Baku’s Position on Karabakh Will Weaken by 2019-20

Baku’s Position on Karabakh Will Weaken by 2019-20 –

Civilnet -Petrostrategies, a French consultancy and think tank, published an article on the recent Armenian-Azerbaijani escalation in its magazine, “World Energy Weekly.” The authors of the article highlight the fragility of oil and gas pipelines stretching from Azerbaijan to Europe. They also stress that Baku will be forced to resolve the Nagorno-Karabakh problem one way or another by 2019-20 given the fact that its net hydrocarbon revenues are going to continue to fall and its capacity to purchase arms will also dwindle.

At the beginning of August, a 6-day micro-war took place between Azerbaijan and Armenia, just a stone’s throw from the Southern Corridor that is used to export 37 million tons/annum of Azeri oil and 6 bcm/annum of Azeri gas. The event went unnoticed by the mainstream press. The latter was more preoccupied by the (much bigger) wars that are raging in Ukraine, Iraq, Libya and Syria. Yet it does highlight the fragility of this Corridor, which is supposed to contribute to Europe’s energy security, and the implementation of which occupied the efforts of western governments for almost a quarter of a century. This is the second time in six years that hostilities have broken out in the vicinity of these pipelines. The first of these was the war between Russian and Georgia, in August 2008. This summer’s micro-war was not as long and bloody as the Russia-Georgia conflict. But it does contain the seeds of a possible future larger-scale clash breaking out in the medium term between Armenia and Azerbaijan if the necessary steps to prevent it are not taken. And if war does break out, it is almost certain that the pipelines of the Southern Corridor will not be spared this time around.

The origin of the Armenian-Azeri conflict goes back to 1921. At the time, within the framework of Stalin’s policy of mixing nationalities in the Caucasus, the Armenian region of Nagorno-Karabakh was incorporated into Soviet Azerbaijan. In 1998, taking full advantage of Gorbachev’s Perestroika, Nagorno-Karabakh sought to exercise its right to self-determination. Baku refused. The full-on war that was sparked after the collapse of the USSR in 1991 led to the defeat of Azerbaijan. The ceasefire agreement that was concluded in May 1994 has not always been respected, but it had never been so badly violated as it was this summer. At the end of July and beginning of August 2014 several thousand infractions were recorded. From August 1 to 6, between 20 and 50 deaths (according to sources) were registered. On August 7, the announcement of a mediation by Vladimir Putin eased the intensity of the military clash. But on the same day, the Azeri President, Ilham Aliyev posted nearly 60 messages on Twitter in which he notably stated: “The war is not over. Only the first stage of it is. But the second stage may start soon”. The day before, he had told his soldiers: “The fascist leadership, the military junta” is leading “an Armenian state [that] was created on the historical Azerbaijani lands” and “we, Azerbaijanis must and will return to these lands”, including the capital city, Yerevan, which he described as the ancient Azeri (kingdom of) “Irevan khanate”.

The meetings held between the Armenian and Azeri Presidents, in Sochi, between August 8 and 10, under the auspices of Putin, should in principle lead to a resumption of negotiations aimed at finding a political solution to the conflict. But nothing guarantees a happy outcome of these talks. Azerbaijan is demanding the re-establishment of its “territorial integrity”. The Armenians answer back that historically, Nagorno-Karabakh has never been part of an independent Azerbaijan. Strengthened by the huge purchases of arms it has carried out in recent years, notably from Russia, Azerbaijan claims its can destroy any given target in Armenia and it states that “the very existence of the Armenian state can be open to question”. For its part, Armenia says it owns missiles that can hit targets 300 km into Azeri territory.

In a rare occurrence in international relations, on August 4, the US Ambassador to Yerevan and the Armenian Minister of Defense published a joint press release in which they expressed “their deep concern for the recent increase in tensions” and state that they “have explored ways to de-escalate the situation”. The US diplomat went as far as to express “his condolences to the families of soldiers who lost their  lives during recent events”. No initiative of this kind has been undertaken by the US ambassador to Baku. It was thus made clear that Washington held Azerbaijan responsible for the military escalade. The US and Europe hailed the Russian mediation that led to a de-escalation. But, unless a political solution can be found to the conflict, Azerbaijan (which refuses the current status quo) risks resuming hostilities over the medium term.

Time is running out for Baku which, over the next 5-6 years, is going to lose its importance as an oil supply source. The production from its three main fields (Azeri, Chirag and Deep Guneshli – ACG) did not reach its target of 50 million tons/annum in 2011. Since then, it has hit a ceiling of around 42 million tons/annum. In October 2012, Aliyev publicly accused BP (the operator of ACG) of having lied to it. It issued an order to the company to stabilize production. At best, the latter could be maintained for another few years, but with a rise in production costs, and therefore a drop in the State’s revenues. A total of 2.5 billion barrels have been produced on ACG to date. At the current rate of 315 million barrels/annum, 70% of the ACG’s original proven reserves of 6 billion barrels will have been produced within the next five years.  

It is over the next five years that Azerbaijan is also going to develop phase 2 of the Shah Deniz field, in order to supply 6 bcm/annum of gas to Turkey and 10 bcm/annum to Europe, as of 2019. At least $56 billion will be invested in this project. This gas is going to be transported via the same route as the current pipelines of the Southern Corridor. In certain places, these run only 25 km away from the front line with Armenia. They are therefore highly vulnerable. Furthermore, Azerbaijan’s relations with its main ally in the region, Turkey, could change. When the Shah Deniz gas lines are built, Baku will be completely dependent on Ankara for its oil and gas exports, with the exception of small volumes sold via Georgia and Russia. On the other hand, Ankara will be able to diversify its oil and gas transits, thanks to additional volumes from Iran and Iraq. The new ‘rapport de forces’ that will then emerge between Azerbaijan and Turkey could enable the latter to take its distance from Baku’s political stance (which it has unreservedly supported up to now) if it deems this necessary for its national interests.   

In other words, Baku had better solve the problem of Nagorno-Karabagh one way or another by 2019-20. The closer it gets to this date, the more its position will be weakened. Furthermore, its net hydrocarbon revenues are going to continue to fall and its capacity to purchase arms will also dwindle. Gas sales cannot compensate for the drop in its oil revenues, as the investments required by Shah Deniz are very high and gas prices usually suffer from a discount compared with oil. Furthermore, the price of Shah Deniz 2 gas is indexed on the European spot market, which up to now has been lower than the price of the Russian or Algerian gas indexed on oil.

The recent micro-war has brought to light a complex political equation. On the one hand, the Americans and Europeans designed the Southern Corridor in order to enable the export routes for Azeri oil and gas to bypass Russia. But on the other hand, the micro-war of August 2014 illustrated that the Western powers need the Russians to ensure the security of these pipelines, which are supposed to contribute to the security of Europe’s energy supply. The conflicting parties also need the Russians. And this will remain to be the case for as long as conflict zones subsist in the region… Thus, in a nutshell, the current status quo suits Russia and, insofar as the situation will depend on Moscow, the latter will only support a change if it thinks it can benefit from the new status quo even more than it does now.