Azeri-Russian dispute over northern pipeline resolved azerbjan 2003


Azeri-Russian dispute over northern pipeline resolved
Russian deputy premier BBC Baku, 11 April 2002

Problems between Azerbaijan and Russia on the transit of Azerbaijani oil have been completely resolved, Russian Deputy Prime Minister and cochairman of the Russian-Azerbaijani intergovernmental commission on economic cooperation, Viktor Khristenko, has told a press conference [in Baku].

In his view, an intergovernmental agreement from 18 January 1996 on the transit of Azerbaijani oil via Russian territory for seven years does not terminate at the end of 2003 but will remain valid until one of the sides announces its withdrawal from it. When seven years are up, the existing agreement will be automatically extended for a year if the sides do not have any claims and agree to continue cooperation. "The amount of oil for transportation fixed in the contract, i.e. 5m tonnes, is completely legal [as given] and remains in force," Khristenko said.

"There is no need to sign a new agreement on the transportation of Azerbaijani oil via the `northern route', President of SOCAR [State Oil Company of the Azerbaijani Republic], Natiq Aliyev, added. "To do this, the transit terms should be changed, which is not necessary now."

Speaking about the reasons why the "northern" route is not attractive for Azerbaijan, the SOCAR president said that this because the Transneft company (operator of the Baku-Novorossiysk oil pipeline) did not guarantee the quality of Azerbaijani oil. Therefore, our high-quality oil flows to the port of Novorossiysk mixed with Russian oil, which brings the price down. "We would have greater income if we transported oil via the "western" route to the port of Supsa," Aliyev said.

However, Transneft wants to have a guaranteed amount of oil for several years in advance and Azerbaijan is ready to discuss the issue of increasing supply and guaranteeing the amount if the Russian side secures the same terms for Baku-Novorossiysk that apply to the Baku-Supsa oil pipeline, the SOCAR president said.

This year (November) SOCAR and Russian experts plan to work out a new agreement which could finally tackle all disputed moments.

Speaking about the increase in the amount of oil transported via Baku-Novorossiysk, Aliyev said that Azerbaijan could pump a maximum of 2.5m tonnes of oil, the amount transported in 2001, and the same amount would be exported next year. In 2003 the supply could be increased depending on growth of production by joint companies and onshore operating companies.

We can also purchase cheap Kazakh oil and refine it at Azerbaijani refineries and pump more expensive Azerbaijani oil via the Baku-Novorossiysk oil pipeline.

December 1998

Azerbaijan, a former Soviet republic, was the world's biggest oil-producing province in the early 1900s. Azerbaijan has attracted international interest by developing its potentially rich oil reserves in the Caspian Sea basin.

Azerbaijan is in the midst of an oil boom brought on by the development of its vast hydrocarbon resources in the Caspian Sea region. Azerbaijan has taken great care to assure that multiple foreign powers and companies gain a stake in the oil boom for both economic and geopolitical reasons.

One important Azerbaijani goal has been to gain international support for its conflict in the breakaway region of Nagorno-Karabakh. Populated mostly by ethnic Armenians, Nagorno-Karabakh had been an autonomous region under Soviet rule. Soon after Azerbaijan's independence, Armenian separatists declared control of Nagorno-Karabakh and parts of Azerbaijan - about 20% of Azerbaijan's territory - displacing almost 1 million Azeris, and a bloody war followed. Although a ceasefire was declared in 1994, Azerbaijan continues its economic blockade of both Nagorno-Karabakh and Armenia. Following the imposition of Azerbaijan's blockade, the United States passed section 907 of the Freedom Support Act in October 1992, restricting U.S. government assistance to Azerbaijan until Azerbaijan has taken "demonstrable steps to cease all blockades and other offensive uses of force against Armenia and Nagorno-Karabakh." In October 1998, U.S. legislation was approved that permitted exemptions to section 907 of the Freedom Support Act for democracy assistance, humanitarian assistance, prevention of the spread of weapons of mass destruction, as well as for programs of the U.S. Foreign Commercial Service, the U.S. Export-Import Bank, the Overseas Private Investment Corporation (OPIC), and the Trade and Development Agency.

As a relatively small country, Azerbaijan has taken care to make sure that powerful neighbors such as Russia and Iran receive a stake in any Azerbaijani oil development. President Aliyev, a former member of the Soviet Politburo, is attuned to Russia's desire to maintain a sphere of influence in the Caspian region and to benefit from its oil boom. Iran, meanwhile, is home to 20 million Azeris - more than 3 times the population of Azerbaijan -- and is Azerbaijan's neighbor and largest trading partner. Although Azerbaijan generally has taken a secular and pro-western course, it has treated Iran as a political and religious force to be reckoned with, and has allocated shares in international consortia to Iran as well. In addition, Azerbaijan has worked to increase economic cooperation with states of Central Asia, Georgia, and Turkey.

Azerbaijan's real (adjusted for inflation) gross domestic product (GDP) contracted by 55% from 1991-1997, with the downward trend finally halted in 1996-1997. This decline does not, however, reflect the country's underground economy; the World Bank has estimated that "unofficial" economic activity accounts for over half of Azerbaijan's overall economy. Fueled by foreign investment in oil and gas, real GDP rose by almost 6% in 1997, and gains of 6%-8% per year are projected over the next five years.

In coming years, Azerbaijan's economy will depend largely on continuing investment in the country's oil sector and the start of oil production in Caspian Sea fields. All in all, much of Azerbaijan's hope for future economic growth rests with successful development of its vast oil and gas resources in the Caspian Sea. The lure of these resources has drawn in foreign direct investment, which increased from $15 million in 1993 to $546 million in 1996, $1.3 billion in 1997, and $1.6 billion in 1998, equivalent to about 40% of Azerbaijan's GDP. Azerbaijan's Ministry of Economy has projected that foreign investment could reach $2 billion in 1999. By 2010, total investment in the oil and gas sector may reach $23 billion. To encourage additional investment, President Aliyev has signed numerous treaties protecting the rights of foreign investors. Despite Azerbaijan's potential future oil wealth, the country still faces several years of tight finances, as Azerbaijan will see only limited oil revenues for the next five years or so.

Despite Azerbaijan's potential oil wealth, the country has made only slow progress toward a market economy. Under a three-year agreement with the IMF signed in December, 1996, Azerbaijan is continuing policies of fiscal and monetary austerity first adopted in 1995. As a result, inflation has fallen, with the government estimating deflation of 0.3% for the 1st ten months of 1998. Azerbaijan's fiscal and monetary policies also have resulted in a stable currency.

Other economic and legal reforms also are being instituted. The country's economic focus currently is on reforming the tax regime, with several changes having been made. These include: introduction of a value-added tax; abolition of the excess-wage tax; and reduction in the top rate of the personal income tax. A bankruptcy law, drafted with the help of the European Bank for Reconstruction and Development (EBRD), is being considered. In November 1998, Azerbaijan's parliament passed the Law of Energy of the Azerbaijan Republic. Under the new law, the state has exclusive ownership rights to hydrocarbon resources, and is required to control exploration and development of resources, construct and maintain infrastructure, and maintain transport and distribution systems. The law also specifies the rules on insurance in the energy industry.

Although privatization has been relatively slow in coming, some 10,000 small enterprises have been privatized. Privatization of large enterprises and farmland has moved quickly since the first voucher auctions for medium and large enterprises began. About 90% of Azerbaijani farmland is now in private hands. Virtually all small commercial enteprises are now private, although most of the larger firms remain in the state sector. At the end of September 1998, Azerbaijan began the privatization of its first major energy enterprise, the Baku gas liquefaction plant. In addition, President Aliyev issued a decree privatizing the International Bank of Azerbaijan in November 1998.

Azerbaijan has begun to shift its trade away from the former Soviet Union and towards its neighbors in Central Asia, Georgia, Iran, and Turkey. Baku, Azerbaijan's largest city and port, is poised to become a major regional transportation and communications hub for the Trans-Caucasus and Central Asian republics. The TRACECA Program (Transport System Europe-Caucasus-Asia, informally known as the Great Silk Road) was launched at a European Union (EU) conference in 1993, and encourages the development of a transport corridor on an East-West axis from Central Asia, through the Caucasus, across the Black Sea, to Europe. In September 1998, twelve nations (including Azerbaijan, Bulgaria, Kazakhstan, Romania, Turkey, and Uzbekistan) signed a multilateral agreement known as the Baku Declaration to develop the transport corridor through closer economic integration of member countries, rehabilitation and development of new transportation infrastructure, and by fostering stability and trust in the region. The corridor would include all forms of transport, including air, automobile, pipeline, rail, and sea as well as telecommunications. In August 1998, President Aliyev signed a decree creating a new ministry that consolidated all transportation systems.

Azerbaijan, the oldest known oil-producing region in the world, experienced an oil boom at the beginning of the 20th century and later served as a major refining center in the former Soviet Union. Oil production peaked at about 500,000 barrels per day (bbl/d) during World War II, then fell significantly after the 1950s as the Soviet Union redirected resources elsewhere. Production has declined since Azerbaijan became independent in 1991, falling to an estimated 193,000 bbl/d in 1997. Most of Azerbaijan's oil is produced offshore in the Caspian Sea. One field -- Gunashli, located 60 miles off the Azeri coast -- currently accounts for more than half of the country's oil production.

Development of new fields through joint ventures and production sharing agreements (Table 1) in the Caspian Sea will boost Azerbaijan's oil production well beyond its earlier peaks, and Azerbaijani oil exports could exceed 1 million bbl/d by 2010 and 2 million bbl/d within 20 years. In what was described as "the deal of the century", an international consortium - the Azerbaijan International Operating Company (AIOC) - signed an $8 billion, 30-year contract in September 1994 to develop three fields -- Azeri, Chirag, and the deepwater portions of Gunashli -- with total reserves estimated at 3-5 billion barrels. Oil revenues are projected to be roughly $80 billion over the thirty year life of the AIOC and Azerbaijan will realize 80% of these revenues.

The AIOC will export its initial production - the "early oil" - via a northern route through Russia and a western route through Georgia, with a combined initial design capacity of about 200,000 bbl/d. Several proposals have been made to expand each of these routes. Exports through the northern route began at the end of 1997, with exports on the western route expected to begin in April 1999. AIOC expects production to peak at about 800,000 bbl/d within the next 15 years. Exporting the additional oil could require the building of a main export pipeline (MEP) with a capacity of 1 million bbl/d. Several options for routes were presented for consideration to the Azerbaijan government in 1997, including pipelines from Baku to Ceyhan (Turkey), Baku to Supsa (Georgia), and Baku to Novorosiisk (Russia). However, no final decision has been made.

One potential complication in Azerbaijan's plans for developing its Caspian Sea resources is uncertainty over the legal status of the Caspian Sea -- specifically the territorial rights of nations bordering its shores (Russia, Kazakhstan, Turkmenistan, Iran, and Azerbaijan). Azerbaijan has advocated the establishment of maritime boundaries into national sectors based on the equidistant division of the sea. Azerbaijan recently entered into a dispute with Turkmenistan over a field called Kyapaz by Azerbaijan and Serdar by Turkmenistan, which included it as part of its Block 30 licensing. In addition, Azerbaijan's Foreign Ministry has objected to the Iranian decision to award Royal Dutch/Shell and Lasmo a license to conduct seismic surveys in a region that Azerbaijan considers to fall in Azeri territory, and has announced that it will call a tender for the D-43, D-44, and D-74 fields which are located in the same region. To date, no final resolution of Caspian Sea legal issues has been achieved.

A regional pipeline and transit system centered on Azerbaijan is beginning to emerge. Oil is being shipped across the Caspian from Kazakhstan and Turkmenistan to the port of Baku for further trans-shipment by rail and pipeline westward to the Black Sea. Shipping volumes have risen from 2,000 bbl/d in 1996 to 20,000 bbl/d in 1997 and an estimated 60,000 bbl/d in 1998. Shipping company Caspian Transco has been working with the Azeri government to overhaul and expand the oil terminal facilities at Dyubendi, 30 miles northeast of Baku, to allow for further increases. The EU announced in October 1998 that it would loan Azerbaijan $25 million under the TRACECA program to rehabilitate and upgrade the seaport near Baku to allow up to 500,000 bbl/d of oil shipments from the eastern Caspian. As Caspian production increases, trans-Caspian pipelines could carry increasing volumes of oil and gas from Kazakhstan and Turkmenistan. The cross-Caspian pipelines could connect with other export pipelines from Azerbaijan, such as the proposed MEP and the early oil routes. In addition, Iran has proposed a pipeline that would transport oil from Baku via a proposed 190-mile pipeline to Tabriz in northwest Iran, where it would also connect with the existing Iranian pipeline network and refineries

Azeri crude is refined domestically at two refineries in Baku, the Baku refinery with a capacity of 238,978 bbl/d, and the Novo-Baku refinery with a capacity of 202,830 bbl/d. Both of these refineries have been running at well below capacity, with overall refinery utilization rates at about 40% in 1997. Azerbaijan estimates that upgrades at the 2 refineries will cost $600 - $700 million.

In the past, to meet domestic demand Azerbaijan had imported natural gas from Russia, Turkmenistan, and Iran. Azerigaz has announced that it does not intend to import any more gas and instead will develop new gasfields in the Caspian Sea to meet demand. For Azerbaijan to achieve self-sufficiency in gas, however, there will need to be a complete overhaul of the country's gas supply system. Currently, infrastructure to deliver gas from offshore fields to consumers in Azerbaijan is not in place, and consequently gas is being flared instead of piped to markets. The EBRD is studying a proposal for the Kalmas gas storage project to further develop the country's gas potential.

Azeri gas production could come from the recently discovered offshore Nakhchivan field, with an estimated 900 billion cubic feet (Bcf) in reserves. Azerigaz has signed agreements with both Statoil and Royal Dutch/Shell to help Azerbaijan to develop and export its gas. The elimination of flaring also could increase gas supplies, because most of Azerbaijan's natural gas production comes from associated gas from offshore oil fields. If the necessary infrastructure were developed, gas production could increase by as much as 1 trillion cubic feet (Tcf) per year by the end of the next decade, and Azerbaijan could become a net exporter of natural gas to its neighbors.

Azerbaijan's gas market has been slow to develop because the price of natural gas to consumers continues to be regulated at artificially low prices. The country's gas market also has been hurt by non-payment of bills by customers, including the use of illegal connections to the gas network. In addition, many areas of the country have not had access to the gas distribution system. Azerigaz announced in August 1998 that it has been able to begin deliveries to new regions this year because of its efforts to save money by curtailing supplies for non-payment and illegal connections, as well as by installing meters.

In October 1998, President Aliyev issued a directive to ensure that a new law of gas supplies was implemented by year-end. The directive governs all liquid and gaseous fuels (other than petroleum), and regulates the production, storage, sale, and use of these fuels. 

Azerbaijan's power sector has a generating capacity of about 5 gigawatts (GW), consisting of eight thermal plants supplying over 80% of generating capacity, and 5 hydroelectric plants. Two-thirds of the country's thermal capacity is powered by Mazut (residual fuel oil), with natural gas as the secondary fuel. In addition to domestic power plants, Azerbaijan imports power from Russia, Turkey, Iran, and Georgia. Azerbaijan also exports electricity to Russia and Georgia. To improve electricity flows between these countries, Azerbaijan has participated in a project within the framework of the EU's TACIS program to create a unified energy system for Azerbaijan, Georgia, and Turkey.

Azerbaijan's power infrastructure, built in the Soviet period, is generally in poor condition. Since independence, there has been almost no public investment or maintenance of public infrastructure, and Baku periodically experiences shortages of gas, water, and electricity. Difficult economic conditions, high taxes, and non-payment by customers in Azerbaijan have left the power sector without sufficient working capital and investment funds. This has resulted in fewer repairs and less maintenance to aging power generation facilities. Azerbaijan must upgrade and replace much of its electrical generation system over the next few years. Over half of the country's turbo-generators and boilers have been in use for more than 40 years. In addition, the energy efficiency and environmental adequacy of the power sector both need to be improved. Large-scale upgrades needed by the power sector could cost $2.5 billion. Several rehabilitation projects are currently underway that will add 670.5 megawatts (MW) of capacity - about 1/3 of the power demand in the Apsheron peninsula where Baku is located.

President Aliyev issued a decree in 1996 to transform the state power company, Azerenerji, into a joint stock company. However, this has been delayed until Azerenerji can generate sufficient revenues to pay its outstanding debts to the government. Although tariffs have been raised several times, rates are still low and collection is not adequate.

President: Heydar Aliyev (since 1993)
Prime Minister: Artur Rasi-zade
Independence: August 30, 1991 (from Soviet Union)
Population (12/98E): 7.9 million
Location/Size: On the Caspian Sea between Russia, Iran, Armenia, and Georgia/33,400 square miles (about the size of Maine)
Major Cities: Baku (capital), Gyandzha, Mingechaur, Nakhchivan, Stepanakert, Sumqayit, Yevlakh
Languages (1995E): Azeri (89%), Russian (3%), Armenian (2%), Other (6%)
Ethnic Groups (1995E): Azeri (90%), Dagestani (3.2%), Russian (2.5%), Armenian (2.3% - nearly all in separatist Nagorno-Karabakh region), Other (2%)
Religions (1995E): Muslim (93.4%), Russian Orthodox (2.5%), Armenian Orthodox (2.3%), Other (1.8%)
Defense (1997E) : 53,300 Army, 2,200 Navy, 11,200 Air Force, 20,000 Militia

Currency: Manat
Exchange Rate (12/97): US$1 = 3,888 manats
Gross Domestic Product (1997E, purchasing power parity): $3.9 billion
Real GDP Growth Rate (1997E): 5.8%
Inflation Rate (consumer prices, 1997E): 0.3%
Merchandise Exports (1998E): $547 million
Merchandise Imports (1998E): $990 million
Major Exports: Oil and oilfield equipment, cotton, wool
Major Imports: Machinery and parts, consumer goods, textiles, foodstuffs, natural gas
Major Trading Partners: Turkey, Russia, Iran, United Arab Emirates, Turkmenistan, Germany, Ukraine, Georgia, Kazakhstan, U.K., and the United States

Proven Oil Reserves (1/1/98E): 3.6-12.5 billion barrels
Oil Production (Jan-Sept 1998E): 194,000 barrels per day (bbl/d), of which 179,000 bbl/d is crude oil
Oil Production (1997E): 193,000 bbl/d, of which 180,000 bbl/d is crude oil
Oil Consumption (1997E): 138,000 bbl/d
Crude Refining Capacity (1/1/98): 441,808 bbl/d
Net Oil Exports (1997E): 55,000 bbl/d
Natural Gas Reserves (1/1/98E): 11 trillion cubic feet (Tcf)
Natural Gas Production (1997E): 0.21 Tcf
Natural Gas Consumption (1997E): 0.21 Tcf
Electricity Generation Capacity (1/1/97E): 5.2 gigawatts
Electricity Generation (1997E): 16.8 billion kilowatthours
Net Electricity Imports (1997E): 0.8 billion kilowatthours
Coal Production (1997E): none
Coal Consumption (1997E): 6,000 short tons
Total Energy Consumption (1997E): 0.7 quadrillion Btu* (0.2% of world total energy consumption)
Energy-Related Carbon Emissions (1997E): 11.3 million metric tons of carbon (0.2% of world carbon emissions)
Per Capita Energy Consumption (1997E): 90.4 million Btu (vs U.S. value of 351.9 million Btu)
Per Capita Carbon Emissions (1997E): 1.5 metric tons of carbon (vs U.S. value of 5.6 metric tons of carbon)
Energy Intensity (1997E): 176,900 Btu/ $1997 (vs U.S. value of 11,600 Btu/ $1997)
Carbon Intensity (1997E): 2.9 metric tons of carbon/thousand $1997 (vs U.S. value of 0.18 metric tons/thousand $1997)
Sectoral Share of Energy Consumption (1996E): Transportation (53.7%), Industrial (39.9%), Residential (5.2%), Commercial (1.2%)
Sectoral Share of Carbon Emissions (1996E): Industrial (33.1%), Transportation (62.0%), Residential (3.9%), Commercial (0.9%)
Fuel Share of Energy Consumption (1997E): Oil (49.0%), Natural Gas (47.6%), Coal (0.02%)
Fuel Share of Carbon Emissions (1997E): Oil (58.3%), Natural Gas (41.7%)
Renewable Energy Consumption (1996E): 16.1 trillion Btu*
Number of People per Motor Vehicle (1997): 21.3 (vs U.S. value of 1.3)
Status in Climate Change Negotiations: Non-Annex I country under the United Nations Framework Convention on Climate Change (ratified May 16th, 1995). Not a signatory to the Kyoto Protocol.
Major Environmental Issues: Local scientists consider the Abseron (Apsheron) Peninsula (including Baku and Sumqayit) and the Caspian Sea to be the ecologically most devastated area in the world because of severe air, water, and soil pollution; soil pollution from the use of DDT as a pesticide and also from toxic defoliants used in the production of cotton
Major International Environmental Agreements: A party to the Conventions on Climate Change and Ozone Layer Protection.  Has signed, but not ratified, Biodiversity

* The total energy consumption statistic includes petroleum, dry natural gas, coal, net hydro, nuclear, geothermal, solar and wind electric power. The renewable energy consumption statistic is based on International Energy Agency (IEA) data and includes hydropower, solar, wind, tide, geothermal, solid biomass and animal products, biomass gas and liquids, industrial and municipal wastes. Sectoral shares of energy consumption and carbon emissions are also based on IEA data.

Organization: State Oil Company of Azerbaijan Republic (SOCAR); Azerigaz - State Gas Company; Azerenerji - State Electric Company
Major Oil Ports: Baku
Oil Export Pipelines: Baku-Novorosiisk (Russia - "early oil" northern route), Baku-Supsa (Georgia - "early oil" western route)
Major Oil Refineries (Capacities 1/1/98): Baku (238,978 bbl/d), Novo-Baku (202,830 bbl/d)
Major Power Plants: Azerbaijan (2100 megawatts or MW), Ali-Bayramy (1100 MW)