WILL GAS HELP RESOLVE THE NAGORNO-KARABAKH CONFLICT?

Since August 2010, a rumor is spreading that the Azerbaijani State oil company, SOCAR, would be about to bid for the North-South pipeline, which ships Russian gas from Mozdok to Yerevan through Georgia. Such a move would give Baku control over 10-15% of the pipeline that delivers 80% of the Armenian gas imports, hence giving it new leverage over Yerevan. It especially sheds light into the new strategy of Azerbaijan regarding the Nagorno-Karabakh conflict. While the shootouts have been increasing lately, Baku intends to use gas development to exert more pressure over Armenia.


BACKGROUND

At the collapse of the Soviet Union, Azerbaijan was a weak country that had little except oil to attract the interest of international actors and great powers. Azerbaijani leaders quickly acknowledged this situation, hence defining oil development as a foreign policy tool. The composition of the Azerbaijan International Operating Company, which extracts oil from the Azeri-Chirag-Guneshli oilfields, perfectly fit into this strategy. The United States (thanks to Amoco, McDermott, Pennzoil, and Unocal) were notably represented within it, as well as Europe (BP, Statoil, and Ramco) and Russia (Lukoil).

However, the main hope was to relate oil development to the resolution of the Nagorno-Karabakh conflict. Since the ceasefire of May 1994, close to 20% of Azerbaijan’s territory was occupied, including the Lachin corridor. Following an idea from the U.S. National Security Council, Unocal pledged in early 1995 to build a “peace pipeline” that would cross Nagorno-Karabakh and Armenia into Turkey. In the meantime, Heydar Aliyev proposed to his Armenian counterpart Levon Ter-Petrossian to link Azerbaijani oil exports to the Armenian withdrawal from the occupied territories.

Neither proposal produced any result. While waiting for Yerevan’s answer to his proposal, Heydar Aliyev committed to a dual export option for Azerbaijani oil, one pipeline going north through Russia and another going west through Georgia. Moreover, leading international companies – Amoco and BP – firmly rejected the possibility that oil export would be tied up to the resolution of the Nagorno-Karabakh conflict. Both companies considered the instability of this region to pose a serious risk to the export routes.

This failure caused a reconsideration of the diplomatic impact of oil. Baku then perceived it as a tool for obtaining aid from international financial institutions and to gain international political support in the resolution of the Nagorno-Karabakh conflict. Azerbaijan hoped that the rising European and U.S. interests in its hydrocarbon resources would play in its favor on this issue. It also asked the U.S. companies to lobby in Washington for the suspension of Section 907 of the Freedom Support Act, which bans U.S. support to Azerbaijan. While Section 907 was finally softened in October 2001, this strategy has so far been a failure. Neither the European Union, nor the United States have increased their support for Baku in the negotiations on the Nagorno-Karabakh conflict.


IMPLICATIONS

When he came to power in late 2003, Ilham Aliyev decided to reconsider this energy strategy for the Azerbaijani-Armenian conflict. He first decided to unify the Azerbaijani energy sector so as to further intertwine hydrocarbons development with foreign policy. He appointed young and reliable people to key positions, providing him with unambiguous control over the country’s energy policy. SOCAR progressively became the leading company in this sector, notably merging with Azerigaz in 2009 and with Azerkimya in 2010. Presently, it is the strongest actor on the Azerbaijani energy market, controlling the production, transportation and sale of Azerbaijani hydrocarbons resources.

Once SOCAR had strengthened its position in Azerbaijan, it started investing in the neighborhood, mainly in Georgia and Turkey. In the former, it rapidly turned into the largest foreign investor (having invested around US$ 470 million so far), controlling the Georgian gas market thanks to SOCAR Energy Georgia. This helped foster cooperation between Baku and Tbilisi, giving Azerbaijan more influence over Georgian regional policy. Since the Georgian Parliament approved the bill in early June, allowing for the privatization of the Georgian portion of the North-South pipeline, SOCAR has been considered as the favorite candidate – despite competition from Gazprom and KazMunaiGas – to take control of the pipeline due to its preferential relationship with the Georgian government. SOCAR is now the largest energy actor in Georgia and there is no economic reason not to invest in the Georgian hydrocarbons transportation sector.

In the meantime, Baku took advantage of the European and Turkish hunger for its gas resources to influence politics in the South Caucasus. First, it has linked its support for the European-driven Southern Corridor project to the Turkish-Armenian rapprochement. While the Obama administration was pushing the negotiations between Ankara and Yerevan forward, Brussels remained relatively passive. Baku made it clear to the European Commission, especially to Directorate General for Energy, that explicit support for this initiative would heavily undermine Azerbaijan’s commitment to the Southern Corridor. The DG Energy then lobbied the Directorate General for External Relations as well as Javier Solana’s Cabinet (which was then on the verge of being replaced by Catherine Ashton) to soften their support for the Turkish-Armenian dialogue. The increasing gas sales to Russia (up to 2 billion cubic meters a year in 2011) were a reminder to Brussels that Azerbaijan has alternatives for its gas exports.

Baku also linked the issue of Azerbaijani gas transit through Turkey to the Turkish-Armenian rapprochement. A political agreement on gas transit was signed only after the rapprochement collapsed. Now, as technical negotiations are ongoing between the Turkish pipeline company, BOTAS, and the Shah Deniz consortium led by SOCAR, Baku has made it clear that no deal can be found if there is a reset in this rapprochement. The opening of the Turkish-Armenian border is one of the few leverages Azerbaijan has over Armenia and it is not prepared to give it up. In addition, the rapid development of the Azerbaijan-Georgia-Romania gas Interconnector (AGRI) project, for which a political declaration was signed on September 14 2010, is here to remind Ankara that Baku has other gas transit alternatives.

CONCLUSIONS

The resolution of the Nagorno-Karabakh conflict has reached a deadlock. Despite hopes on mediation by the Kazakhstani OSCE presidency, the Almaty conference in June 2010 was a failure. The situation is even worsening on the ground, with shootouts increasing at the contact line between the two armies. While a military solution cannot seriously be considered due to international pressures, Azerbaijan is looking for alternative strategies to influence Armenia.
The Azerbaijani gas leverage may not last forever.

While unconventional gas is developing in Europe, the European hunger for gas is less and less stringent, at least before 2020. In the meantime, the Armenian Diaspora in the United States is still powerful, as the difficult nominating process of Matthew Bryza for the post of U.S. Ambassador in Azerbaijan illustrates. The takeover of the Georgian portion of the North-South pipeline would provide Baku with new leverage over Armenia. The latter would find itself in a very unusual and unexpected situation, with its enemy sharing the control of a huge share of its gas imports.

This is likely to increase tensions in the South Caucasus. Firstly, Yerevan could be tempted to aggressive responses to such a predicament. Secondly, the relationship between Armenia and Georgia may worsen after what Yerevan would consider a betrayal by the Saakashvili government. Once again, the stability of the South Caucasus may be at stake. Fear and resentment do not create a positive climate for peace negotiations. The United States, and above all the EU, must engage further with the region to decrease tensions and rebuild some confidence, in order to finally move forward with the resolution of the Nagorno-Karabakh conflict.


Samuel Lussac Ph.D.
International Relations
Institute of Political Science of Bordeaux


/Central Asia-Caucasus Institute/