Recently, Azerbaijan and Russia declared their intention to strengthen energy relations at the official level through participation in new and ongoing projects. For instance, on June 8, 2015 Assistant to the President of Russia, Yuri Ushakov, informed about the intent to establish a bilateral high-level working group on the issues of cooperation in the energy field within the framework of the Russian-Azerbaijani Intergovernmental Commission. The mentioned statement makes it clear that the high-ranked officials have shown a strong political will at least not to follow competition policy in the sphere of energy supplies to the European market.
It should be noted that according to the United Nations Comtrade Database, the total volume of bilateral trade between Russia and Azerbaijan amounted to $4.008 billion in 2014, showing 12% growth in comparison with 2013 ($3.373 billion). However, according to the Russian Federal State Statistic Service, in January-October 2015 the trade turnover decreased by 29.9% to $2.299 billion compared with the same period of 2014 when the turnover amounted to 3.279 billion.
The dramatic reduction in the export volume of the Azerbaijani goods to Russia was mainly caused by the termination of gas supplies by Azerbaijan in 2015. The first supplies of natural gas from Azerbaijan to Russia started in 2010. The agreement was signed during the official visit of the former Russian President, Dmitry Medvedev, to Baku on June 29, 2009. The President of State Oil Company of Azerbaijan (SOCAR), Rovnag Abdullayev, and the CEO of Gazprom, Alexei Miller, finalized it on October 14, 2009. According to the contract, Azerbaijan agreed to supply 500 million cubic meters of gas annually over the Mozdok-Makhachkala-Kazi Magomed pipeline. According to the agreement, Russia agreed to pay Azerbaijan $350 per thousand cubic meters while paying only $300 per thousand cubic meters for the Uzbek and the Turkmen gas. The price for the Azerbaijani gas was even higher than for the Russian gas transported to Europe. It should be noted that an average price of the Russian natural gas deliveries to the European importers amounted to $400 per thousand cubic meters in 2008. However, since the natural gas price is linked to crude oil, the significant drop in crude oil price in 2009 caused the decrease of an average price for the Russian natural gas exported to Europe down to $280 per thousand cubic meters. The prices for 2010 increased up to $300 per thousand cubic meters.
As soon as the supplies were started, the Russian giant gas producer, Gazprom, expressed its willingness to purchase more gas from Azerbaijan. Therefore, the parties firstly increased the amount of supplies to 1 billion cubic meters and then, to 2 billion cubic meters in 2010 and in 2011, respectively. The very fact that Russia imported rather small amounts of the Azerbaijani gas at higher prices through the Mozdok-Makhachkala-Kazi Magomed pipeline can be used as a proof of Russia’s intentions to control flows of Azerbaijan’s natural gas, which could be possibly directed to Europe. Therefore, the agreement was more of a political agenda than a profitable economic deal. As a result, when the agreement was being fulfilled the parties faced a number of problems. For instance, SOCAR delivered only 207 million cubic meters of gas to Russia in 2014 making the 7-hold decrease in gas deliveries. As for 2013, the Azerbaijani export to Russia stood at 1.37 billion cubic meters. Thus, there was no option other than to cease gas supplies.
However, it was not the first time when Moscow and Baku canceled the gas export deal. Actually, the Mozdok-Makhachkala-Kazi Magomed pipeline was formerly used for transporting natural gas from Russian to Azerbaijan. Launching the gas imports from Russia in 2000, Azerbaijan stopped the Russian natural gas shipments over the pipeline in 2007 as a result of an internal self-sufficient production, namely, the commencement of the Shah Deniz Stage 1 Project. Initially, the Azerbaijani authorities inked a gas imports deal with the Russian company Itera. However, in the period from 2004 to 2007 Gazprom provided natural gas deliveries to Azerbaijan in the amount of over 4-4.5 billion cubic meters of gas per year.
The third attempt to establish swap gas deliveries was made by Moscow and Baku in September 2015. According to the agreement reached on September 11, 2015, Russia agreed to supply about 2 billion cubic meters of gas per year with a possible extension (of up to…). Azerbaijan and Russia signed a gas supply deal which should have met the additional domestic natural gas needs of Azerbaijan, which arose due to high-level gas supply in the country (90.4%) and the high industrial production rates. Moreover, SOCAR has hoped that the Russian gas imports would help to minimize the volumes of extraction of associated gas from the Azeri-Chirag-Guneshli block and to use it for injection to reservoirs in order to increase oil production. In turn, Gazprom has hoped to get an opportunity to distribute the surplus amounts of gas which have accumulated due to various reasons, as well as to solve the problem of gas supply to Russia’s North Caucasus region through swap operations in gas supplies which were expected to start in 2017. Actually, possible Azerbaijani gas supplies in the amount of 3-4 billion cubic meters (per year) could fully meet the annual energy demand of the Russian North Caucasus region.
Therefore, on September 29, 2015, Russian giant gas producer, Gazprom, has started the supply of 6 million cubic meters of gas per day to the Azerbaijan Methanol Company (AzMeCo) through the Haciqabul-Baku gas pipeline. However, only in a period of one month, SOCAR announced that Russian gas intake has been stopped. Once again, the parties were faced with an issue of the lack of profit. For instance, the significant decrease in the methanol price in the international market in 2015 made the Russian gas price of $160 per 1000 cubic meters unprofitable for the AzMeCo, especially, taking into account the fact that SOCAR was delivering gas to AzMeCo at the price of $128 per 1000 cubic meters. Therefore, it was decided to keep the plant working at half of its capacity to be able to cover all production expenses. Under these circumstances, the further Russian-Azerbaijani cooperation in the natural gas sphere has caused a lot of questions.
Of course, there is still a possibility that Russia and Azerbaijan will finally establish regular gas supplies or even launch Azerbaijani gas transit through the Russian territory. However, it could possibly happen only if SOCAR succeeds in developing prospective gas fields such as Umid (the second largest gas field after Shah Deniz) and Absheron getting additional volumes of gas, which are not contracted to be delivered to Europe via the Southern Gas Corridor.
Speaking of Azerbaijan’s intentions to develop a partnership with Russia in the oil sphere, it should be mentioned that in the early 1990s the Baku-Novorossiysk pipeline, also known as the Northern Route Export Pipeline, running from the Sangachal Oil Terminal located near Baku was the only route of Azerbaijani oil delivery to the European markets. The Azerbaijan International Operating Company, SOCAR, and Transneft signed an agreement on transportation of the Azerbaijani oil via Russia to the Black Sea port of Novorossiysk on February 18, 1996. According to the contract, Azerbaijan agreed to deliver over 5 million tons of oil annually at a transit rate of $15.67 per ton. Therefore, the oil transportation through the pipeline started on October 25, 1997.
However, same as in the case of natural gas supplies, the parties could not avoid disputes over the issue of oil supplies. For instance, due to a pricing disagreement with Transneft SOCAR temporarily stopped oil supplies through the pipeline in February 2008. After resolving the price disagreement, SOCAR resumed pumping oil in terms of the old agreement. Actually, the oil pricing disputes were caused by the fact that while being transported through the Baku-Novorossiysk pipeline the Azerbaijani oil of the Azeri Light was mixed with Russian oil of Urals. Because the sulphur content (measured per mass) of the Urals reached 1.35% while for the Azeri Light mentioned indicator amounted to 0.15%, the Azeri Light is typically priced at about $3 per barrel over. However, due to the mixing, the Azeri Light is exported at the price of the Urals from the Novorossiysk port on the Black Sea. On December 10, 2015, the price of the Azeri Light and the Urals amounted to $40 and $37 per barrel respectively.
Under these circumstances, Azerbaijani side continuously decreased oil supplies through the Baku-Novorossiysk pipeline. Only in August 2008, the transport of oil via the oil pipeline was radically increased due to a temporary shutdown of the Baku-Tbilisi-Ceyhan and the Baku-Supsa pipelines caused by the sabotage in Turkey and the conflict in Georgia. Therefore, in 2008 the total amount of Azerbaijani oil transported through the Baku-Novorossiysk pipeline was about 4 million tons. For instance, in 2011 and in 2012 SOCAR exported over 2 million tons through the Baku-Novorossiysk pipeline annually. The volumes of oil supplies decreased to 1.75 million tons in 2013 reaching 0.932 million tons in 2014.
Constant reductions of transported volumes of the Azerbaijani oil once again caused tension between the partners. On May 5, 2013, the Prime Minister of Russia, Dmitry Medvedev, even signed a decree on termination of the contract, which actually would have been expired anyway on February 14, 2014. However, at the last moment, SOCAR initiated talks and stated its interest to continue shipping its oil from the Russian port. Therefore, on January 14, 2014, SOCAR and Transneft signed a new agreement on the Baku-Novorossiysk pipeline agreeing to pump at least 1.5 million tons of oil per year.
Therefore, as of 2015, the Baku-Novorossiysk pipeline remains operational. According to the SOCAR report, in January-August 2015 the volume of the Azerbaijani oil pumped via the Baku-Novorossiysk pipeline amounted to 930.7 thousand tons, which is 37.3% more compared to the amount of oil transported during the same period of 2014. Moreover, recently SOCAR confirmed its plans to keep the volume of oil transportation via the Baku-Novorossiysk pipeline at about 1.5-1.6 million tons in 2016.
The most stable and productive energy relations between Azerbaijan and Russia are conducted in the sphere of electricity supplies. Currently, the Unified Energy System of Russia and the energy system of Azerbaijan are operating under parallel operation. The partners are connected by the following high voltage lines: the 330 kV Derbent – Khachmaz and the 110 kV Belidzhi-Yamal high voltage lines. The construction of the second line of 330 kV Derbent-Khachmaz is under consideration.
On June 6, 2013, the parties signed an agreement on measures aimed to ensure parallel operation of their energy systems confirming their intentions to establish common policies for modernization and development of the energy system. Moreover, Russian officials confirmed their intentions to revitalize the project of establishing energy networks of Azerbaijan, Russia, and Iran. Actually, the initial agreement was inked in Tehran in December 2004. The parties even formed a tripartite committee responsible for solving technical issues on the way of ensuring parallel operation of energy systems. As part of the project in November 2006, Azerbaijan and Iran signed an agreement on construction of the 230 kV power transmission line Imishli-Parsabad. However, due to the international sanctions against Iran, the joint project has been suspended. Nevertheless, reaching of the Joint Comprehensive Plan of Action, which has ensured the suspension of the nuclear program of Iran and the lifting of the sanctions, provided Azerbaijan, Russia, and Iran with an opportunity to resume the process of interconnection of energy systems.
According to the statistical data of the Unified Energy System of Russia, Russia’s electricity export to Azerbaijan amounted to 53 million kWh in 2014, showing a 7.6% decrease compared to 2013. On the other hand, Russia’s electricity import from Azerbaijan increased by 4.3% and totaled 134 million kWh in 2014 compared to 129 million kWh in 2013. It is obvious that the Russian-Azerbaijani electricity supplies can hardly be compared to the Russian electricity export to China and the electricity import from Kazakhstan that amounted to 3.376 billion kWh and to 3.084 billion kWh respectively in 2014. However, the parties will definitely continue long-term cooperation in the electricity area.
In conclusion, it should be highlighted that in the middle term Azerbaijan and Russia are still considered to be competitors in the energy market. Russia needs guarantees that Azerbaijan will not create a conceptual problem of its energy transit interests, especially, when it comes to construction of the Transcaspian gas pipeline, which could be launched for the transition of the Turkmen natural gas to Europe via Azerbaijan and Turkey. Therefore, the Russian government will focus on improving energy relations with the Azerbaijani side. However, taking into consideration the fact that over the last 2 decades Moscow and Baku could not manage to significantly increase the volumes of oil and gas supplies, it is rather difficult to expect that the parties will build strong long-term energy strategic partnership.