Economic growth, strategic importance predicted for Azerbaijan with oil production increase

According to respected economic forecaster the Economist Intelligence Unit, Azerbaijan is set in 2006 for an astonishing 27.5 percent growth in GDP, following a just slightly lower growth result (24 percent) registered in 2005. A recent article from the Power & Interest News Report added, "Baku expects 2006 oil revenues of $650 million or more, a figure that is predicted to reach $15 billion annually and reach $160 billion by 2025."

This surge is helping towards financial independence as well. Azerbaijan plans to repay all of the $150 million it owes the IMF next year, the Azeri APA News Agency stated recently.

On August 8, Russia's Interfax reported that oil exports from Azerbaijan from January- July 2006 had registered a year-on-year increase of 65.3 percent, amounting to 11,085 million tons. The exploitation of the Caspian Azeri-Chirag-Gunashli oil fields has helped to shape a leading role for Azerbaijan, with the creation of the 1,768-kilometer-long BTC oil pipeline, which stretches from the Caspian Sea to Turkey's Mediterranean port of Ceyhan, via Georgia (the first 443 kilometers of the pipeline lies in Azerbaijan). By 2008, the pipeline is envisioned to reach its daily capacity of 1 million barrels. The pipeline commenced operations in May, with an inauguration ceremony held in Ceyhan on July 13- to coincide with the arrival of the first pumped oil in Italy, PINR noted.

The pipeline, which cost $4 billion (over a billion more than had been originally planned) was financed by a consortium of 15 international commercial banks (led by ABN Amro, Citigroup, Mizuho and Societe Generale), export credit agencies and political risk insurance companies, as well as the International Finance Corporation (IFC) and European Bank of Reconstruction and Development (EBRD). The leading stakeholder, with 30.1 percent, is British Petroleum. Other major players involved include state oil company SOCAR, Unocal, Chevron, Statoil of Norway, Turkey's national oil company and Italy's Eni SpA.

In the early 1990's, the BTC pipeline was purposefully envisioned by the Clinton administration to bypass Iran- even though it meant taking a longer and costlier route, westward through Georgia. Now that the Bush administration is taking a hard line with Teheran over its nuclear program, the decision to keep Iran out of the pipeline seems to have justified itself for the project's Western sponsors.

Indeed, Azerbaijan's priceless location between east and west and on the energy resource-rich Caspian has won it many a suitor among international oil companies and governments. Part of this has had to do with the West's antipathy to reliance on Russian energy exports; now, other proposed pipeline projects, Baku is set to benefit from the larger political machinations involving the US, EU, China and Russia.

"The BTC is now a serious option for numerous Caspian oilfields seeking an exit to market," says Scottish oil and gas industry consultant Paddy Docherty, recently surveyed by Balkanalysis.com. "With the South Caucasus Pipeline due to add a sizeable gas export capacity, Azerbaijan is very well placed to become the key regional oil & gas entrep?t as well as a major producer. Politically, this bolsters the country against regional rivals, and guarantees the continuing interest and support of outside powers such as the US."

As the recent PINR report notes, other oil and gas projects intended to subvert Russian influence are in development. "...The Nabucco pipeline, a major part of the European Union’s diversification strategy, will carry natural gas from Azerbaijan, Turkmenistan and Iran to Austria and Western Europe. Construction is slated to begin in 2008 and conclude in 2011; Nabucco is expected to achieve a maximum transport of 30 billion cubic meters of gas per year."

The construction of the BTC pipeline, meant to solve certain geopolitical problems, has only increased others. The question of possible new interconnections to the pipeline, the direction of oil flow and the security of the pipeline through certain areas of low-intensity conflicts are all hypotheticals that have numerous possible outcomes- with greater or lesser advantages for various parties.

"With the BTC now in operation, Caspian exports have been transformed at the strategic level," says Paddy Docherty. "Since it offers new options for crude exports from elsewhere in the region, through connecting pipelines across the Caspian, the export dilemma for neighboring producers becomes more complex, especially Kazakhstan."

Enormous Kazakhstan, on the other side of the Caspian from Azerbaijan, anticipates its annual oil output at 100-110 million tons by 2010, and 150-160 million tons by 2015 and thereafter, reported the Jamestown Foundation on August 3. Its Kashagan oilfields, three in number, were discovered in 2000 and 2001. They are believed to hold between 9-13 billion barrels of oil, according to the US Energy Information Administration.

The West has several potential pipeline ideas for moving Kazakh oil into Europe. One, the Constanta-Trieste route, would contact the Romanian Black Sea port of Constanta with Italy's Adriatic port of Trieste, via Serbia, Croatia, and Slovenia. Along with the other potential Balkan pipelines (AMBO, Bourgas-Alexandroupolis) and the Turkish Samsun-Ceyhan project, "these projects rely largely on Kazakhstani oil arriving from Novorossiysk and other Russian Black Sea ports and heading for the open seas," states the Jamestown report.

How exactly will Azerbaijan, as a transit route to the West, be affected by high-stakes politicking over the Kashagan development and export routes? "One of the big questions is over the exit of Kashagan output when it begins production in 2008," says Docherty. "Since a link to the BTC is a possibility, the issue has the potential to lead to a US-Chinese struggle over access to this crude: will it go east or west?"

The Kashagan fields are operated today by a largely Western consortium, led by Eni SpA, Total, Shell and ExxonMobil. So it would seem that Azerbaijan's future profits, in terms of transit revenues from Kazakh crude, are decided. However, despite the Western composition of the consortium, Docherty believes, "that doesn't necessarily mean that they'll sell it west. Oil companies are interested in profits not national loyalties, and in any case the decision for large projects such as a new pipeline involves the highest level of government."

Indeed, as the Scottish analyst reminds, a pipeline linking Kazakhstan to China has been substantially finished. It was constructed by joining existing lines with new pieces, and built by KazMunaiGaz and CNPC. "This doesn't mean it'll carry Kashagan output, but of course the former has a small interest in Kashagan... the question of how Kashagan production will get out has not been settled, and it seems that it could still go either way. Since full production won't be reached until 2016, there’s still some time to settle it."

With important issues such as this one still up in the air, Azerbaijan is taking steps to improve its energy sector elsewhere as well. The country plans to improve its power generating capacity with several new stations. Together with Iranian experts, a commission recently met in Tabriz to plan for building two 36-megawatt hydroelectric power stations on the Araks River. According to a press release from JSC Azerenerji electricity company, this project involves a dual agreement: "under the terms of agreement, Azerbaijan will build the first station in Ordubad province, while Iran will build the second in Maraza province."

The country also plans to repay, in kind, its close ally Turkey for electricity supply given in the 1990's to the vulnerable Azeri province of Nakhchivan - isolated within the territory of Armenia. The construction of new power plants in this enclave, aided by growing natural gas supply, will enable Nakhchivan to pay the debt back in electrical energy, APA recently reported.

Another new investment in this strategic though economically needy area of the country has been announced. According to the Trend News Agency on August 8th, China's fourth-largest auto maker, Lifan, plans to begin construction next month on a car factory in Nakchivan- an enclave of Azerbaijan that is not territorially contiguous with the rest of the country, but actually isolated within Armenia. The Chinese investment will help to improve the local economy of an Azeri island which is for that very reason of strategic value to Baku.

/www.balkanalysis.com/