ON THE ROLE OF THE ENERGY FACTOR IN THE KARABAKH CONFLICT: NEW RE-FRAMING?

17.12.2012

ON THE ROLE OF THE ENERGY FACTOR IN THE KARABAKH CONFLICT: NEW RE-FRAMING?

Sergei Minasyan
Ph.D. (History), Head of the Department of the Political Researches of the Caucasus Institute

Back In 1994, in the period of completion of active military actions in Nagorno-Karabakh conflict, Heidar Aliyev, while preparing for signing “Contract of the Century” with the western oil companies on the development of hydrocarbon resources in Azerbaijani offshore areas of the Caspian Sea, expressed a hope that this factor would play an essential role in the development of the processes round the Nagorno-Karabakh conflict in the way advantageous for Azerbaijan. Today the situation has not changed much as compared to the one in 1990s. Currently considerable profits from the development of Caspian energy carriers (oil and gas) are still considered to be the main financial and economic as well as geopolitical resource of Azerbaijan in the realization of its policy in the Nagorno-Karabakh conflict.

Petrodollars offer hope to the military and political leadership of Azerbaijan that it is still possible to gain principle advantage in military and technical sphere, to stir up the armaments race, to fund big regional projects bypassing Armenia, to invest or even make open corruptive financial injections to the third countries and take other measures in order to attain advantageous for them change of the processes round Nagorno-Karabakh conflict and to compel the Armenian parties to make one-sided concessions. At the same time the oil factor, in the opinion of official Baku, raises the geopolitical significance of Azerbaijan in the eyes of the regional or even global actors. But, to all appearance, the role of the oil and gas factor in the Karabakh strategy of Azerbaijan in the mid-term perspective can essentially shatter.

Several years ago we turned to the issue of the oil factor in Karabakh conflict¹. But the recent developments, connected with the considerable decline of the Azerbaijani oil production (as compared to the previously stated figures and terms), as well as postponing of putting into operation of the main stage 2 of Azerbaijani gas production, demand definite revision of this issue in the new reality.

On October 12, 2012 the president of Azerbaijan sharply criticized the operator of the main Azerbaijani Azeri-Chirag-Guneshli (ACG) oil field – AIOC (Azerbaijani International Operating Company), headed by British Petroleum. According to the Azerbaijani president in consequence of consortium’s blunders the oil production at this oil field has sharply declined in recent years; as a result Azerbaijan received $8 billion less profit than it was due². The oil production in the Azerbaijani sector of the Caspian Sea has been declining for two years (since 2010), but for the first time Azerbaijani leadership so sharply reacted to this tendency. The fact that next year presidential elections will be held in Azerbaijan where Ilham Aliyev will be nominated for the third presidential term without any alternative candidate, attaches additional intrigue to this situation. It seems that the factor of essential decline of oil and gas revenues will have a serious impact on both financial-economic situation and prospects of political stability in Azerbaijan which are mainly based on the inflow of money received from the export of Azerbaijani oil and gas.

Overall estimate of the Azerbaijani offshore oil and gas reserves varies, depending on the political affiliations of the researchers, and it is very difficult to form a fair presentation of the real hydrocarbon potential of Azerbaijan. At least it should be mentioned that the oil and gas reserves in the Azerbaijani water area of the Caspian Sea are though exhaustible but rather considerable. But the policy of Azerbaijan based on the oil and gas revenues faces serious problems.

First of all, oil and gas are not a guarantee of either stable economic growth or political development of the exporter countries, especially if these countries have only a brief experience of state-building and take first steps on the way of democratic transformations and formation of the civil society institutions. Not coincidentally such term as “oil curse” exists; it rather exactly shows the level of economic, social and political problems and difficulties when the stream of money from selling the natural resources befalls on the country. These problems are the dark side of the facade of the economic prosperity of the oil-exporting countries. There are dozens of examples of the countries in the history, in the fate of which the availability of rich natural resources (first of all oil and gas) played an perfidious or even fateful role – from Nigeria to Mexico, from the Spanish Habsburg Empire (in this case cheep silver from the mines in Latin America) to the USSR. The excessive dependence of the Azerbaijani economy on the revenues from the energy resources (which, according to different estimations, directly or indirectly constitutes up to 85% of the budget receipts and 92% of export) sale constitute very serious and chronic menace to the stable social and economic and political development of the country.

On the other hand today it becomes obvious that previously stated by the Azerbaijani leadership volume of the oil reserves was essentially exaggerated. By the estimations of a number of experts the main developer of the hydrocarbons in the Azerbaijani water area of the Caspian Sea – AIOC – reached the peak of the oil production at Azeri-Chirag-Guneshli oil field. And this happened in 2010 and not in 2013-2015 as it was mentioned before by the Azerbaijani authorities (and was not questioned by the British Petroleum – main operator of the AIOC). Currently oil production in Azerbaijan (taking into consideration the reserves of the SOCAR) will fluently decline by 10% annually from more than 50 million tons of oil in 2010 (about 45 million tons in 2011) to the level of annual oil production of the 20 million tons in 2018-2019³. The AIOC plans to stabilize somehow the oil production decline at the expense of putting into operation at the end of 2013 and at the beginning of 2014 of “Western Chirag” new platform at the same ACG oil field, but its active productive life will be 4-5 years and it will only allow to preserve a minimum level of commercial development at this oil field till 2020.

Naturally, Azerbaijan also has a potential on building up its energy resources production capabilities after the start up of the stage 2 of its main gas field – Shah Deniz. But unenviable fate of highly publicized “Nabucco” gas pipeline (which has been formerly considered as the main infrastructure project of supplying Azerbaijani gas to the European market) proves that the publicized gas reserves in Azerbaijan are considerably overrated. Potential revenue from the export of the gas from this field can never compensate the declining volume of receipts from the export of the oil.

By the most optimistic estimations in case of a start up of the commercial development of the stage 2 of Shah Deniz, the gas export from this gas field will not exceed 8-10 billion m3 per year. Taking into consideration theoretically maximum gas prices, the revenue from the development of that gas field will not exceed $4 billion annually which is incomparable with current volume of receipts from oil import by Azerbaijan (approximately $15-20 billion per year). Let us remind you that currently the maximum market price for the gas exported by Azerbaijan is paid by “Gazprom” – about $220-240 per 1 thousand m3, meanwhile Azerbaijan exports gas to Turkey and Georgia at much lower price.

At the same time it should be taken into consideration that by 2017 when it is planned to start the gas supply from the stage 2 of Shah Deniz (it is not excluded that by that time the project will not be realized) the situation on the gas market can be essentially adjusted and, as a result, the price for the Azerbaijani gas will become considerably lower. For example, according to the Turkish Minister of Energy and Natural Resources Taner Yildiz, in 2013-2014 Turkish energy BOTAS Company plans to renounce Take or Pay principle in gas purchase from the stage 1 of Shah-Deniz gas field, which gave preferential terms to the Azerbaijani party⁴.Besides new volumes of liquefied and shale gas may appear at the European market which can also result in the cut in price at the global gas market.

Thus, though in the years to come oil and gas factor will preserve it role of a main financial and geopolitical resource, which provides implementation of the Azerbaijani policy in the Nagorno-Karabakh conflict, nevertheless, its possibilities and significance will be gradually declining. Of course it will have its impact on the approaches of official Baku to the Karabakh conflict and these approaches may undergo serious adjustments. However this factor may manifest itself in the next two years when the tendency of a declining curve in the Azerbaijani gas production will become even more obvious.

¹ Сергей Минасян, Нефтяной фактор в карабахской стратегии Азербайджана: «ресурс» или «проклятие»? http://www.noravank.am/rus/articles/security/detail.php?ELEMENT_ID=2667, 25.04.2008.

² «Алиев: Из-за грубых ошибок British Petroleum Азербайджан недополучил 8 млрд. долларов», http://www.regnum.ru/news/1580138.html, 11.10.2012.

³ Rasizade, Alec, “Azerbaijan’s Chances in the Karabakh Conflict”, Harvard International Review, 18 January 2011, http://hir.harvard.edu/azerbaijans-chances-in-the-karabakh-conflict?/.

⁴ «Правила игры на газовом рынке меняются», Зеркало, http://www.zerkalo.az/2012/pravila-igryi-na-gazovom-ryinke-menyayutsya/, 24.10.2012.

“Globus” analytical journal, #11, 2012

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