David Mdzinarishvili / Courtesy Reuters Oil derricks in the Baku, October 16, 2005.
Foreign Affairs From The Anthology: Crisis in Ukraine
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Gas Politics After Ukraine

Azerbaijan, Shah Deniz, and Europe's Newest Energy Partner

In the wake of the European Union’s failure to conclude an association agreement with Ukraine, one could be forgiven for thinking that it is losing its touch in the former Soviet Union. It isn’t. This week, EU leaders signed a deal with Azerbaijan to build a pipeline for importing gas from Azerbaijan into Europe. All told, the arrangement is expected to bring billions of investment dollars into southern Europe and will, in the construction phase alone, create about 30,000 new jobs in the countries that the pipeline will eventually link: Azerbaijan, Georgia, Turkey, Greece, Bulgaria, Albania, and Italy.

The timing of the Shah Deniz project, as it is called, could not have been better. By now, Russia’s record of attempting to prevent former Soviet states from expanding their trade with Europe is well known. In Ukraine, Russian pressure seems to have worked. In Azerbaijan, too, Russia has meddled in domestic politics (it fronted a Russian citizen in recent Azerbaijani national elections), exiled Azerbaijani workers from Russia, and drummed up anti-Azerbaijani sentiments in the Russian media. Unlike in Ukraine, however, Russian interference couldn’t prevent the deal.

Azerbaijan’s steadfastness is partly the result of years of EU and U.S. diplomacy. In the run-up to this week’s meeting, Brussels blocked Moscow’s acquisition of energy infrastructure along the pipeline route and doggedly investigated Gazprom, Russia’s gas monopoly, for violating EU antitrust laws in the region. Helping matters along is Baku’s firm belief that cooperation with Europe is the path to security and development. A tiny state surrounded by Russia, Iran, and Turkey, Azerbaijan needs the West, perhaps more than Ukraine did, to ensure its independence. It also wants the Europe’s help resolving the Nagorno-Karabakh conflict between itself and neighboring Armenia.

The pipeline deal is also great news for Europe, opening up its first new major source of gas in decades. Shah Deniz is a mega-field, containing 40 trillion cubic feet of natural gas, equivalent to almost two years of U.S. natural gas consumption. It can also produce up to 100,000 barrels a day of condensate, which, when exported with Azerbaijani oil, will add up to almost a million barrels of oil a day.

The export deal has three components. First, Azerbaijan and the investing companies will jointly develop untapped parts of the Shah Deniz field and expand the capacity of the South Caucasus pipeline, which runs from Baku to central Turkey. Second, Azerbaijani and Turkish state companies will build the Trans-Anatolian Pipeline, which will supply gas to Turkey through Azerbaijan and transit gas to Europe. Third, the investing companies will focus on building the Trans-Adriatic Pipeline, which will run through Greece, Albania, and Italy. The Shah Deniz consortium aims for the first gas deliveries to reach Turkey in 2018 and Europe in 2019. When it is complete, the project will provide 565 billion cubic feet of natural gas annually (212 billion to Turkey and 353 billion to consumers in Europe). It will also be able to handle any additional gas from other fields in Azerbaijan and, potentially, from Iraq and Israel. A number of Balkan leaders were also in attendance at the meeting this week and signed a side deal that will facilitate the extension of the Shah Deniz project to Balkan states as well.

The infrastructure for this pipeline is anticipated to cost a whopping $40 billion to build, making it one of the world’s most expensive gas-export projects. It also represents the largest planned investment in Greece and southern Europe since the eurozone economic crisis. It will bring with it new jobs and more investment, which are urgently needed across the region. As a proportion of the European Union’s overall gas supplies, the new pipeline’s contribution will be fairly modest. But for countries such as Bulgaria and Greece, which rely primarily on Russian gas, the pipeline will be critical to energy security. The interconnecting gas pipelines in Europe, filled with Azerbaijani gas, will ensure that Russia can no longer switch off the heat in eastern Europe and the Caucasus on a whim. Gone, too, will be the days of severe gas shortages during periods of high demand, such as the one that rocked Europe last February. The new natural gas supplies will also help Europe reduce its carbon emissions and air pollution, since high electricity prices in recent years have pushed Europe toward cheap U.S. coal.

One of the most important contributions of the Shah Deniz project, however, is that it will connect the gas supply infrastructure of most countries in southern Europe. For more than a decade, the European Union has been talking about the importance of doing so in order to increase energy security. But it left the task to the private sector, which has not risen to the challenge. This new project is thus a chance for the European Union to put its money where its mouth is: From Italy to Greece to Bulgaria and beyond, this could be the start of an more integrated and secure gas market.

Perhaps because the opportunity is so great, several countries would like to stand in its way. First, although Moscow has not publicly opposed the building of the Shah Deniz export route, it could still undermine the project by attempting to destabilize Georgia, for example, through which the pipeline transits. Second, Iran has its own goals in Azerbaijan, with which it shares a border and a religion. Recently, as payback for cooperating too closely with the United States on sanctions, Tehran fronted a number of terrorist operations in Azerbaijan, and, in early November, Iranian soldiers shot at an Azerbaijani military post on the shared border.

Meanwhile, the United States, once a reliable guarantor of security in the region, is now so focused on Iran that it has hardly looked elsewhere in the region. U.S. Secretary of State John Kerry canceled a planned visit to Ukraine, despite the public outcry after Ukrainian President Viktor Yanukovych canned the Association Agreement, in order to further talks with Tehran. Washington did not send a high-level representative to the signing ceremony in Baku either, despite U.S. officials making tremendous contributions to the project over 20 years. Decades of U.S. and EU efforts to shore up the independence of the former Soviet states and build strong alliances in the region could be lost if Washington does not stay involved.

For the European Union, on the other hand, the lessons are mostly political and moral: If the union tries hard enough, it can achieve outstanding results. Just as it did not give up on Caspian gas, it should not give up on wielding influence in the former Soviet states.

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