The Identity of Energy

The EU urgently needs to secure Caspian gas supplies at a sufficient guaranteed level to make its nascent "Southern Corridor” transportation route viable. The bloc is promoting the potential route, and trying to secure a stable supply arrangement to undergird investment in pipeline construction, with the aim of reducing EU energy dependency on Russia. The main challenge to the EU’s Caspian gas aspirations comes in the form of Russian state-led energy giant Gazprom, which is competing for Azeri gas and at the same time actively promoting its own rival South Stream route to supply Europe. With its fingers on the tap, Baku is encouraging the advances of all suitors.
 
With Europe’s dependency on imported energy set to increase from the current 50 percent level to 65 percent by 2030, and gas imports to rise from 57 percent to 84 percent within that timeframe, Russian energy will inevitably be important in the long-term. According to figures published by the U.S. Energy Information Administration in 2010, the countries with the largest energy reserves are Russia (25 percent of world supplies), Iran (16 percent), Qatar (14 percent), and Turkmenistan and Saudi Arabia (four percent each). The second phase of development of Azerbaijan’s huge Shah Deniz field, 60 miles southeast of Baku in the Caspian, could provide sufficient gas for the route in the medium term. European leaders hope that Turkmenistan – where Barroso discussed future energy partnerships the day after his Baku visit – and northern Iraq will supply the route in future.
 
The insecurities associated with current natural gas transit arrangements for both the European countries and Russia were brought to the headlines in early 2006 and again in early 2009, when disputes between Russia and Ukraine – the country through which most Russian gas currently transits to Europe – culminated in supplies being cut by Gazprom. In response to Ukraine’s non-payment of its gas debt and its reluctance to accept price increases in the Januaries of 2006 and 2009, Gazprom reduced the flow through the pipelines, leaving Ukraine to draw on supplies destined for Europe to satisfy its domestic needs. Several European countries were left without gas when temperatures were at their lowest. While Gazprom’s move was justified in strictly contractual terms, and prices paid by former Soviet Union countries remained considerably below standard EU prices, European leaders came to see the gas giant as a tool in a Russian foreign policy that punished politically uncooperative countries with price hikes.

The signing of a memorandum of understanding for energy cooperation between the EU and Azerbaijan in November 2006 prepared the ground for the "Southern Corridor” concept, which was finally outlined in the EU Security and Solidarity Action Plan two years later. This attempt to unite EU countries around a single energy import policy and to diversify supply for the whole of the EU has long been encumbered by the fragmented nature of the interests of countries within the bloc.

The laborious procedure of negotiating common positions among diverse member states with varying energy interests contrasts markedly with Moscow’s seeming ability to mobilize Gazprom swiftly in the service of its strategic interests. Barroso and Oettinger’s recent tour is the result of an attempt to streamline EU foreign policy in the wake of the December 2009 adoption of the Lisbon Treaty – aiming to give the EU weight in an increasingly multi-polar world – and success in realizing the "Southern Corridor” would be a major coup for Brussels. 

Presidents Barroso’s and Aliyev’s recent declaration has not entirely clarified the EU’s position, however. Not made public in its entirety, the statement omits the important detail of the volume of gas to be supplied to Europe. While three pipeline consortia have been vying to bring substance to the concept of the "Southern Corridor,” the Nabucco consortium, which would carry gas directly to Western Europe through Turkey, Bulgaria, Romania and Hungary, to the Baumgarten depot in Austria, is the frontrunner. As a dedicated pipeline for the whole route, it enjoys "strategic” status for the EU, which should in turn bring it investment from the EU budget.

The EU and the companies involved need to secure reliable and sufficient future gas supplies to guarantee the nine billion euro ($12.1 billion) investment the pipeline project would require. For the longer-term, doubts remain concerning Turkmenistan’s reliability as a supplier, given its authoritarian political structure and the fact that to avoid Russia Turkmen gas would have to transit either through Iran or across the as-yet unregulated Caspian.

Defi Dimadama, the director of the International Center for Black Sea studies in Athens, recalls that Azerbaijan has been a reliable supplier for some years, but doubts that Azeri gas alone will be adequate to fill the Nabucco Pipeline. She stresses the importance of uninterrupted energy supply to the global security equation, and criticizes the threatening entanglement of politics in the energy industry, despite public statements to the contrary. "In practice there is too much politics and political/commercial maneuvering in the commercial sphere,” she said.

The influence of Moscow on Baku’s decision-making cannot be dismissed. Russia is an important player in the conflict over the Armenian-populated Nagorno-Karabakh region within Azerbaijan, which remains an open wound for Baku. Military and economic decisions from Moscow have always played a role in defining the regional power balance, and this remains very much the case today. Through its membership in the Russian-led Collective Security Treaty Organization Armenia enjoys a security guarantee from Russia, which it consolidated in August 2010 by signing a 30-year lease extension for the Russian military base on its territory. Moscow thus holds the only key to the resolution of Nagorno-Karabakh, and Baku would not ingratiate itself with Moscow by sustaining the rival European route fully.

Most of all, it would be a mistake to neglect the importance of Baku’s own ambitions. The Azeri leadership shows every intention of exploiting its crucial position in Europe’s energy future. Holding its cards close to its chest with inconclusive deals – Iran’s share of Azeri gas is set to grow by an undefined amount from 2012, while Moscow too gets an increased portion – Baku may yet disappoint the Europeans. By opting to supply large volumes of gas through diverse routes Baku distributors could fall short of providing the quantities needed to fill the Nabucco Pipeline.

The rise in world energy prices since 2003 has decisively altered Baku’s position in the South Caucasus region, where it increasingly sees itself in a leadership role. This hydrocarbon-fuelled wealth has implications for Azerbaijan’s relations with powerful outsiders, too. The European Union’s emphasis on democratization and human rights in the early 2000s is giving way to a more pragmatic attitude, as the bloc’s economic levers have decreasing meaning for wealthy Baku. In exchange for last week’s apparent support for the "Southern Corridor,” president Aliyev has won the reward of EU visa facilitation negotiations; a prize Brussels has traditionally made conditional on democratic reforms in neighboring countries.

Fidan Bagirova of the Open Society Institute in Azerbaijan highlighted the connection between this resource wealth and the lack of democratic reform in the country: "Energy resources and revenues have helped the government avoid dependencies on any international financial institutions or the EU. No money from abroad means no commitments to accountability or other democratic reforms,” she said.