The Caspian in 2012 - Azerbaijan

From now until the end of the year, I will be running a series of posts offering some (guarded) predictions for 2012.

The Azerbaijani government has enjoyed a pretty good 2011, with solid economic growth, no changes on the political front and some small but symbolic foreign policy victories, winning the Eurovision Song Contest and (more importantly) securing a temporary seat on the UN Security Council for 2012 and 2013. Although relations with Iran have been testy, and Karabakh still smoulders, this is nothing new.

In energy, the scramble to choose a pipeline route to Europe for Azerbaijan’s gas may have energy analysts and companies in a spin, but whatever route is picked, Baku wins – it has fully emerged as a critical player in regional energy politics.

Domestically, the situation in Azerbaijan will remain quiet next year. Small protests against the government early in 2011, inspired by the revolts in Egypt and Tunisia, were quickly crushed by security forces. There seems to be little appetite for a new wave of protest and there is unlikely to be a similar ‘trigger event’ as there was last year with the Arab Spring. Barring any unforeseen personal crises, Ilham Aliyev will see out the year as president, probably with his cabinet unchanged. He has been fairly conservative on this front, and most of his team have long experience in their posts.

For the energy industry, 2012 promises to be another bumper year. Although growth in oil output is likely to slow as the major fields mature (some estimates suggest that oil production will be entirely flat), gas production is slated to rise 11% next year. Active exploration work will probably yield more discoveries in the Caspian.

The biggest issue with regard to exports will be a decision on which export route gas from Azerbajan’s giant Shah Deniz Phase Two will take. This will open up one of the last stages of the Southern Corridor to Europe, marking the near-culmination of a remarkable twenty year process.

Speculation has been rife that the EU’s giant Nabucco project is losing the contest against its rivals – the Trans-Adriatic Pipeline, Interconnector-Turkey-Greece-Italy, and new upstarts South-East Europe Pipeline and the Trans-Anatolian Pipeline. The latter two have only emerged recently and have upset the competition.

The SEEP is a BP concept whilst the Trans-Anatolian Pipeline was drawn up unexpectedly by Azerbaijan state energy firm SOCAR. Both companies are key players in Azerbaijan’s energy sector and in the Shah Deniz consortium: this, and the relatively low cost of both SEEP and the TAP (TAP is estimated at about $7 billion, and SEEP would probably cost around the same), makes them the favourites.

My money is on Nabucco being dropped and replaced with a combination of the TAP, the SEEP, and maybe some European Union funding for Azerbaijan’s planned liquefied natural gas project, which would take Azeri gas to Georgia and thence to Romania. Giving up on Nabucco will be a retreat for the EU; expect the decision to be marketed under the watchwords of flexibility and efficiency. Volumes will be slightly lower than those provided by Nabucco, which will potentially remove the rationale for a controversial Trans-Caspian Pipeline to bring Turkmen gas west to Azerbaijan and then Europe.

Abroad, expect business as usual for Baku, albeit with a few positive touches. The UN Security Council seat is big news and has been treated as a symbol of the country’s emergence onto the world stage. Most of Azerbaijan’s efforts on the Council will be devoted to putting pressure on Armenia to withdraw from the occupied territories around Nagorno-Karabakh, as agreed under the existing settlement blueprint and called for under previous UN resolutions. A new resolution will be touted as a success but will probably have as much impact on the ground as the previous ones (i.e. none).

Along the Line of Contact in Karabakh, the grim litany of skirmishes and deaths by sniper fire will rumble along. Both Armenia and Azerbaijan are now deploying drones along the LoC, so expect the conflict to gain a new, aerial dimension (we’ve seen the first signs already). Sabre-rattling, military exercises and soaring defence budgets will all continue, but - as previously – don’t expect a new shooting war.

The potential replacement of France as a co-chair of the OSCE Minsk Group, tasked with mediating the conflict, could give new impetus to peacemaking efforts but probably without much success. If the mediators can get Presidents Aliyev and Sarkisian to agree on the text of a preamble to a draft, that will count as a victory, which indicates just how low expectations now are.

Another issue which Baku ma potentially have to deal with on the Security Council is Iran. 2011 has seen a number of rows between the neighbours, which seem to have been at least partly assuaged by senior Azeri diplomat Ali Hasanov’s recent visit to Tehran. A new diplomatic crisis in the UN over Iran’s nuclear programme (sanctions, condemnation, etc) would put Baku in a tough spot, between being nice to the neighbours  and aligning itself with the West and with anti-proliferation efforts. Expect Baku to play it safe and abstain.