Post-Shah Deniz II Period: Challenges that Azerbaijan may face

12 June 2013
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It  is not a secret that, Azerbaijan is going to make its final decision in late June whether to choose Nabucco West or Trans-Adriatic Pipeline (TAP) in order to connect with Trans-Anatolian Pipeline (TANAP) for transportation of Caspian natural gas to Europe. However, the questions will not be solved only after pipeline decision. Azerbaijani government may face some challenges, notably in the eve of upcoming presidential elections.


Both pipelines – Nabucco West and TAP – have their own advantages and disadvantages. Although, European Commission keeps its neutrality on both Nabucco West and TAP and states that, no matter which pipeline will be selected, both of them are intended for transportation of natural gas to Europe, they cannot underestimate the strategic importance of Nabucco West.


-Because, Nabucco West can provide more markets with natural gas on its route (including via cross-country pipelines) rather TAP will provide. The route that Nabucco West will run through are included in territories of Central and Southeastern European states, which heavily dependent upon Russian-supplied natural gas.


-However, Italian gas market is quite strong diversified. In addition, Italy has good opportunity for LNG transportation via sea routes while most of Central and Southeastern European countries don’t have, since majority are landlocked. But, apart from Italy, three Balkan countries – Albania, Montenegro and Kosovo, where there is not any gas infrastructure, might be attractive for SOCAR. According to Gulmira Rzayeva (SAM expert), “Those are new markets and SOCAR would have a chance to invest in infrastructure and downstream market as it has been successfully doing with oil products in Georgia, Romania, Ukraine and Switzerland. In this sense, TAP’s expansion to the markets of Western Balkans is far more appealing to SOCAR and its partners.” (1)


-According to Vladimir Socor (Senior Fellow of the The Jamestown Foundation), “Nabucco-West is designed to function as a backbone-interconnector of the countries along that route. The Nabucco countries, moreover, are linked with their neighbors through bilateral connections: Austria-Slovenia, Hungary-Croatia (recently completed), Hungary-Slovakia (soon to be built), Romania-Ukraine, Bulgaria-Serbia and Bulgaria-Macedonia, thus multiplying the market options for Caspian gas.” (2)


-Nabucco West also technically overcomes TAP, since Nabucco West is designed to pump from 10 to 30 bcm natural gas per year, while TAP is limited only with 10 bcm per year.


-On 17 September 2012, the President of Azerbaijan, Ilham Aliyev met Chairman of the Board and CEO of GDF Suez, Gerard Mestrallet during his official visit to France and they discussed cooperation on “Absheron” gas field. (3) Moreover, on 28 May, French energy company GDF Suez signed an agreement with OMV Gas and Power to purchase a 9% share in the Nabucco West gas pipeline project. (4) Gaz de France Suez will replace Germany’s RWE. Because RWE had sold its share (16.67%) in Nabucco to Austrian OMV, then OMV sold 9% of RWE’s share to Gaz de France Suez. (5) This shows decisiveness of GDF Suez in cooperation with Azerbaijan in the implementation of Southern Gas Corridor.


-Azerbaijan is currently competing for purchase of Greek DESFA. SOCAR offered around 450 million EUR for DESFA only, while Sintez offers 1.9 billion EUR (for both DESFA and DEPA) and Gazprom offers 950 million EUR for DEPA only. (6) The price bidding of Azerbaijan is less in comparison with others. However, Azerbaijan can stimulate Greece by increasing price bidding and selecting TAP in order to get share in DESFA. On 19 May, Greek Prime Minister Antonis Samaras visited to Baku. According to Kostis Geropoulos (Energy and Russian Affairs Editor for New Europe), “Visit of Greek PM to Baku means that Azerbaijan’s state oil company SOCAR is moving closer to acquiring Greek network operator DESFA.” (7)


-The initial natural gas price bidding offered by TAP and Nabucco West differ each other. Nabucco West offers lower price, while TAP offers higher.


-The most important is a political support for pipelines. Nabucco West supported by US and EU, while TAP suffers of political support even by Greek and Italian governments. United States Senator, Richard Lugar also underscored the importance of Nabucco West pipeline during Azerbaijani-American Forum’s “Vision for the Future” on 29 May in Baku. (8)



Political Outcome of Southern Gas Corridor


However, Azerbaijan must make a smart decision that should not spoil its bilateral and multilateral relations, probably with its very own neighbor - Russian Federation. From very beginning Nabucco (and now Nabucco West) constituted main rival for Russian-led South Stream pipeline. Russia doesn’t want to see additional pipeline running next to South Stream in his biggest market. Recent controversies in Russian-Azerbaijani relations (closure of Gabala Radar Station, Eurovision Song Contest voting failure, suspension of Baku–Novorossiysk pipeline, Eurasian Union/Customs Union etc.) makes to say that Russia is not much content with recent Azerbaijani Government. According to some media speculations, “Russia may put forward its puppet candidate for presidential elections in Azerbaijan.” However, it’s matter of time.


From other hand, western officials frequently criticize Azerbaijan on violation of basic human rights and express their deep concern about current situation during their visits in Azerbaijan. Sometime they also keep calm because of EU’s energy security problem. Oil and Gas policy of Azerbaijan turns them blind to situation in Azerbaijan. However, what will happen after selection of pipeline? The first phase of TANAP will begin in 2018 (next presidential elections). Until this period, Azerbaijan may use its natural gas and pipelines as political leverage toward Europe (not only).



Turkish Perspective of TANAP


As far as is known, Armenia is blockaded by both Azerbaijan (from the east) and Turkey (from the west) because of Nagorno-Karabakh conflict, since 20% of Azerbaijani territories (including Nagorno-Karabakh and adjacent regions) remains under occupation of Armenian Armed Forces. Recent Turkish government stated that, borders won’t be opened unless Nagorno-Karabakh conflict will not be solved.


However, signing of Zurich Protocols on normalization of relations between Turkey and Armenia, news about opening of Yerevan-Van flights, Turkish President, Abdullah Gul’s congratulatory statement to re-elected Armenian President, Serj Sargsyan, and indifferent position of Turkish Parliament to recognition of “Khojaly Genocide” added tiny inconveniences in bilateral relations.


Turkish government knows that, Azerbaijan is only cheap natural gas supplier for Turkey and both countries are in the implementation process of TANAP. Ignoring Azerbaijan means being deprived of cheap natural gas supply and delays for TANAP (although, IGA and HGA ratified by both governments). In this regard, Azerbaijan can put pressure on Turkey in order to ignore Armenia.


Because, TANAP is more strategic project rather than economic one. According to Gulmira Rzayeva (SAM expert), “Azerbaijani Government as an owner of the gas would not want to transport its gas via the pipeline that belongs to the consortium that represents consumer countries’ interests and be dependent on such infrastructure where no one gas producer company’s interests, including SOCAR, is represented.” (9) Therefore, Azerbaijani and Turkish governments made a strategic step and signed TANAP agreement and pipeline is going to replace “Nabucco East” in Turkish territories. SOCAR owns 80% share in TANAP consortium. However, SOCAR also needs to provide security of its share.



What about financial matter?


According to the Decree of the President of the Republic of Azerbaijan  (dated 30 December, 2012), one of the main directions of expenditures of the Oil Fund’s assets is a “Financing of the share of Azerbaijan Republic in the construction of the TANAP project”. (10) State Oil Fund will allocate USD 110.0 million (AZN 86.350.000) for the financing of the share of the Republic of Azerbaijan in the construction of TANAP in 2013. (11) (Also look at.) (12)


However, investments worth $10-12 billion will be needed to implement TANAP project (SOCAR administration earlier stated that TANAP construction will cost $7-8 billion. Rise in the project cost is connected with specification of the route), but Azerbaijani government allocated 110.0 million USD. It’s unclear who is going to finance remaining costs and whether the cost will be further increased or not?





1.Gulmira Rzayeva, “Azerbaijan’s Outlook in the Southern Corridor”, Oil and Gas Review: Exploration and Production, , Vol.10, Issue 2/2012, pg.34,

2.Vladimir Socor, “Comparative Advantages of Nabucco-West Offset By Lack of Financing”, The Jamestown Foundation, Eurasia Daily Monitor, Volume 10, Issue 102 , 30 May 2013,

3.Rencontre du président azerbaïdjanais Ilham Aliyev avec Gérard Mestrallet, président-directeur général de GDF SUEZ, Ambassade d'Azerbaïdjan en France, (17.09.2012)

4.Karafillis Giannoulis, “Suez buys into Nabucco West pipeline”, 28.05.2013,

5.Vladimir Socor, “Nabucco-West Project, European Commission Face Same Moment of Truth in Baku”, The Jamestown Foundation, Eurasia Daily Monitor, Volume 10, Issue 102 , 30 May 2013,

6.“DEPA: Gazprom Emerges as Likely Winner”, 28.05.2013,

7.Kostis Geropoulos, “Gazprom, SOCAR for Greece's DEPA, DESFA”, New Europe, 24.05.2013,

8.Richard Lugar: Increase of Azerbaijani hydrocarbon exports impacts European security”, 29.05.2013, Trend Information Agency,

9.Gulmira Rzayeva, “Azerbaijan’s Outlook in the Southern Corridor”, Gas for Energy Journal, Issue 3/2012, pg.31,

10."Investment Policy of the State Oil Fund of the Republic of Azerbaijan for the year 2013", Approved by the Decree of the President of the Republic of Azerbaijan dated 30 December, 2012.

11.Financing of the share of the Republic of Azerbaijan in the construction of the Trans Anatolian Natural Gas Pipeline Project (TANAP).

12.Decree of the President of the Republic of Azerbaijan on the Approval of the Budget of the State Oil Fund of the Republic of Azerbaijan for 2013 (30.12.2012).

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