, in a
nutshell, the current status quo suits Russia and, insofar as the
situation will depend on Moscow, the latter will only support a change
if it thinks it can benefit from the new status quo even more than it
does now.
http://civilnet.am/petrostrategies-baku-position-karabakh-weaken-2019-2020/
3/9/2014 - 17:00
Petrostrategies, a French consultancy and think tank, published an
article on the recent Armenian-Azerbaijani escalation in its magazine,
"World Energy Weekly." The authors of the article highlight the
fragility of oil and gas pipelines stretching from Azerbaijan to
Europe. They also stress that Baku will be forced to resolve the
Nagorno-Karabakh problem one way or another by 2019-20 given the fact
that its net hydrocarbon revenues are going to continue to fall and
its capacity to purchase arms will also dwindle.
At the beginning of August, a 6-day micro-war took place between
Azerbaijan and Armenia, just a stone's throw from the Southern
Corridor that is used to export 37 million tons/annum of Azeri oil and
6 bcm/annum of Azeri gas. The event went unnoticed by the mainstream
press. The latter was more preoccupied by the (much bigger) wars that
are raging in Ukraine, Iraq, Libya and Syria. Yet it does highlight
the fragility of this Corridor, which is supposed to contribute to
Europe's energy security, and the implementation of which occupied the
efforts of western governments for almost a quarter of a century. This
is the second time in six years that hostilities have broken out in
the vicinity of these pipelines. The first of these was the war
between Russian and Georgia, in August 2008. This summer's micro-war
was not as long and bloody as the Russia-Georgia conflict. But it does
contain the seeds of a possible future larger-scale clash breaking out
in the medium term between Armenia and Azerbaijan if the necessary
steps to prevent it are not taken. And if war does break out, it is
almost certain that the pipelines of the Southern Corridor will not be
spared this time around.
The origin of the Armenian-Azeri conflict goes back to 1921. At the
time, within the framework of Stalin's policy of mixing nationalities
in the Caucasus, the Armenian region of Nagorno-Karabakh was
incorporated into Soviet Azerbaijan. In 1998, taking full advantage of
Gorbachev's Perestroika, Nagorno-Karabakh sought to exercise its right
to self-determination. Baku refused. The full-on war that was sparked
after the collapse of the USSR in 1991 led to the defeat of
Azerbaijan. The ceasefire agreement that was concluded in May 1994 has
not always been respected, but it had never been so badly violated as
it was this summer. At the end of July and beginning of August 2014
several thousand infractions were recorded. From August 1 to 6,
between 20 and 50 deaths (according to sources) were registered. On
August 7, the announcement of a mediation by Vladimir Putin eased the
intensity of the military clash. But on the same day, the Azeri
President, Ilham Aliyev posted nearly 60 messages on Twitter in which
he notably stated: "The war is not over. Only the first stage of it
is. But the second stage may start soon". The day before, he had told
his soldiers: "The fascist leadership, the military junta" is leading
"an Armenian state [that] was created on the historical Azerbaijani
lands" and "we, Azerbaijanis must and will return to these lands",
including the capital city, Yerevan, which he described as the ancient
Azeri (kingdom of) "Irevan khanate".
The meetings held between the Armenian and Azeri Presidents, in Sochi,
between August 8 and 10, under the auspices of Putin, should in
principle lead to a resumption of negotiations aimed at finding a
political solution to the conflict. But nothing guarantees a happy
outcome of these talks. Azerbaijan is demanding the re-establishment
of its "territorial integrity". The Armenians answer back that
historically, Nagorno-Karabakh has never been part of an independent
Azerbaijan. Strengthened by the huge purchases of arms it has carried
out in recent years, notably from Russia, Azerbaijan claims its can
destroy any given target in Armenia and it states that "the very
existence of the Armenian state can be open to question". For its
part, Armenia says it owns missiles that can hit targets 300 km into
Azeri territory.
In a rare occurrence in international relations, on August 4, the US
Ambassador to Yerevan and the Armenian Minister of Defense published a
joint press release in which they expressed "their deep concern for
the recent increase in tensions" and state that they "have explored
ways to de-escalate the situation". The US diplomat went as far as to
express "his condolences to the families of soldiers who lost their
lives during recent events". No initiative of this kind has been
undertaken by the US ambassador to Baku. It was thus made clear that
Washington held Azerbaijan responsible for the military escalade. The
US and Europe hailed the Russian mediation that led to a
de-escalation. But, unless a political solution can be found to the
conflict, Azerbaijan (which refuses the current status quo) risks
resuming hostilities over the medium term.
Time is running out for Baku which, over the next 5-6 years, is going
to lose its importance as an oil supply source. The production from
its three main fields (Azeri, Chirag and Deep Guneshli - ACG) did not
reach its target of 50 million tons/annum in 2011. Since then, it has
hit a ceiling of around 42 million tons/annum. In October 2012, Aliyev
publicly accused BP (the operator of ACG) of having lied to it. It
issued an order to the company to stabilize production. At best, the
latter could be maintained for another few years, but with a rise in
production costs, and therefore a drop in the State's revenues. A
total of 2.5 billion barrels have been produced on ACG to date. At the
current rate of 315 million barrels/annum, 70% of the ACG's original
proven reserves of 6 billion barrels will have been produced within
the next five years.
It is over the next five years that Azerbaijan is also going to
develop phase 2 of the Shah Deniz field, in order to supply 6
bcm/annum of gas to Turkey and 10 bcm/annum to Europe, as of 2019. At
least $56 billion will be invested in this project. This gas is going
to be transported via the same route as the current pipelines of the
Southern Corridor. In certain places, these run only 25 km away from
the front line with Armenia. They are therefore highly vulnerable.
Furthermore, Azerbaijan's relations with its main ally in the region,
Turkey, could change. When the Shah Deniz gas lines are built, Baku
will be completely dependent on Ankara for its oil and gas exports,
with the exception of small volumes sold via Georgia and Russia. On
the other hand, Ankara will be able to diversify its oil and gas
transits, thanks to additional volumes from Iran and Iraq. The new
'rapport de forces' that will then emerge between Azerbaijan and
Turkey could enable the latter to take its distance from Baku's
political stance (which it has unreservedly supported up to now) if it
deems this necessary for its national interests.
In other words, Baku had better solve the problem of Nagorno-Karabagh
one way or another by 2019-20. The closer it gets to this date, the
more its position will be weakened. Furthermore, its net hydrocarbon
revenues are going to continue to fall and its capacity to purchase
arms will also dwindle. Gas sales cannot compensate for the drop in
its oil revenues, as the investments required by Shah Deniz are very
high and gas prices usually suffer from a discount compared with oil.
Furthermore, the price of Shah Deniz 2 gas is indexed on the European
spot market, which up to now has been lower than the price of the
Russian or Algerian gas indexed on oil.
The recent micro-war has brought to light a complex political
equation. On the one hand, the Americans and Europeans designed the
Southern Corridor in order to enable the export routes for Azeri oil
and gas to bypass Russia. But on the other hand, the micro-war of
August 2014 illustrated that the Western powers need the Russians to
ensure the security of these pipelines, which are supposed to
contribute to the security of Europe's energy supply. The conflicting
parties also need the Russians. And this will remain to be the case
for as long as conflict zones subsist in the region... Thus, in a
nutshell, the current status quo suits Russia and, insofar as the
situation will depend on Moscow, the latter will only support a change
if it thinks it can benefit from the new status quo even more than it
does now.
http://civilnet.am/petrostrategies-baku-position-karabakh-weaken-2019-2020/