MASARYK UNIVERSITY

FACULTY OF SOCIAL STUDIES

Department of International Relations and European Studies

Failure of the Nabucco Pipeline Project The role and interests of Azerbaijan

Master‘s Thesis

Elgun Jafarov

Supervisor: Mgr. Jan Osička, Ph.D. UČO: 404865 Study Field: PL – EUP Year of Enrollment: 2012 Brno, December 2015

1 I hereby declare that this thesis I submit for assessment is entirely my own work and has not been taken from the work of others save to the extent that such work has been cited and acknowledged within the text of my work.

Date: 13 December 2015 Signature

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ABSTRACT

The collapse of the Nabucco gas pipeline project which was to carry Azeri gas to Europe in 2014 demonstrates how small states have a major impact on the geo politics of oil and gas supply. When the Nabucco natural gas pipeline project started, the successful completion of the Baku-Tbilisi-Jeyhan oil pipeline seemed to prove that pipelines could be independent of politics. That project too had raised doubts. The failure of the Nabucco project is a case of how a small state was successful in playing big powers against each other. This thesis argues that Azerbaijan uses energy policy as a tool to achieve broader strategic and foreign-policy aims, and that was why it played a major role in the dismissal of Nabucco as a valid natural gas project. Using neorealism as a lens it tries to understand how Azerbaijan used the project to project its capabilities/power to protect its national interests. In doing this it showed that in contrast to the Great Game theory, small states are not mere pawns but can be active players in global geo politics. In other words, small states have agency. As the only available independent gas supplier in the region, Azerbaijan had a big say on the decision making in terms of choosing the countries through which the gas would pass and how it should be delivered to Europe. Often scholars argue that it is big states like Russia or USA or EU who decide on the big projects. The role of small countries like Azerbaijan is overlooked. In fact, by playing one country against the other, Azerbaijan was able to achieve its strategic goals. How and why Azerbaijan chose the failure of Nabucco is an interesting question. And I believe this calls for a more insightful look, and this is the topic of this thesis In this research, besides Azerbaijan, other actors such as Russia and EU will be also investigated but only in how they relate to Azerbaijan. This thesis will also look at the failure of Nabucco and how Azerbaijan's preference for other projects impacted the energy supply diversification policy of EU countries such as Bulgaria, Romania and Greece. It will also look at prospects for the revival of Nabucco.

ACKNOWLEDGMENTS

I would like to thank my family who supported me to study at the Masaryk University.

For me it would not have been possible to study abroad without their full support. I would also like to thank my friend Francis who helped to improve the wording of the thesis. Additionally, I would like to thank Agshin Umudov, who was my lecturer at

Qafqaz University, for sparing his time to discuss my thesis subject with me.

TABLE OF CONTENTS

ABSTRACT ...... 2 ACKNOWLEDGMENTS ...... 3 TABLE OF CONTENTS ...... 4 LIST OF TABLES ...... 5 LIST OF MAPS ...... 6 CHAPTER I: Introduction ...... 7 Methodology ...... 20 CHAPTER II: Literature Review ...... 23 CHAPTER III: Nabucco pipeline project ...... 31 Project outline ...... 31 Analysis of Azerbaijan’s energy policy ...... 36 CHAPTER IV: Azerbaijan’s response to external factors ...... 42 Importance of Azerbaijan’s strategic location and energy resources for the EU, and inconsistent EU backing ...... 42 Turkmenistan: Competition or Co operation? ...... 53 Russian interests...... 61 Iranian interests ...... 66 Turkish Interests...... 71 American interests ...... 75 Summing up ...... 79 CHAPTER V: Conclusions...... 81 BIBLIOGRAPHY ...... 87 Appendix ...... 93

LIST OF TABLES

Table 1. Components of the Southern Gas Corridor...... 47

LIST OF MAPS

Map 1. Nabucco Pipeline Project………………………………………………….….31

Map 2. Proposed Trans-Caspian gas pipeline………………………………………....59

CHAPTER I: Introduction

Azerbaijan is a republic in the Caucasus with 8.2 million habitants and shared frontiers with three powerful states, Iran, Turkey and Russia. However, by carefully balancing its interests and playing on differences the country has been able to influence geo political strategy far more than it should have been able to.1 This chapter will, by putting the

Nabucco gas pipeline project at the center of the analysis, look at how the country has been able to do this.

Azerbaijan is a young country born in 1991 following the fall of Soviet Union.

Independence brought many burdens along with it, among them the need to build and develop the economy. Without a doubt promising natural mineral resources were available. But the geopolitical and economical conditions were not easy as Azerbaijan was in war with neighboring Armenia until May 1994; with higher inflation a destabilized country was not a perfect destination for the oil companies. However, power was quickly consolidated under the third President of Azerbaijan, Heydar Aliyev who had been leader of Soviet Azerbaijan from 1969 to 1982 and became the president of independent Azerbaijan from 1993 to 2003. However, countries like Azerabaijan have always been seen as pawns in an international game between big players.

1 Mehdiyeva, Nazrin, Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011, Available online at https://books.google.ca/books? hl=en&lr=&id=wQYCAwAAQBAJ&oi=fnd&pg=PP7&dq=Analysis+of+Azerbaijan%E2%80%99s+evolv ing+policy+ +in+gas+industry&ots=tKSALZys- K&sig=nvaiEhyCO2IDwiICbFukgOe8r1A#v=onepage&q&f=false Google Books, p.5. 8

Most of the theoretical literature on the subject follows the Great Game theory that emerged out of conflicting Russian and British interests in Central Asia in the 19th century.2 The original Great Game had control of territory as its aim. It is significant because it introduced the term „“geo politics“ into political science. In a famous 1904 article, the British geographer Harold Mackinder argued that Russia's position in Eurasia made the country „“the pivot region“ of world politics. In a nutshell, Mackinder saw history as a struggle between land-based and sea-based powers. He saw that the world had become a "closed" system, with no new lands left for the Europeans powers to discover, to conquer, and to fight over without affecting events elsewhere. Sea and land- based powers would then struggle for dominance of the world, and the victor would be in a position to set up a world empire. In this system, small countries like Azerbaijan were seen as mere pawns. Today while control for territory is no longer central, control over resources and resource rich countries is.

According to this theory Azerbaijan should have been reduced to a satellite state.

Azerbaijan had been dominated by external powers, especially by Russia for most of the last 200 years of its history, so its chances of crafting an independent foreign-policy were quite remote. However, small states can have much greater control over their destinies by playing off other powers against each other.3 Therefore, it is essential to look at

Azerbaijani decision making from the viewpoint of Azerbaijani decision makers. Two

2 Peter Hopkirk, The Great Game: On Secret Service in High Asia. Oxford (Oxford University Press, 2001) 3 Alexander Cooley, Great Games, Local Rules: The New Great Power Contest in Central Asia. Oxford: Oxford University Press, 2012, pp.3-4. 9

things came together to make Azerbaijan, even though a small player, key in international geo-economic strategies. These are (i) it s independence from Russia in 1991, after having been a part of the Tsarist Empire and (ii) the discovery of huge natural-gas reserves on its offshore territory. Further, the start of negotiations with Turkmenistan that aimed at the creation of a legal framework for constructing the Trans-Caspian

Pipeline, and several gas agreements such as Baku-Tbilisi-Erzurum have made

Azerbaijan a major natural gas exporting country. The key element of Azerbaijan's energy policy is the supply of natural gas to European markets through the Southern

Corridor. This is extremely significant as the Southern Corridor is the only westward route for exporting hydrocarbons from the Caspian. This makes Azerbaijan, though a small state by international standards, a major player in the Caspian region. 4 This thesis, by making negotiations over Nabucco, and closely examining the role that

Azerbaijan played in it, will show how a small state, given the right resources and geographical positioning can have an influence that is far beyond its size in international negotiations.

Azerabaijan's foreign-policy is driven by two factors (I) the dispute with Armenia over

Nagorno-Karabakh (ii) the need for energy security and independence. At the core of

Azerbaijani foreign policy is the frozen conflict of Nagorno-Karabakh, a landlocked mountainous region that both Armenia and Azerbaijan claim. The land lies in the territory

4 Sevinj Amirova-Mammadova. “Azerbaijan’s Energy Policy: Natural Gas Supply to Europe.” academia.edu, available online at https://www.academia.edu/3302870/Azerbaijan_s_energy_policy_Natural_Gas_supply_to_Europe_ acccesed on May 3, 2015. 10

of Azerbaijan, but has an ethnic Armenian majority, backed by neighbouring Armenia. A brief war fought from 1988 to 1994 ended with a truce that froze the dispute.5

After the Nagrano Karabagh war, and as a newly independent state, Azerbaijan had to secure its political independence and eco-nomic development amid complex geopolitics that reflected the conflicting interests of different stakeholders, while finalizing its oil and gas projects, particularly for pipeline routes. These stakeholders included multinational oil companies, Azerbaijan’s neighbors and the United States.6 These core elements are essential to understand Azerbaijan's policy. As a resource rich state Azerbaijan could use its oil and gas resources as an important policy instrument, as emphasized by the then- president of the State Oil Company of the Azerbaijan Republic (SOCAR), Sabit Bagirov:

“The only way to accomplish improving Azerbaijan’s economic and political relations with the West was to resort to the ‘oil card’ and to offer the territory of Azerbaijan for the

West’s new strategic routes to Central Asia.”7

This thesis argues that Azerbaijan uses energy policy as a tool to achieve broader strategic and foreign-policy aims, and that was why it played a major role in the dismissal of Nabucco as a valid natural gas project. In doing this it showed that in contrast to the

Great Game theory, small states are not mere pawns but can be active players in global geo politics. In other words, small states have agency. As the only available independent

5 BBC, “Nagorno-Karabakh Profile - Overview.” News Portal. BBC. N.p., 12 Mar. 2015. available online at http://www.bbc.com/news/world-europe-18270325 accessed on May 3, 2015 6 Pinar Ipek. “Azerbaijan’s Foreign Policy and Challenges for Energy Security.” The Middle East Journal, 63.2 (2009): 227–239, 229. 7 Quoted in Pinar Ipek. “Azerbaijan’s Foreign Policy and Challenges for Energy Security.” The Middle East Journal, 63.2 (2009): 227–239, 231. 11

gas supplier in the region, Azerbaijan had a big say on the decision making in terms of choosing the countries through which the gas would pass and how it should be delivered to Europe. It is usually big states like Russia or USA or EU who decide on the big projects; that is also exemplified in the case of Baku-Tbilisi-Ceyhan mega oil pipeline.

The role of small countries like Azerbaijan is overlooked. However, the role and decisiveness of Azerbaijan in Baku-Tbilisi-Ceyhan oil and Baku-Tbilisi-Erzurum gas pipelines should be emphasized.

This thesis is a simple one. It tries to use neorealism to explain Azerbaijan's position in the negotiations for the Nabucco project. It adapts the idea of George and Bennett that the central question to ask of any case study is “What is this a Case of?“8The answer in short is that this thesis tries to understand the Nabucco negotiations through the theoretical framework of neorealism. It looks at different aspects of the negotiating positions of the major players—Azerbaijan, Russia, EU, Turkey, Turkmenistan and the

United States. Using neorealism as a framework, Azerbaijan has protected its core national interests. Therefore, strengthening Azerbaijan’s independence and national security always has been at the core of Azerbaijan’s foreign policy despite some swings under four different presidents between 1992 and 2003. Its rich oil resources and relations

8 Jack S.Levy, “Case Studies: Types, Designs, and Logics of Inference,” Conflict Management and Peace Science, Vol.25, No.1, (2008): pp. 1–18. 12

with Western oil companies were an important policy instrument in achieving these foreign policy goals.9

This was evident in the policy that the first administration of independent Azerbaijan the

A. Elchibey administration (1992-1993) followed. Azerbaijan began intense negotiations with Western oil companies, offering concessions. This resulted in two major oil concessions, with Bp-Statoil in September 1992 and with Pennzoil-Ramco in October

1992 for the Chirag and Guneshli fields, respectively. Though these are oil companies, the basic elements of the strategy, playing off Western states and western interests against

Russian and Turkish interests, and doing the same for Russia and Turkey is a core element of Azerbaijan energy policy emerged. Neither country wanted American oil companies in Azerbaijan. It is significant that for these particular projects the American stake in the initial agreements was particularly important considering that Amoco had the largest interest, followed by Unocal. Russia was totally excluded from these contracts.

Azerbaijan’s government thus fulfilled its strategic goals of strengthening the economic and political independence of the country.10

The same attitude is evident in the current administration. In his speech at the Munich

Security Conference this year, the current president, Ilham Aliyev said, “This project must also be realized. It is a project of energy security, first of all. It should be treated as

9 Pinar Ipek, “Azerbaijan’s Foreign Policy and Challenges for Energy Security”, The Middle East Journal, 63.2 (2009): 233, 227–239.

10 Pinar Ipek. “Azerbaijan’s Foreign Policy and Challenges for Energy Security.” The Middle East Journal, 63.2 (2009): 227–239. 13

a project of national security of the countries involved. At the same time, taking into account our huge gas reserves we can incorporate countries which are not yet part of this

Southern Gas Corridor, but part of Nabucco. We can incorporate them into our system. 11” What is evident here is a key element of Azerbaijan's energy policy---the diversification of its export options.

In practice this has meant making links with several countries at the same time and wooing one even as the relations with another don t work out. For example, in late 2009, as the delays became apparent in negotiations with Turkey over prices and transit of

Azeri gas to Europe, the state oil company (SOCAR) concluded several agreements with

Russia and Iran. It has explored the possibility of importing even larger volumes of Azeri gas, while Moscow has offered the possibility of buying all of Azerbaijan's gas. While maintaining close relations with Turkey, it has also looked at how to bypass Turkey by setting up liquefied natural gas (LNG) terminals on the Georgian and Romanian Black

Sea coasts at an estimated cost of 6 billion dollars. .

One of the key arguments of this thesis is that Azerbaijan has always put its interests first, and its negotiations over the Nabucco pipeline demonstrated this. For example, during his visit to Turkey in early February 2010, the Iranian Foreign

Minister, Manouchehr Mottaki, said that several European countries had approached Iran to sign import agreements and was an eager supporter of the Nabucco pipeline as this

11 Official Website of Azerbaijan Presidency, 06 February 2015, “Ilham Aliyev attended “Diversification strategies” roundtable of the Munich Security Conference”, Available at http://en.president.az/articles/14264 , Accessed on 10 May, 2015.

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would enable Iran to access European markets .12 However, such strategy has its pitfalls, as it may not create the panic intended. For example, Turkey has instead of wooing

Azerbaijan increased energy co-operation with Iran. In the fall of 2009, Turkey signed a controversial deal with Iran for the joint exploration of Iranian reserves and export of

Iranian gas to European markets through Turkey.13

This approach is particularly evident in the case of gas. Gas is one area where European security is particularly vulnerable. Europe currently imports about two-thirds of the natural gas it consumes. In 2012, the main gas suppliers were Russia (roughly 23 per cent), Norway (roughly 22 per cent), and Algeria (roughly 9 percent). In addition, gas supplies are far more vulnerable than oil supplies that can besourced from elsewhere even if primary supplies fail. Gas, on the other hand, is fixed to infrastructure in the form of pipelines or Liquefied Natural Gas (LNG) terminals, rendering short-term substitution extremely expensive, i.e. technically unfeasible.14

This is all the more important in the context of uncertainity over gas supplies to Europe especially after the gas crises in 2006 and 2009. The worsening relationship between

Russia and the EU also highlights the vulnerability of Central Europe. New projects such as Nabucco were meant to address this vulnerability. This is a vulnerability that planned projects such as Nord Stream, South Stream, Nabucco, the projects of liquefied natural

12 Saban Kardas, “Delays In Turkish-Azeri Gas Deal Raises Uncertainty over Nabucco.” March 19, 2010, European Dialogue, available online at http://eurodialogue.eu/energy-security/Delays-In-Turkish- Azeri-Gas-Deal-Raises-Uncertainty-Over-Nabucco, accessed on May 3, 2015. 13 Kardas, 2010. 14 Christian Hübner, European Energy Supply Security in Light of the Ukraine Crisis, Konrad- Adenauer-Stiftung, Berlin, 2007 15

gas (LNG) supplies or the North South Gas Corridor – which are crucial for the supply of natural gas supplies to V4 countries, i.e. to the Czech Republic, Poland, Hungary and

Slovakia.15 On the other hand, this can also be used against the big powers.

However, this did not change Azerbaijan's strategy. Its long term plan is to get several countries to invest in the country, as this will strengthen its position as a country.16 The negotiation over the Nabucco pipeline can be seen only in this context, and not as an isolated instance. To put it in other words, negotiations over the Nabucco pipeline are part of a grand strategy. Thus, even if one particular pipeline does not work out,

Azerbaijan is always looking for other options. As proved by Trans-Anatolian-Pipeline

(TANAP) and Trans-Adriatic Pipeline (TAP) projects. That is indeed core of the

Azerbaijan’s energy strategy; to secure available alternatives.

The best proof that this is long term strategy and not short term and that it is across all sectors is that the same strategy has been adapted to the oil industry. When Azerbaijan became independent in 1991, it sought investment in its oil industry, newly freed from state control, from all over the world. Thus, the British and American companies, Amoco, later BP Amoco, BP, Exxon, Chevron invested in Azerbaijan.17 The Norwegian company

15 Filip Černoch et al, The Future of Natural Gas Security in the V4 Countries. A Scenario Analysis and the EU Dimension, Masaryk University, 2011 summary available online at http://www.ceners.org/research/publications/#v4-gtm-diversification-options accessed on April 12, 2015. 16 Nazrin, 2011, p.5. 17 US. Energy Information Administration, 01 August 2014, Azerbaijan:Analysis, Available at http://www.eia.gov/countries/cab.cfm?fips=aj, Accessed on 08 May, 2015. 16

Statoil, Japanese company Itochu and Inpex, Turkish TPAO all showed great interest in

Azerbaijani energy resources.18

Thus, Azerbaijan has secured latent “agreement” of Russia in certain projects like TAP. It has the support of Turkey. Western countries, especially the United States also have close relations with the Azerbaijan. At the core of this policy is an intense desire to strengthen

Azerbaijani independence and national security. Thus, instead of being a pawn in a great game, Azerbaijan acts as its own agency and uses its energy policy as a tool to attain this.

This, with minor deviations has been a constant in every administration from 1992.

Again, this is why it is futile to try and look at the negotiations over Nabucco in isolation.

The negotiations over the Nabucco pipeline were just a demonstration of the use of

Azerbaijan's most powerful foreign policy tool, its stake in energy. Using its rich oil resources, and its gas reserves, Azerbaijan has been able to forge relations with several powerful countries. Unlike Turkmenistan or Kazakhstan, being free from Russian grip over energy transportation routes gave Azerbaijan a free hand to pursue independent energy policy.

A senior officer from the US Department of Energy emphasized Aliyev’s specific strategy as follows: “Azerbaijan’s strategy has been to bring in as many large companies from different countries as possible. So this is why you see first Amoco, now Bp-Amoco,

Bp, Exxon, Statoil, AgIp, just almost every major company. Almost every major

18 For a summary of Azerbaijan's oil history see Mir-Yusif Mir-Babayev. “Azerbaijan’s Oil History Brief Oil Chronology since 1920 Part 2 by.” Azerbaijan International 11.2 (2003), available online at http://www.azer.com/aiweb/categories/magazine/ai112_folder/112_articles/112_chronology.html acccessed on May 9, 2015.

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company from major countries has a position in Azerbaijan. That was very purposeful because Aliyev’s strategy was to try to gain as much support for Azerbaijan and its development plans from as many countries as possible. Not just the US.19”

In practice, the foundation of this strategy was set up on September 18, 1994, when so called ‘contract of the century’ was signed with major transnational oil companies such as BP to explore Azerbaijan’s oil wealth. The one of the many obstacles was how to transfer oil to the promising European market by-passing Russia. Keeping good relations with Russia, Aliyev’s administration pursued multi-vector foreign policy; meaning good relations with Iran, Russia, Turkey, USA and EU. Unlike Georgia and Armenia,

Azerbaijan did not openly choose a foreign policy direction. Indeed it obviously has an impact also on the country’s energy policy. The country successfully solved the oil transportation problem by deciding over Baku-Tbilisi-Jeyhan (Azerbaijan-Georia-

Turkey) mega oil pipeline. This was followed by the construction of Baku-Erzurum

(South Caucasus Pipeline) natural gas pipeline, transferring Azerbaijani gas to Turkey through Georgia.

These in turn freed Azerbaijan from Russian leverage on transportation of its resources to the West; in other words, Azerbaijan accomplished its energy independence fully, unlike many other Central Asian countries. Such independence encouraged country to take certain energy policy decisions independently.

19 Quoted in Ipek, 2009, p.233. 18

By starting the Shahdeniz gas field in 2006, Azerbaijan became a net gas exporter. And the importance of gas resources of the country is going to replace that of oil for the coming years, as the Azerbaijan’s oil already peaked in 2012. However, major gas exploration still lies ahead and will be boosted with the realization of projects such as

TAP and TANAP or Nabucoo, for which hopes revived after the Anti-Iran sanctions deal made in Lausanne on 2 April 2015.

Under complexities of the geopolitics, Azerbaijan has taken crucial decisions regarding energy policy. And decision on NABUCCO was a good example. For several reasons, the

NABUCCO gas pipeline project stayed in a pipe. This master’s thesis is going to look at why Nabucco stayed so long under consideration; why did it fail; and what was the role of geopolitical considerations behind; and most importantly what role did Azerbaijan play in this. One of the main purpose of this research is to investigate the role of

Azerbaijan’s energy policy regarding Nabucco and shed a light how small countries sometimes can play crucial role and become ‘game changer’.

With this research I intend to contribute to the literature on the energy policies of the small countries who usually seen as vassals of regional powers. Moreover, this research also aims at explaining why one project prevails over other; the important question here is: if the non-state actors also to blame for the failure? In other words, did stakeholders of

Nabucco work effectively for making the deal happen?

This master’s thesis consists of the following chapters: Introduction; Literature Review;

Methodology including definition of the Case; Analysis; and the Conclusion. In the 19

introduction chapter, I introduce the study subject, provide the background information and explain the relevance of the research. In the second chapter, which is literature review, the main literature on the Nabucco pipeline project is discussed. Moreover, literature on the importance of small states is also referred. In the Methodology Chapter, the way how this research is carried out is explained. Besides, what method is used, what sources are used; what time-frame is looked at is discussed in this chapter.

Furthermore, in this chapter, there is a sub-chapter on the case. In other words, the case of

Nabucco project is presented thoroughly in this part of the dissertation. Presentation of the chronology of the development of the event regarding the Nabucco pipeline, with a particular focus on Azerbaijan’ approach to it is presented. Such a historical tracing enables us to comprehend the role of Azerbaijan in the development of the Nabucco project. The fourth chapter will be the Analysis chapter. In this chapter the development of events around the Nabucco pipeline project is investigated. The steps taken by

Azerbaijan is explained in detail. It is looked at how and why this project was failed; what were the reasons behind; and what role Azerbaijan played in that. The final chapter, namely fifth chapter is the chapter of conclusion and interpretations. Here the findings of the research are presented. And based on the facts already available and current politics in the region, possible implications for the near future are also discussed.

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Methodology

I intend to use a qualitative method which fits perfectly with my study case as I already have identified crucial actors and policies in the gas and oil market of Azerbaijan and as well as EU who are involved in Nabucco pipeline project. I will study and analyze speeches of head of states, energy ministers and scan newspapers and other contemporary media to see how the interests around Nabucco project were shaped and shifted and how such dynamics led to the failure of the project and what role a small state like Azerbaijan played in that failure. I will analyze its role in a broader context of its energy policy. It is essential to use contemporary media because the events are very recent and fast moving.

Blogs, commentary, and media do have their bias, but on the other hand, they are often the only sources available. In addition, multiple sources are consulted to ensure that bias is avoided.

Unlike mainstream political science research on energy politics of South Caucasus, who treats main actors of the ‘new great game’ as the only deciding parties of the game, I argue that in certain matters ‘small’ states has also a ‘say’; in other words, I take the perspective of small states looking at the pipeline politics of the region. That will be my main contribution to the research. And the subject in question is very actual for the decision makers of EU as it can be classified into the ‘lessons learned’; because EU’s unclear stance also played a great role for the final decision on choosing one or the other gas pipeline route.

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The main question this research is centered around is how small states can affect transnational plans negatively or positively; that will exemplified with the case Azerbaijan’s stance on Nabucco project. In other words I will look at what was the role of Azerbaijan in Nabucco project. Such a question enables me to underline the role of small states vis-à-vis energy policy in big regional energy projects. That will help to comprehensively analyze policy making in energy politics of the region; and at the same time warn against the overlooking small nations’ influences in this regard.

Analyzing this question, this research will have explanations for the Azerbaijan’s evolving energy policy vis-à-vis Nabucco project taking into account also the external factors that impacted Azerbaijan’s decisions on energy policy. That will help to understand the national interest of Azerbaijan in the failure of the Nabucco and also future perspectives emerged following the Anti-Iran Sanctions deal, which can change overall.

The policy papers and speeches of important decision makers both in Azerbaijan and EU will be used as a main source of the research. Interviews, while an ideal methods, are not suited for this case as very few officials are willing to speak on the record in a semi- authoritarian state like Azerbaijan. Therefore printed interviews and policy speeches are used. Moreover, secondary sources such as books and journal articles as well as online news will be looked at. In fact, a study of the Nabucco project fulfills two different definitions of a case study, Anthony Orum’s definition of it as an intensive examination of “a single case of a particular phenomenon20” (Orum 2001, p. 1509), and Andrew

20 Joe R. Feagin,, Anthony M. Orum, and Gideon. Sjoberg, A Case for the Case Study (Chapel Hill: University of North Carolina Press, 1991), p.1509 22

Bennett expanded definition that includes “both within-case analysis of single cases and comparisons between or among a small number of cases” (Bennett 2001, p. 1513).21 The table below compares the research methods that are relevant to this thesis. In this case, the conception of case studies as the use of a set of theoretical propositions to structure an empirical inquiry into an analytically defined aspect of a set of events22 has been used as the governing principle behind this study. It is not an ambitious one, or a thoroughly empirically researched one, given the limitations of a Master s thesis that predominately relies on secondary sources. It is an example of a theory guided case study23 with the theory behind it being neorealism. Theory-guided case studies are also idiographic, in that they aim to explain and/or interpret a single historical episode rather than to generalize beyond the data24 . Thus this part of my thesis is an attempt to structure a conceptual framework that will illuminate the rest of the study. In this part of the thesis I construct a theoritical framework so that the analytical assumptions, normative biases, and causal propositions that influence this thesis are clear. In other words I use the theory of neorealism to guide my empirical analysis of the case. While in social science this is followed by a subsequent step---using the data to suggest changes in the theory25

—the limitations of space as well as the rather basic knowledge of a complex case like

21 Alexander Lawrence George and Andrew. Bennett, Case Studies and Theory Development in the Social Sciences (Cambridge, Mass. [u.a.]: MIT Press, 2005), 7. 22 Levy, 2008, pp.2-3. 23 Levy, 2008, p.4. 24 Levy, 2008, p.4. 25 Levy, 2008, p.5. 23

the Nabucco pipeline negotiations that a short period of research entails means that this thesis will not suggest any theoretical changes.

Comparative Table of Methods26 Strategy Form of Research Requires Control Focuses on Question of Behavioural Contemporary Events? Events? Experiment How, why? Yes Yes Survey Who, what, where, No Yes how many, how much? Archival Analysis Who, what, where, No Yes/No how many, how much? History How, why? No No Case Study How, why? No Yes

Gerring' s 27 contention is that a case study implies both a single cross-case analysis, or at least thought about a broader set of cases. His argument that the defining feature of a case study is “what is this a case of?” is applicable to this work as it is a case study of how a weak state can influence negotiating strategies of big powers. What Azerbaijan did with regard to the Nabucco pipeline is something that other smaller states could also adopt.

26 Adapted from Robert K. Yin,, Case Study Research : Design and Methods (Thousand Oaks, Calif.: Sage Publications, 2009), 5. 27 John Gerring, Case Study Research: Principles and Practices. New York, NY [u.a.: Cambridge Univ. Press, 2012, p.13 24

CHAPTER II: Literature Review

The theory of neorealism

Neorealism – or structural realism – one of the major theories of international politics, associated with Kenneth Waltz28 (1924-2013) will be the major theoretical framework that I use in this dissertation. He first suggested the idea in his now famous 1979 book Theory of International Relations. Since then it has been used by several authors such as Buzan (1993)29, Jervis30 (1997); Mearsheimer31 (2001); Hanami32 (2003); and Grieco33 (2015). While they disagree on various aspects of the theory they agree on the broad theoretical concepts that Waltz (1979) first formulated. While this thesis will touch upon other authors the focus will be on two of the main proponent Waltz who proposed defensive realism, and Mearsheimer who proposed the idea of offensive realism. At the core The focus of this theory is to explain the potential behaviour of states in terms of their inherent interests. It is essential to remember that is that neorealism is not a theory of foreign policy but a theory of international politics. The key issues that neorealism focusses on are war, the avoidance of war, power balancing, power seeking, the death of states, security competition and arms races, alliance formation, etc.34 The key

28 Kenneth N. Waltz, Man, the State, and War: A Theoretical Analysis. (New York: Colombia Press, 2001); Kenneth N. Waltz, Theory of International Politics. (Reading, Mass: Addison-Wesley Pub. Co, 1979) laid the foundations of neorealism. 29 Buzan, Barry, Ole Wæver, and Jaap De Wilde, Security: A New Framework for Analysis (Lynne Rienner Publishers, 1998 and Barry Buzan. People, States & Fear: An Agenda for International Security Studies in the Post-Cold War Era. London: ECPR Press, 2008. 30 Robert Jervis. “Realism, Neoliberalism, and Cooperation: Understanding the Debate.” International Security 24.1 (1999): 42–63. 31 John J. Mearsheimer. The Tragedy of Great Power Politics. New York: Norton, 2001. 32 Andrew K. Hanami, Perspectives on Structural Realism. New York: Palgrave Macmillan, 2003 33 Joseph M. Grieco, J.G. John Ikenberry, and Michael Mastanduno. Introduction to International Relations Enduring Questions and Contemporary Perspectives. N.p., 2015 34 Jo Jakobsen, “Neorealism in International Relations – Kenneth Waltz.” http://www.popularsocialscience.com/2013/11/06/neorealism-in-international-relations-kenneth-waltz/. N.p., 6 Nov. 2013. 25

concepts of neorealism can be summarised as anarchy, structure, capability, the distribution of power, polarity and national interest. The following section will explain these concepts

Anarchy and Structure

These two concepts are closely intervined and therefore I deal with them in a single section. At the core of neorealism is the idea that the international system is anarchic as, unlike within nations where the state is the only legitimate authority with a monopoly over force, there is no world government35. To quote Waltz “The state of nature among men is a monstrous impossibility. Anarchy breeds war among them; government establishes the conditions for peace. The state of nature that continues to prevail among states often produces monstrous behavior but so far has not made life itself impossible36 .

The term “anarchy“ does not mean that countries are always fighting and there is constant chaos and disorder—it means that there is no overarching government that can impose order, on in other words, the structure itself is “anarchic.“ The lack of an overarching global authority that provides security and stability in international relations means that there is no formal organizing principle such as a world government with a monopoly over force, unlike domesitic politics which is defined by an heirarchy of force. Only nation states have the right to use force to defend themselves in international relations. Sovereign states are thus the building blocks of the international system, and the primary actors in world politics.37 Consequently, the international system is in a

35 Waltz, 2001. 36 Waltz, 2001, 227-28 37 Elif Dibek. “What Are the Basic Concepts of Neorealism?” https://www.researchgate.net/post/What_are_the_basic_concepts_of_neorealism, 11 Aug. 2012, accessed Nov 12, 2015. 26

constant state of flux. States compete and try to ensure that they have the capability to survive, especially maintaining territorial integrity and domestic autonomy in the system. This is because of the absence of trust within the international system and the self interest of states. As Waltz puts it, “ To expect states of any sort to rest reliably at peace in a condition of anarchy would require the uniform and enduring perfection of all of them.38

Consequently, all states must rely on “self help“ which Waltz decribes as a “self-help“ system. This means that as states expect conflict they have to “be concerned with the means required to sustain and protect themselves. The closer the competition, the more strongly states seek relative gains rather than absolute ones39“ As the international system is “anarchy“ and the structure is state-centric, states always are striving to prevent a potential attack from the others. Since there is no centralized authority, there is no reason for a state to obey or adhere to an international system unless there is a kind of balance in the system. In fact if there is order, this is due to restraints imposed by the international system to the units40 However “there is a constant possibility of war in a world in which there are two or more states each seeking to promote a set of interests and having no agency above them upon which they can rely for protection.41

Waltz sees this as the central guiding principle of international relations and argues that the structure of anarchy itself prevents any idealistic approach like democratic peace theory, or liberalism, or world socialism from being successful. Idealistic expectations of humanity striving towards a clear goal or nations living in peace will work only “if the minimum interest of states in preserving themselves became the maximum interest of all of them-and each could rely fully upon the steadfast adherence ro this definition by all of the others. Stating the condition makes apparent the utopian

38 Waltz, 2001, x. 39 Waltz, 2001, x. 40 Jakobsen, 2013 41 Waltz, 2001, 227. 27

quality of liberal and socialisr expectations.42 Thus, “each state arrives at policies and decides on actions according to its own international processes, but its decisions are shaped by the very presence of other states as well as interactions with them43 This view of the state system as one in which nations are competitively seeking advantage all the time allows us to move on to the next element of neo realist theory or capabilities of a state.

Capability

The anarchic nature of the state system leads to the third pillar of neo realism which is capabilities which can be defined as the relative power that a state has in the international system. Five main criteria are key to evaluating the capability or power of a state: its natural resource endowment, its demographic, economic, military and technological capacity.44 States strive to achieve a level of capability that ensures their survival. Each state achieves a different level of capability and thus states within the international system are differentiated via their level of capability. What is important then is not absolute capability but relative capability. Thus, in neorealism what is important is the capability or power that a state possesses at a given moment of time. Different levels of power yield variations in the types and magnitude of structural constraints that states face45. This in turn leads to variations in the way a state will behave. At the core of thier behaviour will be the endless striving to get relative advantage within the system. As there is no overarching principle of organization in the system and it is anarchic by its very nature, states are always insecure. They, therefore, will strive for capabilities or power. As Waltz argues, “the structure of the state system does not directly cause state A to attack state B. Whether or not that attack occurs will depend on a number of

42 Waltz,2001, 227. 43 Waltz, 1979, 65. 44 Waltz, 1979. 45 Jakobsen, 2013. 28

special circumstances-location, size, power, interest, type of government, past history and tradition-each of which will influence the a ctions of both states46“.

This leads to the great paradox of international politics. Nations will always strive to protect themselves from other states, but the more powerful a particular state becomes, the more insecure the other states become. Therefore, they, in turn strive for more and more power leading to never ending cycles of security and capability accumulation. This leads to the divisions between realists based on the level of power that a particular state needs to be secure. Offensive realists argue that states should always seek to increase their power, while defensive realists insist that too much power can be self-defeating. Offensive realists argue only that superior capability more likely to result in successful outcome.This is because overarching power will overwhelm an enemy. In this concept no state can be really sure about other states’ intentions which can change rapidly. Therefore, what a state should try and match is the actual power of its rivals and not its intentions. 47

Another branch, hegemonic stability theory hold that if one state accumulates power this will have a stabilizing effect on the system. It can be argued that all three are different points on a power spectrum. A weak state feels more secure when it accumlates power, in an act of offensive realism but at a certain poin, the state will trigger a balancing reaction that puts its security at risk, a state of affairs that agrees with defensive realist assumptions. Finally, when the state becomes too powerful to balance, its opponents bandwagon with it, and the state's security begins to increase again. This is the situation described by hegemonic stability theory. Fiammenghi48 (2011) holds that the three stages delineate a modified parabolic relationship between power and security and argues that this brings together both streams of the theory—defensive realism and

46 Waltz, 2001, 232 47 Mearsheimer, 2001 48 Davide Fiammenghi. “The Security Curve and the Structure of International Politics: A Neorealist Synthesis.” International security Vol.35. No.4 (2011): pp.126–154.

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offensive realism. He argues that as a state moves along the power continuum, its security increases up to a point, then decreases, and finally increases again. This modified parabolic relationship allows scholars to synthesize previous realist theories into a single framework.

Polarity

The striving for stability in the international system in the absence of an overarching system means that only a balance of power can ensure international peace and stability. This leads to the notion of polarity. What determines the polarity of the international system is the ‘distribution of capabilities’ across units, at any given time There are three major types of polarity: unipolarity, bipolarity and multipolarity. Unipolarity is the state of affairs when there is one dominating power in terms of demographic, economic, military and technological capabilities. This is the state of the world today with the United States maintaining military, economic and technological primacy in the world. The Cold War, when the USA and the USSR faced off each other is the classic example of bipolarity, when the United States and the Soviet Union were two poles of the world. The period before the First World War, and the inter war period would be the best example of a multi polar world. Such a multipolar system with a potential hegemon raise the greatest fear and are consequently the biggest threat to the system as it generates spirals of fear49 Geography prevents any one power from attaining global hegemony and therefore regional hegemons prefer that no other region has a great power, and thus seek to act as off shore balancers. Mearsheimer50 looks at global politics over the last 150 years and argues that powers that tried for hegemony, such as Japan which began to seek the status of an hegemon after the Meiji restoration of 1868 and collapsed in 1945, Germany which began to seek this status from 1862 and collapsed in 1945, the Soviet Union which sought this after the Bolshevik Revolution in 1917 are examples of powers that sought hegemony, On the other hand, off shore balancers, such

49 Mearsheimer, 2001. 50 Mearsheimer, 2001 30

as the United Kingdom from 1792 to 1945 when it balanced Germany through the navy and the United States from 1800 to 1990 when it stationed forces in Europe were off shore balancers against those seeking hegemony. Thus, “balances result not from the malevolence of men or of states but from the condition in which all states exist.51“

Waltz argues that it is not any noble intentions or system of government that leads to peace, but instead that it is the way power is distributed in the system that induce states to act in some ways and not in others. This, however, sees states as rational actors. Going back to the first principle, the fundamental aim of a state is to survive, or to put in other words states seek “security.“ Key to the neo realist view of the world is the idea that states will always aim at balancing their security. As the international system is still in a state of nature, power-projection is the natural behaviour of states but the system constrains power projection beyond a certain level. Nazi Germany s quest for hegemony rather than a blance of power is a a good example of how states can fail if they do not acknowledge the inherent constraints that the system has. This constant striving for balance in the system leads to the next level of the structure of international relations which is national interests.

NATIONAL INTEREST

The final analytical pillar in neorealism is “national interest“ which is an elusive concept.

States strive for security, they try to expand their power, and they are never secure. Thus, the key to understanding how great powers behave in the system is to understand how they try to preserve territorial, economic and military security. At the same time, there is a limit to the projection of power. The system itself has barriers towards an hegemon rising, and many states simply do not have the capability to become great powers. Thus as the example of the United States during the Cold War shows, that even great power

51 Waltz, 2001, x 31

is not enough to dominate across the world. One of the key arguments that Waltz puts forward is that state, unless they are revisionist powers, gradually accept that power needs to be balanced. The world can never predict when a revisionist power will appear on the world stage52 In fact, as rational actors, the long term goal is survival, and survival means that states will try to keep the balance of power. Wars can occur when a conflict of interest escalate or when power is insufficiently balanced This leads to a conflict of interest ending up as war which threatens the states that wage it, and the stability of the international system.

One of the key concepts of neo-realism is that the international is far more important than the domestic. Thus, no matter what the interests of domestic actors, or what conflict exists in the state, any given state will try to get the maximum advantage it can in the international system. It is a given in realist theory that the international state system is anarchic, so how a state responds to other states is a reflection of the power it has in the system.

Neorealists assume that statesmen will respond rationally to these preconditions and choose the foreign-policy course which has the maximum potential to ensure security benefits and minimize security risks.53

52 Jakobsen, 2013. 53 Miriam Fendius Elman, “The Foreign Policies of Small States: Challenging Neorealism in Its Own Backyard,“ British Journal of Political Science, Vol. 25, No. 2 (Apr., 1995), pp. 171-217 32

This was different in early 1990s when Azerbaijan was struggling with internal problems.

However, once the regime has consolidated the power under the Aliyev’s regime, any domestic actor challenging the regime has been disabled or neutralized.

The main criteria is that neo-realism gives importance to the international state system, while theories that focus on domestic actors assume that factors within the state, as for example the power or ideology of a particular political party will impact foreign-policy choices.

Neorealism accepts that systemic or structural factors may limit the choices policy makers have, but assumes that elites are not bound by such constrains, at least domestically. On the other hand, those who stress domestic factors insist that statesmen cannot take the optimum course because of local pressure. In reality, most nations fall somewhere in between these two extremes.54 However, as already noted above, since the regime consolidated the power this does not apply to the incumbent regime in Azerbaijan.

At least when it comes to foreign policy setting, Azerbaijani government has kept its so- called multi-vectored policy, regardless of the desires of different groups who might look for different foreign policy course.

This thesis is theoritically limited in the way it uses only the neo realist framework to explain the issue. In short, the key argument is this.Azerabaijan, a rather weak player on

54 The key works that focus on the role of the state internationally and domestically are Kenneth N. Waltz, Man, the State and War: A Theoretical Analysis (New York: Columbia University Press, 1959) and J. David Singer, 'The Level of Analysis Problem in International Relations', World Politics, 14 (1961), 77-92 33

the international scence used its only advantage, its strategic positioning in the oil and gas landscape to fulfil its national interests.

However, this thesis is limited. It looks at one particular aspect of gas supplies that is the vulnerability of the supply. For this I adapt a definition that has been used in the context of the oil crisis. The focus here is on the potential for coercion, “whether an actor or a group of actors has the ability to force a sustained reduction in the supply of crude oil or crude products on a state.55“ This definition also focuses on a key concern of states— whether they can depend on a steady supply of gasoline and diesel.

Azerbaijan has limited goals and is willing to compromise, as for example in its willingness to deal with the details. For example, Azerbaijan has been demanding a price revision for the gas that is pumped from the Shah Deniz field to Turkey. However, it has not taken any drastic measure.

55 Llewelyn Hughes and Austin Long, “Is there an oil weapon? Security Implications of Changes in the Structure of the International Oil Market“ International Security, Volume 39, Number 3, Winter 2014/2015, pp.152-189, p.153 34

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CHAPTER III: Nabucco pipeline project

Project outline

This chapter will be begin with a description of the Nabucco project, as it is crucial to understanding how the project became a tool of Azerbaijan's foreign-policy. In this part, the key description of Nabucco pipeline project with its development phases is depicted.

This description serves the purpose of locating Azerbaijan’s decisions regarding Nabucco in the following parts of the chapter. Nabucco pipeline is a 7.9 billion euro ($10.69 billion) project to transport gas from Turkey to Austria through Bulgaria, Romania and

Hungary.

Map 1. Nabucco pipeline project

Source: European Dialogue, 2015, From http://www.google.de/imgres?imgurl=http://eurodialogue.org/files/fckeditor_files/Nabucco-Pipeline- map.gif&imgrefurl=http://eurodialogue.org/NabuccoMap&h=564&w=800&tbnid=l5GhNF4C83Oa1M:&zoom=1&tbn h=94&tbnw=134&usg=__Lh8VBI5ZTPHPmpZ8FbTgNo5UEK4=&docid=x2r4jwUU0B3r7M, Accessed on 02 May, 2015.

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Construction of the 3,300-km (2,050 mile) pipeline was scheduled to start in 2011 and the first deliveries were expected in 2014 with an initial annual capacity of 8-10 bcm. It was estimated that the pipeline would be able to transport a maximum of 31 billion cubic metres of gas annually. The first talks over the project were held in February

2002 between OMV Gas and BOTAS, MOL of Hungary, Transgaz of Romania and

Bulgargaz EAD of Bulgaria. In 2002 the five parties signed a protocol of their intention to jointly construct a new gas pipeline connecting the significant Middle East, Egyptian and Caspian gas reserves with Austria and even further into Europe through a new gas pipeline crossing Turkey, Bulgaria, Romania and Hungary.

Nabucco project planned to transfer natural gas of different sources from Erzurum in

Turkey to Baumgarten in Austria. The preparations for Nabucco project were started in

2002. Nabucco pipeline project, which was to have eventually transported gas from the

Caspian Sea to Europe in order to bypass Russia, was cancelled in 2013. A project that began with high hopes, and sponsored by EU, it slowly dwindled away. In the summer of

2012 it was reduced to 1,300 km from an original 3,900 km. Eastern section, which was to have run from Azerbaijan across Georgia and Turkey to the Bulgarian border, was abandoned. Instead, Trans Anatolian Pipeline (TANAP), funded by Azerbaijan and

Turkey, is due to come into operation in 2018. In 2013, Nabucco-West, which was to have carried gas from Turkey to Austria, through Bulgaria, Romania and Hungary, was only remaining part of the original project. At the end of June, it was announced that this project would also be dropped.

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In October 2002 the parties involved commissioned a feasibility study for the construction of the new gas pipeline. In December 2003 EUropean Commission awarded a grant amounting to about 50 percent of the cost to conduct the feasibility study which included market analysis, technical, economic and financial studies. In 2004 the feasibility study was completed. The results indicated that the project was technically and economically feasible.In 2005 Nabucco partners moved ahead with the project, launching into the Development Phase. In 2006 the project partners took on a short term adviser to assist in tendering process of the engineering and development phase of the project. - In

June 2005 the joint-venture agreement was signed. The agreement laid out the rules of

Nabucco pipeline project. The RWE AG (RWEG.DE) becomes the sixth shareholder in

February 2008. The consortium said it was open to a seventh shareholder if it further strengthens the project56.

The Nabucco project had way too higher importance as it had the capacity of 31 bcma; which could have played important role in diversification of supply sources for the natural gas of EU. In other words, was supposedly would decrease EU’s energy dependence to a considerable degree from the Russia. It should be stated that Nabucco gas pipeline was not just counted on the gas from Shah Deniz field in Azerbaijan. To be attached to the planned Tran-Caspian gas pipeline in Turkey, it was supposed to transfer

56 Reuters. “CORRECTED - CORRECTED-FACTBOX-Nabucco Pipeline Project Facts.” Reuters 17 May 2009 available online at http://www.reuters.com/article/2009/05/17/nabucco-gas-iraq- idUSLH62948920090517 accessed on November 25, 2014.

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also potential gas from Central Asia, Caspian Basin as well as from the Middle East to

EUropean Market.

Initially the investment costs for Nabucco was estimated at 5 billion Euros, which later on revised and indicated as high as 17 billion Euros.57 Nabucco consortium consisted of 6 partners, one from each participating countries. The follows are the partners: Austria's

OMV, Turkey's Botas, Bulgaria's Bulgargaz, Hungary's MOL, Romania's Transgaz and

Germany`s RWE, which joined the project later on.58 The Managing Director of Nabucco

Gas Pipeline International Ltd, Reinhard Mitschek, stated that "in the future, Europe will need far more energy than it has until now. Nabucco project is our solution." With its international route, Nabucco pipeline is an important European infrastructure project, connecting Turkey, Bulgaria, Romania, Hungary and Austria.’59

Despite many problems, on July 13 2009 an intergovernmental agreement on Nabucco was signed in Ankara among the prime ministers of Austria, Bulgaria, Hungary and

Turkey and also the president of Romania.60 According to this agreement the construction works were agreed to be done by 2014. Nabucco was a strategic project in terms of its support to EU`s energy policy, to the diversification of supply sources. For that matter, it

57 Meister Stefan and Marcel Vietor, 01/11/2011 South Caucasus:20 Years of Independence, From: https://dgap.org/en/think-tank/publications/further-publications/southern-gas-corridor-and-south-caucasus, Accessed on 13/11/2014 58 Novinite Sofia News Agency, 2008, Sixth Company Joins Nabucco Consortium http://www.novinite.com/view_news.php?id=90070, Accessed 14 November 2014. 59 Nabucco-Pipeline starts detailed technical planning, Press Release.January 8, 2008, Vienna, http://www.nabucco-pipeline.com/press-public-news/press-releases/press-release-20080108.html Accessed 14 November 2014. 60 Nabucco-Pipeline starts detailed technical planning, Press Release.January 8, 2008, Vienna, http://www.nabucco-pipeline.com/press-public-news/press-releases/press-release-20080108.html Accessed 14 November 2014. 39

was declared as one of the key infrastructure projects of EUropean Union’s Trans

European Networks (TEN) program.61 The enormous amount of gas flow from the

Caspian basin and Middle East to Europe through Turkey was considered to cut down

EU`s dependence on the Gazprom`s monopoly.62

The failure of the Nabucco project did not harm the basic interests of Azerbaijan, which was to sell its gas resources to the promising European market. However it is not to deny that if realized, Nabucco project could have given Azerbaijan more geopolitical importance. The Shah-Deniz II consortium, which runs the largest gas field in

Azerbaijan, awarded contract for the transportation of gas to the Trans Adriatic Pipeline

(TAP), which runs through Greece and Albania and under the Adriatic Sea to Southern

Italy. This route is a 500 km shorter than that proposed by the original Nabucco project.

However, ever since its inception the project ran into problems. No steady and reliable energy supplier could be found, with Iran, Turkmenistan, Egypt and Iraq all pulling out.

The final end came when Azerbaijan rejected the plan. Nabucco, backed by the European

Union as a way to tap Caspian gas and diversify supplies away from Russia, has become

“too politicized,” said President Aliyev in an interview to the Wall Street Journal.63 From the beginning Azerbaijan acted carefully not openly to go against Russian interest; indeed that is also core of Azerbaijan’s foreign policy not to agitate its biggest neighbour. That

61 Loskot-Strachota, Agata, 2008, ´´Nabucco vs. South Stream-Rivalry over Balkan Gas Pipelines.`` CES Commentary. No:3, file:///C:/Users/User/Downloads/commentary_03.pdf, Accessed on 07 November 2014. 62 Cornell Svante, MamukaTsereteli and Vladimir Socor, 2005, ´´The Baku-Tbilisi-Ceyhan Pipeline:Oil Window to the West``, http://www.isdp.eu/files/publications/books/fssc05sc05geostrategic.pdf. Accessed on 30 October 2014:28. 63 News.az, 28 January 2010, Nabucco Pipeline Project lacks leadership - Ilham Aliyev, Available at http://news.az/articles/7766, Accessed on 05 May, 2015. 40

taken into account, however, as the negotiating process shows Azerbaijan itself played a big role in the failure of the project. In other words, Azerbaijani government, pursuing its own national interest, did not openly give its support for the Nabucco, though it stated its willingness to supply its gas resources for the project. Azerbaijan showed its open intention to support TANAP and TAP projects, because they are in no way could be associated going against Russian interests; that is to say, supporting TANAP and TAP fulfils Azerbaijani national interest in two ways. First, they are enough for Azerbaijan to export its natural gas; second they are not agitating Russia, which is also core of

Azerbaijan’s multi-vectored foreign policy.

Here was a good example of Azerbaijan’s strategy. The projected trans-Caspian gas pipeline is expected to transfer Central Asian gas transiting Azerbaijan and Georgia to

Turkey and then to connect to Nabucco pipeline. Indeed what made Nabucco more promising were the possible gas transfers from Central Asia and Middle East, since

Azerbaijan’s own gas resources cannot alone play that crucial role for the purpose of diversification of the supply sources for EU. It does not mean that Azerbaijani gas sources are not attractive for the EU members; especially if think about those Eastern

European countries - Poland, Bulgaria, Austria, Slovakia etc., - who are mainly dependent on the Russian gas supplies.64 If we think EU as a unit and look at the role of

Azerbaijan in meeting its gas demands, then Azerbaijan’s gas resources have limited importance; however, if we take certain EU members, such as Bulgaria, than

64 Chyong, Chi-Kong & Vessela Tcherneva, 17 March 2015, Europe’s Vulnerability on Russian Gas, Available from http://www.ecfr.eu/article/commentary_europes_vulnerability_on_russian_gas, Accessed on 30 October 2015. 41

Azerbaijan’s gas resources can play vital role in rescuing them from Gazprom’s dependence. Therefore it is important to understand the importance of Azerbaijani gas resources for single member states of the EU.

However, if realised Nabucco could have played a crucial role in meeting the overall gas demands of the EU. But still Azerbaijan served the EU’s energy diversification policy and energy security, but with a limited impact in comparison with the planned Nabucco project.

Analysis of Azerbaijan’s energy policy This part of the thesis will locate the pipeline negotiations in the context of Azerbaijan’s overall strategy to make clear how negotiations were subordinate to broader foreign- policy and strategic goals; how are the national interests of Azerbaijan met with the failure of Nabucco. It will explore why other countries need Azerbaijani gas, and how this weakness is used to push forward Azerbaijani goals.

What is evident here is that the key element of Azerbaijan's energy policy is the supply of natural gas to European markets through the Southern Corridor. This is extremely significant as the Southern Corridor is the only westward route for exporting hydrocarbons from the Caspian. Important to add unlike Turkmenistan and Kazakhstan,

China is not an option for Azerbaijan. Azerbaijan’s independent energy policy and its geopolitical location make it, though a small state by international standards, a major

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player in the Caspian region when it comes to energy supplies to the European market. 65

This will especially hold true if projects such as Trans-Caspian is realized.

While pipelines are economically feasible, they carry a political risk as they lead to long term links and mutual interdependency between suppliers and consumers. As can be seen in the complicated negotiations that surrounded the Nabucco project, Azerbaijan has tried to reduce the risk through a variety of strategies, including playing one country against the other, balancing its interests between its two powerful neighbors, Russia and Turkey, and its main costumer the European Union.66 Thus, it has balanced its political interests along with its economic interests. This has been a crucial element in the way priorities in energy projects, especially long term energy projects, have been defined.67

In other words, Azerbaijan has not openly and directly confronted Russian energy interests during the Nabucco negotiations; Azerbaijan has announced its interest in

Nabucco project, however made it clear that enabling the other gas recourses, especially

Turkmenistan’s, available for the project is very crucial. It was clear for Azerbaijani government that the possible other sources of gas for Nabucco are still uncertain, and in such a situation the best strategy for Azerbaijan was to follow the developments. It is clear that Azerbaijan alone cannot go ahead with the implementation of Trans-Caspian

65 Mammadova. “Azerbaijan’s Energy Policy: Natural Gas Supply to Europe.”, 2015 academia.edu, available online at https://www.academia.edu/3302870/Azerbaijan_s_energy_policy_Natural_Gas_supply_to_Europe_ acccesed on May 3, 2015. 66 Mehdiyeva, Nazrin, Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011p.3. 67 Mehdiyeva, Nazrin, Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011, .p.3. 43

gas pipeline, which was supposed to be one of the main sources of the supplies for the

Nabucco project. First Azerbaijani government decided to see the required available sources and infrastructure for the Nabucco pipeline.

This is particularly true of long term energy projects. This strategy is also goes well with the nature of the gas market. Unlike oil supplies that can be sourced from other countries, once the necessary infrastructural elements are in place it is not easy to switch. There are other vulnerabilities, such as the need for transit states that can easily be put under political or economic pressure, high costs, long gestation periods, geographical constraints, and unlike oil, where alternative sources can be found in a few weeks, it will take years to restore gas supply if a transit state disrupts the flow. Moreover, natural gas markets are still regionally fragmented and such markets have a long way to go before they are efficiently transformed.68

Increasing investments in the natural gas sector, the development of new transit lines, and an increasing dependence of Southern and Eastern European states on Azerbaijani gas have been the guiding policy of Azerbaijani energy policy especially in the transit of natural gas.69 The challenges that Azerbaijan faces are many. It is a landlocked country.

There are other key players such as Russia, Turkey and Iran, all of whom do not want to the emergence of Azerbaijan as a major player. Transportation is limited, transit lines

68 Mehdiyeva, Nazrin, Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011, p.5. 69 Mehdiyeva, Nazrin, Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011, p.2.

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have to be built. The Azerbaijani response to these challenges can be summarized as trying to acquire a majority stake in the pipelines, a diversification of pipeline routes by developing multiple options, and finally pursue a free market policy with international players like British Petroleum. Since 1995 BP have been invested in Azerbaijan in form of FDI 34 billion US dollars, which shows long term investment interest of BP in

Azerbaijan.70

There are external factors that play an important role too. Europe’s natural gas supplies, especially in recent years through the development of a southern corridor of gas from the

Caspian region as an alternative to Russian natural gas, has been a focal point of U.S. energy policy in Europe and Eurasia. Current geo political trends mean that the demand for Azerbaijani gas is likely to rise. These include rising global demand and competition for energy resources from emerging economies such as China and India, persistent instability in energy producing regions such as the Middle East, a fragmented internal

European energy market, and a growing need to shift fuels in order to address climate change policy. All of this has made energy supply security a key concern for European nations and the European Union (EU). One of the key elements of the EU’s energy supply strategy has been to shift to a greater use of natural gas71 of which Azerbaijan is a key supplier; diversification of supplies sources is very important in this sense. This

70 Elchin Guliyev. “Foreign Direct Investment in Transition Economies The Case of British Petroleum in Azerbaijan.” Baku, Azerbaijan: N.p., 2014 available online at http://webcache.googleusercontent.com/search?q=cache:7sk- CMYxKW4J:ecomod.net/system/files/Foreign%2520Direct%2520Investment%2520in%2520Transition%2 520Economies.%2520BP%2520in%2520Azerbaijan.docx+&cd=1&hl=en&ct=clnk&gl=ca accessed on May 07, 2015. 71 Ratner.et.al. Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification. Washington D.C.: Congressional Research Service, 2013. Web. 1 May 2015 available online at https://www.fas.org/sgp/crs/row/R42405.pdf. 45

makes it, in spite of its relatively small size, a key player. Azerbaijan’s natural gas production from the Shah Deniz field is expected to keep on increasing, the scale of which is not only expected to make the country self-supporting in natural gas but also to result in substantial export revenues and position the country as a major gas exporter from the Caspian basin. The economic potential of Azerbaijan's resources are not in question. The proven and potential reserves in the Azerbaijani sector of the

Caspian Sea are potentially equal to North Sea resources. However, it is not easy. Long- distance transnational pipelines are central to energy security.72

Another factor is Russia. Europe’s natural gas consumption is projected to grow even as its own domestic natural gas production has declined. Current trends predict that Europe will continue to depend on Russian gas. For example, as domestic fossil fuel production continues to decline fast, especially in Denmark and the Netherlands, gas imports in

Europe are expected to increase between 2020 and 2030, according to the International

Energy Agency.73 Moreover, at present The EU is the largest energy importer in the world, importing more than half (53%) of the energy it consumes. The EU needs to

72 Pinar Ipek. “Azerbaijan’s Foreign Policy and Challenges for Energy Security.” The Middle East Journal, 63.2 (2009): 227–239. 73 International Energy Agency. Energy Policies of IEA Countries 2014 Review European Union. Paris: International Energy Agency available online at http://www.iea.org/Textbase/npsum/EU2014SUM.pdf accessed on May 3, 2015 for a summary of the report see Euroactiv. “EU Dependent on Russian Gas for ‘Foreseeable Future’, Warns IEA.” Euroactiv, accessible online at -http://www.euractiv.com/sections/energy/eu-dependent-russian-gas-foreseeable- future-warns-iea- 310469 accessed on March 5, 2015. 46

actively boost its engagement with producer, transit and consumer countries and adapt quickly to changing global markets, the report maintained.74

Increasing economic activity and the EU s ambitious plans mean that the demand for natural gas will continue to go up. However, Europe’s dependence on Russia as a supplier is likely to grow. Given current geo political tensions and Russia's willingness to use gas as a political weapon, the EU is keen on exploring alternative sources for its natural gas needs. The EU itself is divided on the question. It is uncertain whether Europe as a whole can, or is willing to replace a significant level of imports from Russia. Some

European countries that feel vulnerable to potential Russian energy supply manipulation may work harder to achieve diversification than others.75 One solution to this problem, a solution that the EU would be eager to adapt is a pipeline that bypasses Russia, which is what the Nabucco pipeline was. Europe s aim in the Caspian is to preserve the security of

European energy supplies and prevent the monopolization of oil resources by any one powerful country. 76

Azerbaijan has shrewdly exploited this need with ad hoc alliances. Stedman's concept of alliances where he argued that a successful strategy depends on the ability to create an

74 International Energy Agency. Energy Policies of IEA Countries 2014 Review European Union. Paris: International Energy Agency available online at http://www.iea.org/Textbase/npsum/EU2014SUM.pdf accessed on May 3, 2015 75 Ratner.et.al. Europe’s Energy Security: Options and Challenges to Natural Gas Supply Diversification. Washington D.C.: Congressional Research Service, 2013. Web. 1 May 2015 available online at https://www.fas.org/sgp/crs/row/R42405.pdf., Accessed on 01 May, 2015. 76 Elkhan Nuriev, EU Policy in the South Caucasus A View from Azerbaijan. Center for European Policy Studies, 2007 available online at http://papers.ssrn.com/sol3/papers.cfm? Accessed on May 3, 2015. 47

external coalition for peace, the resources that the coalition brings to its responsibility, and the consensus that the coalition forms about the legitimacy (or lack thereof) of spoiler demands and behavior can easily be adapted to Azerbaijan's long term strategy.77

Azerbaijan has continued to keep a close alliance with Russia and Turkey even as it is a key U.S. and European ally. Its natural gas reserves, estimated at 30 trillion cubic feet, are relatively small compared to its Central Asian counterparts. Nevertheless, Azerbaijan has been able to leverage its resources substantially due to its key geographic location and reputation as a reliable partner.78 Azerbaijan also is a transit hub in an evolving geo- strategic and geo-economic system that stretches from Europe to the South Caucasus and

Central Asia. As a result of the confluence of both Azerbaijani and EU interests, especially the possibility of giving Europe another route to transport Caspian energy supplies to European member states, especially those who are mostly reliant on

Gazprom, Russia’s state-owned monopolistic company. Given all these factors, a trans-Caspian pipeline carrying natural gas to Azerbaijan, Georgia, Turkey and then to

Central Europe.79 It is important to state that Azerbaijan has already been transporting

Kazakhi oil through its Baku-Tbilisi-Ceyhan oil pipeline to the European market; and

Kazakhstan is interested to increase its supplies through this route as Azerbaijan’s own

77 Stephen John Stedman, "Spoiler Problems in Peace Processes," International Security, Vol. 22, No. 2 (Fall 1997), p. 6-7. 78 Michael Economides. “Pipeline Would Loosen Russian Stranglehold On European Natural Gas Supply.” Forbes 19 Nov. 2012 available online at http://www.forbes.com/sites/greatspeculations/2012/11/19/pipeline-would-loosen-russian-stranglehold-on- european-natural-gas-supply/ accessed on April 3, 2015. 79 Elkhan Nuriev, EU Policy in the South Caucasus A View from Azerbaijan. Center for European Policy Studies, 2007 available online at http://papers.ssrn.com/sol3/papers.cfm? Accessed on May 3, 2015, p.9. 48

oil production has been declined in the last years; and that has made more free space for the Kazakhi oil supplies to be sent to westward from Azerbaijan.

Furthermore, Azerbaijan is also becoming very important transit country for the Silk

Road railway connection between China and Turkey which is supposed to further connected with Europe; and will take Chinese goods to Europe and European goods to

China.80 Most importantly the transport period is shortened more than twice in comparison to the transport through Seas. It should be noted that the test container train has been already carried first cargo successfully.81 Once this road starts normal functioning, it will substantially contribute to the Azerbaijan’s importance as a transit corridor between the Europe and the Asia.

Though a small state, the confluence of these factors give Azerbaijan an advantage. All of this makes Azerbaijani gas supplies important to the EU. The Nabucco pipeline project that Azerbaijan supported initially at first, but then become less pressing for its implementation and came up with alternatives, which can be seen as a part of this diversification strategy.

Throughout the negotiations around Nabucco and TAP projects, Azerbaijan put its national interest forefront; and choosing TAP served that end in a best way. Firstly,

Azerbaijan did not make Russia enemy for uncertain gains; instead Azerbaijan took a

80 Kirtzkalia Nana, 10 February 2015, First cargo transported by railway from China to Georgia, Trend News Agency, Available from http://en.trend.az/scaucasus/georgia/2362826.html, Accessed on 01 December, 2015. 81 Daly John (Silk Road Reporters), 21 October 2015, How the Caspian Sea is Becoming a Rail Corridor, Available at http://www.silkroadreporters.com/2015/10/21/how-the-caspian-sea-is-becoming-a-rail- corridor/, Accessed on 01 December, 2015. 49

‘relative gain’ from choosing TAP project. Indeed with its limited capability, that was the best Azerbaijan did. Secondly, expansion of other projects, such as Nabucco-West, can be still revived and if this happens Azerbaijan will take its benefit as well.

50

CHAPTER IV: Azerbaijan’s response to external factors

Once negotiations over the Nabucco project are seen as an element of Azerbaijan's strategic and foreign policy it is easy to see how Azerbaijan was able to play off one country against the other. This chapter will look at the various positions that Azerbaijan took with reference to other countries as part of the Nabucco project. The main rational behind all negotiating positions was the Azerbaijan’s long term national interests. The

Azerbaijani government calculated how far accomplishment of Nabucco project would ensure the long term national interests in terms of both selling its own natural gas resources and increasing its strategic value. This is the key aspect that governs

Azerbaijan’s relations with neighbouring energy rich as well as transit countries. There are two aspects to this relation; Competition and Co operation. There are no permanent friends or permanent enemies. Azerbaijan has always followed its own interests and this was true of the Nabucco project also. In this chapter I will look at how Azerbaijan’s decisions on the Nabucco pipeline project has been influenced by consideration of external factors.

Importance of Azerbaijan’s strategic location and energy resources for the EU, and inconsistent EU backing

Before going into the details on EU support for the Nabucco project, a brief glance at the natural gas sector of Azerbaijan and the general gas pipeline politics in the region, and the EU’s approach thereof is looked at. In order to comprehend what role Azerbaijan

51

played in Nabucco, it is necessary to understand Azerbaijan’s strategic value as well as important energy resources for the EU who looks for the diversification of its energy supply sources. This is the most important element in the relationship between the EU and Azerbaijan.

Azerbaijan is also rich with the natural gas resources. But, prior to 2006 Azerbaijan was gas importer country. Gas boom in Azerbaijan started in 2007 with the production commencing at Shahdeniz82 field. The average gas production from Shahdeniz was supposed to be around 304 billion cubic feet (Bcf) per year and plus 45,000 barrels of condensate per day.83 Azerbaijan has the enormous reserves of gas with proven natural gas reserves at roughly 35 trillion cubic feet (Tcf) as of January 2014. Most of these located in Shahdeniz field. The discovery of Absheron and the Umid fields between 2010 and 2011 raised this figure up by 15 Tcf. However, the problem of how feasible it is to extract this gas remains, and therefore they are not yet considered as reserves.

The country imported its gas from Russia until 2007, when it became an exporter of natural gas.84 Most of Azerbaijan's natural gas goes to Turkey, and some to Greece through the Turkey-Greece inter-connector. The Gazi-Magomed-Mozdok pipeline supplies Russia, and a small volume of natural gas goes to Iran via the Baku Astara pipeline. Iran ships natural gas to Nakhchivan, an Azerbaijani enclave situated between

82 Literally means ´King`s Sea`. 83 SPG Media Ltd. 2009. Shah Deniz South Caspian, Azerbaijan. http://www.offshore- technology.com/projects/shah_deniz/. Accessed on 07 October, 2014. 84 Abdelghani Henni, 14 November 2014, Azerbaijan Energized: The Road to Recovery, Society of Petroleum Engineers, From http://www.spe.org/news/article/azerbaijan-energized-the-road-to-recovery On 04 December 2014. 52

Iran and Turkey. Enclave is completely dependent on Iran for its natural gas supply. In

2013, Azerbaijan exported about 240 Bcf through South Caucasus Pipeline.

BP, the operator of the development, estimates that Shah Deniz field has an estimated 40

Tcf of natural gas in place. It is located on the deep water shelf of the Caspian Sea, in water depths of up to 1,600 feet. According to BP, the field produced about 346 million cubic feet per day of natural gas and about 53,740 bbl/d of condensate in 2013. In 2012,

Azerbaijan produced 607 billion cubic feet (Bcf) of dry natural gas and consumed 379

Bcf. Once Shah Deniz field is fully developed, it is expected to have a peak capacity of

565 Bcf (in addition to the 315 Bcf in Phase I), making it one of the largest gas development projects anywhere in the world.

The discovery and development of Shah Deniz gas field, together with commissioning of the South Caucasus Pipeline (SCP) has transformed Azerbaijan's natural gas sector, allowing country to become a natural gas net exporter. The Azeri-Chirag-Guneshli

(ACG) complex and Shah Deniz fields produce most of the natural gas in Azerbaijan.

Both crude oil and natural-gas from the ACG fields and from Shah Deniz are processed at the Sangachal Terminal. The terminal then ships these hydrocarbons through the South

Caucasus Pipeline for export. And in 2007 Azerbaijan began to export natural gas to

Turkey, Georgia and Greece, which means Azerbaijan has become net gas exporter from being the net importer in 2007.85 Discovery of huge gas resources in Shah Deniz made it clear that during the further exploration and development of the field, Azerbaijan will

85 Mishin, Vladimir. 2008. ´´Azerbaijan Wants Its Gas to Flow to Nabucco.``Nezavishimaya gazeta. http://en.ng.ru/energy/2008-03-11/6_nabucco.html. Accessed on 07 October, 2014. 53

need a pipeline transferring the gas resources to EUrope. Basically that is how the idea of

Nabucco born. Azerbaijan plays a key role in the Southern Gas Corridor, as it will be the initial source of gas. Nabucco was not only thought for the Azeri gas, it was also counted for the Central Asian gas resources. That means, Azerbaijan can benefit from it also a future transit country for gas deliveries from Turkmenistan. Georgia, on the other hand, is also relevant as a transit country on route to the West, be it to Turkey or via the Black

Sea.

As Shah Deniz gas field is very important for the any gas pipeline starting from

Azerbaijan, it is crucial to provide brief information on this field. The contract between

Azerbaijani government and several transnational oil companies such as BP, TPAO,

NICO, Lukoil in 1996. It took exactly ten years to make it operational.86 The driving force for the development of gas fields in Azerbaijan is the attractiveness of EUropean market. EU is desperately looking for new sources of oil and gas to diversify the supply sources of energy. In this sense, the Southern Gas Corridor is very important, and projects like Nabucco and TAP are/were supposed to be key part of this corridor. Below brief information about the different gas corridor of EU will be provided. Moreover, main projects which are part of the Southern Gas Corridor will be discussed briefly.

EU has opted for pipeline corridor system since it is much more cost effective than bringing in gas through tanker. There are three large import corridors that bring in gas

86 Statoil.com, 2007, Shah Deniz and the South Caucasus Pipeline (SCP), Accessed on 13 November 2014, http://www.statoil.com/en/About/Worldwide/Azerbaijan/Pages/ShahDeniz.aspx 54

into Europe. They are (1) from Russia (Eastern Gas Corridor), (2) from Norway

(Northern Gas Corridor) and finally, from North Africa (Western Gas Corridor). There are plans to set up a fourth corridor, namely the Southern Gas Corridor will transport natural gas to Europe. A small but growing share of gas imports reaches EU in liquid form by sea (LNG)87.

The Nabucco pipeline would have carried natural gas from Caspian region and the

Middle East to South East Europe and to the Italy, Austria, and Southern Germany. Oil and gas companies began to invest in individual projects at the beginning of the 2000s, but the Southern Gas Corridor, as overarching project, emerged most solidly in a decision of European Parliament and the Council of September 2006, coded as “NG3”88. That showed a clear support of EU for the project. Finally, in a second review of the energy strategy, EUropean Commission categorized the – meanwhile also called – “Southern

Gas Corridor” as a Community priority.89 It was especially through the Russian-Georgian war of August 2008 and the Ukrainian-Russian gas crisis of January 2009 that the

Southern Gas Corridor and its key project, Nabucco Pipeline, became a central component of a European debate about diversification especially from the dependence on gas deliveries from Russia.

87 Christian Hübner. European Energy Supply Security in Light of the Ukraine Crisis. Berlin: Konrad-Adenauer-Stiftung, July 2014., Facts & Findings Series, p.3. 88 Christian Hübner, July 2004, European Energy Supply Security in Light of the Ukraine Crisis. Berlin: Konrad-Adenauer-Stiftung, Facts & Findings Series. p.6. 89 Stefan Meister and Marcel Viëtor. “The Southern Gas Corridor and the South Caucasus.” South Caucasus – 20 Years of Independence. Berlin: Friedrich Ebert Stiftung, p.338 55

From the point of view of EUropean Commission, the Southern Gas Corridor comprises all those projects that originate in the Caspian region or the Middle East, regardless of the fact whether the gas transit is conducted to a great extent on Turkish territory (Nabucco,

Trans-Adriatic Pipeline (TAP), Interconnector Turkey-Greece-Italy (ITGI)) or via the

Black Sea (Azerbaijan-Georgia-Romania Interconnector (AGRI), White Stream).

Table 1. Components of Southern Gas Corridor

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Source: Meister Stefan and Marcel Vietor, 01/11/2011 South Caucasus:20 Years of Independence, From: https://dgap.org/en/think-tank/publications/further-publications/southern-gas-corridor-and-south-caucasus, Accessed on 13/11/2014

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EUropean Union supported all projects that comprised the Southern Gas Corridor. It contributed more than 20 million EUR to Nabucco, ITGI/IGB, TAP and White Stream through its program for Trans-European Energy Networks (TEN-E); and another 200 and

145 million EUR respectively were set aside for Nabucco and ITGI/IGB by EUropean

Energy Program for Recovery (EEPR). However, Nabucco was supported politically by

EU.

In general, although expressing its clear support for the Nabucco Project, the political cuts and divides in the EU have been also evident in backing for this project. As EU lacks a common foreign policy or common energy policy different countries have supported different projects. Thus, Bulgaria, Romania, Hungary and Austria supported Nabucco pipeline, at the same time they supported the rival South Stream project. Though

Germany did not want to grant Nabucco any financial support initially at the negotiations for European Energy Program for Recovery at the beginning of 2009, it supported the project politically, mostly as a result of pressure from the German energy company RWE.

However, support was not exclusive, since other German energy companies supported competing projects such as TAP and South Stream. Italian companies were part of South

Stream and ITGI, Hungarian companies of Nabucco, South Stream and AGRI, Greek companies of ITGI and South Stream. That proves quite much how there were different interest groups that did not go in line with the EU common energy policy.

In addition to such cross linking patterns of support there are also other factors. Support for heavy infrastructural projects such as pipelines is political decision, especially if they cross politically unstable regions such as the Caspian area and the Middle East. The ideal 58

solution would be for EU to develop a common energy and security policy but that is unlikely, at least in the near future.

In January 2011 European Commission President, José Manuel Barroso, and President of

Azerbaijan, Ilham Aliyev signed joint declaration on gas delivery for Europe.

Commenting on the signing of joint declaration Reinhard Mitschek, Managing Director of the Nabucco Gas Pipeline International GmbH stated that:

“The Joint Declaration on strategic gas supplies to Europe is of particular importance as it seals the bond between the EU nations and a close neighbour and strategic partner. Building on the Intergovernmental agreement, which was signed by the governments of the Nabucco transit countries in July 2009, the Joint Declaration serves to pave the way to the full implementation of Nabucco, by providing a firm political basis for gas supply from Azerbaijan. The joint declaration highlights in point five the importance of the Southern Corridor which is a strong encouraging political signal for producers and gas buyers. Nabucco as flagship project is the most advanced pipeline project in the Southern Corridor and is designed to meet the needs of the growing future gas markets.”90

However, the U.S. and the EU did not show decisiveness beyond signing papers for the

Nabucco pipeline. Even after Nabucco reduced to Nabucco-West, these two important actors did not show a firm support for the Nabucco-West. Instead they announced that they are indifferent for Nabucco-West and TAP projects. But it was clear that Shah Deniz consortium was going to choose only one of these options which were supposedly best served Azerbaijan’s national interest, taking into account political condition, and they finally chose TAP, not the Nabucco-West. And Azerbaijan was complaining about such a stance of the EU. Comparing options of Nabucco-West and TAP, then Azerbaijan’s

Energy Minister Natig Aliyev stated that "I consider that Nabucco West is the best option

90 Europetrole, 14 February 2011, “Nabucco Statement on EU-Azeri strategic gas deal”, Available at http://www.euro-petrole.com/nabucco-statement-on-eu-azeri-strategic-gas-deal-n-i-4823, Accessed on 10 May, 2015. 59

from all points of view...It has a big capacity, big diameter, and it gives us the opportunity to deliver gas to east and central Europe. It's a more reliable market for Azeri gas."91 In terms of EU’s diversification policy, Nabucco-West was supposed to be preferred over TAP.

During the Southern Corridor forum held in Baku in May 2013, complaining about the decreasing EU backing and EU Commission’s inability to secure required funding for the

Nabucco-West project, the vice-President of SOCAR Elshad Nasirov stated that

“Europeans and Americans could easily have financed the Nabucco project a few years ago, at a cost equivalent to that of a few weeks of military operations in Iraq for example”.92 Elshad Nasirov was quoted saying that “"if the EU has not found the means to implement this project, we would not argue with the opinion of the EU about how the interests of European countries are protected. We will not argue with the EU, but we can confirm the fact of inability of the EU and member countries to find ways to build a pipeline."93 It is to argue that Azerbaijan with its capacity, certainly, cannot plan and construct big energy projects on its own; Azerbaijan needs support from main players such as EU for financing and implementation of the projects. TANAP project is a good example for that; in this case Azerbaijan has done it together with Turkey.

91 Guarascio Francesco, 24 July 2012, “UPDATE 2-Azeri energy minister backs Nabucco-West gas pipeline”, Reuters , Available at http://www.reuters.com/article/2012/07/24/azeri-nabucco- idUSL6E8IOFZA20120724, Accessed on 08 May, 2015. 92 Vladimir Socor, 30 May 2013, “Comparative Advantages of Nabucco-West Offset by Lack of Financing”, Eurasia Daily Monitor, Volume:10, Issue:102, Available at http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=40958&no_cache=1#.VU0Fi46qqko, Accessed on 06 May, 2015. 93 ABC.az, 12 February 2013, “SOCAR: Azerbaijan not sure of Nabucco West realization”, Available at http://abc.az/eng/news_12_02_2013_71625.html, Accessed on 10 May, 2015. 60

Let it be TAP or Nabucco-West or Nabucco, they all meet Azerbaijan’s basic national interest; that is to sell its upcoming gas resources to the European market, this is minimum what Azerbaijan wants. Such an approach of indifference made Azerbaijan to opt for TAP in 2013. That way Azerbaijan chose an option which did not risk its national interest anyway, but at the same time it did not serve the best of EU energy policy.

Because TAP will not target the countries that are most dependent on Russian gas imports, but Nabucco-West was supposed to do so.

In his interview to the Romanian news site HotNews, the European Commissioner for the

Energy Gunther Oettinger satated that Azerbaijan’s decision to opt out for TAP was purely commercial decision; he noted that “...in my view the decision is based on commercial deliberations, to put it bluntly: money talks. In fact, Italy is a large, rich market with little real competition at the end of a shorter pipeline, compared to many fragmented small markets along the route of Nabucco West, a longer more costly pipeline. In addition, in Austria, there is a hub, developed in the past few years, that consistently drives down prices.”94 That shows how EU energy commissioner and

SOCAR official have different beliefs in the failure of the Nabucco West. That was back in 2013. However, despite the fact that classic Nabucco pipeline is gone, there is enough capacity to save the Nabucco-West which is very crucial for certain EU members such as

Bulgaria, who is 80% dependent on Russian gas imports.

94 Pantazi Christian, 01 July 2013, HotNews Interview with the European Commissioner for Energy Gunther Oettinger, Available at http://m.hotnews.ro/stire/15104603, Accessed on 09 May, 2015. 61

Loss of Nabucco as well as South Stream put Bulgaria into difficult situation. That is why countries like Bulgaria have been intensifying negotiations with Azerbaijan over future gas transfers as there are hopes for new gas explorations in Azerbaijan. After meeting with the Azerbaijani President Ilham ALiyev, the Bulgarian Prime Minister Boyko

Borissov stated that “we want to revive the Nabucco project, more specifically the stretch that goes through Bulgaria. Our country is an extremely loyal EU member and has implemented all legal requirements of the Third Energy Package, unlike many other countries. Therefore, together with President Aliyev, we will present the revival project to the European Commission”. On his part President Aliyev pointed out that “we think that we can unite TAP and Nabucco. It is not important what you call this route. Our main goal is that the volumes of Azeri gas enter Europe...the more EU countries receive our gas, the better for all.”95

Turkmenistan: Competition or Co operation?

It was hoped that Turkmenistan would contribute to the Nabucco project. From the beginning it was believed that without the gas resources of Central Asia, especially

Turkmenistan, and Middle East, Nabucco project would not make sense. It is important to look at what Azerbaijan’s position was towards this conviction; namely whether

Azerbaijan was interested in incorporation of Turkmenistan into the Nabucco project

95 Georgi Gotev, 05 March 2015, “Bulgaria wants to revive Nabucco, Azerbaijan says pipeline name not important”, EurActive.com, Available at http://www.euractiv.com/sections/energy/bulgaria-wants- revive-nabucco-azerbaijan-says-pipeline-name-not-important-312645, Accessed on 08 May 2015. 62

even though it would put Azeri gas into competition with the Turkmen gas, serving the same market. Azerbaijan’s relationship with Turkmenistan is also a crucial factor that shaped Azerbaijan’s stance on Nabucco project. Although Azerbaijan and Turkmenistan have differing view on legal status of Caspian Sea and conflict over some oil fields, when it comes to Nabucco they have conducted several negotiations. Turkmenistan has shown clear interest in European energy market. However, no solid backing from the ‘West’ and the China’s growing interest and access into Turkmen gas market pose a serious question for the integration of Turkmenistan into European energy network. The country is rich in gas resources. According to the BP Statistical Review Turkmenistan has reserves of 2.67 trillion cubic meters natural gas without taking into consideration the very promising

South Yolotan-Osman gas field, which is believed to contain 4 to 14 trillion cubic meters of natural gas alone.96 If true, that estimate is way higher than EU28’s annual gas consumption which was 462 bcm for 2013 according to EUrogas.97

With such a capacity Turkmenistan seemed very promising as a supplier for EU. In return, EU wanted Turkmenistan’s collaboration with Azerbaijan. However, surrounded by Russia and China, there are complications for Turkmenistan to get its natural gas into European market. Back in 2007 Turkmenistan agreed with Russia to continue with its gas transportation through Russia after Russia announcing its

96 Chazan Guy, October 2008, “Turkmenistan Gas Field is one of World’s Largest”, The Wall Street Journal, From http://online.wsj.com/articles/SB122409510811337137, Accessed 15 November 2014. 97 Eurogas press release, March 2014, “Drop in 2013 EU gas demand emphasizes need for swift change”, from http://www.eurogas.org/statistics/, Accessed on 15 November 2014. 63

readiness to pay EUropean market prices for the Turkmen gas. It can be incurred that helping Turkmenistan to transfer its gas through Azerbaijan, indeed Azerbaijan indirectly would undermine the Russian interests vis-a-vis Turkmenistan. That begs the question if Azerbaijan can take such a risk disturbing its biggest and the most powerful neighbour.

This is reflected in the ambiguity of the position that both states have taken and which continues until now. For example, In April 2014, there was an upbeat meeting between Rovnag Abdullayev, head of Azerbaijan’s state oil company

SOCAR and Turkmenistan’s President Gurbanguly Berdymukhamedov, in which

“implementation of joint projects on construction of gas transit pipelines that are of great importance” was acknowledged, “ given the growing needs of the world market in stable supplies of energy.” Again in September the two sides issued a statement in

Ashgabat about "the possibility of building a trans-Caspian gas pipeline, settlement of the disputed oil fields in the Caspian Sea, and joint protects in the energy sector.”98

However, later that year, Turkmenistan failed to send a representative to the meeting.

The chances are not very high that Turkmenistan will participate in a revived

Nabucco project.

98 Natural Gas Europe. “Could There Be a ‘Central Asian Nabucco?’ Will Turkmenistan and Azerbaijan Cooperate on the Southern Gas Corridor?.” Natural Gas Europe 10 Nov. 2014: available online at http://www.naturalgaseurope.com/turkmenistan-azerbaijan-southern-gas-corridor-central-asian-nabucco accessed on May 9, 2015

64

There are several reasons for this. Key are varying estimates of the amount of gas available, other partners, and finally a deep reluctance to offend Russia by being part of a project that bypasses Moscow. Here there is a marked contrast with Azerbaijan.

In contrast to the balancing act of Azerbaijan and its commitment to it s long term foreign-policy and strategic goals, helped by its geographic position and rich resources, Turkmenistan, in contrast, is more like a pawn in line with the Great Game theory.

This was evident in 2009 when a gas conflict popped up between Russia and

Turkmenistan in March. It seemed to change the conditions in favour of EU.

Turkmenistan intended to build an internal East-West gas pipeline aiming at transferring gas resources to EUropean market. To no one’s surprise Russia wanted to control this route, however, Turkmenistan perceived the construction of this pipeline as a strategic project that could contribute Turkmenistan`s policy of diversification of its transportation routes.99

Consequently, Russia stopped the transfer of the Turkmen gas through its territory that led to huge losses for the Turkmen government; almost 2 billion USD for the spring of 2009.100 In return, that convinced Turkmenistan that it should pursue a reliable alternative transportation route beyond Gazprom gas system. In this respect the Trans-Caspian pipeline project, which could have saved Nabucco, had been

99 Jarosiewicz, Aleksandra, 2009, ´´The Russian-Turkmen gas war,`` East Week Analytical Newsletter, No:21(171). http://osw.waw.pl/en/epub/EW/2009/090603/01.htm, Accessed on 10 November 2014. 100 Jarosiewicz, Aleksandra, 2009, ´´The Russian-Turkmen gas war,`` East Week Analytical Newsletter, No:21(171). http://osw.waw.pl/en/epub/EW/2009/090603/01.htm, Accessed on 10 November 2014. 65

revived. China s interest in the gas also helped. Indeed, starting from 2007 China strengthened its work on piping Central Asian gas and after the gas crisis, in late

2009, stepped up work when China built gas processing plants in Turkmenistan as well as launching first gas pipeline to China from Turkmenistan. By 2012,

Turkmenistan was providing more than half of the China’s gas imports, with 21.3 bcm and moreover, by 2020 Turkmenistan plans to bring this number to 65 bcm.101

That means that, for Turkmenistan the main market is China; it has many reasons, among others, is that China does not at all bothers with the nature of the ruling

‘regime’ and also it is the easiest route to free Turkmenistan from Russian grip in terms of controlling energy routes.

Apart from that, Turkmenistan signed agreements with China and Iran for gas deliveries to these countries. Taking into consideration all the promises Turkmenistan made to the EU, Russia and China, it was doubtful if Turkmenistan at all is able to fulfil agreements on gas deliveries. This was a valid question in 2007 as nothing was certain, and there was no auditing of Turkmen gas capacity. In 2007 Turkmen gas capacity was estimated at 60 bcm and 50 bcm of that was promised to be transported through Russia.102 But many realities have changed since then, which will be mentioned below.

101 Murat Sadykov, 8 May 2014, “Turkmenistan ups gas Exports to China Again”, Eurasianet, Retrieved from http://www.eurasianet.org/node/68354, On 16 November, 2014. 102 Ibrahimov Rovshan, Trans-Afghan Pipeline:Will Ambitions Convert into the Reality, 15 May, 2008, The Journal of Turkish Weekly, http://www.turkishweekly.net/comments.php?id=2903 Accessed on 19 October 2014. 66

With regard to the Nabucco project, Turkmenistan had a very ambiguous approach.

As noted above in 2007, Turkmenistan expressed its interest in cooperation with

Russia following the latter’s announcement of the construction of the Caspian gas pipeline transferring Turkmen and Kazakh gas to north. In 2008, once Russia announced that it would not construct such a pipeline, then Turkmenistan restarted negotiations with Azerbaijan hoping for the realization of the Nabucco pipeline. In

November 2008, Azerbaijan, Turkey and Turkmenistan signed a memorandum on cooperation for increasing their level of trade with Europe.103 Azerbaijan and

Turkmenistan have a conflict over certain oil field in the Caspian Sea.104 This was a key element in negotiations over Nabucco and it was also reflected over the negotiations on Nabucco pipeline. While negotiations were going on fully in 2009, when hopes for Nabucco were higher, President of Turkmenistan Berdimuhamedov gave a statement about applying to international arbitration about the legal status of

Azerbaijan, implying that Azerbaijan breaches the international sea law. That statement was a surprise for Azerbaijani government as relations were improving since Berdimuhamedov has come to the power in Turkmenistan.

It is important to note that in July 2009 the Turkmen President Berdimuhamedow for the first time ever openly declared that Turkmenistan is ready to cooperate with the

103 Valiyev Anar, Septemnber 2009, “Azerbaijan and Turkmenistan’s Dispute over the Caspian Sea: Will it Impede the Nabucco Project?”, PONARS Eurasia Policy Memo No.87, Available at http://www.gwu.edu/~ieresgwu/assets/docs/pepm_087.pdf, Accessed on 06 May, 2015, p.3. 104 Valiyev Anar, Septemnber 2009, “Azerbaijan and Turkmenistan’s Dispute over the Caspian Sea: Will it Impede the Nabucco Project?”, PONARS Eurasia Policy Memo No.87, Available at http://www.gwu.edu/~ieresgwu/assets/docs/pepm_087.pdf, Accessed on 06 May, 2015. 67

West on transporting its gas to Europe vie planned Nabucco route by using planned

Trans-Caspian pipeline or via Iran. However, he noted that if main partners of

Nabucco clear up all the stumbling blocks before the realization of the project, his country will join the deal.

It is indeed in line with the Turkmenistan’s policy of diversification of transportation routes. In line with the hope of gathering support for Nabucco, the German company

RWE signed a contract with Turkmenistan for developing gas deposits as well as dealing with the transportation problems via South Caucasus Energy Corridor.105

Map 2. Proposed Trans-Caspian Pipeline

105 Jarosiewicz, Aleksandra and Justyna, Gotkowska. 2009. ´´Germany`s RWE to invest in the gas sector of Turkmenistan.`` East Week. http://osw.waw.pl/en/epub/EW/2009/090729/02.htm. Accessed on 07 December, 2014. 68

Source: Retrieved from http://osw.waw.pl/en/epub/EW/2009/090729/02.htm The reaction of Azerbaijan to these developments is significant. As long as Turkmenistan was lukewarm about the subject, and had other markets, Azerbaijan did not lobby for the

Nabucco project, in spite of the earlier talks. This served Azerbaijan’s long term strategy of not offending Russia. There were no significant signs from the EU except for the memorandum signed, and Azerbaijan calculated that there was no reason antagonizing

Russia or a possible connection to Turkmen gas sometime in the distant future. Indeed, here were no clear signs of possible implementation and support from the EU. Thus it was a cold headed realist approach to the question.

That sensibility can be seen also in talks about the construction of Tran-Caspian Pipeline.

The EU has expressed its interest in this pipeline and encouraged Azerbaijan and

Turkmenistan to go ahead with this. However, so far no real action has been taken.

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However, with the changing regional politics following the anti-sanctions deal against

Iran in April 2015, this issue is back to the table. And Turkey again tries to bring

Azerbaijan and Turkmenistan together to discuss the construction of this pipeline.106

Azerbaijan will firmly support such a project if it sees the full support of all the actors involving, including the EU. As of now, Azerbaijan has secured its national interests in terms of finding promising market for its gas resources, hence will not risk harming its relations with its biggest neighbour.

Against some arguments that Azerbaijan is not interested in transfer of Turkmen gas through its territory to West as these resources will serve the same market where

Azerbaijani gas goes or will go. However, this ignores a very significant point. It should be noted that by being a transit country for the Turkmen gas, Azerbaijan certainly will receive a substantial amount of transit fees, which is very important to the backdrop of decreasing oil production of the country. Moreover, having transit lines carrying

Turkmen gas will certainly increase the political leverage of Azerbaijan over

Turkmenistan As shown above transit pipelines are very vulnerable to political pressure, and hence can force the latter one to give up its claims over certain oil fields in the

Caspian Sea against Azerbaijan once and for all.

106 Zaur Shiriyev, 11 March 2015, “Turkmenistan, Turkey and Azerbaijan: A Trilateral Energy Strategy?”, Eurasia Daily Monitor, Volume:12, Issue:45.

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Russian interests

Russian Federation has expressed its opposition to Nabucco from the start and has taken steps to undermine its implementation. The launch of the South Stream project was the best example for this. Larger in capacity and Russia’s ability to use the inconsistency in

EU common energy policy to attract shareholders from the Nabucco project were important successful measures on the part of Russian Federation. Again, Azerbaijan's sense of realpolitik was clear. In spite of the considerable anti Nabucco rhetoric,

Azerbaijan refused to be provoked even though the Nabucco project was labelled an anti

Russian project. The Azerbaijani government did not wish to agitate its most powerful neighbour who has strong political leverage on Azerbaijan on certain issues such as

Nagorno-Karabakh conflict, 2 millions of Azerbaijani immigrants in Russia etc.

Notwithstanding such leverage Azerbaijan always positively reacted to the calls for the realization of Nabucco project. That includes participation of President of the Republic of

Azerbaijan in meetings of heads of governments discussing Nabucco in Hungary; meetings with the president of the EU Commission or the head of the EU Central Bank etc. However, Azerbaijan avoided being a sole actor lobbying for the Nabucco. In other words, Azerbaijan’s support for Nabucco had its own limitations vis-a-vis Russia.

Taking such a position, neither lobbying for, or going against the project also helped

Azerbaijan to keep its ambiguity intact.

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In 2007, Russia increased the pressure, after the South Stream project was introduced. 107.

The Russian Federation used all the means to undermine Nabucco pipeline. The South

Stream directly competes with Nabucco since both are planning to flow Central Asian gas sources.108 Three partners (OMV, MOL and Bulgargaz) of Nabucco consortium joined to the South Stream. In this way Russia has been able to break down the political consensus on Nabucco. Moreover EU members like Germany, France and Italy also signed an agreement with the Gazprom for supporting the South Stream109 gas pipeline project.110

This fact reflects how incoherent was EU`s common energy policy regarding the support for the Nabucco project. When the South Stream was announced, in EU high policy level it was stated that the existence of two projects, Nabucco and the South Stream, should not be seen as a contradiction, however, it was also stated that the priority would be given to

Nabucco project.111 Indeed use of such a language served to dismiss the Nabucco project as anti-Russian one, that in turn helped Azerbaijan time to time take bold decisions to

107 The South Stream gas pipeline was supposed to transfer Russian gas through the Black Sea to Bulgaria and further to Austria. However, this pipeline was abandoned in December 2014. See Ladka Mortkowitz Bauerova, December 2, “Putin Abandoning South Stream Pipeline Brings Relief to Ukraine”, Bloomberg Business, Available at http://www.bloomberg.com/news/articles/2014-12-02/putin-abandoning- south-stream-pipeline-brings-relief-to-ukraine, Accessed on 07 May, 2015. 108 Ekshi, Muharrem, 2009,´´First pipeline built will block the other:Nabucco versus South Stream``, Today`s Zaman, http://www.todayszaman.com/business_first-pipeline-built-will-block-the-other- nabucco-versus-south-stream_180948.html, Accessed on 15 November, 2014. 109 The South Stream project, announced in 2007, plans to transfer Russian gas in capacity of 63 bcm per year through Black Sea to Bulgaria, Serbia and further to Hungary and Austria. See South Stream official webpage: http://www.south-stream.info/pipeline/history/ 110 Ekshi, Muharrem, 2009,´´First pipeline built will block the other:Nabucco versus South Stream``, Today`s Zaman. 111 Loskot-Strachota, Agata. 2008, ´´Nabucco vs. South Stream-Rivalry over Balkan Gas Pipelines.`` CES Commentary. No:3, file:///C:/Users/User/Downloads/commentary_03.pdf, Accessed on 17 November 2014. 72

express its support for this project. However, still Russia had its own tools to undermine the Nabucco project. Azerbaijan’s multi-vector foreign policy has its own shortcomings.

On one hand Azerbaijan showed its willingness for Nabucco, and on the other hand

Azerbaijan knew that it should not discomfort Russia. As a principle of multi-vector foreign policy relations with Russia had to be in check as well. In this respect, it is important to look at the developments between Azerbaijan and Russia in 2008, keeping in mind that this was an unease year for the Caucasus region as we witnessed Russian-

Georgian war in August 2008.

The swift response of Russia to Georgia's attempt to take over the disputed regions of

Abkhazia, South Ossetia was met with military might in August 2008. After this it is significant that Azerbaijan became less assertive in favouring regional projects that were labelled as anti-Russian.112 Azerbaijan’s level of assertiveness and position has been shifting since the beginning of the Nabucco project until the last point, when it was rendered dead.

In early July 2008 then Russian President Medvedev visited Azerbaijan and

Kazakhstan, and one of the purposes of the visit was to pose uncertainties for

Nabucco project and show Russian interests in it. In his visit President Medvedev emphasized Russia’s interest in importing natural gas from Azerbaijan, and indeed it was interpreted as Russia’s will to reduce the hopes for realization of Nabucco

112 Valiyev Anar, Septemnber 2009, “Azerbaijan and Turkmenistan’s Dispute over the Caspian Sea: Will it Impede the Nabucco Project?”, PONARS Eurasia Policy Memo No.87, p.3.

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pipeline project. Many foreign policy and energy experts of Azerbaijan openly made such interpretations: “Russia is interested in importing Azerbaijani gas for several reasons, first and foremost way to prevent the possibility of pursuing the pro-Western

Nabucco pipeline, which is clearly of an anti-Russian direction. If the Azerbaijani gas will go to the north, Nabucco will simply have nothing to fill”.113 Following that, in

March of 2009 Azerbaijan and Russia signed a memorandum on possible future gas export from Azerbaijan to Russia.114 And then on 29 June, 2009 President Medvedev had second visit to Azerbaijan. During this visit, a contract was signed to export 500 million cubic meters gas to Russia and this amount was planned to be taken from the first phase of Shah Deniz project.115 This agreement was widely interpreted as a clear victory for Russia since it made Azerbaijan to transfer a substantial amount of natural gas from the first phase of Shah Deniz gas to Russia. Indeed, this gas was also supposed to be piped into Nabucco in the future.

However, this did not change Azerbaijan's strategy. Its long term plan is to get several countries to invest in the country, as this will strengthen its position as a country.116The

113 Ibrahimov, Rovshan, Medvedev’s Visit to Azerbaijan:Possible Scenarios in Energy Cooperation, 2008, The Journal of Turkish Weekly. http://usakyayinlari.com/news.php?id=56969, Accessed on 08 November, 2014. 114 Jarosiewicz, Aleksandra, 2009, ´´Azerbaijan`s gas export policy``, East Week Analytical Newsletter, No:13(163). http://osw.waw.pl/en/epub/EW/2009/090401/02.htm, Accessed on 10 November, 2014. 115 Jarosiewicz, Aleksandra, 2009, ´´China joins the Turkmen-Russian gas conflict``, East Week Analytical Newsletter, No 24(174), http://osw.waw.pl/en/epub/EW/2009/090701/01.htm, Accessed on 10 November 2014. 116 Mehdiyeva, Nazrin. Power Games in the Caucasus: Azerbaijan's Foreign and Energy Policy Towards the West, Russia and the Middle East. London: I.B. Tauris, 2011. Internet resource available online at https://books.google.ca/books?hl=en&lr=&id=wQYCAwAAQBAJ&oi=fnd&pg=PP7&dq=Analysis+of+A 74

negotiation over the Nabucco pipeline can be seen only in this context, and not as an isolated instance. To put it in other words, negotiations over the Nabucco pipeline are part of a grand strategy. Thus, even if one particular pipeline does not work out,

Azerbaijan is always looking for other options.

The fact that this is a matter of policy is evident when one compares the gas negotiations with oil negotiations right after independence. This mirrors the way in which oil negotiations were conducted. Azerbaijan sought investment from all over the world.

Thus, the British and American companies, Amoco, later BP Amoco, BP, Exxon, invested in Azerbaijan and the Norwegian company Statoil invested in Azerbaijan.

Azerbaijan played its part on the Nabucco project as far as she saw any interest or backing from the other actors who were supposed to benefit from the project. For example, Azerbaijan held several discussions on Nabucco with Bulgaria who was supposed to be one of the main receivers of Azerbaijani gas through the Nabucco project.

Following the gas conflict between Ukraine and Russia in early 2009, Bulgarian

President Georgi Parvanov held long discussions with Azerbaijani President Ilham

Aliyev in Baku.117

Even bolder step was taken on 26 January, 2009 when Azerbaijani President Ilham

Aliyev joined the Nabucco summit in Hungary. Heads of states and governments of

zerbaijan%E2%80%99s+evolving+policy+ +in+gas+industry&ots=tKSALZys- K&sig=nvaiEhyCO2IDwiICbFukgOe8r1A#v=onepage&q&f=false Google Books, p.5. 117 Fariz Ismailzade, 28 January 2009, “Rush for Nabucco: Azerbaijan’s Position Strengthens”, Eurasia Daily Monitor, Volume:6, Issue:18, Available at http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=34424&no_cache=1#.VUyDPI6qqko Accessed on 08 May, 2015. 75

EU also took part in this summit. It is worth to note that Russia was openly opposing such a meeting. Participation of Azerbaijani President in such a meeting proves that how Azerbaijan is free from Russian political leverage when it comes to energy politics.

In general, Azerbaijan has certain high level policy priorities and one of them is the solution of the conflict over Nagorno-Karabakh and surrounding seven districts.

Russia has a solid leverage over the solution of this conflict, and Azerbaijan has to take that into account in every crucial foreign policy decision not to ‘upset’ its biggest neighbour. Keeping that in mind, choosing TAP instead of Nabucco indeed in short term did not disturb Russia, because TAP project will target the different set of energy import dependent EU members than that of classic Nabucco targeted. In other words, after all Azerbaijan’s gas in amount of 10bcm will not undermine Russian supply monopoly in the Central and Eastern Europe.

Iranian interests One of the key players in the regional game was Iran. When it was planned initially, the idea was to acquire gas resources from Azerbaijan, Iran as well as Turkmenistan,

Azerbaijan time to time made calls to incorporate Iran into the project, which was refused by U.S. for the known reasons of sanctions. For Azerbaijan, it makes more economic sense in long-run to be an energy hub and for that transfer of gas from Turkmenistan and

Iran is crucial. April 2015 breakthrough in anti-sanction deal with Iran has changed the policy constellations of the region. That will surely affect the energy politics where

Azerbaijan is an important actor. Lift of sanctions opens the way for Iran to be included 76

in regional projects. Choosing TAP project Azerbaijan has secured its minimum energy interest which was to have a promising market for the 10bcm gas resources it will have to sell. Given fact that new explorations can add up to this number, and then Nabucco-West can be realized as well.

At the same time, Iran has a difficult relationship with Azerbaijan. One of the key elements in the relationship is North Azerbaijan which is South Iran. Iran has suspected that Azerbaijan would be used by the United States to launch and attack on Tehran—this led to a non aggression treaty in 2005, Azerbaijan suspect Iran of inciting Shia radicalism in Azerbaijan, part of historical Azerbaijan is in Iran and Iran is deeply suspicious of any

Azeri nationalism.118

The Nabucco issue initially complicated things as it came during a time of heightened suspicion. When Azerbaijan announced its willingness to support Nabucco project, Iran was one of the countries that expressed its opposition to the project. As another fierce opponent of Azerbaijan’s energy cooperation with the EU, Iran spoke against any trans-

Caspian pipeline project. Deputy Minister of Oil Hossein Noqrekar-Shirazi said that “Iran is against the construction of pipelines under the seabed of the Caspian sea, because it might damage the environmental balance of the sea”.119 Without such pipelines, including the gas pipeline from Turkmenistan, Nabucco’s fate would be questionable.

Turkmenistan, with the fifth largest gas reserves in the world, is seen as one of the main

118 Savante E Cornell, Azerbaijan since Independence (M.E. Sharpe, New York : 2011) 119 ECASB, 27 January 2009, “brief report on underway pipeline projects and the view of the countries: Nabucco, Alaska, Iran, Russia”, Available at http://company477.ecasb.com/en/news/518, Accessed on 09 May, 2015 77

elements in the Nabucco pipeline. So far with the backing of USA and EU, Azerbaijan has been implementing regional energy projects and also continuing explorations in its coastal waters despite the fact that the legal status of the Caspian Sea is not yet settled.

In case of full support given by the ‘west’ and Russia remaining neutral, a trans-Caspian pipeline project is possible. With the current political changes of the region, even Iran’s incorporation into the project would rule out the incorporation of Turkmenistan. But this will be known once new power constellations are shaped in the region which will take some more time. From the beginning it was known that Azerbaijani gas alone was not enough to fill Nabucco pipeline. Resources from Turkmenistan, which is the fourth largest gas reserves, and Iran (has 16% of world gas deposits, second in the world after

Russia) were considered very important.120 Resources from suppliers like Azerbaijan

(according to different estimates holds 0.6% of world gas deposits), Egypt (1.2% of world gas deposits) and Iraq (1.7% of world gas deposits) were also important but cannot compete with that of Iran’s and Turkmenistan’s.121

If Iran’s gas had been piped into Nabucco pipeline that could have solved many problems. However, obviously Iran was ruled our because of US extraterritorial sanctions and it was never addressed how to deal with the U.S. extraterritorial sanctions that hindered Iran from involvement in the regional cooperation.122 In fact

120 Balcer, Adam, 2009, ´´Intergovernmental agreement on Nabucco case signed.`` Central European Weekly, No:25(37). http://osw.waw.pl/en/epub/CEW/2009/090715/01.htm, Accessed on 02 November 2014. 121 Balcer, Adam, 2009, ´´Intergovernmental agreement on Nabucco case signed.`` Central European Weekly, No:25(37). http://osw.waw.pl/en/epub/CEW/2009/090715/01.htm, Accessed on 02 November 2014. 122 Ekshi Muharrem, 2009. 78

back in 2010 Azerbaijan’s former Energy Minister Natig Aliyev expressed his opinion about the incorporation of Iran as a precondition for the realization of the

Nabucco saying that “I think in a few years, when the Iran and Iraq situation is more stable politically, we will be able to implement the Nabucco project very speedily...I don't think construction will be in one or two years. Countries like Iraq, Iran and

Turkmenistan need to join this project”. 123 However, right after that US. State

Department’s special envoy for Eurasian energy policy stated that Iranian participation in the Nabucco project is ruled out.124

Although time to time tension between the “West” and Iran softens, the sanctions still remained in power. However, a big change is in tube after P5+1 made a deal in

Lausanne on April 2, 2015, agreeing on a roadmap to solve the “Nuclear question”.

This deal, if finalised, will open doors for incorporation of Iran into regional energy projects. With that Iran can transfer its energy sources through existing pipelines in

Azerbaijan to the West. Consequently, if Iran cooperates with Azerbaijan on energy transfer to West, then Nabucco will certainly come back as TAP does not have a large capacity to meet large gas supplies to Europe.

It is interesting that just two days after the Nuclear deal with Iran, the president of

SOCAR, Mr. Rovnag Abdullayev talked about Iran’s interest in buying SOCAR’s shares at TANAP project, and stressed that SOCAR is ready to consider this interest.

He added that “After the decision on lifting sanctions against Iran, the relevance of

123 PressTv, March 2010, “Azerbaijan insists on Iran, Iraq Nabucco participation”, Available at http://edition.presstv.ir/detail/121351.html, Accessed on 09 May, 2015. 124 PressTv, March 2010, “Azerbaijan insists on Iran, Iraq Nabucco participation”, 79

TANAP has grown even more. Iran will increase gas production, and apart from

TANAP there is no alternative for Iranian gas to enter the world markets”.125 As already implied more natural gas supplied into TANAP and possibilities of more to be transferred, means greater chances for the revival of Nabucco, or at least implementation of Nabucco-West.

Iran also has plans to increase gas import from Turkmenistan to supply the northern part of the country. In 2009 Iran agreed with Turkmenistan to develop the promising

South Yolatan gas field, and increase the volume of gas transfer to Iran from 8 bcm up to 20 bcm126. It was seen as a blow for the realization of big projects like Trans-

Caspian or Nabucco. However with the changing ‘game’ after the Nuclear deal, indeed it can serve in favour of the Nabucco.

Nevertheless, Iran has also other options including using Turkey directly through

Pars pipeline project. But there is also tension between Turkey and Iran at the moment because of politics in Yeman and Syria. That in return increases chances for

Iran going for Southern Gas Corridor rather than Pars project. Given the highly dynamic regional politics, currently it is not possibly to predict which option will be used. We need some more time to make an accurate assessment about it. So much depends on the new power constellations in the South Caucasus. If U.S. and the EU decide to take Iran as a main energy supplier of Europe to undermine Russia’s most

125 Vestnik Kafkaza, 4 April 2015, “Rovnag Abdullayev speaks about energy plans of Baku”, Retrieved from http://vestnikkavkaza.net/news/economy/68950.html, Accessed on 06 April 2015. 126 Farrar-Wellman, Ariel and Robert Frasco, July 8 2010, “Turkmenistan-Iran Foreign Relations”, IRANTRACKER, from http://www.irantracker.org/foreign-relations/turkmenistan-iran-foreign- relations, Accessed on 21 November 2014. 80

important power, namely manipulation of energy resources, then Iran’s incorporation into regional projects can be realised. All these political developments are surely out of Azerbaijan’s control, but they will without any doubt impact Azerbaijan’s position either as an energy supplier or transit country.

Turkish Interests Azerbaijani negotiations with Turkey ran into problems over disputes about the amount of gas and the price at which the 8 billion cubic metres of gas for the first phase of

Nabucco from Azerbaijan’s new Shah Deniz II gas development would go to Turkey. 127

The relationship between Turkey and Azerbaijan is complicated. Ironically, at the heart

Turkish-Azerbaijani relations is another country, Armenia. At the core of Azerbaijani foreign policy is the frozen conflict of Nagorno-Karabakh, a landlocked mountainous region that both Armenia and Azerbaijan claim. The land lies in the territory of

Azerbaijan, but has an ethnic Armenian majority, backed by neighboring Armenia. A brief war fought from 1988 to 1994 ended with a truce that froze the dispute. After

Turkey announced plans to normalize relations with Armenia, the Azerbaijani-Turkish relation cooled, as Azerbaijan resents that the Turkish Armenian border was opened before a solution to the dispute was found.128

127 Katinka Barysch. Pipeline Politics: Why Nabucco Is Stuck. Center for European Reform. Available online at http://www.cer.org.uk/insights/pipeline-politics-why-nabucco- stuck#sthash.AkByLRWQ.dpuf accessed on May 3, 2015 128 “Nagorno-Karabakh Profile - Overview.” News Portal. BBC, 12 Mar. 2015 available online at http://www.bbc.com/news/world-europe-18270325, accesed on May 3, 2015.

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However, for other reasons including Turkey's refusal to recognize the massacre of

Armenians in the Ottoman Empire in 1915 as a genocide relations between Armenia and

Turkey have not yet been normalized completely. Turkey officially recognized the

Republic of Armenia on 24 December 1991. Till now Turkey refuses to establish diplomatic relations with the Republic of Armenia. Though, on October 10, 2009 in

Zurich the Ministers of Foreign Affairs of the two countries signed the “Protocol on the establishment of diplomatic relations between the Republic of Armenia and the Republic of Turkey” and “Protocol on development of relations between of the Republic of

Armenia and the Republic of Turkey” Armenia has argued that Turkey has refused to normalize relations linking the ratification of the Protocols in the Grand National

Assembly of Turkey to the settlement of the Nagorno-Karabakh issue.129

Baku has a strategic interest in getting access to the European gas market while Turkey wants to become a European gas hub. If the Nabucco project had worked out, it would have connected the EU directly to Azerbaijani gas. Moreover, investment is likely to flow in. However, again, Azerbaijan has subordinated economic interest to political interests.

There are other arguments on the prizing of the gas, since Turkey already buys around 6 bcm of gas from the Shah Deniz I field cheaply and sells half of that to Greece for a much higher price. Azerbaijan wants more for the gas, but this is not at the core of the dispute.130.

129 Ministry of Foreign Affairs of the Republic of Armenia. “Bilateral Relations Turkey.” Available online at http://www.mfa.am/en/country-by-country/tr/ accessed on May 3, 2015 130 Katinka Barysch. Pipeline Politics: Why Nabucco Is Stuck. Center for European Reform. 82

This does not mean the relationship is completely frozen. Following a December 2011 contract between Turkey and Azerbaijan,the Azerbaijani-Turkish Trans-Anatolia Pipeline

Project (TANAP), which will be 2,400 miles long with an estimated construction cost of $5 billion, and transport natural gas from Azerbaijan's Shah Deniz II fields in the

Caspian Sea across Turkey was started. TANAP suggested that Nabucco continue -– in a shortened form –- its way from the Turkish-Bulgarian border into the Baumgarten continental hub near Vienna. The larger Nabucco project is now known as "Nabucco-

West." Shah Deniz shareholders, including such big players as BP and Norway's Statoil, promote Nabucco-West be linked to the planned TANAP and apparently so does Turkey.

Even as such negotiations have continued, Azerbaijan has opened negotiations with both

Russia and Iran..131

Again Turkish policy must be seen in terms of the energy politics of the area. The key distinction is between the supply-side countries and the transit countries. Turkey's major fear as a transit country is that the proposed Nabucco pipeline taking gas from Azerbaijan to Austria will become a potential flashpoint. In fact, many of the negotiations with

Turkey have centered around this key point. Thus, the Nabucco project came to an end in

Baku. The reasons are quite obvious.

Available online at http://www.cer.org.uk/insights/pipeline-politics-why-nabucco- stuck#sthash.AkByLRWQ.dpuf accessed on May 3, 2015

131 Katinka Barysch. Pipeline Politics: Why Nabucco Is Stuck. Center for European Reform. Available online at http://www.cer.org.uk/insights/pipeline-politics-why-nabucco- stuck#sthash.AkByLRWQ.dpuf accessed on May 3, 2015

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The Nabucco pipeline was to the advantage of Europe. Turkey did not have a major stake in it. Co operating with Azerbaijan, a supply-side country, was to the advantage of both.

Although the TANAP and TAP pipelines will reduce Europe’s dependence on Russian supplies of gas, its capacity of 10 billion cubic metres of gas per year is only around one third of the amount Nabucco was to have carried. This equates to just 1 percent of

Europe’s total demand. And while Nabucco was a joint European project, Turkey and

Azerbaijan are behind TANAP and TAP.

The decision to abandon Nabucco was not taken in Brussels, but in Baku. According to reports in the Russian media, the Shah-Deniz II consortium invited representatives of the

Nabucco and TAP projects to the Azerbaijani embassy in Budapest, where the decision in favour of TAP was announced132. It is important to note that in this consortium, BP has the biggest shares followed by TPAO and SOCAR; in many regional projects BP has taken leading role, and it is important to know that Azerbaijani government has a special relationship with BP. SOCAR is state company that carries out Azerbaijan’s energy policy in practice. Its role in regional projects cannot be seen different from Azerbaijan’s national interest.

Another element is the complexity of the regimes involved. Pipelines are expensive and are easy to block. Azerbaijan has a long standing relationship with Turkey, and yet, it was did not hesitate to freeze the relationship when a core issue the Nagorno-Karabakh issue came up. Turkey too plays a game of competing alliances. It has signed up for the

132 Clara Weiss. “European Union’s Nabucco Pipeline Project Aborted.” World Socialist Web Site (2013): n. pag. Print. 84

Russian backed South Stream project, in spite of the fact that it too is a rival to the

Nabucco pipeline.133

American interests

This strategy was evident in the case of the Nabucco pipeline. The United States and

Azerbaijan signed a MoU in March 2007 calling for discussions on the proposed TGI pipeline and the EU backed Nabucco gas pipeline. The Americans argued that this pipeline would be more economical then routes through Russia, and in August 2007 the

U.S. Trade Development Administration granted Azerbaijan 1.7 million to fund feasibility studies that would look into the viability of an oil and gas pipeline across the

Caspian sea that would link to the BTC pipeline and the SCP. However, as this chapter has shown, the Nabucco pipeline however began to be delayed as Russia began to propose other pipelines that would reduce the effectiveness of the Nabucco pipeline. It also raised questions about the feasibility of supplies. Here Azerbaijan's strategy can be seen at work. Azerbaijani gas would be required for both pipeline. However, in case of excess capacity the only other source would be Iranian gas, which would then strenghten

Iranian and Azerbaijani relations. However, in case this does not work out Azerbaijan also hinted at the existence of gas reserves off the Capsian sea. The US supported this. IN

March 2008 Deputy Assistant Secretary Matthew J. Bryza said that „“we now believe

133 Einar Wigen. “Pipe Dreams or Dream Pipe? Turkey’s Hopes of Becoming an Energy Hub.” The Middle East Journal, Volume 66, Number 4, Autumn 2012, pp. 598-612 (Artic 66.4 (2012): 598–612, p.599.

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that as an official U.S. Government view “Azerbaijan has enough gas to fill TGI, to launch Nabucco, and perhaps even to fill Nabucco,“134

This provoked a reaction from Russia. In May 2007 President Putin signed an agreement with the presidents of Turkmenistan and Kazakhistan to transport gas from Turkmen and

Kazakh gas to Russia, in reaction to the Nabucco pipeline from Turkey to Austria.135

Thus, the EU and the United States were supporting two gas pipelines, one from Turkey to Greece and Italy, called TGI, and the second from Turkey across Bulgaria, Romania, and Hungary and into Austria, known as Nabucco. Access to Azerbaijani gas supplies is particularly important. If the upstream investment in the Shah Deniz field can be accelerated, significant quantities of gas could flow from Azerbaijan to Europe in a very short time.

The expectation was for Azerbaijan to start sending small volumes of gas to Greece by the end of 2008, and within a decade, Azerbaijan could ex-port one-third of the amount that Russia currently sends to Europe. At the core of this was the diversification of gas pipelines. The TGI and the Nabucco pipelines were examples of Azerbaijan reaching out to the West. The Russian reaction, which included an attempt to agree that Gazprom

134 Quoted in Jim Nichols. Armenia, Azerbaijan, and Georgia: Political Developments and Implications. Diane Publishing, 2011 full book available online at https://books.google.ca/books?id=ripaBLQ9tskC&pg=PA34&dq=nabucco+pipeline+azerbaijan&hl=en&sa =X&ei=GDtPVbfTIOnmyQObqoD4Ag&ved=0CB8QuwUwAA#v=onepage&q=nabucco%20pipeline%20 azerbaijan&f=false, p.34. 135 Quoted in Jim Nichols. Armenia, Azerbaijan, and Georgia: Political Developments and Implications. Diane Publishing, 2011 full book available online at https://books.google.ca/books?id=ripaBLQ9tskC&pg=PA34&dq=nabucco+pipeline+azerbaijan&hl=en&sa =X&ei=GDtPVbfTIOnmyQObqoD4Ag&ved=0CB8QuwUwAA#v=onepage&q=nabucco%20pipeline%20 azerbaijan&f=false, p.34. 86

would supply the Nabucco pipeline, shows how successful the strategy of diversification of gas supplies had become. Azerbaijan had the support of the EU, the United States, and

Russia was trying to take conciliatory measures. The Russian attempt was opposed by the West.136 When the South Stream announced, Putin visited his counterparts in countries along the Nabucco route.137 Russia also lobbied Hungary to terminate the pipeline on its territory rather than in Austria as the original Nabucco project had envisaged. As Hungary recieved 77 percent of its gas imports and 97 percent of its oil imports from Russia it was easier to put pressure on Hungary.

Azerbaijan's playing off rivals against each other was evident in the case of Nabucco project. The Nabucco project is dead, but not Azerbaijan's influence in it. For this it is key to understand the distinction that Azerbaijan makes. The Nabucco as a pan European project is dead, but it lives on in a limited form. Thus, Azerbaijan's Shah Deniz II gas producers consortium will continue to supply gas to the Nabucco project now known as the Nabucco-West project. Moreover, Azerbaijan has also supported alternative pipelines in tune with its strategy to use its gas and energy sources as leverage in international relations. Following a December 2011 contract between Turkey and Azerbaijan, a new rival for Nabucco emerged: the Azerbaijani-Turkish Trans-Anatolia Pipeline Project

(TANAP). The proposed TANAP would be 2,400 miles long with an estimated

136 Zeyno Baran, “EU Energy Security: Time to End Russian Leverage.” The Washington Quarterly, 30.4 (2007): 138. 137 Zeyno Baran, “EU Energy Security: Time to End Russian Leverage.” The Washington Quarterly, 30.4 (2007): 138.

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construction cost of $5 billion. It is expected to transit natural gas from Azerbaijan's

Shah Deniz II fields in the Caspian Sea across Turkey. TANAP suggested that Nabucco continue -– in a shortened form –- its way from the Turkish-Bulgarian border into the

Baumgarten continental hub near Vienna. The larger Nabucco project then started to be referred to as "Nabucco-West." Shah Deniz shareholders, including such big players as

BP and Norway's Statoil, promote Nabucco-West be linked to the planned TANAP and apparently so does Turkey.138

Again, in the broader context, Azerbaijan does not lose. What the Nabucco project aims at is to bypass Russia. For the EU the main benefit of Nabucco is that it will give access to a „“completely new source of gas“ from the Capsian region.139 When one considers this as its ultimate aim Azerbaijan's position is secure whatever the route. The gas will come from Azerbaijan. Alternative pipelines means that Azerbaijan makes links with all the countries, especially the powerful players such as Russia, Turkey and the EU. At the same time, as the United States supports the pipeline for geo political reasons, Azerbaijan can also count on Western support.

With the start of Shah Deniz’s second phase in 2014-15, Azerbaijan will be able to double production to about 40 billion cubic meters. That means it will become valuable

138 Sunday’s Zaman. “Farewell to ‘greater’ Nabucco as TANAP Emerges to Replace It,“ available online at http://www.todayszaman.com/business_farewell-to-greater-nabucco-as-tanap-emerges-to-replace- it_280677.html accessed on May 2, 2015. 139 Great Britain. Parliament. House of Commons. Energy and Climate Change Committee.; Great Britain. Parliament. House of Commons. “UK Energy Supply : Security or Independence? : Eighth Report of Session 2010-12.” , pp.19-20.

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to European players and also attract an estimated 20 billion dollars in investment. The more investment the more Azerbaijan's position becomes valuable.140 Again, it fulfills the broader aims of Azerbaijani foreign policy.

Summing up

Once Azerbaijani gas policy is seen as an example of a small state using the resources it as a tool to achieve foreign-policy goals it becomes much easier to understand the complex negotiations over the pipeline. In essence, Nabucco was an attempt to bypass

Russia. For the EU and by extension the United States, especially after the Ukrainian civil war it is essential to reduce dependence on Russian gas. For Azerbaijan, there is no such imperative. Instead, it profits from playing off the powers against each other. Its supports Russia's South Stream, it has opened negotiations with Iran, and it continues to supply gas to Turkish pipelines. However, it is willing to cut or to renegotiate terms when it sees its strategic interests threatened. Thus, a rather lukewarm attempt by Turkey to normalize relations with Armenia was stalled because of the Nagorno-Karabakh dispute, to which Turkey is not a party. Even if the project made economic sense it is unlikely that Azerbaijan would agree to anything that sacrifices broader political and strategic interests. Azerbaijan, however, has a key advantage. The gas must come from

Azerbaijani gas fields. What would weaken this advantage is alternatives from Iran or

140 OECD Development Center. Development in Eastern Europe and the South Caucasus; Armenia, Azerbaijan, Georgia, Republic of Moldova and Ukraine, OECD Publishing, available online at http://dx.doi.org/10.1787/9789264113039-en, p.83.

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Russia. Given the tense relationship that the West has with both it is unlikely to lose this advantage soon.

TGI and Nabucco make sense only if Central Asian gas is available. The EU, Russia,

Turkey and Iran are the major powers in the area, countries like Azerbaijan and the other

Central Asian states play them against each other. The Nabucco project can be seen as a response to Putin 's energy agreements with Kazakhstan, Turkmenistan, and Uzbekistan in May 2007. The three Central Asian states agreed to enhance co-operation with Russia in the energy sphere, allowing the construction of a new Russia-bound gas export pipeline along the eastern shore of the Caspian Sea while upgrading and expanding existing pipelines. Russia would also develop Central Asian fields. New long-term supply contracts were also signed. 141

141 Zeyno Baran. “EU Energy Security: Time to End Russian Leverage.” The Washington Quarterly, 30.4 (2007): 131–144, p.139.

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CHAPTER V: Conclusions

This thesis has shown that the only way to understand the fluctuating negotiations over

Nabucco is to situate it in the broader context of Azerbaijani foreign-policy. On the surface, the Nabucco project was a failure. After numerous delays the project had to scrapped. However, if the question is reframed differently---Did the Nabucco project contribute to the overall aims of Azerbaijani foreign policy?--the answer is yes. In other words, the main conclusion is that Nabucoo is just a tool in a broader foreign policy strategy of Azerbaijan. This thesis showed how the Nabucco project, though a failure, has contributed over all to Azerbaijan’s energy independence which gives it a greater say in foreign policy.

This dissertation has used the neorealist theoritical framework in energy politics in order to analyse that it is not always ‘big players’ who decide energy policy for all and that small countries like Azerbaijan can use oil and gas policy as a tool to further national interests. It is essential to understand that Azerbaijan preferred TAP not Nabucco as it met its main national interest which was to keep Russia happy. Therefore, the Nabucco pipeline politics served Azerbaijan's multi-vector foreign policy. With the limited options that it had, its strategy was to not openly support the Nabucco project, as the issue of gas sources for Nabucco had not been addressed. Therefore, to protect it s national interest, which was to avoid making enemies in vain, Azerbaijan used the Nabucco pipeline negotiations to fulfil national interests.

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So Azerbaijan purseued the policy not to make enemies in vain Indeed small states who have achieved their energy independence can also play significant role in regional energy politics, to put it specifically in pipeline politics. Azerbaijan has proven to be a good sample for that, which is observable while looking at the case of Nabucco project and

Azerbaijan’s role in negotiations over it.

Being a transnational project, Nabucco cannot be investigated in isolation. Key actors with vested interested needed to be looked at to comprehend how and why Azerbaijan have had changing approach to the Nabucco project. That is why this dissertation looked at the Azerbaijan’s energy policy to the backdrop of the interests of important actors’ such as Russia, Turkey, Iran and Turkmenistan.

However lack of EU backing is another factor that caused the failure of the original

Nabucco project. The EU was not very decisive in its support for the Nabucco project although it gave official support in the level of EU commission. However, the EU could not unite all interest groups to unite in support of Nabucco; some Nabucco shareholders shifted to the South Stream. Moreover, the EU could not secure required funding for the implementation of the project. Even when the classic Nabucco project reduced to West-

Nabucco, the EU declared it is indifferent between TAP and Nabucco-West projects.

Seeing no solid backing on the part of EU or U.S., Azerbaijan settled for the minimum it was looking for, namely transferring just its own available resources to Europe.

This thesis also investigated how Azerbaijan pursued the policy of diversification of energy transport routes and becoming owner of such routes in order to avoid possible future manipulations over these routes. Azerbaijan’s offer to finance the TANAP project,

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and buying energy infrastructures in Greece are good examples for this energy policy pursued by Azerbaijan.

To sum up, even if Nabucco was mostly a political and strategic project its failure was due to both political and economical reasons. Main problem was the uncertainty with the availability of natural gas from the targeted supply sources. Turkmenistan’s own way- outs for diversification of its transportation routes played a critical role. The undecided legal status of the Caspian Sea plays also a great role, as most likely Russia and Iran would not agree on construction of trans-Caspian pipeline and small countries of the region like Azerbaijan and Turkmenistan has not much say on that. Now with changing regional politics even Trans-Caspian pipeline project is being mentioned in the news quite often.

Commercial considerations were also decisive in failure of the project, as estimated costs of the project by time increased; at the beginning it was estimated at roughly 8 billion

Euros, but by 2012 it was put as high as 15 billion which further questioned the commerciality of the project and additionally no country or company was willing to break the ice to make substantial investments. The inconsistency in EU common energy policy also negatively impacted the realization of the project. Now it is up to ‘big brothers’ like EU and USA if Nabucco will be returned back to the life.

The commerciality of Nabucco project was questioned from the beginning. However, this doubt was deepened in last few years because of several reasons. First of all, many experts argued that this project is not economically profitable; it is purely political project

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to decrease EU’s dependence from Russia142. Initially, partners for the project planned to transfer 31 bcm of gas to Europe, however once they realised difficulties with most of the supply sources, they started only to count on Azerbaijani gas, which could make only 10 bcm. That substantially strengthened the doubts on the commerciality of the project. The cost of the project was estimated at 12-15 billion Euros. Here came the question on who are going to pay for the construction of the pipeline? EU, the USA or the supplier countries. The ongoing economic crisis made it difficult for the countries to undertake financial burdens of the construction.

Without a doubt, countries would have financed Nabucco’s construction, only if there were no other viable alternatives to it. First of all, shorter pipelines regarded more economically viable than financing such a big pipeline without being sure about the supply sources other than Azerbaijan’s.

Another development that impacts Nabucco project is the emergence of LNG.

Traditionally, LNG has not been part of the energy mix in Europe. For example, Import of LNG into Europe fell by a quarter between 2011 and 2012 and by almost a third between 2012 and 2013. Between 2010 and 2013 European supply fell by 54.8 bcm,

LNG import by 40.6 bcm.143 The below quotation from the renowned energy expert

Jonathan Stern summarizes the impact of LNG on Nabucco very well:

142 House of Commons Energy and Climate Change Committee, The UK’s Energy Supply: Security or Independence, Eight Report of Session 2010-12, p:20. 143 Deschuyteneer. “LNG Import Potential to Europe.” Presentation at the IFRI Energy Breakfast Roundtable. Brussels. 2014 available online at https://www.google.ca/?gws_rd=ssl#q=IFRI_deschuyteneer28414final.pdf. 94

"Although people talk about the southern corridor, and it is still correct -- the original concept is still correct that there is a lot of gas at the other end of Europe, in the

Caspian and Middle East region -- the complexity of actually getting something going there has been so great, and so long-term, that in the meantime a lot of European countries have built, and more are planning to build, LNG terminals."144

Furthermore, LNG developments had also an impact on reconsideration of the economic viability of Nabucco project. In case of Nabucco no one showed willingness to undertake any financial burden by itself and because of that process did not move forward.

However, now changing political circumstances bring back the hope that there will be shareholders willing to invest into Nabucco.

As long as sanctions against Iran are in place, Iranian gas cannot be brought to Europe.

However, now game can be changed as deal on sanctions against Iran has been made. In fact, Nabucco announced that they would not built access lines to Iran, but now with the changing rules, this conviction can change as well. Qatar is another option. Qatari gas is send by tanker to East Asia and Europe. However, to deliver it by pipe line via the

Southern Gas corridor Iranian infrastructure would have to be used, or new pipelines built through Iraq. Both were considered unfeasible at the time, but now it is an open option in case Nabucco is back.

144 Necknagel Charles, 27 June 2013, “Nabucco Pipeline Suffers Setback As Rival Expected To Get Azerbaijani Gas”, RFERL, Retrieved from http://www.rferl.org/content/nabucco-gas-pipeline-rivals- future-in-doubt/25030223.html, on 20 November 2014

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This is where the importance of Azerbaijan comes. Though it has small reserves of 1.3 tcm or 0.7 per cent of world wide natural gas reserves, it is most accessible. This minuscule capacity will expand as new gas fields are discovered but Azerbaijan still will have only small share of the total. However, Azerbaijan's gas is far more accessible. In addition, Azerbaijan is closely interconnected with Georgia which is an important transit country. Georgia is key transit country for Azerbaijani gas on its way to Europe.

Azerbaijan has supplied Georgia with natural gas since 2006 at prizes lower than

Gazprom. Azerbaijan would like to leave orbit of Russia. The construction of the Baku-

Tbilisi-Ceyhan oil pipeline (BTC), with American support, and the Baku-Tbilisi-Erzurum gas pipeline (BTE) have given it an advantage. Southern gas corridor would have given

Azerbaijan a key advantage, as it generates more than 60% of its Gross Domestic Product

(GDP) with the export of oil and natural gas. Thus, Azerbaijan plays a key role in the

Southern Gas Corridor as the source of natural gas and transit country. Azerbaijan can offer much to Europe, but it needs full commitment on the part of the EU. Azerbaijan has achieved to link Caspian Basin to EU with TANAP and TAP. It can be interpreted as a beginning and there is space for expanding further gas deliveries along this line. EU will look for additional supplies from the region, and if additional supplies become available then the full capacity of the existing pipelines will be used or new pipelines will be added up.

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Appendix

Appendix 1. The gas industry in Azerbaijan.

Source: EIA, 2014, http://www.eia.gov/countries/country-data.cfm?fips=aj

Appendix 2. Southern Gas Corridor

Source: Necknagel Charles, 27 June 2013, RFERL, Retrieved from http://www.rferl.org/content/nabucco-gas-pipeline-rivals-future-in-doubt/25030223.html, on 20 November 2014

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