It is oftentimes said that the Middle East is the most complicated region in our world, however the Southern Caucasus would certainly take issue with that assumption. The military developments in and around Nagorno Karabakh have complicated matters even further, expanding the territorial holdings of Azerbaijan and effectively perpetuating them by creating a Russian peacemaking battalion. Political developments have imminently brought about energy-relevant changes and one of the main novelties of the post-2020 world might be a much tighter Russia-Azerbaijan energy link. For the first time in many months, it could be Azerbaijan now that would be actively engaging with the Russian “big brother”.
Retrospectively looking, the Russo-Azerbaijani energy relationship can at best be described as problematic. Although much of Azerbaijan’s current producing portfolio was the result of a joint Soviet effort to tap into the Caspian offshore, the Aliyev administration wasted no time on trying to invite as many Western majors into its flagship project (Azeri-Chirag-Guneshli, aka the “contract of the century”). Russia tried to sneak into the Azerbaijani offshore but the best it could garner was LUKOIL buying its way into the ACG shareholder structure, perhaps aided by the fact that LUKOIL’s main owner and general director is an ethnic Azeri. Transanatolian and Trans Adriatic pipelines (TANAP and TAP) notwithstanding, this year’s Nagorno Karabakh war has changed all that.
Azerbaijan’s military victory, tangibly facilitated by Turkish support, rested upon an international recognition to be finalized. The tripartite agreement between Moscow, Yerevan and Baku has provided just that and Western powers have joined in, providing an extra layer of recognition. Coincidentally, all this is happening with two US majors intent on leaving Azerbaijan, with Chevron already gone and ExxonMobil seeking a suitable buyer for its stake. Should both US majors leave, BP would be the only oil titan remaining, operating the ACG fields and the Baku-Tbilisi-Ceyhan pipeline. Russian companies, especially LUKOIL that virtually controls all of the Russian Caspian and has become the nation’s flagbearer there, buzz with excitement.
It is oftentimes said that the Middle East is the most complicated region in our world, however the Southern Caucasus would certainly take issue with that assumption. The military developments in and around Nagorno Karabakh have complicated matters even further, expanding the territorial holdings of Azerbaijan and effectively perpetuating them by creating a Russian peacemaking battalion. Political developments have imminently brought about energy-relevant changes and one of the main novelties of the post-2020 world might be a much tighter Russia-Azerbaijan energy link. For the first time in many months, it could be Azerbaijan now that would be actively engaging with the Russian “big brother”. Retrospectively looking, the Russo-Azerbaijani energy relationship can at best be described as problematic. Although much of Azerbaijan’s current producing portfolio was the result of a joint Soviet effort to tap into the Caspian offshore, the Aliyev administration wasted no time on trying to invite as many Western majors into its flagship project (Azeri-Chirag-Guneshli, aka the “contract of the century”). Russia tried to sneak into the Azerbaijani offshore but the best it could garner was LUKOIL buying its way into the ACG shareholder structure, perhaps aided by the fact that LUKOIL’s main owner and general director is an ethnic Azeri. Transanatolian and Trans Adriatic pipelines (TANAP and TAP) notwithstanding, this year’s Nagorno Karabakh war has changed all that.
Azerbaijan’s military victory, tangibly facilitated by Turkish support, rested upon an international recognition to be finalized. The tripartite agreement between Moscow, Yerevan and Baku has provided just that and Western powers have joined in, providing an extra layer of recognition. Coincidentally, all this is happening with two US majors intent on leaving Azerbaijan, with Chevron already gone and ExxonMobil seeking a suitable buyer for its stake. Should both US majors leave, BP would be the only oil titan remaining, operating the ACG fields and the Baku-Tbilisi-Ceyhan pipeline. Russian companies, especially LUKOIL that virtually controls all of the Russian Caspian and has become the nation’s flagbearer there, buzz with excitement.
As blistering as the developments of 2019-2020 might seem, the upcoming months might bring about further Russian moves into Azerbaijani upstream. LUKOIL has expressed interest in joining the Umid/Babek, perhaps the most ambitious project on Azerbaijani books, located 45km to the west of Shah Deniz. The fields are the last untapped mohicans of Soviet offshore exploration, first appraised in the 1950-1960s, and both tilt towards the gas/condensate side – the total assumed reserves of Umid/Babek stand at 20 TCf and almost 1 BBbls of condensate. SOCAR has been spearheading Umid test production, backed by Nobel Upstream (20%), under a 2017 risk service contract, however, has failed to make significant headway and keeps on pushing the commissioning dates backward. The root cause of such tardiness lies in the high costs of production – pay formations in Umid/Babek are at least 6km deep.
What does this mean for Russian oil interests in Azerbaijan? Russia’s tangible reluctance to take sides in the Armenian-Azerbaijani conflict and Moscow’s guaranteeing of Azerbaijan’s new borders by means of a peacekeeping force has provided material benefits for its main Caspian-focused producer, LUKOIL. Russia’s participation is still revolving around risky projects, but the risk involved is significantly smaller than it used to be with all past frontier assets. Although there is no guarantee that LUKOIL will buy its way into Azerbaijan’s upstream, the political narrative that underlies the evident rapprochement of Moscow and Baku seems to be aiding it greatly.
By Charles Kennedy for Oilprice.com
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