Russia And Azerbaijan Outline Energy Cooperation

Courtesy of STRATFOR (subscription required), some analysis on Russia and Azerbaijan’s plans for energy cooperation:

As the geopolitical dynamics in the Caucasus continue to shift, Russia and Azerbaijan have given indications of what their future energy cooperation will look like. Rovnag Abdullayev, the head of Azerbaijani state energy company SOCAR, said Aug. 19 that the company could transport Russian oil through the Baku-Tbilisi-Ceyhan pipeline and that there are plans to reverse the Baku-Novorossiysk pipeline to send Russian oil supplies to Azerbaijan. While these projects are still tentative and in the discussion phase, they point to a gradually deepening relationship between Baku and Moscow.

These potential agreements follow the joint venture signed last week between SOCAR and Russian energy firm Rosneft during a meeting between Russian President Vladimir Putin and his Azerbaijani counterpart, Ilham Aliyev. The joint venture was broad and lacked specifics, but the two sides said further details would be revealed in the coming months. Indeed, these recent discussions serve to elaborate on the possibilities.

SOCAR officials have said Azerbaijan is “technically prepared” for both the Baku-Novorossiysk and Baku-Tbilisi-Ceyhan projects, but the projects will be tested and evaluated this year and could be realized as early as 2014. Part of the Russian oil would be transferred to refineries in Azerbaijan, while some could be added to the mix of exports that Azerbaijan sends to downstream countries, such as Georgia and Turkey, or farther on to Europe. The Baku-Tbilisi-Ceyhan pipeline was originally designed to circumvent Russia and give Europe an alternate route to decrease its energy dependence on Russia. The proposal to send Russian oil through this pipeline is still under negotiation, but would be a notable reversal.

Azerbaijani oil production has decreased in recent years, primarily due to falling production at the BP-operated Azeri-Chirag-Guneshli fields in the Caspian Sea. The drop-off in production has left the Baku-Tbilisi-Ceyhan pipeline, which has a capacity of 1.2 million barrels per day, well short of its peak; Azerbaijan is currently exporting only 700,000-800,000 barrels per day through the pipeline. Adding Russian oil to the pipeline would get oil flows closer to the pipeline’s capacity and would lower operating costs and increase revenues for Baku. Azerbaijan’s oil refineries are also operating well below their annual capacity of 300,000 barrels per day, processing only 120,000 to 140,000 barrels per day of crude oil. Thus, increased imports from Russia via the Baku-Novorossiysk pipeline would also help Azerbaijan get closer to reaching its refining capacity.

The SOCAR chief’s announcement on these proposals follows a recent Azerbaijani decision to go with the Trans-Adriatic natural gas pipeline in place of the more ambitious and strategic Nabucco West route. Among the many financial, technical and political considerations that influenced that decision, Russia’s opposition to Nabucco West was well known throughout the negotiation. Azerbaijan’s energy recalculations come as Georgian Prime Minister Bidzina Ivanishvili and his Georgian Dream movement have been cautiously opening up to Moscow politically and economically. Growing bilateral energy ties between Russia and Azerbaijan appear to be the next logical step in this shifting regional climate.

This entry was posted on Tuesday, August 20th, 2013 at 1:29 am and is filed under Azerbaijan, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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