No. 33 12 December 2011 Abkhazia South caucasus Ossetia analytical Adjara digest N Karaago bakhrno- resourcesecurityinstitute.org www.laender-analysen.de www.res.ethz.ch www.boell.ge Oil and Gas PiPelines in the sOuth CauCasus ■■Interlinked Energy Supply and Security Challenges in the South Caucasus 2 By Lusine Badalyan, Bremen ■■Tables and Graphs Military Spending in the South Caucasus region 6 Oil and Gas Reserves—International Comparison 7 ■■Map Major Oil and Natural Gas Pipelines Around the Caspian Sea 8 ■■The Nabucco Gas Pipeline Project and its Impact on EU Energy Policy in the South Caucasus 9 By Julia Kusznir, Oslo ■■ChroniCle From 15 November to 14 December 2011 14 institute for European, Research Centre Center german association for HEiNRiCH Böll STifTUNg Russian, and Eurasian Studies for East European Studies for Security Studies East European Studies The george Washington University of Bremen ETH Zurich SoUTH CaUCaSUS University CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 2 interlinked energy supply and security Challenges in the south Caucasus By Lusine Badalyan, Bremen abstract The article examines the interplay of external powers’ energy security interests in the South Caucasus, show- ing in particular how energy supplies and transportation routes affect and alter regional security dynamics. Pipelines that could have promoted peaceful outcomes are in fact facilitating greater tension. introduction is defined as a set of units, whose major process of (de) The recent debate on Georgia’s plans to sell a minor- securitization are so interlinked that “their security prob- ity stake in its segment of the North–South gas pipe- lems cannot reasonably be analyzed or resolved apart line, which supplies Russian natural gas to Armenia, is from one another” (Buzan and Waever 2003: 44). As one piece of a larger energy policy puzzle in the South such, this approach assumes not only that the security Caucasus region that sheds light on the importance of concerns of all three South Caucasian states—Arme- energy issues and their close interconnections with secu- nia, Azerbaijan and Georgia—are significantly intercon- rity dynamics in the region. nected, but also that the region’s security architecture The plan to sell the Georgian segment of the North– per se is largely affected by the strong foreign penetra- South pipeline, which connects Mozdok, Tbilisi, and Yere- tion of regional and global powers. Thus, any change van, first arose in early 2006, because the poor condition in general power balances, state-to-state interdepend- of the pipeline required private investment for reconstruc- ences, and durable patterns of amity and enmity at the tion. The Russian majority state-owned energy company regional and global levels may have an essential impact Gazprom hurried to buy the segment. The deal almost on the security dynamics of the South Caucasus region. had been concluded when the US offered $49.5 million Caspian energy resources and strategic export pipe- to renovate the pipeline. In return for the US investment, lines traversing through the region have a crucial impact the Georgian government agreed to ban the sale of the on the complex security framework of the South Cau- pipeline for 5 years, a period which expired in April 2011. casus. Russia’s, and to a lesser extent Iran’s, gas supplies In 2010, the issue again returned to the agenda. The to the region also play a strategically important role. Georgian Parliament passed a bill, which removed the Located in the unique geostrategic area between the EU, pipeline from the list of strategic government-owned Russia, Central Asia and the Middle East, the South facilities and made a sale possible. The US raised no Caucasus represents a key transit corridor of energy objections to the idea of privatization. resources between the landlocked Caspian basin and Among the potential companies that are interested in Western consumer markets. purchasing the North–South gas pipeline are Gazprom During the Soviet era, Moscow controlled Caspian and Azerbaijan’s state-owned company SOCAR. Russia’s energy reserves and the pipeline networks were con- desire to buy the segment seems to be driven by its inten- structed so as to link all the energy-rich countries to Rus- tion to gain additional economic leverage for implement- sia. The Soviet Union’s demise opened up the region to ing its foreign policy in the region. In the case of Azer- external actors allowing foreign companies to invest in baijan, acquiring the pipeline would offer a possibility to exploiting energy reserves and constructing alternative put economic pressure on Armenia and potentially help pipeline routes to transport gas and oil from the region in forging a solution to the Nagorno-Karabakh conflict. to the lucrative international markets. Armenia, possessing no major energy resources, is The proven energy reserves of the Caspian basin are heavily dependent on extensive energy imports from modest compared to the enormous energy volumes in Russia. Thus, the North–South pipeline is of strategic the Middle East, and in fact are also far below the fig- significance for the country. If the pipeline comes under ures suggested in the early 1990s, e.g. by the US State SOCAR’s control, Armenia will perceive the transfer as Department. (An overview of reserves and production a threat to its energy supply as well as its national secu- figures is given in the data section following this arti- rity. This development in turn may generate bilateral cle.) What makes Caspian energy resources so signifi- tensions that risk jeopardizing regional stability. cant is that they offer Western buyers the opportunity to diversify energy imports away from the near monop- export pipelines olistic energy supplies of the Middle East and Russia. The South Caucasus is one of the subcomplexes of the Currently the region relies on two major pipelines. larger post-Soviet Regional Security Complex, which The BTC pipeline running from Baku (Azerbaijan) via CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 3 Tbilisi (Georgia) to Ceyhan (Turkey) is the main oil ern route, was not an reliable option, as it passes through export pipeline and the BTE running from Baku via the North Caucasus, where the Chechen war started Tbilisi to Erzurum (Turkey) is the main gas export pipe- in 1994 and where military and terrorist activities have line. The other important export pipelines run from continued ever since. Baku to Novorossiisk (Russia) and to Supsa (Georgia); The need for an alternative line to export Azerbaijani both were constructed for Azerbaijani “early” oil produc- “early” oil was critical. Despite Russia’s various pressures tion and have only a small capacity. In addition there are to make the northern pipeline the single route for trans- two import pipelines which deliver gas to the South Cau- porting Azerbaijani oil, in 1995 the AIOC announced casus region, namely the North–South pipeline, which its intention to utilize a second pipeline route, the Baku– originates in Russia, and the Iran–Armenia pipeline. Supsa pipeline. Capable of carrying 120,000 barrels of oil per day, the pipeline (917 km long) runs from Baku The baku–novorossiisk and baku–supsa to Georgia’s Black sea coast of Supsa. The pipeline began pipelines operations in 1999, exactly at the same time when Rus- In 1994 the Azerbaijani state oil company (SOCAR) sia closed the Baku–Novorossiisk line because of active signed a $7.4 billion 30-year production contract with military operations in Chechnya. a consortium of major international oil companies In the new geopolitical environment of the Cauca- called the Azerbaijan International Operating Company sian subcomplex in the 1990s Russia emerged neither (AIOC) which became known as the “Deal of the Cen- strong enough politically nor sufficiently economically tury”. This much-publicized contract made Azerbaijan robust to impose its will and to be able to force Azerbai- a global supplier of energy and opened the Azeri energy jan to export its energy supplies exclusively through the sector to major international oil companies which made Russian pipeline system. What is more, both global and multibillion investments. The prospect of oil wealth and interregional actors started to become actively engaged foreign investment that resulted from this deal became in the Caspian energy utilization process and balanced an important stabilizing factor contributing to the cease- Russia’s efforts to control the export routes. fire and freezing of the Nagorno-Karabakh conflict. The Baku–Supsa pipeline marked the beginning of From the outset the contract prompted extensive reorienting Azerbaijani energy exports away from Russia discussions around the possible pipeline options for the and created the first alternative route bypassing Russian transportation of Azerbaijani oil and gas and became a territory for Caspian energy exports. However, with its controversial issue for the global as well as regional and small capacity, the pipeline, which had been designed interregional actors of the Caucasus. to carry only “early” oil, could not bring any substan- During the Soviet period large oil projects were tial shift in power and security dimensions in the region. undertaken in the Azerbaijani energy fields and they could utilize pipelines traversing Russia which already iran–armenia pipeline existed. From the commercial perspective, relying on The Iran–Armenia gas pipeline, which primarily sought the existing pipelines for the new projects would have to serve as an alternative energy source for Armenia and been more feasible, since small modifications or the con- to reduce its dependence on Russian gas supply, in fact struction of new parts would have cost less than to build started to operate under the control of Russia’s gas com- a totally new pipeline. However, the AIOC consortium pany Gazprom. The agreement on the pipeline construc- was reluctant to opt only for the existing cheap option. tion, which had been signed in early 1992, was put into It pursued a “multiple pipelines” approach, aimed at practice only 12 years later. In 2007 the first section of reducing Russia’s position as a transit country of Cas- the pipeline opened, running from the Iranian city of pian energy supplies and diversifying Azerbaijani energy Tabriz via the Iran–Armenian border town Meghri to export options. Ultimately, it was decided to pump the Kajaran in Armenia. It is only 142 km long with a small “early” oil of Azerbaijan in two directions, namely via capacity of 2.3 bcm of gas per year. According to the northern and western route export pipelines. agreement, most Iranian gas is used to fire the Hrazdan In 1996 Azerbaijan signed an intergovernmental power station and the electricity produced by the Arme- agreement with Russia to build up the Baku–Novoros- nian power station is exported back to Iran. siisk pipeline to transport Azerbaijani “early” oil from Initially, planners wanted to build a pipeline with Baku to the Russian Black Sea port of Novorossiisk double the capacity of the existing pipeline. As a result which hosts a huge oil terminal. The pipeline, 1,347 km the pipeline would have made Iran not only an impor- long, began operations in December 1997 with a total tant energy supplier for the Caucasian region, but would capacity of 100,000 barrels of oil per day. Notwith- have also allowed it to carry gas to the European markets, standing the pipeline’s commercial viability, the north- thereby competing with Russia’s energy supply monop- CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 4 oly. It has, therefore, been alleged that it was pressure markets in a safe, timely and economically sound man- from Gazprom that kept the pipeline small. ner represent key EU policy priorities. The BTC and the Thus, from the very beginning, Russia became BTE projects can help the EU to avoid its strategic depen- actively involved in the project and controlled the com- dence on Russian energy supplies and delivery routes. petitor’s supply. For the construction of the pipeline, The US government’s strong support for the pipe- Gazprom invested $200 million in the project and after- line projects goes beyond merely assuring energy secu- wards also purchased the section of the pipeline that rity. The pipelines are viewed as strategic projects that runs through Armenian territory via the ArmRosGaz are critical to US national security interests. This per- company (owned by 45% by Gazprom, 10% by Itera spective is connected with the evolving geo-strategic and and the remainder by the Armenian energy ministry). geo-economic location of the South Caucasus. It rep- As a result, the only plausible alternative to Russian resents a crossing point between the EU, Russia, Cen- energy supplies for Armenia came under Gazprom’s con- tral Asia and Middle East. Moreover, it is a unique cor- trol. It is potentially important and strategic for Mos- ridor connecting the Caspian basin with the Black Sea, cow’s foreign policy to continue to control pipelines and and serves as a key transportation route for Caspian the distribution network in Armenia as well as to pre- energy supplies (bypassing Russia and Iran) to western vent any possible challenge to its existing energy sup- markets. Additionally, the region provides direct access plies. Thus, Iran’s potential attempt to transit its energy for allied operation forces in the Greater Middle East resources to western markets and to become a prominent and Central Asia. In this respect, the pipeline projects player in the South Caucasus was blocked not only by opened new prospects for expanded US involvement in the US sanctions regime but by Russia’s strategic eco- the region while NATO became the principle guaran- nomic interests. tor of the pipelines’ security. Not surprisingly, Russia denounced the pipelines bTC and bTe pipelines and viewed the projects not as a purely economic ven- The construction of the Baku–Tbilisi–Ceyhan (BTC) and ture but as a political project directed against its secu- the Baku–Tbilisi–Erzurum (BTE) pipelines introduced rity, political and economic interests. Since Putin’s pres- significant changes to the South Caucasus status quo idency, Russia has emphasized a greater strategic interest by changing the relationship among the external actors. in maintaining its influence in what it calls the “near The BTC is probably one of the most controversial abroad”. Clearly, redirecting Caspian energy exports and politicized energy pipelines of modern times. It is away from the Russian transit system challenged not the second longest (1,768 km, following only Russia’s only Russia’s dominant role as a key channel for Cas- approximately 4,000 km Druzhba pipeline) and one of pian energy supplies to Europe but also its traditional the most expensive pipelines in the world, costing $4.6 strategic interests in the Caucasus. billion. The pipeline began operations in July 2006 and its capacity is 1 million barrels of oil per day. It starts Conclusion from the Azerbaijani Azeri-Chirag-Guneshli oil field The South Caucasus, after the demise of the Soviet and connects to the Turkish Mediterranean port of Cey- Union, emerged at the crossroads of strategic energy han via Tbilisi bypassing the overloaded Turkish Straits. supply routes, making the region increasingly impor- In 2006 Kazakhstan made a pledge to provide the BTC tant for global as well as regional actors. This role has an additional 53 million barrels of oil each year. been particularly enhanced with the construction of Parallel to the BTC is the BTE natural gas pipeline new energy export pipelines, particularly the BTC and (also known as the South Caucasus Pipeline) which car- the BTE, that connect landlocked Azerbaijani energy ries natural gas from the Shah Deniz field in Azerbaijan resources with international markets. These pipelines through Tbilisi and links to the Turkish national gas altered the status quo of power relations in the region. pipeline network in Erzurum. The BTE became oper- They marked the end of Russia’s monopolistic control ational in December 2006 and has a total capacity of over the energy transportation routes from the Caspian 6 bcm per year. Most of the gas is exported to Turkey, region and helped both Azerbaijan and Georgia move and only a small amount is sent to Europe via a transit away from the Russian sphere of influence. The pipe- pipeline through Greece. lines helped to strengthen their political and economic Western leaders called the BTC and BTE pipelines autonomy, enabling them to choose their own foreign one of the most important projects of the 21st century. In policy and security orientation. As a result they became the case of the EU, the pipelines serve as an important significant regional actors. factor for the preservation of its energy security. Diversi- While the BTC and the BTE projects clearly met fied energy supplies and alternative delivery routes to EU the US and the EU strategic interests, for the Caucasus CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 5 region per se the projects cannot be described as “peace ects. In its energy consumption it is highly dependent on pipelines” promoting security and stability in the region. Russian gas supplies while the only “diversified” energy The new role of Azerbaijan and Georgia has increased export route, the Iran–Armenia gas pipeline operates tensions in the region, most obviously in Georgia’s rela- under Gazprom’s control. As with the North–South tions with Russia. However, while Georgia after the Rose pipeline discussed in the introduction, Azerbaijan might revolution has made steps towards the establishment of aim to employ its economic capacity at the negotiating democratic institutions and standards, Azerbaijan has table over Nagorno–Karabakh. However, in Armenia made no such gains. Its political system is based on a the energy export routes are not viewed as tied to the strong centralized authoritarian regime where the inde- resolution of the Nagorno-Karabakh conflict. pendence of the country implies the survival of its elite As has been demonstrated, the energy supplies and and their policies rather than legitimate democratic gov- the choices of energy export routes are closely inter- ernance. Azerbaijan’s authoritarian political elite uses linked with the security dimensions in the South Cauca- energy revenues to modernize its military capacity and sus. While the main export pipelines could have served build-up the army. Since 2003 the country’s defence as strategic “peace” projects for the sake of which the spending has grown dramatically. This year military regional actors cooperate, they instead have the poten- outlays amounted to one fifth of overall state budget tial to create dividing lines and disharmony between expenditures, equal to $3.12 billion. At the same time, the participating states and thus exacerbate the exist- this sum is more than the entire Armenian state budget. ing regional insecurities. (More detailed figures are given in the data section fol- It is essential for regional security that energy reserves lowing this article.) and supply routes are used appropriately. At the same Although it is unlikely that another war will break time, the core imperatives of regional security are domes- out over Nagorno-Karabakh and Azerbaijan’s military tic political in nature and depend highly on the estab- build-up might simply be an effort to increase its prestige, lishment of democratic institutions, legitimate gover- in the volatile security structure of the region it creates nance and the rule of law. a potentially destabilizing environment. In this respect, Moreover, it is important to promote cooperation it can lead to an unplanned escalation of tensions and between foreign as well as regional actors by not exclud- pre-emptive actions by one side or the other, inevitably ing anyone but creating a win-win situation from which affecting the existing precarious stability in the region. all relevant actors profit. Achieving this goal requires an Azerbaijan’s efforts to isolate Armenia from the understanding of the South Caucasus as a single region, regional pipelines projects, thus weakening the coun- where the economic needs and security issues of the try economically, fit into this context. Armenia, mostly regional entities are so closely interlinked that they can- as a consequence of the unresolved Nagorno-Karabakh not be successfully resolved without a holistic approach. conflict, was left out of these major regional energy proj- About the Author Lusine Badalyan is a PhD student at the Research Centre for East European Studies at the University of Bremen. Her research is funded by a grant from the Volkswagen Foundation as part of a research project on domestic discourses and foreign policy-making in the Caspian region. References • Begoyan, A. (2004), “United States Policy in the South Caucasus: Securitisation of the Baku Ceyhan Project”, Iran and the Caucasus, 8/1. • Bahgat, G. (2007), “Prospects for energy cooperation in the Caspian Sea,” Communist and post Communist Stud- ies, 40/2. • Buzan, B. and O. Waever (2003), Regions and Powers. The Structure of International Security. Cambridge Univer- sity Press, Cambridge. • De Waal, T. (2010) The Caucasus: An Introduction, Oxford: Oxford University Press. • Hetland, J.and T. Gochitashvili (2003), Security of natural gas supply through transit countries, Boston: Dordrecht. • Peimani, H. (2009), Conflict and security in central Asia and Caucasus, ABC-CLIO. • Shaffer, B. (2010), “Caspian energy phase II: Beyond 2005”, Energy Policy, 38/ 11. • Shankleman, J. (2006), Oil profits and peace: does business have a role in peacemaking? Washington, D.C.: United States Institute of Peace. • Starr, F. and S. Cornell (2005), “Baku–Tbilisi–Ceyhan: oil window to the west”, Central Asia-Caucasus Institute. CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 6 TaBlES aND gRapHS Military spending in the south Caucasus region Figure 1: Military spending in Mln. Usd 1,800 mln. USD Armenia 1,600 Azerbaijan Georgia 1,400 1,200 1,000 800 600 400 200 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Armenia 129 72 n. a . 122 105 134 132 142 144 140 138 159 175 215 254 297 345 359 404 Azerbaijan 367 386 195 161 142 163 186 243 257 291 313 391 474 554 1,138 1,237 1,666 1,473 1,421 Georgia n . a. n . a. n. a . n. a . 124 78 75 58 39 50 72 84 117 310 527 1,043 990 604 452 Note: Figures for Armenia and Georgia do not include military pensions. If the figures for Armenia were to include military pensions they would be 15–20% higher. Source: Military Expenditure Database of the Stockholm International Peace Research Institute, http://www.sipri.org/databases/milex Figure 2: Military expenditure as share of Gdp 10 Armenia % 9 Azerbaijan 8 Georgia 7 6 5 4 3 2 1 0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Armenia 2.10 2.12 n.a . 4.06 3.28 3.91 3.53 3.70 3.56 3.13 2.70 2.73 2.74 2.87 2.95 3.04 3.40 4.12 Azerbaijan 2.07 4.77 3.68 2.74 2.25 2.32 2.41 2.63 2.27 2.31 2.24 2.42 2.63 2.30 3.42 2.86 3.54 3.49 Georgia n. a . n.a . n.a . n.a . 2.21 1.25 1.14 0.92 0.62 0.74 1.00 1.07 1.37 3.34 5.22 9.16 8.52 5.61 Note: Figures for Armenia and Georgia do not include military pensions. If the figures for Armenia were to include military pensions they would be 15–20% higher. Source: Wold Bank—World Development Indicators, http://data.worldbank.org/data-catalog/world-develop ment-indicators; see also the source for Fig. 1. CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 7 oil and Gas reserves—international Comparison Figure 1: distribution of World oil reserves (proved reserves, end of Year 2010) 0% 10% 20% 30% 40% 50% 60% Middle East 54.4% South and Central America 17.3% Africa 9.5% Russian Federation 5.6% North America 5.4% Asia Pacific 3.3% Kazakhstan 2.9% Azerbaijan 0.5% Norway 0.5% EU 27 0.5% Source: BP Statistical Review of World Energy 2011, http://www.bp.com/statisticalreview Figure 2: distribution of World Gas reserves (proved reserves, end of Year 2010) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Middle East 40.5% Russian Federation 23.9% Asia Pacific 8.7% Africa 7.9% North America 5.3% Turkmenistan 4.3% South and Central America 4.0% Norway 1.1% EU 27 1.1% Kazakhstan 1.0% Uzbekistan 0.8% Azerbaijan 0.7% Ukraine 0.5% Source: BP Statistical Review of World Energy 2011, http://www.bp.com/statisticalreview CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 8 Map Major oil and natural Gas pipelines around the Caspian sea Figure 1: Major oil pipelines Omsk Northern Druzhba Samara Pavlodar Karachaganak Southern Druzhba RUSSIA ASTANA KIEV Atyrau - Samara Karachaganak - Atyrau KAZAKHSTAN Brody - Odessa Atasu UKRAINE Kazakhstan to China Caspian Pipeline Consortium (CPC) Atyrau To China ROM.MOL. Odessa Tengiz Kumkol Tikhoretsk Kashagan Aral Constanta Baku - Novorossiisk Novorossiisk Aqtau Sea Burgas Black Sea GEO.Baku - Sup’sa Makhachkala Proposed Kazakh - Iran Sup’sa Pipeline TBILISI Caspian KYRGYZSTAN Baku - Tbilisi - Ceyhan (BTC) ARM. A Z R . BAK U Sea UZBEKISTAN TASHKENT TURKEY Turkmenbashi Azeri-Chirag- TURKMENISTAN TAJIKISTAN CHINA Guneshli Major crude oil export pipeline Ceyhan Neka Port OOiill, pgiapse,l ianned p claonnndeedn,s parteo pfoiesledd or under construction PAKISTAN SYRIA TEHERAN AFGHANISTAN IRAQ IRAN INDIA 400 miles Copyright © 2010, Frank Haydon, ETH Zurich Figure 2: Major natural Gas pipelines Orenburg Brotherhood KIEV Orsk ASTANA Soyuz Karachaganak KAZAKHSTAN Transgas Atasu UKRAINE To Russia Severny Ustyurt Atyrau To China MOL. RUSSIA Tengiz Stavropol Aral ROM. South Stream Tuapse Sea To China Blue Stream Caspian UZBEKISTAN Almaty Black Sea GEO. Sea South Caucasus TBILISI Possible trans- Central Asia - KYRGYZSTAN Istanbul AZR. Caspian routes Center TASHKENT Erzerum ARM. BAKU TURKMENISTAN DUSHANBE ANKARA Shah Deniz ASHGABAT TAJIKISTAN TURKEY Nabucco Iran - Turkey CHINA Tabriz Major natural gasexport pipeline PAKISTAN Gas pipeline planned or under SYRIA TEHERAN To Pakistan and India construction Oil, gas, and condensate field IRAQ IRAN AFGHANISTAN INDIA 400 miles Copyright © 2010, Frank Haydon, ETH Zurich Copyright © 2010, Frank Haydon, ETH Zurich CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 9 The nabucco Gas pipeline project and its impact on eU energy policy in the south Caucasus By Julia Kusznir, Oslo abstract If constructed, the Nabucco Gas Pipeline would provide Europe with up to 31 billion cubic meters of gas a year from non-Russian sources. While a variety of problems hinder construction of the pipeline, Rus- sia’s evolving relationship with Ukraine may promote change in the current stagnant situation. However, a growing role for the European Union in the South Caucasus may provoke new tensions in its relations with Russia. introduction its position as the dominant importer to the European For about 15 years after the collapse of the Soviet Union, energy market. The fact that a number of EU states, there was very little activity in the energy relations above all the new Central and East European mem- between the European Union and the countries of the bers, are completely dependent on Russian natural gas South Caucasus. At the beginning of the 1990s, the for their domestic energy consumption makes the situ- European Commission created the program of Techni- ation more difficult. At the same time, the frequent con- cal Assistance to the Community of Independent States flicts over the last few years between Russia and the tran- (TACIS) to support the development of the post-Soviet sit countries Ukraine and Belarus have raised questions countries. Two components of this program covered regarding Russia’s reliability as a partner and her will- cooperation with Armenia, Azerbaijan and Georgia: ingness to use her energy power as a “political weapon” TRACECA and INOGATE, which focused on, among to influence European foreign and economic policy. other areas, improving the energy transportation net- This increasing dependence on Russian energy work, guaranteeing energy supply and coordinating resources led European policy-makers to develop in investment in pipeline projects. In this context, EU insti- 2007 the EU Security and Solidarity Action Plan. This tutions have supported the development of the South document focuses on liberalizing the EU energy mar- Caucasus hydrocarbon transportation routes, including ket, enhancing energy efficiency and diversifying energy the Baku–Batumi railroad and three pipelines: the Baku– supply. One of its main priorities was the promotion of Tbilisi–Ceyhan (BTC) oil pipeline, the Baku–Supsa oil the Southern Gas Corridor as a means of developing pipeline and the South Caucasus gas pipeline (SCP). new supply sources and infrastructure to transport gas However, the EU only provided technical support and from the Caspian and Middle Eastern regions, partic- helped in framing the agreements between the countries ularly from Azerbaijan, Turkmenistan, Iran and Iraq. involved (Azerbaijan, Kazakhstan and Georgia). At the Three main gas pipeline projects were included in the same time, the EU devoted less attention to Armenia. Southern Corridor plan: (1) the Interconnection Tur- This lack of cooperation was explained by the dearth key–Greece–Italy pipeline project (ITGI), (2) the Trans- of energy resources in Armenia and the country’s high Adriatic Pipeline project (TAP) and (3) the Nabucco dependence on Russian gas giant Gazprom. In general, pipeline project (for an overview of the pipelines, see the EU saw the South Caucasus as part of the Russian Table 1). Following the adoption of the Security and Sol- “Near Abroad”. Another reason for the EU’s relative lack idarity Action Plan, the Nabucco pipeline was named of interest in active energy cooperation was the consid- as a flagship project for the European Union. The Euro- erable divisions between, and competition among, the pean Commission viewed the project from two perspec- different actors and institutions at the EU level. There tives: (1) as a foundation for the diversification of gas was also no consensus on the external policy toward the supply and (2) as a real opportunity to realize its geopo- South Caucasus due to the anxiety that direct compe- litical vision of connecting the Caucasus and the Caspian tition with Russia in this region would have a negative region into one energy network. The EU has accorded impact on EU–Russian energy relations. Azerbaijan an important role within this project as a In the mid-2000s, the situation began to change major energy-producing country. as a result of the rise in European gas demand and the increasing imports from Russia to meet it. Currently, nabucco as a Flagship project for the eU Russia provides 40% of the EU’s gas imports. The EU Nabucco has been in planning since 2002. It is envis- Commission forecasts that the Russian portion of gas aged as a 3,900 km pipeline from Turkey to Austria via supply will rise to over 60% by 2030, strengthening Bulgaria and Hungary that would carry up to 31 billion CaUCaSUS aNalYTiCal DigEST No. 33, 12 December 2011 10 cubic metres (bcm) of gas to Europe per year with esti- ning, but it is not clear which is a front runner. The mated construction costs of over 7.9 billion euros. Cur- partners from the Shah Deniz consortium have stressed rently, the Nabucco consortium is made up of Austria’s that they will select from these four proposals the best OMV, Bulgaria’s Energy Holding Bulgargaz, Germa- route to transport SD2’s gas to Europe at the end of this ny’s RWE, Hungary’s MOL, Romania’s Transgaz and year or early next year. However, the European Com- Turkey’s Botas, each of which holds a 16.67% stake. The mission strongly believes that Nabucco is the only proj- project plans to receive about 20 bcm of gas per year ect in the Southern Corridor that will enable a diversi- from the Azerbaijani Shah Deniz gas field 2 (SD2) and, fication of Europe’s gas supply. initially, 10 bcm from Turkmenistan. In the long term, Meanwhile, the representatives of the Azerbaijani gas should also come from Iraq. In addition, there are government pointed out that there are also other pipe- negotiations with other suppliers, such as Kazakhstan line projects in planning that could be attractive for the and Egypt. The construction of the pipeline has been transportation of gas from the SD2 field to the Euro- postponed many times. According to optimistic fore- pean market; the Nabucco pipeline could therefore be a casts, the project will start in 2013 and the first supplies good future option when the gas from Azerbaijan’s other will be commissioned in 2017. gas from fields located in other countries of the Caspian In spring 2007, the project was accorded highest basin are available. In addition, Baku has stressed many priority as laid down in the guidelines for trans-Euro- times that it is much more interested in the diversifica- pean energy networks (TEN-E). Within this system, tion of its export routes and that it would prefer to con- the European Commission has given significant sup- centrate on smaller pipeline projects, which could be port for Nabucco in a number of ways. First, the Euro- more profitable. As a result, Azerbaijan’s SOCAR and pean Commission (based on a mandate from the 27 EU Turkey’s state operator BOTAS have declared the estab- states) was actively involved in the negotiations between lishment of their own gas corridor across Turkish terri- the Nabucco consortium and the supplier countries. tory by building the Trans Anadolu Pipeline (TANAP), As result, an intergovernmental agreement lasting 50 which will run parallel to Nabucco’s planned route and years was signed in July 2009 and later ratified by the have a capacity of 16–17 bcm per year. state governments and the parliaments of the EU mem- According to many experts, the BP pipeline pro- bers involved in Nabucco, as well as by Azerbaijan and posal seems to be more attractive than its three com- Turkey. The consortium also received financial sup- petitors because it would be based on a combination of port: European banks were willing to contribute 4 bil- existing and new infrastructure. Moreover, there are lion euros (2 billion of which came from the European powerful arguments against the other two small proj- Investment Bank, 1.2 billion from the European Bank ects (ITGI and TAP): while they plan to deliver gas for Reconstruction and Development, and 800 million to several European countries, the main gas volume is euros from the International Finance Corporation). The intended for the Italian market, which is already over- rest is expected to be financed through shareholder bor- supplied. The current financial problems of Greece also rowing and by private investors. In addition, the Euro- place doubt on the realization of these two projects. Tak- pean Commission helps coordinate the administrative, ing all this into account, the Shah Deniz consortium environmental and social impact assessments in the has also renewed discussions about other possible supply countries through which Nabucco will run. options to Europe, for example by expanding the capac- However, the competition among the three planned ity of the existing transport infrastructure in Azerbaijan pipeline projects in the Southern Corridor (ITGI, TAP and Georgia or using tanker routes across the Black Sea. and Nabucco) became evident when the Shah Deniz consortium led by BP and the Azerbaijani state oil com- Troubles surrounding the nabucco project pany SOCAR announced in summer 2011 a bid for the All these factors are weakening the momentum of the Shah Deniz gas. All three consortia submitted their com- Nabucco project and reducing significantly its chance prehensive transportation proposals. However, BP has of being selected as the optimal delivery route for SD2 also announced a plan for its own South East Europe gas to Europe. Although the Shah Deniz consortium Pipeline (SEEP), which would be able to transport SD2’s still has time to decide which pipeline it will use and post-2017 gas output of 10 bcm per year to Europe. the Azerbaijani government has the right to veto any This would be a third of Nabucco’s volumes. In addi- decisions on the pipeline routes, it seems that a smaller tion, SEEP put forward its proposals for the SD2 gas in project—possibly the SEEP project supported by BP— the case that none of the three proposed pipeline proj- is the frontrunner in the matter of the Southern Corri- ects meet the Shah Deniz consortium’s needs. Conse- dor. However, the European Commission has refused quently, there are currently four proposals in the run- to give up. As a compromise, it has suggested cooperat-