(PDF) HOW DO ENERGY SECURITY AND EURO-ATLANTIC INTEGRATION CORRELATE IN THE SOUTHERN CAUCASUS?

This paper seeks to compare the energy policies of the three Southern Caucasian states and examine the interdependence of their energy and security policies. The particular focus is the impact of energy-related issues on their Euro-Atlantic integration tendencies. While examining how the states in the region ensure their energy security, three aspects form the focus of this research - operational and planned oil and gas pipelines in the region, energy disputes of the three states with Russia, and the current and intended use of nuclear energy. Two groups of oil and gas pipelines in the region have either been built since the collapse of the Soviet Union or are being planned. The first includes U.S.-backed multiple pipelines. The benefits of the Baku-Tbilisi-Ceyhan (BTC) and Baku-Tbilisi-Erzurum (BTE) pipelines for Azerbaijan and Georgia, as well as Europe, have been examined by many analysts. This paper also analyses the implications of Armenian exclusion from those pipelines, and argues that non-inclusiveness of the multiple pipelines results in the formation of dividing lines along energy alliances, which affects the tendencies of Euro-Atlantic integration of the region. The second group of pipelines in the region are the new Russian and Iranian pipelines. Within this group, the focus of research is the extent to which the Iran-Armenia gas pipeline – and its potential transit role – contributes to energy security of Armenia. Many experts point out that symptoms similar to those of “Dutch disease” are already evident in Azerbaijan. Recently the increase of military expenditures based on oil and gas revenues, along with bellicose rhetoric from Baku, as well as Armenia’s response to it, have been sufficiently explored. This article touches upon the implications of “Dutch disease” for the internal security of Azerbaijan and also for Georgia, which, as an oil and gas transit state, also seems to be affected by Dutch disease. All South Caucasian states had energy disputes with Russia in 2005-2007. Gazprom announced gas price hikes not only to Georgia at the time of growing tensions between Russia and Georgia but also to Azerbaijan, with which Russia has had quite balanced relations, and Armenia, with which Russia has a strategic partnership. The paper examines the ways in which each of the three countries reacted to price hike announcements and handled the disputes, whether by political statements, negotiations and energy deals with Russia or alternative gas supplier states. Another way of ensuring energy security in the Southern Caucasus is the use of nuclear energy. Currently Armenia is the only country in the region that has a nuclear power plant (NPP). Armenia has committed to shutting down the plant in its Action Plan within the EU’s Neighborhood Policy. Simultaneously, Armenian authorities have announced the decision to construct a new NPP as the only alternative to the old one. Georgia has also announced its intention of constructing an NPP, and Azerbaijan intends to develop a nuclear research reactor. Additionally, Turkey plans to develop nuclear energy, constructing more than one NPP. After two decades of negative approaches by the international community, especially Western Europe, towards nuclear energy, mostly as a result of the Chernobyl accident in 1986, the opposite trend has started all over the world, including the Euro-Atlantic space. The main triggers are climate change debate, power cuts in Western Europe and growing oil and gas prices. It is increasingly recognised that in addition to other advantages, nuclear energy reduces dependence on energy imports, particularly hydrocarbon fuels. How do energy policy trends in the region affect Euro-Atlantic tendencies? The Southern Caucasian states were the pioneers of IPAP, launching political dialogue with Allies, and advancing defence reform aimed at interoperability with NATO forces, already being pursued within the Planning and Review Process (PARP). They intend to be not only security consumers but also providers via their contribution to NATO-led peace-support operations. However, the purposes and the style of cooperation of the three states with NATO fluctuate. Georgia seeks a more advanced relationship with the Alliance. NATO membership is not on the agenda of Azerbaijan and Armenia. Both countries are trying to keep the balance between the U.S. and NATO, on one side, and Russia and Iran on the other. A main underlying difference between their foreign policies is their relationship with Turkey. If the relationship between Azerbaijan and Turkey is based on the “one nation, two states” notion, Armenia and Turkey do not have diplomatic relations. This reality informs Armenian threat perceptions and maintains the need for Armenia’s strategic partnership with Russia. Blockade of land routes for Armenia by Turkey and Azerbaijan as well as exclusion of Armenia from the regional energy projects keeps Armenia dependent on Russia and Iran for its energy supply, which places limitations on Armenia's efforts to advance its Euro-Atlantic integration. This research examines the possible ways to diminish the effects of the division of the region along energy alliances. It also examines how NATO can contribute to the energy security of its Partners in order to advance their Euro-Atlantic integration.

3 NATO DEFENSE COLLEGE COLLEGE DE DEFENSE DE L’OTAN Research Division Division Recherche HOW DO ENERGY SECURITY AND EURO-ATLANTIC INTEGRATION CORRELATE IN THE SOUTHERN CAUCASUS? by Sossi Tatikian Edited by Karl-Heinz Kamp Rome, May 2008 ©NATO Defense College 2008 4 TABLE OF CONTENTS Introduction ............................................................................................. 5 Chapter 1. Overview of energy resources and ways to ensure the energy security of the three Southern Caucasian States ............. 8 Chapter 2. Operational and planned oil and gas pipelines ............ 13 U.S.-backed multiple pipelines ............................................................... 13 How was the route of Baku-Tbilisi Ceyhan chosen? .............................. 15 The geopolitical role................................................................................ 16 The Dutch disease and its implications ................................................... 19 The impact of the pipelines on the Nagorno Karabakh conflict.............. 25 Pipeline security ...................................................................................... 29 Planned Nabucco and Trans-Caspian pipelines ...................................... 34 New Russian and Iranian pipelines ......................................................... 41 Baku-Novorossiysk pipeline ................................................................... 41 Pipeline between Iran and Azerbaijan..................................................... 42 Iran-Armenia pipeline ............................................................................. 42 Planned Iran-Armenia oil refinery project .............................................. 45 U.S. reactions to Armenia’s energy deals with Iran................................ 46 Chapter 3. Energy disputes and deals with Russia ......................... 48 Armenia – “Property for Gas” as a solution? .......................................... 48 Georgia – “Political price?” .................................................................... 51 Azerbaijan – “Reorientation towards the West?”.................................... 54 Chapter 4. Use of nuclear energy in the region............................... 57 Armenian Nuclear Power Plant (ANPP) ................................................. 57 The intent of Armenia to construct a new NPP....................................... 61 Intentions of Georgia, Azerbaijan and Turkey to develop nuclear energy ......................................................................................... 67 Conclusions ................................................................................... 70 Recommendations ........................................................................ 74 Bibliography ................................................................................. 78 ©NATO Defense College 2008 5 INTRODUCTION1 This paper seeks to compare the energy policies of the three Southern Caucasian states and examine the interdependence of their energy and security policies. The particular focus is the impact of energy-related issues on their Euro-Atlantic integration tendencies. While examining how the states in the region ensure their energy security, three aspects form the focus of this research – operational and planned oil and gas pipelines in the region, energy disputes of the three states with Russia, and the current and intended use of nuclear energy. Two groups of oil and gas pipelines in the region have either been built since the collapse of the Soviet Union or are being planned. The first includes U.S.-backed multiple pipelines. The benefits of the Baku-TbilisiCeyhan (BTC) and Baku-Tbilisi-Erzurum (BTE) pipelines for Azerbaijan and Georgia, as well as Europe, have been examined by many analysts. This paper also analyses the implications of Armenian exclusion from those pipelines, and argues that non-inclusiveness of the multiple pipelines results in the formation of dividing lines along energy alliances, which affects the tendencies of Euro-Atlantic integration of the region. The second group of pipelines in the region are the new Russian and Iranian pipelines. Within this group, the focus of research is the extent to which the Iran-Armenia gas pipeline – and its potential transit role – contributes to energy security of Armenia. Many experts point out that symptoms similar to those of “Dutch disease” are already evident in Azerbaijan. Recently the increase of military expenditures based on oil and gas revenues, along with bellicose rhetoric from Baku, as well as Armenia’s response to it, have been sufficiently explored. This article touches upon the implications of “Dutch disease” 1 The views expressed in this research do not present positions of the Ministry of the Foreign Affairs of Armenia or the OSCE where Sossi Tatikian has worked, or the UN where she is currently working. ©NATO Defense College 2008 6 for the internal security of Azerbaijan and also for Georgia, which, as an oil and gas transit state, also seems to be affected by Dutch disease. All South Caucasian states had energy disputes with Russia in 20052007. Gazprom announced gas price hikes not only to Georgia at the time of growing tensions between Russia and Georgia but also to Azerbaijan, with which Russia has had quite balanced relations, and Armenia, with which Russia has a strategic partnership. The paper examines the ways in which each of the three countries reacted to price hike announcements and handled the disputes, whether by political statements, negotiations and energy deals with Russia or alternative gas supplier states. Another way of ensuring energy security in the Southern Caucasus is the use of nuclear energy. Currently Armenia is the only country in the region that has a nuclear power plant (NPP). Armenia has committed to shutting down the plant in its Action Plan within the EU’s Neighborhood Policy. Simultaneously, Armenian authorities have announced the decision to construct a new NPP as the only alternative to the old one. Georgia has also announced its intention of constructing an NPP, and Azerbaijan intends to develop a nuclear research reactor. Additionally, Turkey plans to develop nuclear energy, constructing more than one NPP. After two decades of negative approaches by the international community, especially Western Europe, towards nuclear energy, mostly as a result of the Chernobyl accident in 1986, the opposite trend has started all over the world, including the Euro-Atlantic space. The main triggers are climate change debate, power cuts in Western Europe and growing oil and gas prices. It is increasingly recognised that in addition to other advantages, nuclear energy reduces dependence on energy imports, particularly hydrocarbon fuels.2 How do energy policy trends in the region affect Euro-Atlantic tendencies? The Southern Caucasian states were the pioneers of IPAP, 2 A new project for constructing an NPP is under development in Lithuania to prevent potential energy dependence on Russia since the old Ignalina shut down in 2009. Latvia and Poland are to take part in the project, and Estonia is trying to decides whether to join the Finnish or Lithuanian project. Belarus, the country most affected by the Chernobyl accident, plans to build a new nuclear power station, perhaps to reduce its energy dependence on Russia because of the gas dispute in 2006. ©NATO Defense College 2008 7 launching political dialogue with Allies, and advancing defence reform aimed at interoperability with NATO forces, already being pursued within the Planning and Review Process (PARP). They intend to be not only security consumers but also providers via their contribution to NATO-led peace-support operations. However, the purposes and the style of cooperation of the three states with NATO fluctuate.3 Georgia seeks a more advanced relationship with the Alliance. NATO membership is not on the agenda of Azerbaijan and Armenia. Both countries are trying to keep the balance between the U.S. and NATO, on one side, and Russia and Iran on the other. A main underlying difference between their foreign policies is their relationship with Turkey. If the relationship between Azerbaijan and Turkey is based on the “one nation, two states” notion, Armenia and Turkey do not have diplomatic relations. This reality informs Armenian threat perceptions and maintains the need for Armenia’s strategic partnership with Russia. Blockade of land routes for Armenia by Turkey and Azerbaijan as well as exclusion of Armenia from the regional energy projects keeps Armenia dependent on Russia and Iran for its energy supply, which places limitations on Armenia's efforts to advance its Euro-Atlantic integration. This research examines the possible ways to diminish the effects of the division of the region along energy alliances. It also examines how NATO can contribute to the energy security of its Partners in order to advance their Euro-Atlantic integration. 3 For more analysis of the relations of the three Southern Caucasian states with NATO, see Sossi Tatikian, “Euro-Atlantic Integration Trends of the South Caucasian States”, Central Asia and the Caucasus, No. 4 (40), 2006. CA&CC Press, Sweden. http://www.ca-c.org/journal/2006-04eng/12.pr.tatiken.shtml ©NATO Defense College 2008 8 CHAPTER 1 OVERVIEW OF ENERGY RESOURCES AND WAYS TO ENSURE ENERGY SECURITY The three Southern Caucasian states have different quantities of energy resources and different ways of ensuring their energy security. While Azerbaijan is rich in hydrocarbons, and has become an important energy producer, Georgia and Armenia are not rich in hydrocarbons. Georgia is rich in hydro resources, and Armenia is the only state in the region that has an NPP. All three states are also using other sources of energy, such as thermal energy and alternative sources. Azerbaijan “Azerbaijan's oil strategy allowed us to guarantee the country's energy security for the next 100-150 years,” Azerbaijani President Ilham Aliyev said on 24 October 2007. “We are strong because Azerbaijan has not only solved the issue, but has also contributed to the resolution of the problem in other countries, both neighbouring and faraway countries.” 4 This statement is based on the fact that Azerbaijan is one of the most oil-rich countries in the world, and is also rich in natural gas. Estimates of Azerbaijan’s proven crude oil reserves range from 7 to 13 billion (bln) barrels, and natural gas reserves vary from 30 to 48 trillion cubic feet (tcf). 5 Two companies – State Oil Company of Azerbaijan (SOCAR) and Azerbaijan International Operating Company (AIOC) 6 – are exploiting and producing oil, as well as gas in Azerbaijan. Since 1997 AIOC, operating in the offshore Azeri, Chirag, and deep water Guneshli (ACG) mega-structure, has represented over 70% of Azerbaijan’s total oil 4 “Azeri energy security guaranteed for next 100-150 years”, Aliyev, 24 October 2007, Interfax. “Azerbaijan Natural gas. Information Administration”, August 2006. http://www.eia.doe.gov/emeu/cabs/Azerbaijan/NaturalGas.html. 6 AIOC partners are: BP, Chevron, SOCAR, Inpex, Statoil, ExxonMobil, TPAO, Devon Energy, Itoch, Delta/Hess. 5 ©NATO Defense College 2008 9 exports.7 Oil production in Azerbaijan is forecast at 62.8 mln tonnes in 2011, up 40% from 2007 production. 8 According to the Azerbaijani government, gas production in Azerbaijan could amount to 32.41 bln cubic meters (bcm) in 2011, which would be 89.6% higher than the forecasts for 2007.9 However, some estimates suggest that the decline of those reserves may start between 2009 and 2012. Indeed, SOCAR production will begin to drop in 2008 owing to the decline of its operating fields. Therefore Azerbaijan is developing the use of other energy sources.10 Azerbaijan has 8 thermal power plants (TPP) and six hydroelectric power plants (HPP).11 Because of an inefficient distribution network, Azerbaijan imports power from Russia, Turkey, Iran and Georgia to make up for transmission losses. A project for the establishment of a common power system with Georgia and Turkey was developed within the TACIS program.12 To supply electricity to the Nakhchivan exclave, Azerbaijan imports electricity from Turkey and Iran. 13 During the visit of Iran’s President Ahmadinejad to Azerbaijan in August 2007, an agreement was reached to build two hydroelectric power stations, one in Ordubad in the Azerbaijani Nakhichevan and another in Mazre in Iran.14 Georgia Georgia is known as having a shortage of energy resources and importing oil, natural gas, coal and electricity. Winter heating crises have been routine for Georgia for many years. With the launch of the BTC and BTE pipelines, the shortage of hydrocarbons was counterbalanced with Georgia’s importance as a transit country for Caspian oil and gas. 7 Azerbaijan. Oil. Energy Information Administration, August 2006, http://www.eia.doe.gov/emeu/cabs/Azerbaijan/Oil.html 8 Oil production in Azerbaijan to grow 40% in 2011, 20 October 2007, Interfax. 20 October 2007. 9 Gas production in Azerbaijan could grow 90% by 2011, 2 November 2007, Interfax. 10 Azerbaijan oil exports slated to rise 54.5% by 2011, 13 November 2007, Interfax. 11 Energy and nuclear power planning study for Armenia, IAEA-TECDOC-1404, July 2004, IAEA website, http://www-pub.iaea.org/MTCD/publications/PDF/te_1404_web.pdf , p. 129, 132. 12 Ibid, p. 129. 13 Ibid, p. 129. 14 Azerbaijan and Iran will construct two hydroelectric power stations on Araz River, 24 August 2007, http://www.regnum.ru/english/875343.html ©NATO Defense College 2008 10 However, according to Chomakhidze, a Georgian expert, Georgia cannot be ranked among countries poor in energy resources, and most of them exist in the country in greater or lesser amounts.15 Hydropower makes up the main part of both potential and proven resources. Georgia has 20 HPPs and favourable conditions for the construction of new ones, because 40% of its total technical hydropower resources are concentrated in eight major rivers.16 In October 2007, the Georgian government and Turkish company “Georgian Urban Energy” signed an agreement to build a hydroelectric power station in Georgia, expected to satisfy the electricity needs of Georgia in winter, and to export electricity to Turkey in summer.17 Georgia has two TPPs - Mtkvari Energy Ltd and Tbilsresi heating stations. The first two blocks are Mtkvari (the second one has not been operational since an accident in 2002) along with other assets were partly purchased by energy holding "Inter Rao" (the branch company of "Russian United Energy System") in 2003.18 Experts believe that there are potentially significant oil and gas reserves in the Black Sea and other regions of Georgia. According to surveys, offshore oil reserves alone come to about 0.5-3 bln tons. The oil quality varies from field to field.19 Foreign companies have already invested over $70 mln in oil exploring in Georgia.20 Experts assume that Georgia has natural gas in commercial amounts and that it will eventually occupy an important place in the country’s fuel balance. Georgia is also the only country in the Southern Caucasus with significant coal deposits, though production is currently negligible.21 15 Demur Chomakhidze, “Georgia: Natural Energy Resources”, Central Asia and the Caucasus, No. 4(46), 2007, pp. 27-34. 16 Ibid. 17 “Turkish Company Builds Hydroelectric Power Station in Gavakhk”, by Aghavni Harutyunian, 9 October 2007, http://www.azg.am/?lang=EN&num=2007100902. 18 Heating Stations, Ministry of Energy of Georgia website. http://www.minenergy.gov.ge/index.php?m=304. 19 Demur Chomakhidze, op. cit. 20 “Will Armenia export oil?”, 23 June 2006, PanArmenian Network, http://panarmenian.net/details/eng/?nid=680. 21 Demur Chomakhidze, op. cit. ©NATO Defense College 2008 11 Armenia Armenia is also considered to have limited energy resources. It imports oil, natural gas and nuclear fuel. Hydropower, nuclear energy and a small amount of coal are exploited domestically. After reopening, the Armenian NPP has been producing 30-50% of the country’s electricity.22 Hydropower is based on Lake Sevan and 5 rivers. Since the Soviet period there are 9 big HPPs, mostly operating at low capacity, because after the intense use of the lake during the energy crisis in 1990s, the Armenian Government decided to reduce releases from it to restore its potential.23 Armenia and Iran plan to construct a big HPP in Armenia on the Araks River. 24 Only 2 small HPPs were operational in Armenia after the collapse of the USSR.25 56 small HPPs have been constructed in Armenia over the last few years, and another 58 hydroelectric power plants are planned to be constructed in 2008-2009, which will satisfy 10% of the domestic energy demand.26 TPPs account for a significant part of electricity production in Armenia. Hrazdan TPP is the biggest with a capacity of 1100 MW. 27 Armenian authorities have borrowed $150 mln from the Japanese Development Agency for complete reconstruction of the old Yerevan TPP.28 Armenia is the only country in the region that has windmills. There are 5 of them, 22 “Armenia and the EU: Discussion with Foreign Minister of Armenia”, Joint Committee on European Affairs, 28 February 2007, Parliament of Ireland website. http://debates.oireachtas.ie/DDebate.aspx?F=EUJ20070228.XML&Ex=All&P.=2 “Energy Security Problems of Armenia debated”, 16 March 2007. http://www.parliament.am/news.php?do=view&ID=1696&cat_id=2&day=16&month=03&year=200 6&lang=eng&&print=1 23 “Armenia Nuclear Profile”, IAEA website. http://www.pub.iaea.org/MTCD/publications/PDF/cnpp2003/CNPP_WebP./PDF/2003/Documents/D ocuments/Armenia%202003.pdf. 24 “Iran-Armenia pipeline was opened”, Ministry of Energy of Armenia website, http://www.minenergy.am/show_category.php?id=49. 25 “The number of hydroelectric power plants to double in a few years”, Public Radio of Armenia, http://www.armradio.am/news/?part=eco&id=11523. 26 The number of hydroelectric power plants to double in a few years. 27 “ArmRosGasprom acquires Iran-Armenia pipeline and 5th energy unit of Hrazdan TPS from the government”, 7 April 2006.-7 April 2007, http://www.regnum.ru/english/619137.html. 28 “Armenian nuclear plant to function for another decade”, by Emil Danielyan, 8 August 2005. Eurasia Daily Monitor, http://www.jamestown.org/edm/article.php?article_id=2370122. ©NATO Defense College 2008 12 and an Italian company has been contracted to construct 200.29 There is an agreement with Iran on the construction of a wind power station.30 Armenia does not extract gas but depends on gas import. Since the Soviet period there have been five main gas pipelines built, which ensured the gas delivery from three sides: Georgia, North and West Azerbaijan. Today, only the Georgian route is operating, as a result of the blockade imposed by Azerbaijan. When, in early January 2006, gas supplies from Russia to Georgia and consequently to Armenia were cut off by explosions, Armenia was forced to live off reserves from its gas reservoir for nine days.31 Soon the Iranian-Armenian pipeline will be operational, allowing gas to be received from Iran. Armenia consumes approximately 1.5 bln cubic meters of gas annually. ArmRosGasprom (ARG), a gas monopoly company with close ties with Gazprom that has been operating since 1997, claims that Armenia is the most gasified country in the CIS.32 Until recently Armenia was considered to lack its own oil and gas resources. Oil products are imported from the neighbouring countries. In September 2007 Canadian Transeuro Energy Corporation started exploration for oil and gas in Armenia. Transeuro Energy has delivered all the necessary modern equipment. Optimism is conditioned by rich occurrences of hydrocarbon close to the Armenian border with Turkey, Georgia, and of course, in Iran and Azerbaijan.33 29 “Armenia and the EU” Discussion with FM of Armenia, 28 February 2007. “President Kocharyan met with President Mahmoud Ahmadinejad of Iran”, 23 October 2007, http://www.armradio.am/news/?part=off&id=10914. 31 “A “family” feud over fuel: pipeline politics are crucial in Armenia-Russia relations. The Moscow connection”, by Julia Hakobyan, Armenian General Benevolent Union Website Publications, http://www.agbu.org/publications/article.asp?A_ID=206 32 “Russian control of Iran-Armenia pipeline confirmed”, by Emil Danielyan, 12 September 2007, http://www.armenialiberty.org/armeniareport/report/en/2007/09/36763A5D-5E36-44FB-940CEFCC1CEB99EF.ASP. 33 “Will Armenia export oil?”, 23 June 2006, PanArmenian Network, http://panarmenian.net/details/eng/?nid=680. 30 ©NATO Defense College 2008 13 CHAPTER 2 OPERATIONAL AND PLANNED OIL AND GAS PIPELINES U.S.-backed multiple pipelines On 8 March 1996, Georgian President Shevardnadze and Azerbaijani President Heydar Aliyev signed a 30-year agreement whereby a portion of AIOC's “early oil” would be pumped via Georgia, specifically to Georgia's Black Sea ports of Supsa and Batumi. 34 In 1999, the BakuSupsa pipeline of limited capacity started transporting oil from Baku to Supsa, opening the new western direction of the Azeri oil. 35 The U.S. played an active role in the decision by AIOC to build the Western route. Baku-Supsa has become the sole stable transportation option for AIOC oil, proving the economic profitability of a political decision.36 At the 1999 OSCE Istanbul Summit, the Presidents of Azerbaijan, Georgia and Turkey signed a contract on the transport of crude oil from the Caspian to the Mediterranean Sea through the BTC. Simultaneously, together with Presidents of Kazakhstan and the U.S, they signed the Istanbul Declaration supporting the project.37 To construct, own and operate the pipeline, which cost $3.6 bln, the BTC Company was created in 2001.38 The first oil was pumped from Baku on 10 May 2005, reaching Ceyhan on 28 May 2006. 34 Caucasus Region, Energy Information Administration, Marcon International, inc., http://www.marcon.com/print_index.cfm?SectionGroupsID=51&P.ID=375. 35 Portal created by Heydar Aliyev Foundation, http://www.azerbaijan.az/_Economy/_OilStrategy/_oilStrategy_e.html. 36 Svante E.Cornell, Mamuka Tsereteli and Vladimir Socor, Geostrategic Implications of BTC. BTC: Oil Window to the West, Edited by S. Frederick Starr and Svante E. Cornell, 2005 Central AsiaCaucasus Institute & Silk Road Studies Program – A Joint Transatlantic Research and Policy Center, John Hopkins University-SAIS. http://www.silkroadstudies.org/BTC.htm, p. 31. 37 Portal created by Heydar Aliyev Foundation. 38 Its shareholders are: BP (30,1%), SOCAR (25,00%), Unocal (8,90%), Statoil (8,71%), TPAO (6,53%), Eni (5,00%), Total (5,00%), Itochu (3,40%), INPEX (2,50%), ConocoPhillips (2,50%) and Amerada Hess (2,36%). ©NATO Defense College 2008 14 In 2006, the Presidents of Kazakhstan and Azerbaijan signed an oil transportation agreement, under which Kazakhstan joined BTC. The pipeline will thus be able to carry oil from the Kashagan field in the Caspian. According to the estimates of French Total, it would cost about $4 bln to prepare the necessary infrastructure to link Kazakh oil to the BTC. Despite the high costs, experts believe it is worthwhile for Kazakhstan to participate in BTC to make the pipeline profitable.39 The second strategic pipeline in the region is the BTE, constructed to transport natural gas from Shah Deniz offshore field in Azerbaijan. This field is estimated to be one of the world’s largest gas field discoveries of the last 20 years, to Georgia and Turkey, traversing Russia and Iran. The first stage of the project cost $4.2bln.40 Shah Deniz became operational in December 2006 but closed in January 2007 owing to technical problems. The shutdown caused problems for Georgia, which was forced to buy emergency gas supplies from Russia at a (higher) spot price.41 The first aim of the BTE is to supply Turkey and Georgia. From the Turkish system gas can eventually be transported to the South-Eastern Europe through the envisaged Turkey-Greece-Italy pipeline. 42 The pipeline can be connected to Turkmen and Kazakh producers and potentially supply Europe with Caspian gas through the planned Nabucco and/or Trans-Caspian Gas pipelines.43 39 Baku-Tbilisi-Ceyhan: Kazakhstan finally commits to the pipeline. 19 June 2006. Eurasianet.Org. http://www.eurasianet.org/departments/business/articles/eav061906.shtml. Also, about the perspectives related to the transportation of Kazakh oil to Azerbaijan, see under the Section on Trans-Caspian Gas and Oil pipelines. 40 The investors in the South Caucasus Pipeline Company are: BP (Technical Operator – 25,5%), Statoil (Commercial Operator 25,5%), Azerbaijan SCP Ltd. (10%), LUKOIL (10%), NICO (10%), Total (10%), and TPAO (9%). The Ministry of Industry and Energy of the Azerbaijan Republic is a non-funding shareholder. 41 “More trouble for BP as gas scheme is halted”, 02 February 2007, by Terry Macalister, The Guardian, http://www.guardian.co.uk/oil/story/0,,2006007,00.html?gusrc=rss&feed=24. 42 285-km, $300m gas pipeline has been proposed to be built between the Turkish city Bursa and Greek city Komotini. Greece has agreed to buy Shah Deniz gas through this pipeline. An agreement was initiated in April 2002. 43 “South Caucasus Pipeline”, http://en.wikipedia.org/wiki/South_Caucasus_Pipeline ©NATO Defense College 2008 15 How was the route of Baku-Tbilisi-Ceyhan chosen? The BTC route (also BTE route since it is parallel to BTC up to Erzurum), is neither the shortest nor the cheapest route for transporting oil from the Caspian to global markets. But a number of political considerations by involved actors resulted in choosing that route. Three main options were considered: expanding the Russian system to the north, through an existing network of pipelines and railroads; the Iranian option to the South, largely through newly built pipelines; and the U.S.-supported concept of multiple pipelines, that sought to prevent any actor from a monopoly over the export of the Caspian energy resources.44 From the U.S. perspective, transporting the Caspian oil through Russia would “place the fragile new sovereignties under constant threat, and divert their energies from building viable independent states and free societies to non-productive geopolitical concerns”.45 Choosing the Iranian option would contradict the U.S. policy of political and economic isolation and sanctions against Iran. Besides, as Ambassador Morningstar, Special Advisor to the President and Secretary of State for Caspian Basin Energy Diplomacy, has argued, “it makes no sense to undermine the independence of the Caspian Newly Independent States by tying their hydrocarbon exports into the pipeline system of Iran, one of their primary competitors.”46 BP representatives have also pointed out that although the Iranian route is shorter, for this route transport facilities needed to be financed, and the combined cost of the pipeline and hauling tariffs would come close to the cost of other options.47 Within the last, U.S.-backed, option, the choice of route was either via Georgia or Armenia. According to some experts, a pipeline route passing through Armenia to Turkey would have been the shortest and cheapest way.48 However, the route through Armenia was considered politically inconvenient by Turkey and Azerbaijan. According to Tuncay Babali, 44 Svante Cornell, Mamuka Tsereteli and Vladimir Socor. Op. cit. p. 18. S. Frederick Starr, “Baku-Tbilisi-Ceyhan: School of Modernity”, BTC: Oil Window to the West. p.8. 46 Tuncay Babali, “Implications of Baku-Tbilisi-Ceyhan main oil pipeline project”, Perceptions, Winter 2005, p. 39, http://www.sam.gov.tr/perceptions/Volume10/winter2005/TuncayBabali.pdf. 47 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit. 48 Ibid., pp. 80-81. 45 ©NATO Defense College 2008 16 Deputy Chief of Cabinet to the Turkish President, Armenia was left out of the BTC project because of the unresolved Nagorno-Karabakh (NK) conflict, and tensions between Turkey and Armenia. He also referred to Ilham Aliev, then vice-president of SOCAR, who stated that “the question of selecting an oil transport route was a political and not an economic decision for Azerbaijan.” 49 According to Turkish-American scholar Zeyno Baran, the late Azeri President Heydar Aliyev hoped to use the prospect of the pipeline crossing Armenia as an incentive for the latter to return NK. But Yerevan refused, and so Azerbaijan (with support from Turkey) decided to block integration of Armenia into regional projects, and to deprive it of access to Western markets via Turkey, leaving it increasingly dependent on Russia and Iran.50 The geopolitical role Most analysts underline that BTC was originally a politically motivated project. “We have never said it’s just about business. It’s about these producing countries gaining a greater measure of autonomy,” stated Stephen Mann, senior US adviser on Caspian Basin Energy Diplomacy.51 Its economic viability has been addressed in later stages. According to political analysts, when it was eventually implemented it was found to be commercially viable. However, there are still doubts among companies that Azeri oil alone might not be sufficient to make the pipeline viable. There was considerable scepticism about the pipeline because of its length, the uncertainty of its commercially viability, and because it would pass through countries with varying degrees of political stability. The U.S. became involved in the project to help create and sustain the political and economic conditions that made implementation of the project possible.52 The BTC is the biggest economic project that the U.S. has supported in the former Soviet space. 49 Tuncay Babali, op. cit. Zeyno Baran, “Baku-Tbilisi-Ceyhan: Implications for Georgia”, Baku-Tbilisi-Ceyhan: Oil Window to the West, pp. 113-114. 51 Cited in Mark Berniker, “Debate continues over viability of Baku-Tbilisi-Ceyhan construction”, 12 July 2002, in Alexander’s Oil and Gas Connections. News and Trends: Central Asia, Volume 7, Issue No. 14. 52 Jones, Elizabeth, "U.S. Caspian Energy Diplomacy: What Has Changed?", Caspian Studies Program, 2001, http://bcsia.ksg.harvard.edu/publication.cfm?program=CSP&ctype=event_reports&item_id=78 50 ©NATO Defense College 2008 17 In terms of energy security, the BTC helps to diversify the global oil supply.53 It also has an impact on world oil prices and limits the market power of OPEC member states. 54 The U.S. has particularly supported such goals; and its position is that Russia should not have a monopoly on pipelines transporting Caspian resources, and that pipelines should not pass through Iran. A letter from U.S. President Bush read out at the ceremony said that the pipeline would bolster energy security, strengthen participating countries’ energy diversity, enhance regional co-operation and expand international investment opportunities.55 U.S. Ambassador Jones has outlined the four declared strategic goals that define U.S. policies toward the Caspian Region: to support the independence and sovereignty of states in the region; to promote economic integration and interdependence among the Caspian states, as well as between them and Turkey; to secure reliable sources of energy and exports to the world market that are safe from disruption; and to support U.S. business interests and investment in the region. 56 The disputes between Russia and ex-Soviet states, and attempts by Russia to use energy as political leverage further reinforced the U.S. position. On 22 October 2007, Secretary of State Rice stated that the U.S. respects “Russia’s interests, but no interest is served if Russia uses its great wealth, its oil and gas wealth, as a political weapon, or...if it treats its independent neighbours as part of some old sphere of influence.”57 Azerbaijan gained a direct connection to global energy markets via the pipeline. Oil revenues have greatly boosted Azerbaijan’s economic growth. Also, Azerbaijan relies on the pipeline to raise its importance and bolster international support for the Azeri position in NK conflict. 53 Baku-Tbilisi-Ceyhan Pipeline, http://en.wikipedia.org/wiki/BTC_pipeline Pugliaresi, Lucian, "Energy Security: How Valuable is Caspian Oil?", Policy Brief 3, Cambridge, MA:Caspian Studies Program,January 2001. 55 K. Gajendra Singh, “Baku-Ceyhan Pipeline: Another West-East fault line”, 31 May 2005, Paper No. 1395, South Asia Analysis Group, http://www.saag.org/papers14/paper1395.html 56 Jones, Elizabeth, op. cit. http://bcsia.ksg.harvard.edu/publication.cfm?program=CSP&ctype=event_reports&item_id=78. 57 “U.S. warns Russia against using energy as “political weapon”, RFE/RL NEWSLINE, Vol. 11, No. 196, part I, 23 October 2007. 54 ©NATO Defense College 2008 18 Substantial transit fees accrue to Georgia. Most importantly, as Georgian President Saakashvili said, the pipeline undermines Russian influence.58 BP says the major oil and gas fields and pipelines will provide revenues of more than $150bn to Azerbaijan, Georgia and Turkey from 2005 to 2024.59 Turkey has gained greater geopolitical importance thanks to the pipeline. Zeyno Baran points out that the BTC was promoted by Turkey mainly for geopolitical reasons. Relative to the size of its GDP, the direct revenue that Turkey will receive from the project is not comparable to the impact it will have on the public finances of Azerbaijan and Georgia. Nevertheless, Turkey will be able to purchase crude oil at a lower price thanks to reduced transportation costs.60 Moreover, the pipeline adds to capacity, supplementing as it does existing Turkish transit routes such as the Bosphorus and Dardanelles straits that had already reached their limits. For Russia it has two major implications. First, it competes with Russian oil in international markets. Second, the BTC reduced the influence of Russia on Azerbaijan and Georgia, including its ability to influence their foreign and security policies. 61 Although Russia tried to prevent the project, when the pipeline became a reality, it had to accept its existence. Iran also opposed the BTC and the overall involvement of Western companies in the Caspian Sea. Tehran tried to use the unresolved legal status of the Caspian Sea as an argument to prevent Azerbaijan inviting them to begin exploration works. Iran opposed the pipeline not only because it bypassed its territory and was a competitor but also because Iranian firms were excluded from the consortium under U.S. pressure.62 Being left out of the pipeline, Armenia opposed the pipeline as well. Having experienced severe energy crisis in 1990s and struggling to ensure its energy security, not having an opportunity to take advantage of 58 K. Gajendra Singh, “Baku-Ceyhan Pipeline: Another West-East fault line”. “Q&A: Baku-Tbilisi-Ceyhan”, Guardian Unlimited. May 26, 2005, http://business.guardian.co.uk/qandas/story/0,,1677268,00.html. 60 Zeyno Baran, op. cit. p.108. 61 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit., p.17. 62 Svant Cornell and Fariz Ismailzade, “Baku-Tbilisi-Ceyhan: Implications for Azerbaijan”, p.79. 59 ©NATO Defense College 2008 19 the Caspian oil was undermining Armenia’s potential for economic development. However, Armenia would not consider refusing to support NK for oil, since from the Armenian point of view oil and national unity are not comparable. After the pipeline came into existence, Armenia adopted a proud approach, not complaining about not being part of the pipeline, though energy dependence and isolation from regional projects are identified as external threats to its security.63 Turkish President Sezer has called the BTC the “Silk Road of the 21st century.”64 Frederick Starr compares the significance of the pipeline with that of PfP. 65 Cornell, Tsereteli and Socor argue that the successful completion of the BTC was a significant move toward the deepening of interaction between the South Caucasus and Europe, increasing mutual interdependence. Furthermore, it made Europe invest politically and economically in the security of the South Caucasus.66 However, Armenia’s non-inclusion in the project undermines this notion. The pipeline, as those authors argue, “anchors Georgia and Azerbaijan to Europe and enables them to freely choose their foreign and security policy strategy and orientation,” 67 By leaving out Armenia, it creates division in the South Caucasus and does not give the three states in the region equal opportunities either for Euro-Atlantic integration or for economic development. The Dutch disease and its implications In 2005, when oil started flowing through the BTC, Azerbaijan’s GDP grew by 26%.68 Azerbaijan's 2008 budget will be $12 bln, while in 2002 it was $1.5 bln.69 63 National Security Strategy of the Republic of Armenia, Ministry of Defense of Armenia, http://www.mil.am/eng/index.php?P.=49. 64 K. Gajendra Singh, “Baku-Ceyhan Pipeline: Another West-East fault line”. 65 S. Frederick Starr, op. cit. p. 14. 66 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit. pp. 25-29. 67 Ibid. 68 Energy Information Administration, Langdon D. Clough, 2007, “Energy profile of Azerbaijan”, in: Encyclopedia of Earth, Eds. Cutler J. Cleveland (Washington, D.C.: Environmental Information Coalition, National Council for Science and the Environment). [Published September 12, 2007], http://www.eoearth.org/article/Energy_profile_of_Azerbaijan, p.1. 69 Azerbaijan looks to stash cash”, 25 October, World News Editor, UPI. GROONG Digest 4577. ©NATO Defense College 2008 20 However, there are negative implications of overdependence on the energy industry that accounts for 80-84% of the country's exports. 70 Experts point out that some symptoms of Dutch disease are already evident in Azerbaijan. The boom has not provided significant employment outside the energy sector, and the business climate for nonoil sectors in Azerbaijan is unfavourable. According to the IMF, expenditures and inflation have increased since 2005. Almost 45 % of the population lives below the poverty line. 71 The disparity between Baku and the regions, especially rural areas, is widened by irregular rates of economic development. 72 According to Transparency International, Azerbaijan is one of the most corrupt states in the world. All of this creates the potential for political instability in the country, including protests by the disenfranchised and the probability of their oppression by the authorities. The Azeri government admits the danger of Dutch disease. In 2005, the Minister of Economic Development urged the business community to diversify Azerbaijan’s economy, avoiding excessive dependence on the energy sector.73 To manage the “paradox of plenty,”74 President Heydar Aliyev created a State Oil Fund (SOF) in 1999, designed to use money obtained from oil-related foreign investment for education, poverty reduction, and efforts aimed at raising rural living standards. According to its Executive Director, on 1 November 2007 SOF totalled $2,166 bln, 45.5% more than at the beginning of the year.75 SOF was created on the Norwegian prototype and following the provisions of the UK-sponsored “Extractive Transparency” designed to help resource-rich countries avoid 70 Dutch disease is a concept according to which an increase in revenues from natural resources deindustrialises a nation's economy by raising the exchange rate, which makes the manufacturing sector less competitive. Sympthoms of Dutch disease are inflation, high expenditures and lack of investment in other sections. The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of natural gas in the 1960s. 71 “Energy profile of Azerbaijan”, op. cit. p. 1. 72 “Azerbaijan: Baku boom has yet to hit regions”, by Rovshan Ismayilov, 13 August 2007, Eurasia Insight, www.eurasianet.org/departments/insight/articles/eav081307.shtml 73 “Seeking economic diversity”, 8 August 2005, Source: Caspian Business News, http://www.unaz.org/dpi/clippings/8-08-2005_CBN_eng.html 74 “Paradox of plenty” is a term used for the unequal distribution of revenues among the population. 75 The Oil Fund of Azerbaijan has equalled to $2.16 bln., 1st November 2007, www.regnum.ru/news/908834.html. ©NATO Defense College 2008 21 corruption. However, local analysts complain about the lack of its public accountability and transparency.76 According to Karl and Gary, in less developed countries dependent on oil revenues, the gap between expectations and reality can cause disorder and war. Their governments rely on repression to keep themselves in power and spend a great percentage of their revenues on military and security forces.77 The International Crisis Group (ICG) argues that Dutch disease is likely to increase the risk of adoption of a radical nationalist agenda and resumption of war by Azerbaijan, to divert popular discontent.78 Tom de Waal, a London-based journalist, says: “There's obviously an issue, which is that you're going to have a much more revolutionary underclass, who as the rich get richer and they're not sharing it, get more militant. And then you could see strikes among oil workers, you could see Islamist movements growing.79 According to ISA expert Rahder, the country's disenfranchised minorities benefit little if at all from oil revenues and are increasingly disillusioned. Radical Islam is quickly stepping in to fill in the gap. While these groups appear to lack any concrete organization, the government's failure to strengthen Azerbaijan’s democratic institutions could buy them time to become a serious threat.80 The prevented plot to target Western embassies in Azerbaijan on 29 October 2007 may suggest that radical Islamists are becoming a major challenge. Although Azeri authorities tried to downplay the spread of wahhabism, experts believe that the incident shed light on the growth of Islamic radicalism in Azerbaijan.81 76 “Pipeline opening helps spur political opposition in Azerbaijan”, bt Shahin Abbasov and Khadija Ismailova, 6 June 2007, Eurasia Insight. http://www.eurasianet.org/departments/insight/articles/eav060605.shtml 77 T erry Lynn Karl and Ian Gary, “The Global Record”, Foreign Policy In Focus (Washington, DC & Silver City, NM: Interhemispheric Resource Center/Institute for Policy Studies/SEEN, January 2004). http://www.fpif.org/papers/03petropol/development.html 78 “Nagorno-Karabakh: Risking War”, Europe Report No. 187, 14 November 2007, International Crisis Group, pp. 8-10. See more about this in the next section. 79 “Azerbaijan: Baku-Tbilisi-Ceyhan Inauguration Sign of Baku’s Growing Strength”, 12 July 2006, RFE/RL, http://rfe.rferl.org/featuresarticle/2006/07/61b4f75f-1f45-4c58-b543-2efa9a4a530b.html 80 “Azerbaijan: Heading off jihad”, 13 November 2007, ISA Consulting Independent, Intelligence Information. http://www.isaintel.com/site/index.php?option=com_content&task=view&id=101&Itemid=1 81 “Azerbaijan: Terror attack foiled in Baku", EurasiaNet, 30 October 2007, ISN Security Watch, http://www.isn.ethz.ch/news/sw/details.cfm?id=18292 ©NATO Defense College 2008 22 Not only oil producing but also transit countries are prone to Dutch disease. According to Georgian expert Vladimir Papava, some symptoms of Dutch disease have appeared in Georgia, reflected in problems such as inflation, human rights and democratic development.82 The tariff revenues, estimated to be some $50 mln annually, flow into Georgia's budget. 83 Two years after the oil began to flow, some economists and NGO activists question how much the BTC has stimulated economic growth in Georgia. According to Glendinning from BP’s Georgia office, the indirect impact on the economy and the direct impact on average Georgians depends on how Tbilisi spends the money that BTC is generating for the state budget.84 Corruption allegations between the current Georgian authorities and opposition leaders who have previously held official positions and the civil unrest in Georgia in autumn 2007 can be partly explained by Dutch disease. The dismissal of the PM by President Saakashvili and the social programmes he launched before resigning in order to start his electoral campaign are an indication of his admission of serious social problems in Georgia. The brutal use of force against protesters bring remind the predictions of Karl and Gary. Many analysts suggest that Georgia seems to be “sliding towards authoritarianism.”85 Georgia has increased its defence budget. In September 2007, the Parliament approved a budget increase that allocated $723 mln: i.e. over 7 % of the GNP or a quarter of the budget to the Defence Ministry. 86 Parliamentary opposition did not support increase of the Georgian Army from 28,000 to 32,000, arguing that increasing the Army to improve the country's defensive capacity or comply with NATO standards is 82 Vladimer Papava, “Baku-Tbilisi-Ceyhan: Implications for Georgia”, Baku-Tbilisi-Ceyhan: Oil Window to the West, pp. 91-102. 83 Baku-Tbilisi-Ceyhan Oil Pipeline Project, The Ministry of Energy of Georgia, http://www.minenergy.gov.ge/index.php?m=309. 84 “Georgia: Does Baku-Tbilisi-Ceyhan promote hoped-for local economic growth?”, by Molly Corso. 18 April 2007, Eurasianet.org http://www.eurasianet.org/departments/insight/articles/eav041807.shtml 85 “Georgia: Sliding towards authoritarianism?”, Europe Report No. 189, 19 December 2007, International Crisis Group. 86 “NATO chief visits Georgia”, by Molly Corso and Nina Akhmeteli, EurasiaNet, 9 October 2007, http://www.isn.ethz.ch/news/sw/details.cfm?id=18215 ©NATO Defense College 2008 23 unnecessary. 87 The Abkhaz Parliament expressed concern over the increase of Georgian defence expenditures. Members of the Abkhazian Parliament contended that in doing so, the Georgian leadership is preparing to start large-scale military actions.88 According to the same authors, oil rents tend to impede democratization and sustain a long line of authoritarian rulers.89 The political elite keeps the oil revenues to itself, and starts treating citizens as clients. There are exceptions, at least four well-established oil rich democracies – Norway, Canada, UK and US. But most analysts believe that they do not fall under the rule since they were established democracies with strong institutions, rule-of-law and a strong tax system before they became oil exporters.90 When it was decided to build BTC, human rights activists criticized Western governments for going ahead with the plan. One argument against the pipeline were the reported human and civil rights abuses by the Azeri authorities.91 Human Rights Watch issued a letter on 24 May 2005 to President Aliyev, denouncing the detention of Azeri opposition figures on 21 May, one week before launching BTC. Police used force, beating participants and detaining more than 100 people. 92 However, pointing out the human rights related problems in Azerbaijan contradicted the real politics that made the transport of Caspian oil to Europe necessary, especially given even lower human rights standards in other states rich in unexploited oil and gas. UK-based Baku-Ceyhan Campaign have pointed out that responsibility for the security of the pipeline in the Kurdish areas would rest with the Turkish State Gendarmerie, charged by the Council of Europe with 87 “Parliamentary opposition not to support increase of army up to 32 000”, 14 September 2007, Prime News, http://eng.primenewsonline.com/news/121/ARTICLE/15334/2007-09-14.html 88 “Abkhaz parliament: Georgia is getting ready for large-scale military action”, 25 September 2007, Regnum News Agency, http://www.regnum.ru/english/889551.html 89 Terry Lynn Karl and Ian Gary, “The Global Record,” Foreign Policy”in Focus (Washington, DC & Silver City, NM: Interhemispheric Resource Center/Institute for Policy Studies/SEEN, January 2004). 90 Samuel R. Schubert, Revisiting the oil curse: Are oil rich nations really doomed to autocracy and inequality?, National Defense Academy in Austria, Institute for Human and Social Sciences, Oil and Gas Business, 2006, pp. 4, 11. 91 Baku-Tbilisi-Ceyhan pipeline, http://en.wikipedia.org/wiki/BTC_pipeline 92 K. Gajendra Singh, op. cit. ©NATO Defense College 2008 24 human rights abuses.93 Amnesty International, the Kurdish Human Rights Project and Friends of the Earth accused BOTAS, the Turkish pipeline company, of offering less compensation to landowners than promised.94 Besides, most of those hired to construct the pipeline were laid off upon its completion. Many believe the Azerbaijani government had encouraged BTC Consortium to employ foreign workers in order to avoid dealing with potential unemployment afterwards.95 The 2007 meeting of the Human Rights Commission of the European Parliament has not been positive for Baku. Senior EC official Wissels said that the deteriorating human rights situation in Azerbaijan is “not acceptable” for the EU and contradicts the spirit and purpose of its Action Plan within the European Neighbourhood Policy.96 In October 2007, EU Special Envoy for the Southern Caucasus Semneby said the EU’s interest in Azerbaijan’s energy resources and transit potential will not cause the bloc to turn a blind eye to its deteriorating human rights standards. 97 However, it is unclear what this means in practical terms – what the EU can do, beyond declarative statements, to boost the improvement of the human rights situation in Azerbaijan. The greatest environmental controversies related to the BTC have been related to global climate change. The fossil fuel industry can be seen as part of a complex system that transfers carbon from geological underground reserves, where it is safely locked away, to the atmosphere, where it contributes to global warming. According to Baku-Ceyhan Campaign NGO, once burnt, the oil transported daily along the BTC pipeline at a rate of one million barrels daily (when it is operating at full capacity after 2008) will contribute 160 million tones of CO2 to the 93 Conflict, militarization, human rights and BTC, Baku-Ceyhan Campaign Website. http://www.bakuceyhan.org.uk/more_info/humanrights.htm “Q&A: Baku-Tbilisi-Ceyhan pipeline”, 26 May 2005, The Guardian. 95 “The oil flows through BTC, but a problem may loom”, by Mevlut Katik, 31 May 2006, Eurasianet.org, http://www.eurasianet.org/departments/business/articles/eav053106.shtml 96 FAST Update Azerbaijan. Trends in conflict and cooperation Jul-Aug 2007, Swiss Peace Foundation, 12 September 2007, http://www.reliefweb.int/rw/RWB.NSF/db900SID/LRON76YHJX?OpenDocument 97 “EU Envoy Call South Caucasus a ‘Broken Region”, 3 October 2007, RFE/RL. http://www.rferl.org/featuresarticle/2007/10/b9a6d173-75fd-41c2-a783-671415de0c94.html. 94 ©NATO Defense College 2008 25 atmosphere every year. 98 Others have pointed out that BTC crosses seismic zones. 99 The route takes the pipeline through three active faults in Azerbaijan, four in Georgia and seven in Turkey. The pipeline's engineers have equipped it with a number of technical solutions to reduce its vulnerability to earth movements. 100 And lastly, any leakage in Georgia could affect the mineral water aquifer at Borjomi national park.101 The impact of the pipelines on the Nagorno Karabakh conflict Since the ceasefire in 1994, negotiations have been going on under the OSCE Minsk Group (MG) co-chaired by the U.S., France and Russia. However, there is no peace agreement. Armenia supports the peaceful settlement of the conflict based on the principle of self-determination. Azerbaijan refers to another principle of international law – territorial integrity, and increasingly mentions war as a means to solve the conflict. Azerbaijani and some Western analysts argue that Armenia is interested in keeping the status quo, hoping that with the passing of time NagornoKarabakh’s de facto independence will become a reality increasingly difficult to ignore. However, western analysts are increasingly inclined to argue that Azerbaijan seems to be postponing any peace deal until the military balance has shifted decisively in its favour, based on benefits due to its new role as a major energy exporter.102 In its 3 July 2006 statement, the MG outlined the core principles of a basis for the two sides to draft a far-reaching settlement agreement. U.S. Co-chair Bryza added that President Kocharyan accepted the OSCE’s outline of a possible settlement. According to ISN expert Karl Radher, this may mean that MG sees Azerbaijan as the main impediment to a resolution.103 This revelation occurred during the same month when oil 98 “Climate change and the Baku-Tbilisi-Ceyhan pipeline”, Baku-Ceyhan Campaign, http://www.bakuceyhan.org.uk/more_info/climatechange.htm 99 Jonathan Elkind, “Economic Implications of Baku-Tbilisi-Ceyhan”, Baku-Tbilisi-Ceyhan: Oil Window to the West, p.54. 100 Baku-Tbilisi-Ceyhan pipeline, http://en.wikipedia.org/wiki/BTC_pipeline 101 “Q&A: Baku-Tbilisi-Ceyhan”, Guardian Unlimited, May 26, 2005. 102 “Nagorno-Karabakh: Risking War”, ICG, p. 3. 103 “OSCE bombshell reveals Karabakh position”, by Karl Rahder, 7 August 2006, ISN Security Watch, http://www.isn.ethz.ch/news/sw/details.cfm?id=16482 ©NATO Defense College 2008 26 started flowing through BTC, accompanied by bellicose statements by the Azeri President and other senior officials, and an enormous increase in national defence expenditures, based on oil revenues. Speaking on 23 June 2006, three weeks before the official inauguration of the BTC, and 10 days before the MG statement, President Aliyev said: “Armenians should start thinking now where Armenia is going to be after one year, three years, five [years]. In the next 20 years, Azerbaijan will receive just from the oil project US$140 bln…We will use these tremendous opportunities to strengthen our army, [and] show that our army will be able at any moment to take back our occupied lands.”104 As ICG maintains, oil money has given Azerbaijan self-confidence and the means to upgrade its armed forces. Azerbaijan’s elites believe the country is becoming a regional power and will soon dictate terms to Armenia.105 In July 2007 Aliyev said that “Azerbaijan is the most powerful country in the region from a military standpoint. Armenia has to realize it and voluntarily withdraw its troops from the lands it does not own. It will help escape a war.” 106 Azerbaijan will further increase its defence spending by $300 mln to $1.3 bln in 2008.107 Azerbaijan uses every opportunity for anti-Armenian propaganda. Domestically, the motivation is to promote ethnic hatred; internationally, to gain international support regarding the conflict. Self-explanatory evidence of the extent of Azeri propaganda toward Armenia is a statement made by the Information Section of the Ministry of Defence to the Azeri media following the prevention of the planned wahhabist attack on Western embassies in late 2007, claiming that the Armenian Church and Secret Services are behind wahhabists in Azerbaijan.108 104 “Azerbaijan: BTC Inauguration Sign of Baku’s Growing Strength”, by Luke Allnut, 12 July 2006, RFE/RL, http://www.rferl.org/featuresarticle/2006/07/61b4f75f-1f45-4c58-b543-2efa9a4a530b.html 105 “Nagorno-Karabakh: Risking War”, op. cit., pp 8-10. 106 “Oskanian slams Aliyev`s Karabakh statements”, New Europe, The European Weekly, 5 July 2007, Issue no. 737, http://www.neurope.eu/view_news.php?id=75705. 107 “Azerbaijan boosts defense budget, warns Armenia”, 22 October 2007, Reuters. http://www.reuters.com/article/latestCrisis/idUSL22373221 108 “Baku to accuse Yerevan in spread of sectarianism and v(w)ah(h)abysm”, 13 November 2007, www.demaz.org ©NATO Defense College 2008 27 In response, Armenia is also increasing its military budget. However, it cannot be compared with that of Azerbaijan: Armenia’s 2007 military budget was a record $280 mln but only about a quarter of Azerbaijan’s.109 Military budget for 2008 increased by 20% to $376 mln. 110 Prime Minister and former Defence Minister (DM) Sargsyan, who was subsequently elected President as a result of the February 2008 elections, reflected the views of the Armenian authorities when he said: “Should Azerbaijan launch provocations over NK, Armenia will not remain indifferent… Money alone cannot produce a battle-ready army, especially in a relatively short period of time. The experience of the early 1990s shows that Azerbaijan’s considerable superiority over us, in terms of funds, manpower and weapons, could not be translated into superiority on the battlefield.” 111 Experts predict that Azerbaijan will require 10-15 years to begin to challenge Armenia’s armed forces.112 According to the Chief of the General Staff of the Armed Forces of Armenia Ohanyan, Armenian authorities do not underestimate the military potential of Azerbaijan, and the Armenian response takes the form of military exercises, reforms in the army and improved military efficiency.113 Armenia has adopted a pragmatic approach to defence reform and interoperability with NATO forces, displaying reserve in public statements and not rushing into taking on commitments, but whenever it has committed it has gained a good reputation among NATO experts for the quality of practical implementation.114 Meanwhile, some experts have commented that Azerbaijan remains some way away from NATO standards and seeks to develop interoperability with NATO to serve its own interests – most particularly in seeking military advantage in case of a resumption of hostilities with Armenia.115 109 “Nagorno-Karabakh: Risking War”, op. cit., p. 13. “Parliament begins debates on 2008 budget”, Armenpress, 13 November 2007. 111 Serj Sargsyan, “External challenges cannot bring us to our knees”, Tatul Hakobian, 29 October 2007, http://www.armradio.am/news/?part=pol&id=10975 112 Vladimir Karapetian, Spokesperson of the Ministry of Foreign Affairs, responds to a question by “Arminfo” News Agency on the statements by Azerbaijani President, 18 January 2008, http://www.armeniaforeignministry.com/main/index.html 113 “We respond to Azerbaijan’s military rhetoric with military exercises and reforms”, http://www.armradio.am/news/?part=pol&id=11732 114 Sossi Tatikian, “Euro-Atlantic Integration Trends of the South Caucasian States”, Central Asia and the Caucasus, p. 109. 115 Andrew Monaghan, “Azerbaijan’s Key Role in the South Caucasus”, Research Paper, NDC, Rome, No. 32, March 2007, p. 5. 110 ©NATO Defense College 2008 28 On 18 January, the Spokesperson of the Armenian Foreign Ministry refuted President Aliyev’s recent statement that there could be no comparison between Armenia and Azerbaijan in the area of economic development and reputation on the international scene, arguing that Azerbaijan’s international rankings are problematic in economic and social issues. He referred to the Heritage Foundation Wall Street Journal’s Economic Freedom Index, which has ranked Armenia 28th and Azerbaijan 107th out of 162 countries rated, the Freedom House rankings that considers Armenia Partly Free and Azerbaijan Not Free, and the Foreign Policy Index of Failed States that places Armenia 50 places above Azerbaijan.116 It is difficult to estimate whether Azerbaijan intends to start a war or rather uses it as leverage in negotiations over NK. ICG predicts that the riskiest period for the resumption of military actions related to the NK conflict could be around 2012, when the oil revenues of Azerbaijan may begin to fall, and a military adventure might seem a tempting way to distract citizens from economic crisis. 117 Even if Azerbaijan does not really intend to start war, it seems that, in view of the oil-generated advantages and benefits, Azerbaijani authorities do not see the need for compromise on their side. “As to mutual concessions, it seems like Azerbaijan has nothing to make a concession with and it makes a concession only through keeping peace. Peace cannot be considered as a concession in settlement of a conflict,” said the Deputy Speaker of the Armenian Parliament Hovhannisyan. 118 The Director of the Institute for National Strategic Studies at the Armenian Defense Ministry, Major General Kotanjian, explains bellicose Azeri statements as an attempt to exert harsh military and political pressure upon the Minsk Group co-chairs – the USA, Russia and France.119 116 Vladimir Karapetian, Spokesperson of the Ministry of Foreign Affairs, responds to a question by “Arminfo” News Agency on the statements of Azerbaijani President, 18 January 2008. Nagorno-Karabakh: Risking War. ICG, op. cit., pp. 8-10. 118 Armenia’s position in negotiations on Nagorno-Karabakh weakening – Deputy Speaker of Armenian Parliament, 7 November 2007, Trend News, http://news.trend.az/index.shtml?show=news&newsid=1071798&lang=EN 119 “Baku is losing its temper and intimidates OSCE MG co-chairs with war”, interview with Hayk Kotanjian, 1st December 2007, http://www.regnum.ru/english/923892.html 117 ©NATO Defense College 2008 29 Pipeline Security Concerns relating to the security of BTC, BTE and future possible pipelines in the region were already being expressed in the initial stages of their planning. Many analysts consider various conflicts in the region as potential threats to the physical security of pipelines. Existing pipelines go through the edges of the Kurdish region of Turkey. They are only 15km away from NK, 30km from Abkhazia and 55km from South Ossetia. In Turkey, the PKK has a history of targeting oil installations.120 Most analysts consider the Kurdish problem as the main threat to the security of pipelines at the moment, and believe that there are already clear indications that PKK militants are considering attacking energy assets if a Turkish military offensive is directed against them. On 19 October 2007, Europe-based pro-PKK Firat news agency quoted PKK commander Karayilan as saying that “We have no specific policy on pipelines but we are now waging a defensive war...Since pipelines that cross Kurdistan provide the economic resources for the Turkish army's aggression, it is possible the guerrillas target them,” he said.121 Azerbaijani Deputy FM Ibragim assessed that statement as “a serious threat” to the economic interests of numerous states. 122 Gal Luft, based on the Turkish TV reports, claims that on 24 October a remote controlled device was detonated on a pipeline in the Garzan region of Turkey, and two days later PKK bombed an oil pipeline in South-Eastern Turkey.123 However, it is difficult to determine the accuracy of such reports. Even if the PKK attacks pipelines carrying Caspian oil and gas, it will do so in 120 During the height of their armed conflict with Turkish security forces in 1990s, the PKK identified Turkish pipelines and oil refineries in the Kurdish regions as legitimate military targets. In December 1991, the PKK destroyed Turkish Petroleum’s TPAO’s Selmo oil wells near the city of Batman with rocket fires. In less than five weeks between 31 August and 5 October 1992, the PKK attacked three different pipeline sites in the Kurdish regions. Between 1996 and 1997, PKK attacked the TurkishIraqi Kirkuk-Yumurtalik pipeline twice (source: Turkey-Iraq spat may hit energy”, by John C.K. Daily, 26 October 2007, UPI). 121 “Kurd rebels say may hit Turk pipelines if attacked”, 19 Oct 2007, http://www.reuters.com/article/ worldNews/idUSL193454520071019. See also John C.K. Daily, op. cit. 122 “Azerbaijani official concerned by PKK threat to pipelines”, RFE/RL NEWSLINE, Vol. 11, No. 196, part I, 23 October 2007. 123 “Baku-Tbilisi-Ceyhan: Not yet finished and already threatened”, Energy Security, by Gal Luft, 4 November 2004, Institute for the Analysis of Global Security, http://www.iags.org/n1104041.htm ©NATO Defense College 2008 30 Turkey, not in Azerbaijan or Georgia. Furthermore, even if those attacks occur, they are isolated and pin-prick attacks that do not pose a serious threat to pipeline security. Small-scale damage can be fixed within a short period of time. If a pipeline does not operate for few days, it will cause only minor economic disruption. Some Western commentators suggest that since the pipeline passes close to Nagorno-Karabakh, it could be vulnerable to “terrorist attacks,”124 or that “Armenian nationalists” might decide to attack the BTC to hurt Azerbaijan deriving its income from oil sales.125 Turkey and Azerbaijan have often tried to accuse Armenia and Nagorno Karabakh of terrorism after 9/11, including in NATO, but could not present evidence for it. Some Western analysts and media associate movements for independence with national liberation movements struggling for independence. Few of those movements indeed use terrorist methods; however, in the case of Nagorno Karabakh, there has been a war over the conflict but Nagorno Karabakh Armenians have not used terrorist methods. In January 2003, Azerbaijan's DM Abiyev told the UK Ambassador and Military Attaché that Armenia's “aggressive policy” and the arms and hardware accumulated by Armenia posed an “actual threat” to the security of BTC that should be eliminated.126 Yet even the Azeri Foreign Minister (FM) Mamedyarov admitted that Armenia is unlikely to make trouble for the BTC.127 If military actions do not start, it is highly unlikely that NK or Armenia will launch attacks targeting pipelines. However, that possibility cannot be excluded in case of war. ICG predicts that in tgh event of resumption of military actions by Azerbaijan, important oil and gas pipelines near NK would probably be among the first casualties of a new war.128 Given Azerbaijan’s militaristic statements, its announcement of a significant increase in defence expenditures based on oil revenues and its threats to solve the conflict by military means, should war resume, 124 “Q&A: The Baku-Tbilisi-Ceyhan pipeline”, op. cit. Gal Luft, op. cit. Conflict, militarization, human rights and BTC, Baku-Ceyhan Campaign, http://www.bakuceyhan.org.uk/more_info/humanrights.htm 127 “Azerbaijan’s foreign policy agenda”, Carnegie endowment, 4 August 2005, http://www.carnegieendowment.org/events/index.cfm?fa=eventDetail&id=805&&prog=zru 128 Nagorno-Karabakh: Risking War, op. cit. For more about the increase of military expenditures of Azerbaijan, see the next Section of this paper. 125 126 ©NATO Defense College 2008 31 NK or Armenia might consider disrupting the pipelines, as part of the defence strategy. Some analysts also consider the conflicts in South Ossetia, Abkhazia and the North Caucasus as threats to the pipelines in the region. In January 2003, the Baku-Supsa pipeline was shut down for two days because of an explosion, which some analysts suggested was caused by sabotage. 129 Although an investigation concluded that the explosions in North Ossetia in January 2006 that cut off gas and electricity supplies to Georgia and Armenia were caused by technical malfunction, many analysts still think of it as an act of sabotage, based on President Saakashvili’s accusation. Gal Luft even suggests that because of its unhappiness with the BTC, Russia might lend its hand to groups to sabotage it.130 However, Russia has more legitimate ways to assert its role in the world energy market than resorting to such dubious methods. Islamic radical movements are identified as a further potential threat to pipelines. According to Azerbaijan’s National Security Minister Abbasov, in 2004 the country’s Special Services had information that regional insurgents and members of Al Qaeda were planning acts of sabotage designed to derail construction of the pipeline. When in November 2007 an alleged attack on Western embassies was prevented in Azerbaijan, Baran warned that Wahhabists can be a threat for the pipelines. 131 Luft has pointed to Iran as a country most interested in impeding in the disruption of the BTC, possibly using terrorist groups it sponsors towards that aim.132 While so far there is no visible evidence for this, ISA expert Rahder suggests that Iran controls cells linked to Hezbollah in the south of Azerbaijan: if a U.S. attack on Iran appears to be aided by Azerbaijan, these groups might move against western economic targets.133 129 Caucasus Region, Energy Information Administration, Marcon International Inc., http://www.marcon.com/print_index.cfm?SectionGroupsID=51&P.ID=375. 130 Gal Luft, op. cit. 131 “Azerbaijan plot shows radicals’ threat has teeth”, by Lada Yevgrashina, 8 November 2008, http://www.alertnet.org/thenews/newsdesk/L08191665.htm 132 Gal Luft, op. cit. 133 “Azerbaijan: Heading off jihad”, 13 November 2007, ISA Consulting Independent, Intelligence Information, http://www.isaintel.com/site/index.php?option=com_content&task=view&id=101&Itemid=1. ©NATO Defense College 2008 32 The BTC consortium has implemented stringent security measures. The pipeline is buried underground along virtually the entire route. Aboveground structures, such as 8 pump stations, have blast walls, closedcircuit cameras and armed guards. The pipeline route is monitored and patrolled. BP employs local Georgians to patrol the pipeline as a first line of defence by potentially alerting officials to any suspicious activity. BP has also provided training and funding to the units of Georgia’s new 700member Strategic Pipeline Protection Department.134 In April 2002, Azerbaijan and Georgia signed a military agreement designed to increase oil and gas pipeline security, alongside anti-terrorist and anti-separatism efforts,135 and in June 2002 Azerbaijan, Turkey and Georgia signed a trilateral agreement on combating terrorism and organized crime, which mainly concerns the security of pipelines.136 In August 2004, the armed forces of the three countries conducted a joint military exercise in Baku aimed at strengthening coordination and cooperation in preparation for defending BTC from a terrorist attack.137 Most US-led anti-terrorism initiatives in the region have been directly linked to the need to increase security along the pipelines.138 While still Vice President of SOCAR, Ilham Aliyev publicly stated that the protection of BTC would involve the U.S. 139 In 2004, U.S. military specialists reportedly commenced the installation of long-range mobile radars near the pipeline. General Ward, the Deputy Commander of the U.S. European Command, revealed in a 2004 Senate hearing that “provisionally deployed mobile forces” will soon patrol BTC.140 Russia considers the attempt to use protection of pipelines as a pretext for enhancing foreign, in particular U.S. military presence in the region, and assesses it as a threat to Russia’s national security.141 FM Lavrov repeated Russia’s opposition to the potential deployment of “third-party military 134 “Turkey: Oil pipeline security questions persist”, by Alexandros Petersen, 12 July 2006, http://www.isn.ethz.ch/news/sw/details.cfm?id=16379 Conflict, militarization, human rights and BTC, op. cit. 136 Tuncay Babali, op. cit., p. 43. 137 Gal Luft, op. cit. 138 Conflict, militarization, human rights and BTC, op. cit. 139 Ibid. 140 Gal Luft, op. cit. 141 K. Gajendra Singh, op. cit. 135 ©NATO Defense College 2008 33 forces” in the region at a meeting of Caspian Sea littoral states in March 2006. He claimed that some foreign states harbour ambitions “to infiltrate the Caspian politically and militarily with ill-defined goals,” and added that Caspian states had the ability to ensure regional security without outside help.142 In the light of the possibility of the U.S. military action against Iran, the latter is even more worried about the perspective of deployment of U.S. troops in the Caspian region. On 23 October 2007, the NATO SG’s Special Representative for the Caucasus and Central Asia, Simmons, stated that NATO is considering the possibility of providing security for BTC, pointing to terrorism as the biggest threat to the pipeline.143 It is not clear which terrorism he means in this context: the threat of wahhabism that became obvious a few days after this statement, or the potential threat of the PKK or Hezbollah. Azerbaijani Deputy PM Sharifov stated in October 2007 that NATO refused to assist Azerbaijan in obtaining advanced equipment for ensuring security of pipelines, maintaining that the Alliance is involved only in ensuring security of communications passing through the territory of its member countries, and does not have experience in protection of oil pipelines running via non-members. 144 This refusal by NATO might indicate that NATO does not see a serious threat to the pipelines carrying Azeri oil and gas. On the same day, Ilham Aliyev announced that there have been no incidents or threats against the pipelines in Azerbaijan either during their construction of pipelines or during their exploitation; however, export infrastructure is well protected by the Special Service of the State Protection. 145 The Azeri Ambassador to NATO added that Azerbaijan is capable of guarding pipelines without any help from international organizations, including NATO.146 142 “Russia tries to scuttle proposed Trans-Caspian pipeline”, by Serjei Blagov, 28 March 2006, http://www.eurasianet.org/departments/insight/articles/eav032806.shtml “NATO could provide security for Baku-Ceyhan oil pipeline”, 23 October 2007, Interfax. 144 “NATO not Responding Positively to Azerbaijan’s Appeal for Provision of Security of Pipelines”, Deputy Premier, 30 October 2007, http://news.trend.az/cgi-bin/readnews2.pl?newsId=1064148&lang=EN 145 Ilham Aliyev, “Export infrastructure of Azerbaijan is well protected”, 31 October 2007, www.regnum.ru/news/907376.html. 146 “Official says Azerbaijan capable of defending oil export pipeline”, RFE/RL Newsline, Vol. 11, No. 204, part I, 2 November 2007. 143 ©NATO Defense College 2008 34 Planned Nabucco and Trans-Caspian pipelines The Nabucco project is a planned gas pipeline connecting the Caspian region, the Middle East and Egypt via Turkey, Bulgaria, Romania and Hungary with Austria, and further on with the Central and Western European gas markets. Its official estimated cost is about 5 bln Euro.147 The first construction phase, expected to start in 2009, will cover the planned route from Ankara to Baumgarten. Subsequently, existing pipeline facilities between the Turkish/Georgian and Iranian borders will be used for 2 years. This will enable the pipelines to become operational in 2012 with an initial capacity of up to 8 bcm. The construction of the rest of the pipeline will run in parallel from 2012 to 2013 and will consist of the construction of the remaining section between the Turkey to Georgia and/or Iran and Turkey.148 Among the top policy priorities for EU energy development is “avoidance of strategic dependence” on Russia: Nabucco will help Europe to diversify its energy supply and reduce dependence on Gazprom.149 Europe was not enthusiastic about Nabucco until Gazprom stopped delivering gas to Ukraine on 1 January 2006 over a price dispute, which briefly disrupted supplies to Western Europe as well. Some European states believe that a diversification of routes from Russia would guarantee security of supplies and that Russia’s North Stream and Blue Stream projects can be alternative routes to the unreliable transit routes via Ukraine and Belarus.150 However, most European states now tend to agree on the need to diversify not only the routes but also supplier states. It will also reduce the price of the gas. Russia is able to buy gas in Central Asia for $100 per 1000 cm and sell it in Europe for around $300. 151 According to some 147 Nabucco Gas Pipeline International GmbH website. Project Description / Pipeline Route, http://www.nabucco-pipeline.com/project-description-pipeline-route/index.html 148 Ibid. 149 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit., p. 28. 150 “EU’s Nabucco project, which is “definitely not a dream”, by Muzhdat Hasanov, 30 April 2007, http://www.turkishweekly.net/comments.php?id=2588. 151 Matthew Bryza, “Outflanking Russia’s Energy Grip on Europe Energy”, Summer/Fall 2007, European Affairs, the European Institute, http://www.europeanaffairs.org/current_issue/2007_summer_fall/2007_summer_fall_11.php4 ©NATO Defense College 2008 35 experts, apart from using gas as a political tool, Russia is not investing enough in its energy sector to assure long term security of supplies to Europe. Russia might not have enough gas of its own to supply its domestic market and Europe at the same time, and become reliant on gas from the Central Asia.152 The EU has signed memoranda on energy cooperation with Azerbaijan and Kazakhstan intending to diversify its sources. However, the lack of a common energy policy prevents the European Commission (EC) from playing a more active role in negotiations over Nabucco. That is the reason that the EU has been seeking the involvement of the U.S. in promoting the project. Azerbaijan has declared its commitment to the project. On 20 September 2007, a Memorandum of Understanding (MoU) was signed between the Austrian Ministry of Economy and the Azerbaijani Ministry of Industry and Energy, under which Azerbaijan will play a leading role in the transport of gas from the Caspian to Europe, integrating gas volumes into Nabucco through the BTE route. Deliveries are scheduled for 2012. 153 Thus, Azerbaijan will be essential to phase one of the Nabucco pipeline in correlation with phase two of field production at Shah-Deniz. 154 SOCAR is also invited to participate in the project as a shareholder. Europe would like to use the natural gas of Iran, which is in possession of the world's second largest gas reserves and is relatively near the EU’s borders, for the Nabucco project, while the U.S. have just tightened sanctions against Iran as a way to put more pressure on Tehran to stop its nuclear enrichment programme. Washington imposes penalties on U.S. companies making deals with Iran and can also act to penalize European companies that are active in Iran.155 152 Andrew Monaghan, Russia-EU Relations: An Emerging Energy Security Dilemma, pp. 8-10. “Azerbaijan invited to huge gas pipeline project as shareholder”, 20 September 2007, Trend, http://capital.trendaz.com/?show=news&newsid=1014535&catid=519&subcatid=481&lang=EN 154 “Gas discussions in Turkmenistan, Azerbaijan after the Budapest Nabucco conference”, by Vladimir Socor, 24 September 2007, http://www.jamestown.org/edm/article.php?article_id=2372444 155 “Letter from Europe. Guessing game focuses on European energy”, by Judy Dempsey, International Herald Tribune, 20 Sept 2007, http://www.iht.com/articles/2007/09/20/opinion/letter.php 153 ©NATO Defense College 2008 36 As Deputy Assistant U.S. Secretary of State for European and Eurasian Affairs Bryza has stated, the U.S. support the Nabucco and is eager to see Europe reduce its dependence on Russian natural gas. Equally, he has added that “We support Nabucco as a way to help Europe diversify with Caspian gas – but not Iranian gas.”156 The Bush administration has made it clear that Washington intends to keep economic pressure on Tehran, and the perspective of the military attack of the U.S. on Iran continues to remain a possibility, making the involvement of Iran in the project out of consideration at the moment. On 22 March 2007, State Secretary Rice and Azeri FM Mamedyarov signed an MoU on Energy Security Cooperation in the Caspian Region. Of special focus will be the creation of the Turkey-Greece-Italy gas pipeline, and potentially Nabucco and other pipelines, with Azerbaijani gas, to help Europe bolster its energy security.157 If Azeri gas is believed to be sufficient for the first stage of the project, for its second stage it would be necessary to transport gas from Central Asian states – particularly Turkmenistan and Kazakhstan - especially if there is no agreement in the Euro-Atlantic community on Iran’s role in the pipeline.158 Perhaps because of the estimated insufficiency of its gas for Phase 2, on 21 August 2007 Aliyev mentioned the possibility of cooperation in projects connected to the Nabucco pipeline during Iranian President’s visit to Baku.159 Such a move can also be aimed at securing compromises from Tehran on the legal status of the Caspian Sea.160 With or without Iranian involvement, Nabucco will cross Turkey. The Samsun-Ceyhan oil pipeline that links Turkey’s northern and southern 156 Ibid. “U.S.-Azerbaijan sign MoU on Energy Security Cooperation”, 22 March 2007, Media Note, Office of the Spokesman, Washington, DC., http://www.state.gov/r/pa/prs/ps/2007/mar/82072.htm 158 The role of Central Asian gas for Europe is discussed in the next section on Trans-Caspian gas and oil pipelines. 159 “FAST Update Azerbaijan. Trends in conflict and cooperation”, op. cit. 160 “The EU’s relations with Azerbaijan. Overview”, http://ec.europa.eu/external_relations/azerbaijan/intro/index.htm 157 ©NATO Defense College 2008 37 coasts, as well as the Turkey-Greece pipeline under construction to allow the transfer of Caspian oil to Europe. To limit the damage caused by the BTC to Turkish-Russian bilateral relations, Turkey agreed to the Blue Stream gas pipeline, transporting 16 bcm of Russian gas annually under the Black Sea to Turkey and then Europe since 2005. According to Baran, by making this concession Turkey endangered not only the diversification of its own gas supplies, but that of the EU as well. 161 Now, however, as Andrew Monaghan points out, Turkey is seeking to define itself as a key energy hub and a major artery for energy supply for Europe. Such a role is significant for negotiations and the process for Turkish membership of the EU. 162 Turkey can use its transit role for energy as a political tool, especially if its accession process to the EU is stalled. Such a perspective might be the reason that, according to the Hungarian Minister for Economy and Transport Minister, participants of Nabucco fear potential obstacles created by Turkey to gas transit.163 Between February and August 2007, Ankara and Tehran announced several energy deals. Iran gave Turkey’s Petroleum Company the right to explore for oil and gas in Iran. The parties also agreed to transfer Turkmen gas through Iran to Turkey and then on to Europe, thus becoming part of the Nabucco pipeline.164 Iran might contribute to reducing Turkey’s gas dependency on Russia as well as having the same role for Europe. Iran will find customers to export, bypassing U.S. sanctions that prohibit making investments in Iran exceeding $20 mln, thus also making a political statement and gaining importance for Europe. Transporting Turkmen gas to Turkey via Iran bypasses the problem of the unresolved status of the Caspian Sea, preventing the transit of Turkmen gas underneath the Caspian, and at the 161 Zeyno Baran, “Baku-Tbilisi-Ceyhan: Implications for Georgia”, p.115. Andrew Monaghan, “Energy Security – What Role for NATO?”, op. cit. p. 5. “Nabucco Member-counties Fear Turkey”, 23 November 2007, http://capital.trendaz.com/index.shtml?show=news&newsid=1081466&catid=519&subcatid=481&la ng=EN. 164 “Iran’s energy deals with Turkey and Azerbaijan: The many facets of Caspian energy politics”, by Stephen Blank, 9 May 2007, Central Asia Caucasus Institute, http://www.cacianalyst.org/?q=node/4687/print. 162 163 ©NATO Defense College 2008 38 same time counterbalances the Russian attempt to prevent Central Asian states from supplying gas to Europe through non-Russian pipelines. As a reaction to these deals, U.S. Undersecretary of State Burns called on Turkey and other countries to “sacrifice” their business ties with Iran to help prevent Tehran from obtaining nuclear weapons. “We do not think it makes sense to announce long-term oil and gas deals at a time when Iran is going ahead with nuclear weapons research,” Burns said.165 The EC was careful in its reaction to the Iran-Turkey deal. EC spokesman for energy, Espuny, reiterated earlier remarks that the EU is looking for Iranian gas to feed into Nabucco but stressed “if the geopolitical circumstances allow it.”166 Later, on the subject of Iran’s involvement in Nabucco, he said that “for the realization of Nabucco, Iranian gas is neither necessary nor looked for.”167 On 23 June 2007, Gazprom and ENI signed an MoU on the South Stream project. In the following two days, after meetings with President Putin, Bulgarian and Greek Heads of State confirmed their interest in the South Stream. The project excludes Turkey. The South Stream is widely seen as a threat to Nabucco, targeting its potential consumers. The EC stated it is not against Russia’s plans to construct the South Stream, but it is not a priority for the EU since it does not bring new sources of supply. The EC also tried to play down the importance of the South Stream.168 However, the agreement by Italy, Bulgaria and Greece to become part of it undermines the EU’s attempt to forge a common energy security policy demonstrating the lack of unity and consensus within the Union. 165 “U.S.’s Burns wants business to cut Iran ties”, 19 September 2007, http://www.reuters.com/article/topNews/idUSL1991285920070919. “Iran-Turkey deal: The sum of all US-Russia fears”, by Kostis Geropoulos, 20 July 2007, Issue No. 739, New Europe, The European Weekly, http://www.neurope.eu/articles/76159.php 167 “The future of Nabucco pipeline up in the air”, by Khadija Ismayilova, 5 December 2008, http://www.eurasianet.org/departments/insight/articles/eav120507.shtml 168 «EU pipeline project loses momentum », 26 June 2007, by Judy Dempsey, International Herald Tribune, http://www.iht.com/articles/2007/06/26/business/EUgas.php 166 ©NATO Defense College 2008 39 The Nabucco Consortium 169 reportedly has difficulty agreeing on how much of the financing should be covered by loans, which could come partly from EBRD as well as finding another partner to share the costs making the project viable.170 The German RWE company has announced its interest in joining the Nabucco consortium as an investor, contingent on access to commercially attractive gas volumes of Turkmenistan and Kazakhstan. Gaz de France has expressed interest in joining the Consortium. Gaz de France could be excluded by Turkey for political reasons related to President Sarkozy’s effort to block the opening of economic and monetary policy discussions for starting Turkey’s negotiations to join the EU, as well as the French parliament’s move to criminalize denial of the 1915 Armenian massacres as genocide.171 In the beginning of December 2007 the five members of the Nabucco Consortium opted not to make a final decision on the project until the first quarter of 2008. Andre Mernier, Secretary General of the Energy Charter, has gone on record as saying Nabucco may be impractical. He also suggested that the Caspian Basin may not possess sufficient reserves to support existing pipelines, in addition to Nabucco.172 Thus, it remains to be seen whether and in which conditions the project will be implemented. As Azeri gas alone is considered insufficient for Nabucco, Europe might be waiting for the Central Asian to commit and even be hoping that there might be changes in Iran as a result of the parliamentary elections to be held on 14 March 2008. The Trans-Caspian Gas Pipeline is a proposed submarine pipeline between Tengiz Field (Kazakhstan), Türkmenba y city (Turkmenistan), and Baku where it will be connected with the BTE pipeline, and through it be incorporated with the planned Nabucco Pipeline. Its estimated cost is US $5 bln. The aim of the U.S.-backed project is the transportation of 169 The shareholders of Nabucco Gas Pipeline International GmbH are Austrian OMV, Hungarian MOL, Romanian Transgaz, Bulgarian Bulgargaz and Turkish BOTA companies. Each shareholder holds an equal share of 20% in Nabucco Gas Pipeline International GmbH. 170 Judy Dempsey, op. cit. 171 “Turkey aims to pressure Europe over gas pipeline”, by Judy Dempsey. 5 April 2007. http://www.iht.com/articles/2007/04/05/business/pipe.php#end_main; see also Judy Dempsey, 26 June 2007, op. cit. 172 Khadija Ismayilova, op. cit. ©NATO Defense College 2008 40 natural gas from Kazakhstan and Turkmenistan to Europe, traversing Russia and Iran. Some experts such as Ariel Cohen believe that Kazakhstan and Turkmenistan can fill the pipelines when Azerbaijani fields begin to decline.173 There have also been discussions with regard to including Uzbekistan in the project, which has become complicated as a result of the deterioration of relations between Uzbekistan and the West, and its diplomatic isolation following the 2005 civil unrest in Andijan. The project is opposed by Russia and Iran, current exporters of Turkmen gas. Moscow has stated that a major gas pipeline would pose a serious environmental risk to the region. The unresolved status of the Caspian complicates the project as well. 174 Russia and Iran also insist that any potential pipeline project would require the consent of all five Caspian littoral states in order to proceed.175 Azerbaijan, seconded by Kazakhstan, upholds the right of Caspian countries to make sovereign decisions about laying pipelines on their respective seabed sectors.176 During Russian President Putin’s visit to Kazakhstan and Turkmenistan in May 2007, an agreement was signed by Russia, Kazakhstan and Turkmenistan on the rehabilitation of existing oil pipelines from Russia to Kazakhstan and the construction of a new gas pipeline from Turkmenistan via Kazakhstan to Russia. The deal is considered a threat both to the Nabucco and to the Trans-Caspian pipelines since it might result in insufficient volumes of the Central Asian gas potentially to be transported to Europe. 177 Subsequently, however, both Turkmen and Kazakh Presidents signalled their interest in the pipeline.178 173 “Ariel Cohen. New Great Games in the Caspian will Involve Complex Stakes”, 10 October 2002, http://www.iicas.org/articles/library/10_10_02_libr_rus_bz.htm Iran requires Caspian Sea to be equally divided among five littoral states. Russia, supported by other states, promotes the principle of apportioning shares based on the length of each country’s coastline. The unresolved status of the Caspian suits Russian interests: if it is resolved, Turkmenistan and Kazakhstan would then have more options to export oil and gas directly to Europe, bypassing Russia. 175 Trans-Caspian Gas Pipeline: http://en.wikipedia.org/wiki/Trans-Caspian_Gas_Pipeline#_noteiscip 176 “Azerbaijan spearheading initiative on Trans-Caspian gas pipeline”, by Vladimir Socor, 30 March 2006, Eurasia Daily Monitor, http://www.jamestown.org/edm/article.php?article_id=2370929 177 For more on the Nabucco project, see Rovshan Ibrahimov, 18 June 2007, at: http://www.turkishweekly.net/comments.php?id=2635 178 Kostis Geropoulos, op. cit.; Valdimir Socor, “Gas discussions in Turkmenistan, Azerbaijan after the Budapest Nabucco conference”, op. cit. 174 ©NATO Defense College 2008 41 New Russian and Iranian pipelines Baku-Novorossiysk pipeline SOCAR and Transneft signed a contract on the transport of Azeri oil via the Russian Black Sea port in 1996. 179 On 27 October 1997, SOCAR began pumping oil through the pipeline. 180 However, Baku regarded it mainly as a temporary solution until other pipelines become operational. Because of the conflict in Chechnya as well as disagreements between Azerbaijan and Russia on customs and other commercial considerations, the Northern route has seldom operated at full capacity. 181 Azeri government officials hinted in 2004 that SOCAR would stop using the Novorossiysk route once the BTC becomes fully operational because it would no longer be economic to have higher quality Azeri crude oil mixing with Russian Urals blends.182 Besides, the route is unsafe, given Novorossiysk’s proximity to the North Caucasus. 183 In May 1999 Ilham Aliyev, then First Vice-President of SOCAR, stated that Chechnya resorted to blockage of the pipeline after Russia's Transneft company failed to pay for oil transportation through Chechen territory. 184 The Baku-Novorossiysk pipeline closed briefly in June 2004 after thieves set off an explosion while attempting to steal oil from the pipeline.185 SOCAR began reducing oil exports via the pipeline in August 2005 in order to divert crude to the BTC line, once it becomes operational.186 In February 2006 Azerbaijani Energy Minister said that no more than 3 mln 179 Transport routes of Azerbaijani oil (Baku-Novorossiysk, Baku-Supsa): http://www.azerbaijan.az/_Economy/_OilStrategy/oilStrategy_05_e.html 180 Metin Gezen, “Azerbaijan’s gas struggle with Russia”, 14 January 2007, http://www.turkishweekly.net/comments.php?id=2424 181 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit., p. 31. 182 “Energy profile of Azerbaijan”, op. cit., pp. 5-6. 183 Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit., p. 19. 184 “First “early Caspian oil” in tanker at Supsa to European markets. Alexander’s Gas and Oil Connections, News and Trends”, Central Asia, Volume 4, Issue No. 9, 11 May 1999. http://www.gasandoil.com/GOC/news/ntc92002.htm 185 “Energy profile of Azerbaijan”, op. cit. pp. 5-6. 186 Ibid. ©NATO Defense College 2008 42 tons of Azerbaijani oil could be shipped via the pipeline each year.187 From January to October 2007, Azerbaijan exported 1.51 mln tons of oil through it. The company plans to further decrease its oil exports via this route, and in 2008, just 1 mln tons of Azerbaijani oil is expected to be transferred through Novorossiysk. 188 It should be noted, though, that Azerbaijan still uses the pipeline, in spite of the statements it made during its gas dispute with Russia, which suggested it would stop using it altogether.189 Pipeline between Iran and Azerbaijan Azerbaijan's Nakhchivan Autonomous Region is separated from the mainland of Azerbaijan by a strip of Armenian territory. As a result of the NK conflict, Nakhchivan was cut off from gas supplies. To ensure the supply of gas to Nakhchivan, Azerbaijan signed a 25-year swap agreement with Iran according to which Azerbaijan committed to supplying natural gas to Iran’s northeastern provinces via the BakuAstara Pipeline, which was built during the Soviet period. Iran in return committed to delivering natural gas via a new pipeline into the Nakhichevan exclave, the opening ceremony of which was held on 20 December 2005.190 Iran-Armenia pipeline The agreement to build an Iran-Armenia pipeline was signed in 1992 but construction began only in November 2005. The project seemed unrealistic to many in Armenia, since it appeared that Iran had insufficient interest to invest in the project and implement it. Moreover, U.S. reactions to the project raised concerns. The start of the construction was related to the fact that Armenian energy dependence on Russia reached a critical level, and it became imperative to ensure an alternative energy source. 187 “Trade, investment take central stage at Russia-Azerbaijan summit”, by Rovshan Ismayilov, 28 February 2006, Eurasia Insight, http://www.eurasianet.org/departments/business/articles/eav022806.shtml 188 “Azerbaijan decreases oil exports via Baku-Novorossiysk pipeline”, 20 September 2007, http://www.regnum.ru/english/887804.html 189 See more about this in the section Azerbaijan – “Reorientation towards the West?”. 190 “Energy profile of Azerbaijan”, op. cit., p.8. ©NATO Defense College 2008 43 The 40 kilometer Armenian section was ready and the pipeline technically operational in September 2007. However, Armenia did not start to use it: the Energy Minister of Armenia said Armenia did not need additional supplies of gas as of September 2007.191 “Iranian” gas to be supplied to Armenia will most probably originate in Turkmenistan.192 For each cm of Iranian gas, Armenia is supposed to return 3 KW of electricity to Iran through two high-voltage power lines between the countries.193 The construction of a third power transmission line is envisaged to facilitate electricity transfer following the pipeline’s completion. The pipeline cost about $220 mln. The first 100-km Iranian section was officially inaugurated by Armenian and Iranian Presidents on 19 March 2007. 194 $33 mln was invested in the construction of the Armenian section of the pipeline. Of this, 15% was provided by Armenia. The rest was loaned by the Iranian Export Development Bank. 195 Armenia is planning to lay another 197 km of the pipeline by January 2009 to connect it with the existing distribution network bringing gas from Russia via Georgia and increase the pipeline’s capacity. As a part of the deal between Armenia and Gazprom in April 2006, ArmRosGasprom (ARG) acquired certain rights in relation to the pipeline. Later in June 2006, Deputy Chair of Gazprom Board Ryazanov noted that the company was going to buy the Iran-Armenia gas pipeline. On 12 September 2007, it was officially confirmed that ARG has become the owner of the entire Armenian section of the pipeline, and will construct pipeline’s second section, investing in it $150 mln.196 191 “Armenia not importing Iranian gas just yet”, 11 September 2007, http://groong.usc.edu/news/msg201983.html 192 Iran imports Turkmen gas to supply the northern part of the country, which is distant from Iran’s main fields (source: “Iran-Armenia gas pipeline: Far more than meets the eye”, by Vladimir Socor, 21 March 2007, http://www.jamestown.org/edm/article.php?article_id=2372025 193 “Iran-Armenia natural gas pipeline”: http://en.wikipedia.org/wiki/Iran-Armenia_Natural_Gas_Pipeline “Iran, Armenia open gas pipeline”, 19 March 2007: http://news.bbc.co.uk/2/hi/europe/6466869.stm 194 Iran-Armenia natural gas pipeline, op. cit.; and Iran, Armenia open gas pipeline, op. cit. 195 “Iran-Armenia pipeline was opened”, Ministry of Energy of Armenia, http://www.minenergy.am/show_category.php?id=49 196 “Russian control of Iran-Armenia pipeline confirmed”, by Emil Danielyan, 12 September 2007, http://www.armenialiberty.org/armeniareport/report/en/2007/09/36763A5D-5E36-44FB-940CEFCC1CEB99EF.ASP ©NATO Defense College 2008 44 The Iran-Armenia pipeline initially was planned to diversify Armenia’s energy sources, increase its energy security and reduce dependence on Russia. Additionally, becoming a transit country for Iranian gas to Georgia and then via the Black Sea to Europe would increase Armenia’s geopolitical importance and benefit it economically. Both would reduce the negative impact of being left out of the BTC and BTE pipelines. In 2006, reportedly under Russian pressure on Yerevan, the diameter of the pipeline was reduced from the originally designed 1,420 mm to 700 mm, preventing the expansion of Iran’s independent gas export policy and its competitiveness with the Russian policy. 197 Thus for the time being, because of Russian control over the pipeline, only one of the goals that Armenia pursues through this pipeline – contributing to energy security – is achieved. However, there are discussions about possible construction of a new Iranian-Armenian gas pipeline that can be used for transit. The pipeline allows Iran to supply its gas despite U.S. sanctions. Some also believe that Iran is trying to illustrate that it is a force for stability in the region. Commentators claim that Iran also hopes to use Armenia as a transit route for its gas into Europe. During his visit to Yerevan on 24 October 2007, the Iranian President said in an interview that the IranArmenia gas pipeline is designed to deliver Iranian gas to the Armenian people, but Iran welcomes the idea of using it for transporting gas to Europe.198 Two days after the pipeline opening ceremony the, Georgian President Saakashvili visited Armenia. Analysts concluded that Saakashvili came to discuss the possibility of supplying gas to Georgia via the pipeline. Former Georgian FM Zourabishvili raised the issue during an official visit to Yerevan still in 2004.199 At the moment Armenia cannot export Iranian gas, following the reduced diameter of the pipeline, but it remains a possibility for the future. Georgia would import Iranian gas to reduce its 197 “Iran-Armenia gas pipeline: Far more than meets the eye”, by Vladimir Socor, 21 March 2007, http://www.jamestown.org/edm/article.php?article_id=2372025 198 “Second line on Iran-Armenia gas pipeline may be completed in late 2008”, Russia & CIS General Newswire, October 31, 2007. 199 “Georgia shows interest in Iran-Armenia gas pipeline”, by Mariana Grigoryan, 12 April 2007, http://www.eurasianet.org/departments/business/articles/eav041207.shtml ©NATO Defense College 2008 45 dependency on Russia. But because of the Armenian deal with Gazprom, the pipeline is partly controlled by Russia now, so Georgia might doubt that it will reduce energy dependency on Russia. Besides, to ease U.S. concerns related to the import of Iranian gas, Georgian officials have stated that Georgia will not need to import Iranian gas if supplies from Shah Deniz remain adequate. According to Armenian FM Oskanian, Armenia looks “to benefit from an ambitious project to build a natural gas pipeline that would stretch from Central Asia to Turkey and Europe via the Caspian Sea,” regarding the project as an opportunity to further diversify Armenia’s energy resources in the long run. “Armenia will try to have some involvement in that project,” he said.200 Armenia might have a chance to be a participant in the proposed pipelines, if Iran becomes a part of them, and can also benefit from the Caspian energy resources, if Turkmenistan delivers them via Iran. It should be noted that in the late 1990s there was trilateral cooperation between Turkmenistan, Iran and Armenia, with a focus on energy cooperation. Both Russia and the U.S. for different reasons will oppose the idea of the Armenian-Iranian pipeline becoming part of the Nabucco or TransCaspian pipelines. At the same time, Turkey and Azerbaijan, despite U.S. pressure, are trying to involve Iran in Nabucco. One of the reasons for Azerbaijan’s interest in involving Iran might be to prevent the potential use of the Armenian-Iranian pipeline as an alternative route for transporting the Iranian gas to Europe. Planned Iran-Armenia oil refinery project Iran and Armenia plan to construct an oil refinery. Oil would be pumped into Armenia through the oil pipeline from Tabriz. Refinery products are expected to be shipped back to Iran by rail, though currently there is no railway between Armenia and Iran. The Novorossiysk-Tbilisi-YerevanNakhichevan-Julfa route, active in the Soviet era, is now interrupted in two places, Abkhazia and the Nakhichevan-Armenia border. This is due 200 “Armenia interested in TransCaspian pipeline project”, by Emil Danielyan, 9 January 2007, ArmeniaLiberty.org. http://www.armeniadiaspora.com/ADC/news.asp?id=1917 ©NATO Defense College 2008 46 respectively to the Abkhazian and NK conflicts. The cost of the project, including the factory, railroad and pipeline will be $1-2 bln.201 Armenia depends entirely on imported oil products to meet domestic demand. Iran, despite its vast oil reserves, lacks refining capacities and imports gasoline.202 According to a preliminary agreement, the refinery will engage in advanced processing of Iranian oil and produce light petroleum products. Armenia's oil consumption requirements stand at around 1 mln t/y. However, a facility with such a capacity would only serve the domestic market and thus never recoup construction costs. Therefore, the refinery is planned to have a processing capacity of at least 7-7.5 mln tonnes per year in order to recoup the estimated costs of construction.203 Gazprom Neft, a subsidiary of Gazprom, is reportedly considering an investment of $1.7 bln in the project, and Iran is also likely to invest.204 Some Russian analysts suggest the project is motivated by political rather than financial interests.205 Gazprom has replied that the refinery could be economically profitable and may offer competition to Azerbaijan.206 U.S. reactions to Armenia’s energy deals with Iran The U.S. has expressed concern over Armenia’s energy deals with Iran. On 15 June 2007, the US Charge d’Affaires Godfrey became the first U.S. official publicly to voice alarm over Armenian-Iranian cooperation. He expressed appreciation for the transparent way in which Armenia conducts its energy relations with Iran, but warned that they might run counter to international sanctions imposed on Tehran over its nuclear programme. His remarks contrasted with those of the former U.S. 201 “Russia and Iran may restore rail corridor through Armenia”, by Haroutiun Khachatrian, 16 May 2007, Central Asia-Caucasus Institute, http://www.cacianalyst.org/?q=node/4614 202 “Armenia, Iran, Russia to open talks on oil refinery”, by Emil Danielyan, 17 April 2007, Armenialiberty.org. http://www.armeniadiaspora.net/ADC/news.asp?id=2201 203 “Energy Minister Touts Potential New NPP, Refinery for Armenia”, by Andrew Neff, Global Insight, 25 October 2007, GROONG Digest, 4577. 204 “Russia and Iran may restore rail corridor through Armenia”, by Haroutiun Khachatrian. 205 “Armenia: Doubts over Russian plans for investment”, by Haroutiun Khachatrian, 14 February 2007, EurasiaNet.org. http://www.energypublisher.com/article.asp?id=7950 206 “Gazprom interested in Russia-Armenia-Iran oil refinery”, 11 October. 2007, Tehran Times, http://www.tehrantimes.com/index_View.asp?code=154756 ©NATO Defense College 2008 47 Ambassador Evans, in February 2006, according to whom Washington was “sympathetic to Armenia’s efforts to diversify sources of energy.”207 Responding to a question about Godfrey’s statement, Armenian FM Oskanian said that Armenian-Iranian energy cooperation will not damage US-Armenian relations. Deputy Parliamentary Speaker Vahan Hovannisian, a presidential candidate for the upcoming elections, argued that Armenia “doesn’t have much of a choice,” given the continuing Azerbaijani and Turkish blockades.208 U.S. approval of Armenia’s energy deals with Russia, 209 as well as probable U.S. support to Armenia for implementing the project of the construction of the new NPP,210 is perceived by some as a way to prevent deepening energy cooperation between Armenia and Iran, even if U.S. diplomats say that support for the NPP project would not be conditional on Armenia putting the brakes on its energy cooperation with Iran. 211 207 “US concerned by Armenia’s energy ties with Iran”, by Emil Danielyan, 21 June 2007, Eurasianet, http://www.eurasianet.org/departments/insight/articles/eav062107a.shtml Ibid. 209 See more about this in the section Armenia – “Property for Gas” as a solution?. 210 See more about this in the section “The intent of Armenia to construct a new NPP”. 211 As a State Department official told EurasiaNet, “our [U.S.] position on Armenia’s need to replace Metsamor with a new power plant is independent of our concerns over Armenia’s cooperation with Iran.”, in “US concerned by Armenia’s energy ties with Iran”, by Emil Danielyan, 21 June 2007, Eurasianet. http://www.eurasianet.org/departments/insight/articles/eav062107a.shtml 208 ©NATO Defense College 2008 48 CHAPTER 3 ENERGY DISPUTES AND DEALS WITH RUSSIA Armenia – “Property for Gas” as a solution? At a meeting on 16 December 2005, Russian President and Gazprom’s top management informed the Armenian President that the price of gas supplies to Armenia would rise from the existing level of $54-$56 per 1,000 cm to $110, effective on 1 January 2006.212 According to Vladimir Socor, the gas delivered to Armenia by Russia comes from Turkmenistan. Until 2006, Gazprom bought Turkmen gas at $44 per 1,000 cm, and starting in 2006, at $60 per 1,000 cm. The Russian-proposed price hike to Armenia exceeds Turkmenistan’s price hike to Gazprom.213 After four months of confidential negotiations, Gazprom and the Armenian government signed an agreement which defines strategic principles of cooperation in gas-energy projects in Armenia. ARG, in which, according to reports, Gazprom and its subsidiary Itera hold combined 68% shares, acquires the 5th unit of Hrazdan TPP (its other units already belonged to Gazprom) and the Armenian section of IranArmenia pipeline. The agreement also allows Russia to export electricity from the Hrazdan-5. The agreement fixes the gas price at the rate of $110 per 1000 cm till 1 January 2009.214 Hrazdan-5 was reportedly given to Russia for $60 mln, and Gazprom pledged to invest at least $150 mln to complete its construction.215 This deal was called “Property for Gas.” 212 A “family” feud over fuel: pipeline politics are crucial in Armenia-Russia relations. The Moscow connection, by Julia Hakobyan, Armenian General Benevolent Union Website Publications, http://www.agbu.org/publications/article.asp?A_ID=206 213 “Armenia gains short reprieve from 100% price hike on Russian gas”, by Vladimir Socor, 17 January 2006, http://jamestown.org/edm/article.php?article_id=2370670 214 “ArmRosGasprom acquires Iran-Armenia pipeline and 5th energy unit of Hrazdan TPS from the government”, 7 April 2006-7 April 2007, http://www.regnum.ru/english/619137.html 215 “Armenia cedes more energy assets for cheaper Russian gas”, by Emil Danielyan, 10 April 2006, EurasiaNet, http://www.eurasianet.org/departments/business/articles/eav041006.shtml ©NATO Defense College 2008 49 Gazprom announced the deal on 6 April. The day after, Armenian Energy Minister denied that the rights for the Iran-Armenia pipeline had been transferred to Russia. However, later reports confirmed Gazprom’s announcement. This part of the agreement is especially controversial since the main explanation given by Armenian leaders to justify the construction of Iran-Armenia pipeline at the time of the U.S. attempt to isolate Iran was the need for diversification of energy sources, breaking Russia’s gas supply monopoly. Besides, two Iranian state-controlled companies had won in both tenders for the construction of the pipeline and the modernization of Hrazdan-5. According to former PM Manukian, Russia realized that Armenia’s energy cooperation with Iran is a serious alternative to that with Russia and blackmailed Armenia by increasing the price of gas.216 Reportedly, the Russian side has argued that Georgia had insisted on the increase in gas price to Armenia, stating that the price should be equal for all countries of the region. 217 Some analysts and practitioners believe that the Russian move could be conditioned by Armenia’s enhanced cooperation with NATO, and in particular by Armenia’s decision in summer 2004 to develop an Individual Partnership Action Plan (IPAP) with NATO. This deal, together with previous deals such the handover of the financial management of ANPP and the transfer of a number of important energy assets to Russia within the “Property for Debt” deal made in 2002, put 80-90% of Armenia’s energy assets and system under Russian control. With the exception of a few TPPs and HPPs, the rest are owned by Russian companies. The energy assets transferred to Russia within the “Property for Debt” deal included 4 units of Hrazdan TPP that were conveyed to Russia to pay off Armenia’s state debt totalling $93 mln, the Sevan Cascade, and the electricity distribution network. According to media reports, the Russian RAO UES paid $25mln for the SevanHrazdan cascade and $70 mln in exchange for Armenia’s Electric Network of.218 216 “Debating big brother’s presence: Concerns linger of Armenia as ‘outpost’”, by Gayane Abrahamyan, 2 November 2007, http://www.armenianow.com 217 RA AN Vice-President Vahan Hovhannisyan’s Press Conference, 21 Marcy 2006, National Assembly of the Republic of Armenia at: http://www.parliament.am/news.php?do=view&ID=1706&cat_id=4&day=21&month=03&year=200 6&lang=eng 218 Gayane Abrahamyan, op. cit. ©NATO Defense College 2008 50 The deal escalated the public debate on Armenian-Russian relations. There were politicians among both pro-governmental and oppositional circles who questioned the Armenian-Russian strategic partnership. PM Markarian became the highest-level official to voice doubts about Armenian-Russian relations. He said that Russia seems to treat its ally Armenia in the same way it treats Ukraine or Georgia regarding gas prices. Therefore, Armenia should re-examine the notion of “strategic partnership” with Russia, diversify its security options, and advance its cooperation with NATO and the EU. 219 Kocharyan's National Security Adviser Isagulian cautioned that Russia's indifference toward Armenia may cause disappointment and push Armenia toward NATO. 220 The Speaker of the Parliament Bagdasarian and a former PM Harutyunian called on the government to review the conditions under which Russian military bases are deployed in Armenia and to start charging for maintaining them.221 Then DM Serj Sargsyan reacted to such statements saying that there was no need to link the gas issue with the presence of Russian military bases in Armenia. He described as untimely conclusions that Armenia should revise its military partnership with Russia and underlined that “the Russian military bases were established in Armenia at the request of Armenia, not Russia.”222 President Kocharyan, reacting to the criticism in televised remarks, said among other things that Western energy giants continue to show little interest in the Armenian energy sector.223 Reacting to Armenian bitterness over the gas price hike, First Deputy PM of Russia and Chairman of the Board of Directors of Gazprom Medvedev said: “Political alliances played no role in the change of the tariffs for gas export to the South Caucasus.” The Russian Vice PM and DM Ivanov said that Russia is a market-oriented country and should follow those principles.224 219 “Armenia gains short reprieve from 100% price hike on Russian gas”, by Vladimir Socor, 17 January 2006, http://jamestown.org/edm/article.php?article_id=2370670. 220 “Putin-Kocharyan love fest conceals real problems”, by Vladimir Socor, 26 January 2006, Eurasia Daily Monitor, http://www.jamestown.org/edm/article.php?article_id=2370704 221 Julia Hakobyan, op. cit. 222 Ibid. 223 “Armenia cedes more energy assets for cheaper Russian gas”, by Emil Danielyan. 224 Julia Hakobyan, op. cit. ©NATO Defense College 2008 51 As for the U.S. reaction, it seemed that in contrast to the disapproval of such deals between Georgia and Russia, Washington was not necessarily unhappy with the Armenian authorities’ deal with Gazprom since it was undermining Armenia’s cooperation with Iran. As Bryza said, “Armenia has a long and positive experience working with Russian gas suppliers and that needs to continue.”225 Georgia – “Political price?” According to most experts, Russia has been using energy as a tool for political pressure on Georgia, seeking to show Georgia its vulnerability and level of dependence on Russia, to force Georgia to make concessions on foreign policy matters. On New Year’s Day 2001, Russia cut off supply of natural gas to Georgia, in spite of prepayments for it made by the American AES Corporation, which operated the Tbilisi Power Station and distribution network.226 In 22 January 2006, gas supplies from Russia to Georgia, and therefore also to Armenia, were cut off by explosions in North Ossetia. During the days that followed, Georgia imported gas from Azerbaijan and Iran. President Saakashvili blamed the Russians for the crisis, calling the explosions an act of terror. However, an investigation later concluded that the pipes had burst because of a mechanical malfunction. 227 Although some Western analysts still refer to this explosion as a terror act involving Russia, it does not seem likely that Russia will provoke a terrorist attack against pipelines. A more likely explanation is that Georgian President Saakashvili scapegoated Russia in order to reap political dividends from the incident. Finally, on the eve of winter 2006-2007, Gazprom announced that from 1 January 2007 it would increase gas prices to Georgia from $110 to $235 per 1,000 cm. This followed the Russian embargo on Georgian wine, mineral water and agricultural products, the arrest of Russian military officers by Georgia on espionage charges, the cutting off of transportation and communication links with Georgia by Russia, and withdrawal of 225 226 227 “Armenia cedes more energy assets for cheaper Russian gas”, by Emil Danielyan. Svante Cornell, Mamuka Tsereteli and Vladimir Socor, op. cit., p. 26. Julia Hakobyan, op. cit. ©NATO Defense College 2008 52 most Russian diplomatic staff from Georgia. 228 “The price is not a commercial one,” Saakashvili stated.229 The first reaction of the Georgian government was refusal to purchase Russian gas at the new price. The Western media and analysts widely publicized the Georgian-Russian gas dispute and interpreted the price hike as an attempt by Russia to penalize pro-Western Georgia for its policies. However, it is not widely known that Russia increased the gas price for Georgia one year after it stated a price hike for its partner Armenia, which was diminished only as a result of the “Property for Gas” deal between Armenia and Russia. On 15 December 2006, the Energy Ministers of Georgia, Turkey and Azerbaijan reached an agreement about the delivery of 1.01 bln cm of gas from Azerbaijan’s Shah Deniz field to Georgia. This comes in addition to the 250,000 cms Georgia will receive as a transit fee for the BTE pipeline.230 Negotiations to obtain 800 mln cm of Shah Deniz-generated natural gas from the Turkish quota failed. Greece walked away with the rights for part of the Turkish quota, paying $149 per thousand cm. Some analysts criticized the Georgian delegation for not securing a deal.231 The delivery of the Azeri gas was postponed as a result of technical problems related to the start of Shah Deniz. Therefore, on 22 December 2006 Georgia agreed to pay the “political price.”232 After Shah Deniz began operating, Georgia started importing 1.3 mln cm gas from it daily for $120 per 1,000 cm and also 1 mln cm daily at $63 per thousand cm as transit tariff. These volumes are sufficient for most of the year but not for winter. 233 Independently of the gas dispute with Russia, in winter Georgia also receives electricity from the Armenian NPP and Hrazdan TPP. Georgia also gets 10% - about 700,000 cm daily - 228 “Officials: Georgia will survive gas price hike”, by Diana Petriashvili, 6 November 2006, http://www.eurasianet.org/departments/insight/articles/eav110606aa.shtml 229 “Georgia: Private companies carry burden for Gazprom gas price talks”, by Diana Petriashvili, 24 November 2006, http://www.eurasianet.org/departments/business/articles/eav112406.shtml 230 “Gazprom makes the Georgian Government pay”, by Diana Petriashvili, 9 January 2007, EurasiaNet, http://www.eurasianet.org/departments/insight/articles/eav010907.shtml 231 “With winter approaching, Georgia’s natural gas supply still unsure”, by M. Alkhazadhvili, 18 September 2007, http://www.gab-ibn.com/IMG/pdf/Ge4-_With_Winter_Approaching_Georgia_s _Natural_Gaz_Supply_Still_Unsure.pdf 232 “Gazprom makes the Georgian Government pay”, op. cit. 233 “With winter approaching, Georgia’s natural gas supply still unsure”, op. cit. ©NATO Defense College 2008 53 of the Russian gas shipped to Armenia via the North-South pipeline as a transit tariff.234 Georgia also started negotiations on a gas supply with Iran. However, according to some experts, technical problems do not allow large volumes of Iranian gas to be transported via Azerbaijan.235 Moreover, the U.S. Ambassador to Georgia stated that the U.S. government does not approve of Tbilisi striking long-term deals with Iran. The Georgian PM said the U.S. will not stand in the way of short-term gas deals with Tehran, and that “we are likely to buy gas from Iran, and we will possibly exchange electricity with Iran.”236 The way the authorities handled the risks posed by the energy crisis was criticized domestically. Some analysts believe that the authorities should have held real negotiations with Gazprom instead of making radical public statements refusing Russian gas. They also criticize the government for not understanding that Shah Deniz gas is aimed first of all to supply gas to Europe, and not to satisfy Georgia’s needs. 237 An economic expert suggested that President Saakashvili’s administration is partly to blame for the present situation. “When an external enemy appears, people forgive the authorities a lot of mistakes, and this is why the authorities continue using that aggressive rhetoric against Russia.” Orvelashvili said. “But the power crisis is not only about Russia, but also about the inactivity of the Georgian government.”238 David Usupashvili, a leader of the opposition Republican Party, pointed out that Russian firms own key Georgian energy suppliers. “The government made a big mistake when it handed over energy units to Russian companies. 239 The continuation of Russia’s control over these units will be a permanent threat to energy supply.”240 Anatoly Chubais, 234 “Georgia: Private companies carry burden for Gazprom gas price talks”, op. cit. “Baku banks on independent energy policy”, by Rovshan Ismayilov for Eurasianet, 14 December 2006, http://www.isn.ethz.ch/news/sw/details.cfm?id=17047 236 “Georgia claims energy crisis ‘over’”, by Diana Petriashvili and Joshua Kucera for Eurasianet, 19 December 2006, http://www.isn.ethz.ch/news/sw/details.cfm?id=17066 237 “Gazprom makes the Georgian Government pay”, op. cit. 238 “Officials: Georgia will survive gas price hike”, op. cit. 239 Observers suspect Shevardnadze of trading strategic assets in return for a promise that Russian players will back his political allies in a contentious upcoming parliamentary vote. 240 Officials: Georgia will survive gas price hike”, op. cit. 235 ©NATO Defense College 2008 54 chairman of the Russian electricity monopoly, RAO Unified Energy Systems (UES), confirmed on 6 August 2006 that the company has a 75 % stake in Georgia’s AES-Telasi joint venture. The UES deal followed a late May strategic partnership agreement between the Georgian government and Gazprom.241 U.S. officials have expressed concern about the secretive nature of Gazprom’s deals with the Georgian government.242 Despite the declared purpose of disposing of the energy dependence on Russia, it is likely that Georgia will continue energy cooperation with Russia in the near future. According to Broladze, Energy Director of ESCO, a Georgian power grid operator, in fall 2007 Georgia started importing electricity from Russia, which accounts for 14.6% of the total domestic consumption of electricity. Georgia will export electricity to Russia in summer, receiving it back in winter. Instead, Georgia has stopped its supplies from Azerbaijan on a similar exchange basis.243 Azerbaijan – “Reorientation towards the West?” Until recently, Azerbaijan was dependent on Russian gas, importing 160175 bcf gas per year from it.244 In winter 2006-2007, shortly before the Shah Deniz offshore field became operational and Azerbaijan became a gas exporter, Gazprom announced that it would raise the price of natural gas exports to Azerbaijan from $110 to $235 per 1,000 cm of gas in 2007,245 and would cut the volume of supplies from 4.5 bcm to 1.5 bcm. Gazprom representative stated that it “will fully meet Azerbaijan’s needs because the country will increase its own gas production next year. Azerbaijan is getting ready to become a gas exporter. We are not against competition with Azerbaijan, but we are not going to support this competition.”246 241 Zeyno Baran, “Deals give Russian companies influence over Georgia’s energy infrastructure”, 18 August 2003, http://www.eurasianet.org/departments/business/articles/eav081803.shtml “Gazprom makes the Georgian Government pay”, op. cit. 243 “Georgia starts importing electricity from Russia”, Interfax, 22 October 2007. 244 “Azerbaijan. Natural gas”, Information Administration. August 2006. http://www.eia.doe.gov/emeu/cabs/Azerbaijan/NaturalGas.html 245 Metin Gezen, “Azerbaijan’s gas struggle with Russia”, 14 January 2007, http://www.turkishweekly.net/comments.php?id=2424 246 “Baku banks on independent energy policy”, by Rovshan Ismayilov for Eurasianet, 14 December 2006, http://www.isn.ethz.ch/news/sw/details.cfm?id=17047 242 ©NATO Defense College 2008 55 However, Bryza argues that Russia threatened to stop the gas to Azerbaijan, if Azerbaijan exported “even a molecule of gas west”, meaning to Georgia, Turkey or Greece.247 This statement raises questions. It is not clear how much truth there is in this: whether Russia actually made such a statement, and whether it was made to the U.S. authorities, or to the Azeri authorities, who then reported it to the U.S. authorities. Or is it just an assumption? And surely it is only natural that Russia should have stopped subsidizing gas for a rising major competitor as a gas exporter in the world market? Reportedly, in early November, President Aliyev rejected a proposal by President Putin to take part in a “coordinated policy” for energy exports, emphasizing that Baku wanted an independent policy line. The assumption is that Russia was seeking the cooperation of Azerbaijan in its energy policy towards Georgia, and Azerbaijan refused to cooperate with Russia since Georgia is the only non-Russian-controlled energy transport corridor for its oil and gas to the West.248 According to some analysts, it caused a reorientation of Azerbaijan's foreign policy “towards the West”, spelt out in a Wall Street Journal editorial by FM Mamedyarov, who spoke of a “defining moment for Azerbaijan and the South Caucasus as a whole.” The Russian move was interpreted as “more than just a market message” by him. “In response,” he wrote, “we have decided to stop buying Russian gas as well as to stop using the Russian pipeline to export Azerbaijani oil to Europe.” 249 As with Georgia, Azerbaijan attempted to use the gas dispute with Russia to gain political dividends in the West. At the same time, Azerbaijan started negotiations with Iran on importing Iranian gas.250 Bryza has assessed the decision of Azerbaijan not to buy Russian gas anymore as “a frightening decision” to make. “It challenged head-on the country’s major gas supplier, on which Azeris had been dependent until 247 Matthew Bryza, “Outflanking Russia’s Energy Grip on Europe Energy”, Summer/Fall 2007, European Affairs, European Institute. http://www.europeanaffairs.org/current_issue/2007_summer_fall/2007_summer_fall_11.php4 248 Rovshan Ismayilov, op. cit. 249 “Azerbaijan looks westward”, by Karl Rahder, ISN Security Watch, 22 February 2007, http://www.today.az/news/politics/36915.html 250 Metin Gezen, op. cit. ©NATO Defense College 2008 56 now.”251 However, surely it is only natural that Azerbaijan should have stopped importing gas from Russia as soon it was able to satisfy its domestic demand on its own, even if this meant facing the price hike earlier than initially planned? 251 “Outflanking Russia’s Energy Grip on Europe”, by Matthew Bryza. ©NATO Defense College 2008 57 CHAPTER 4 USE OF NUCLEAR ENERGY IN THE REGION Armenian Nuclear Power Plant (ANPP) In the 1960s, the Soviet leadership decided to meet the growing energy needs of the copper and aluminium production industry in Armenia by building a nuclear power plant (NPP) 28 km outside of Yerevan that became operational in the late 1970s. ANPP was supplying electricity not only for Armenia but also for Georgia, Azerbaijan and Turkey.252 After the devastating 7 December 1988 earthquake, the Council of Ministers of the USSR decided to stop the ANPP, even though no dysfunction caused by seismic impacts was revealed. An opinion prevails in Armenia that the reasons for the decision were political, at a time of protests that initially were in support of NK’s self-determination quest, and then expanded into demonstrations demanding Armenia’s independence.253 The closure of the ANPP increased the energy dependence of Armenia on neighbouring states. Following the disintegration of the USSR and as a consequence of NK conflict, Azerbaijan blocked the two pipelines from Turkmenistan that were providing 80% of natural gas for Armenia. Reportedly, there were also acts of sabotage by Azerbaijan against Armenian pipelines crossing Georgia that were blown up twice in January-February 1994. 254 Armenian people had a maximum of two hours of electricity per day between 1992 and 1995. Economic activity in Armenia virtually ground to a standstill. The energy crisis resulted in emigration figures ranging from 500,000 to 750,000. The Armenian environment suffered massive degradation as alternative fuel sources were sought. Over a million trees were felled for heating, while Lake Sevan was shrunk to half its level by overdependence on hydropower. 252 Perilous States: Conversations on Culture, Politics, and Nation, George E. Marcus, 1993, p. 94. See the Ministry of Energy of Armenia website, Nuclear Energy Sector, http://www.minenergy.am/level2_.php?id=11 254 The Decision to Reactivate a First-Generation Soviet NPP: Conceptual and Decision-Analytic Frameworks, John M. Gleason, http://www.piercelaw.edu/risk/vol8/winter/Gleason.htm 253 ©NATO Defense College 2008 58 In 1993, Armenian authorities took a decision to re-commission Unit 2. IAEA officials inspected it in August 1993 and found no technical reasons not to restart the plant. IAEA Director General Blix visited Armenia and promised assistance in restarting the plant.255 The decision of Armenia to reopen ANPP met strong international opposition. Among the arguments were safety concerns, seismic risks and the NK conflict. Azerbaijan, Turkey and Georgia protested against the reopening of the plant, while Iran did not object to it.256 G-7 and the EU were also opposed to restarting the ANPP. The U.S. voiced strong reservations about financing the “dangerous” reactor. The EBRD, which has an assistance programme for countries with the same type of reactors, refused financial assistance for the plant.257 However, the West did not suggest alternative options for dealing with the severe energy crisis.258 In March 1994, Armenian and Russian authorities reached an agreement under which Russia would provide technical assistance and nuclear fuel for reactivating the plant. Russia shipped nuclear fuel worth $22 mln. Russian institutes took responsibility for project management, design and reconstruction. More than 500 tons of equipment was transported from Russia to Armenia by air because of Azerbaijani roadblocks. Russia provided training programmes and financial assistance for radiation monitoring, modernization and other restart projects. A report states that $48 mln was spent on rehabilitating the plant, $35 mln of which came from the Armenian Diaspora while $10 mln were loans from Russia.259 Unit 2 resumed operation in October 1995. This was the first time that an NPP had been reactivated after such a lengthy period of disuse. After the reopening of Metsamor, the debate over its safety continued. Azerbaijan and Turkey continued to express concerns.260 Turkey argued that since the plant is located 20km from the Turkish border, in case of an accident Turkish people would suffer, and that it is a potential source of radiation release. In 1996-1997, there was an attempt to launch cooperation 255 NTI: Country Overviews: Armenia: Nuclear Facilities, at: http://www.nti.org/e_research/profiles/Armenia/Nuclear/4567_4630.html. 256 John M. Gleason, op. cit. 257 NTI, op. cit. 258 “Armenia Restarts Nuclear Plant”, Washington Post, 28 June 1995. 259 NTI, op. cit. 260 Washington Post, op. cit. ©NATO Defense College 2008 59 between Armenian and Turkish nuclear regulatory bodies in training, seismic studies and emergency planning of the ANPP under the auspices of the IAEA. However, while Turkey’s goal was to send Turkish inspectors to the plant on a regular basis and to prove that it is not safe, Armenia was trying to use the project as a step on the way of establishing diplomatic relations, so the project was not implemented. Azerbaijani delegations to the IAEA and Council of Europe have made a series of accusations, without supportive evidence, that nuclear waste is buried on occupied territories. However, all nuclear material, including Armenia’s spent waste, is under IAEA control, which rules out the possibility of moving it without IAEA’s knowledge, and the IAEA has never detected any movement of the spent fuel generated from the ANPP. 261 Originally, spent nuclear fuel was to be managed by the Russian Mayak agency for reprocessing and final disposal.262 Since 1989 no spent fuel has left Armenia. Russia had agreed to accept spent fuel generated after Unit 2’s restart, but it required a secure land route, which was impossible because of the Azeri blockade.263 Armenia has stated that it is ready to facilitate an international fact-finding mission, apart from regular IAEA inspections, to prove that those accusations have no basis. In 2000, the French Framatom (now-Areva) built a dry spent fuel storage. The French government allocated assistance at a cost of $7.8 mln for the project.264 The U.S. reconsidered its position and became another main provider of assistance for the ANPP, funding safety improvements and supporting nuclear regulation of Armenia until now. Between 2001 and 2003, routine suspensions of the ANPP’s operation for renovation and refuelling were extended since Russia had demanded payments for previously delivered fuel as well as prepayment for future shipments. In March 2003, the financial management of Metsamor NPP was handed over to INTER RAO UES265, for trust management for five 261 Interview with an IAEA official, December 1997. “Armenia Nuclear Profile, IAEA website. http://www-pub.iaea.org/MTCD/publications/PDF/ cnpp2003/CNPP_WebP./PDF/2003/Documents/Documents/Armenia%202003.pdf 263 “Armenia Introduction”, on International Nuclear Safety Website: http://insp.pnl.gov/-profilesarmenia-armenia_intro.htm 264 Noyan Tapan, “Nuclear Waste Repository Planned for Power Station”, 17 July 1997. 265 An affiliate of RAO UES of Russia and the Rosenergoatom. 262 ©NATO Defense College 2008 60 years, in return for the cancellation of $40mln debt to Russian nuclear fuel suppliers. According to the deal, Russia will provide Metsamor NPP with fresh nuclear fuel at a cost of $13.78 mln. The Russian Minister of Industry, Science, and Technology stated that the ANPP would remain Armenian property, as Russia’s international agreements prohibit Russian ownership of NPPs outside of its borders. According to senior officials of the Armenian Energy Ministry, Armenian legislation does not allow the NPP to become foreign property, and Russia has assumed management over the plant’s finances but not its power production activities.266 One of the arguments against the reopening of ANPP was its lack of a containment vessel to protect the core from mortar attack. However, Yerevan considers that any attack would come from a neighbour rather than from a distance, so the possibility of radiation escape serves as a deterrent to such attacks.267 To ensure the protection of ANPP, the Ministry of Defence and the Police Service of Armenia provide Special Forces for guarding a wide and a narrow perimeter around the plant, respectively. The Police also train personnel to safeguard the Interior of the plant.268 At a 3 December 2002 session of the Nuclear Safety Council, President Kocharyan said that Armenian authorities put special emphasis on the physical security of ANPP in response to the international terrorist threat. 269 In September 2006, Russia and Armenia jointly conducted the Anti-Terror-2006 joint exercise at Metsamor plant, aimed at practising coordination of law enforcement agencies in the event of a terrorist attack.270 The EU has continued to insist on the closure of the ANPP since its reopening, because the plant does not meet contemporary safety requirements. The issue is contentious in Armenia-EU discussions. In the Armenian Action Plan within EU’s Neighborhood Policy, Armenia 266 NTI, op. cit. Richard Wilson, “Report on the Restart of the Metsamor NPP in the Republic of Armenia,” Andrei Sakharov Foundation, 25 July 1995. 268 Teresa Sabonis-Chafee, “Preliminary Report on Armenia”, Center for Non-proliferation Studies Report, 10 May 1996. 269 NTI, op. cit. 270 “Anti-terrorism drills at Armenia NPP set for active phase”, 25 September 2006, http://en.rian.ru/world/20060925/54240711.html 267 ©NATO Defense College 2008 61 undertook to close the ANPP. However, the timing of the closure has been a matter of disagreement. In 2016 the plant will exhaust itself technologically. The EU wants Armenia to close it as soon as possible. Armenia has suggested closing it sometime between 2012 and 2015, on the basis of the need to replace it with other energy resources, and it sees a new NPP as the only adequate alternative. On 29 November 2007, having already decided to construct a new NPP, the Armenian authorities approved a strategy to shut down ANPP, at a cost of up to $280 mln, without indicating a date.271 In September 2007, EuroAtom announced its readiness to provide 200 mln Euro as a preferential loan for the closure of the ANPP.. The loan will be targeted and cannot be used for building a new NPP in Armenia.272 While reiterating the EU’s interest in closure of the ANPP, the Head of the EU Troika delegation, State Secretary of Austria Winkler said: “The EU respects the sovereign right of every state to choose the type of energy which best corresponds to its capacities and interests.”273 So, currently the EU does not support the Armenian decision to construct a new NPP but does not oppose it either. The explanation for this is twofold. First, the Armenian authorities have made a case that nuclear energy has no alternative in Armenia. Second, negative attitudes in some EU member states towards nuclear energy are being reconsidered. The intent of Armenia to construct a new NPP The first reports on the intention of Armenian authorities to construct a new NPP date back to 1995. In June 1996, President’s spokesman stated that, as a result of negotiations which took place between Armenian President Ter-Petrossian and French President Jacques Chirac, France will help to construct a new power plant by the year 2007.274 Talks were underway with France, Germany, the U.S. and Russia to begin construction in 1998 of a plant with a generating capacity of 1000 271 “Armenian Government promises to close Soviet-era nuclear plant”, 30 November 2007, The Source: The Canadian Press. http://groong.usc.edu/news/msg212784.html 272 “EU insists on closure of Armenian NPP”, 26 September 2007, A EurasiaNet Partner Post from BBC Monitoring, http://www.eurasianet.org/posts/092607eu.shtml 273 “EU demands closing down the NPP”, 20 April 2006, http://www.armradio.am/news/?part=pol&id=5582. 274 NTI, op. cit. ©NATO Defense College 2008 62 MW.275 In 1997, ANPP Director Asatyan stated that French specialists will build a new NPP using French equipment, although the reactors and steam generators will be Russian-produced.276 After a number of general statements made by senior Armenian officials since 2005 about the necessity to build a new NPP, the Armenian authorities indicated that the decision had finally been taken in 2007. In September, Energy Minister Movsisyan stated that, considering regional developments and the tendency in the international market to raise the prices of power generating materials, the only alternative to the ANPP could be a new nuclear unit that would meet modern safety and security requirements. 277 He also said that “many foreign countries now understand that Armenia must have an NPP.”278 The intention is to build an NPP with 1000 MW capacity on the site of the existing facility. It is planned to be operational by 2016-2017. The construction will cost about $2 bln. Armenian Foreign and Energy Ministers have stressed that not only domestic needs but also regional energy problems are taken into account while planning to construct a new plant and determining its capacity.279 The Armenian government’s decision to construct a new NPP was prompted by the confirmation of the existence of commercial uranium reserves in Armenia. “Preliminary estimates show that Armenia has enough uranium reserves to meet the needs of its own NPP and export part of them,” the Energy Minister said in October 2007. 280 The Connecticut-based Global Gold Corporation (GGC)281 announced on 25 275 “Armenia: No alternative to New Nuclear power Station by 2007”, BBC, 27 September 1996. NTI, op. cit. Not to close the old NPP until the new one is built, by Hayots Ashkharh, 8 September 2007, http://www.armtown.com/news/en/has/20070908/186162021/; “Armenia to build new reactor at its NPP”, ITAR-TASS, 24 October 2007, http://groong.usc.edu/news/msg208163.html 278 “New Armenian NPP to cost $2 bln”, 07 September 2007, RIA Novosti – World. http://en.rian.ru/world/20070907/77382351.html 279 “Armenia to build new reactor at its NPP”, op. cit.; Armenia and the EU: Discussion with Foreign Minister of Armenia, Joint Committee on European Affairs. 280 “Armenia to build new reactor at its NPP”, op. cit. 281 Global Gold Corporation is an international gold mining, development and exploration company with mining properties in Armenia, Chile and Canada, committed to building shareholder value and maintaining social and environmental responsibilities. Global Gold Uranium LLC, a wholly owned subsidiary of Global Gold Corporation, is engaged in the exploration for and development of uranium 276 277 ©NATO Defense College 2008 63 January 2006 it has acquired the rights to prospect for uranium, along with gold, in a north-eastern region of Armenia.282 During the meeting of Armenian and Russian presidents in Sochi in early 2007, the idea of Russian-Armenian Uranium Joint Venture was raised. The Head of Rosatom Kiriyenko announced during his visit to Armenia in April 2007 that Russia is ready to invest in the joint venture as much as necessary. He also invited Armenia to become a participant in the International Uranium Enrichment Centre in Angarsk. He estimated Armenia's uranium reserves as at least 30,000 [metric] tons.283 During a meeting of the Armenian Nuclear Safety Council on 30 May 2007, President Kocharyan said that Armenia, jointly with Rosatom, will shortly start prospecting for uranium in its southern provinces. Kocharyan stressed that Armenia will not enrich uranium on its territory. 284 “We prefer to join the idea of formation of international centres on providing services of nuclear fuel cycle under IAEA. Agreement with the Russian Federation has been already achieved,” he said.285 Obviously, the Armenian Government needs significant international assistance for the costly and ambitious project to construct a new NPP. Energy Minister Movsisyan said in October that “the Armenian NPP may use a Russian, Canadian, American, European or Japanese reactor, or it may install a hybrid, as Bulgaria did, using a Russian reactor but European electrical machines and mechanisms, and an American safety system.” There have been clear indications of Russian and U.S. interest and a somewhat vague indication of French interest. deposits. Global Gold is located at Greenwich, Connecticut. More information can be found at www.globalgoldcorp.com 282 Global Gold Corporation website. Corporate Profile. 283 “Armenia signed an agreement with Russia to develop uranium reserves”, by Lyndon LaRouche, Political Action Committee Website, http://www.larouchepac.com/news/2007/07/11/armenia-signedagreement-russia-develop-uranium-reserves.html 284 Under the partnership Global Nuclear Energy Partnership, a limited number of countries including the U.S. and Russia would provide uranium fuel to other nations for powering reactors to generate electricity, and then retrieve the fuel for reprocessing. This would deprive those nations of their own nuclear fuel enrichment programs, which can cause proliferation of nuclear weapons. 285 “Armenia not going to enrich uranium on its territory”, 31 May 2007, PanArmenian.Net. http://www.panarmenian.net/news/eng/?nid=22487&date=2007-05-30 ©NATO Defense College 2008 64 Senior officials of Rosatom and Russian Atomstroyexport have stated that if the Armenian government decides to build a new NPP, Russia is ready to send nuclear specialists as well as to fully finance the construction project.286 Some analysts assess this strong commitment by Moscow as aimed at maintaining Yerevan’s allegiance.287 In March 2007, U.S. Assistant Secretary of State Fried indicated that the U.S. would not object to the Armenian government's plans to build a new NPP since, after recent explosions on the gas pipeline shipping Russian gas to the South Caucasus, the U.S. and Europe have paid greater attention to the energy security of the region and its energy diversification to reduce its dependence on Russian fuel supplies. 288 Indeed, the U.S. provides significant political support and economic assistance to Armenia as well as technical assistance to the current ANPP. In June, U.S. Charge d’Affaires in Armenia said that the U.S. is ready to help Yerevan put the project into practice. 289 On 21 November 2007, a Statement of Cooperation in developing Feasibility Study for a new NPP in Armenia between the U.S. Government and Ministry of Energy of Armenia was signed.290 On 21-21 January, US Nuclear Regulatory Commissioner Peter B. Lyons visited Armenia on a fact finding mission.291 Politically, moreover, the U.S. might feel responsibility to assist Armenia since, despite its significant role in the region, it still could not ensure the Armenian participation in pipelines carrying the Caspian oil and gas. The countries also have security dialogue and military cooperation, and the U.S. has been promoting Armenia’s Euro-Atlantic integration. At a joint press briefing by President Sarkozy and PM Sargsyan during the Armenian PM’s visit to France on 26 October 2007, reference was 286 “Armenia in Talks with Russia over New Nuclear Plant”, by Armen Dulian, GROONG Digest, 4572, 25 October 2007. 287 Lyndon LaRouche, op. cit.; “Russia acts to keep ties with Armenia strong”, Serjei Blagov, 23 April 2007, Eurasia Insight, http://www.eurasianet.org/departments/insight/articles/eav042307a.shtml 288 Daniel Fried Indicates U.S. Would Not Object To Construction Of New NPP In Armenia, 16 March 2007, http://www.armeniadiaspora.net/ADC/news.asp?id=816 289 Armen Dulian, op. cit. 290 “United States support new nuclear plant feasibility study”. 21 November 2007, http://www.armradio.am/news/?part=eco&id=11206 291 “US Nuclear Regulatory Commissioner visits Armenia”, http://www.armradio.am/news/?part=eco&id=11718 ©NATO Defense College 2008 65 made to the opportunity of French companies’ involvement in the programmes for nuclear energy development in Armenia. 292 President Sarkozy has announced his ambitions to increase the role of France in NATO. France also has advanced political relations with Armenia. A French contribution to the construction of a new NPP in Armenia, bringing Armenia closer to the Euro-Atlantic community, will increase the role of France both in the Euro-Atlantic community and in the Southern Caucasus. France has 58 nuclear plants that generate about 80% of its electricity. The decision by France, which lacks hydrocarbons, to develop nuclear energy was a way to achieve energy independence.293 Armenia’s situation is similar to the French one, and so there is a good basis for nuclear cooperation. The French AREVA NP company is a world leader in the design and construction of NPPs, in cooperation with German Siemens. 294 The two companies together have developed the EPR (European Pressurised-Water Reactor), which is safer and cheaper than existing plants. It also produces less nuclear waste.295 In France, NPPs are designed to withstand an earthquake twice as strong as the 1000-year event calculated for each site. Having a French-type reactor, therefore, would be a good option for seismic-prone Armenia.296 France does not mine uranium domestically but imports it, mostly from Canada and Nigeria. French companies have various holdings in the uranium market. 297 France might be interested in the uranium reserves in Armenia. If it starts exporting uranium from Armenia, it can also assist in the reprocessing of the spent fuel generated in the NPP in Armenia, since it is the most successful reprocessor in the world. It has already helped Armenia to build a dry storage facility for nuclear fuel in 2000.298 292 “PM Serj Sargsyan met with French President Nicolas Sarkozy”, 27 October 2007. http://www.armradio.am/news/?part=off&id=10971 293 Nuclear power in France: http://en.wikipedia.org/wiki/Nuclear_power_in_France 294 See more about AREVA at: http://www.areva.com 295 “France’s nuclear option”, by Alexandra Fouché, BBC News Online, 9 October 2003, http://news.bbc.co.uk/2/hi/europe/3177360.stm 296 “NPPs and earthquakes”, Briefing Paper, 20 August 2007, Austrialian Uranium Association at. http://www.uic.com.au/nip20.htm 297 Nuclear power: http://en.wikipedia.org/wiki/Nuclear_power 298 The safe storage and disposal of highly radioactive spent nuclear fuel remains the biggest challenge. However, spent fuel becomes less radioactive over time. First, it is stored in on-site water ©NATO Defense College 2008 66 With nuclear energy becoming less unfashionable, Russia is adopting an active role in the construction of new NPPs. It is showing interest in bidding for the construction of new NPPs in Eastern and Central Europe, in particular in Belarus and Hungary. 299 Recently Russian Atomstroyexport won a tender to construct an NPP in Bulgaria.300 Russia seems to be open to the idea of cooperating with other states in the development of new NPPs. In November 2007, Rosatom signed an agreement for cooperation on nuclear projects with the German Siemens, aiming to use Siemens technology in building new NPPs and modernizing old ones in Russia and abroad.301 This can be explained by the fact that Russian nuclear technologies are believed to be outdated. Rosatom representatives have also made statements about the possibility of cooperating in the construction of NPPs with France. It is inadvisable to exclude Russia from the project, since Russia’s potential unhappiness could be expressed by the new hike in the gas price or by exercising its rights over those energy assets of Armenia that are under its control. Involving Russia in the project of a new NPP in Armenia might contribute to reducing dividing lines in the region and counterbalancing the perceived anti-Russian nature of BTC and other regional pipelines. At the same time, Russia should not play a major but rather a secondary role in the project, and most importantly, should not have control over the new nuclear power plant, since the main objective of its construction should be reducing Armenia’s energy dependency on external sources, mainly Russia. The most appropriate Russian role in the project, which has already been agreed by the parties, is the enrichment of uranium processed in Armenia. Armenia does not intend to have a full nuclear cycle, which is positive pools, and after a few decades it can be moved to dry storage facilities until its radioactivity decreases naturally to levels safe enough for other processing. The amount of waste can be reduced, particularly through reprocessing. Reprocessing can potentially recover up to 95% of the remaining uranium and plutonium in spent fuel. Thus, it addresses not only the concern of waste disposal but also provides the solution of sustainability in the issue of energy security. 299 “Moscow ready to help Belarus build NPP”, 17 October 2007, Interfax; “Russia prepared to bid to build new NPPs in Hungary”, 30 October 2007, Interfax, 300 “EC approves Atromstroyexport’s participation in Bulgarian NPP project”, 7 November 2007. 301 “Russia, German firm sign nuclear cooperation pact”, RFE/RL Newsline, 14 November 2007, Volume 11, No. 211, http://www.rferl.org/newsline/1-rus.asp?po=y ©NATO Defense College 2008 67 from the point of view of non-proliferation. Russia is one of the few countries with a full nuclear cycle and reprocessing capacities. As part of the Global Nuclear Energy Partnership, it can assist other countries to enrich uranium and reprocess spent fuel. If the uranium mined in Armenia is going to be enriched in the International Uranium Enrichment Center in Angarsk, the spent fuel can be reprocessed there as well. If Armenia and Russia find a way to transport the uranium to Siberia, whether by air or by restoring the non-functioning railway line from Russia to Armenia via Georgia, and secure the agreement of Georgia to transfer the nuclear material via its territory, the problem of spent fuel can be solved in the most efficient way. There are favourable conditions in Armenia for the construction of a new NPP. Having had an NPP for few decades that went through all stages construction, putting into operation, shutdown and restarting, Armenia has the necessary experience and expertise, links with the IAEA and the national nuclear authorities of potential contributors to the project. Armenia is a party to all major international conventions on nuclear safety and safeguards, and the IAEA has been satisfied with their implementation. It also has a Nuclear Regulatory Authority and has adopted the necessary national legislation on nuclear issues that among other things allows foreign companies to have stakes in NPPs in Armenia. Public opinion is in favour of nuclear energy, which it recognizes as the only reliable energy source for Armenia. Intentions of Georgia, Azerbaijan and Turkey to develop nuclear energy Tbilisi has announced its interest in constructing a third generation NPP. On 13 July 2007, after a meeting between the French and Georgian Presidents, Sarkozy said that France was ready to study the economic and environmental implications of the project. Saakashvili also met the CEO of the leading French Energy company Areva Lauvergeon to discuss the prospects of building the power station. 302 However, Georgian PM Nogaideli said on 15 July that “the issue concerns possible replacement 302 “Feasibility of Construction of a NPP in Georgia.”, Caucasus Institute for Peace, Democracy and Development, Tbilisi, Georgia, 5 October 2007. ©NATO Defense College 2008 68 of the Armenian old nuclear reactor with the new one...So talks about where this new reactor will be located – whether it will be in Armenia, or in Georgia, or whether it will be constructed at all or not – are too early.”303 On 13 and 26 September 2007, senior representatives of the National Academy of Sciences of Azerbaijan announced their intention to develop a small nuclear reactor to obtain isotopes for medical purposes. It was explained that Azerbaijan’s oil and gas will be exhausted one day, and nuclear energy will be necessary to keep the pace of economic development. It is assumed that “Russia might bid for the project and be a worthy rival to the French or Japanese.” 304 Turkey has considered the idea of constructing an NPP for quite a while. On 9 February 2006, during his visit to the US, Turkish Energy and Natural Resources Minister Guler discussed participation of American companies in the construction of an NPP. 305 “The Draft Law on the Construction and Running of the NPPs and Their Sales of Energy” drafted by the Government has been accepted by the Parliament’s Energy Commission. Two companies have already submitted bids to the Turkish Atomic Energy Agency for construction of NPPs in different Turkish cities. One of them has already received a licence and has pledged to complete the plant by 2015.306 There are even voices in Turkey that argue that in order to establish a balance of power in the region if Iran goes nuclear, the U.S. should make Turkey a nuclear power307 as well, for the sake of both Turkey's and US national security.308 303 “Georgia Sizes up Nuclear Option”, 15 July 2007, Civil Georgia, http://www.civil.ge/eng/article.php?id=15282 “Azerbaijan will complete construction of nuclear reactor”, 26 September 2007, http://www.regnum.ru/english/890542.html; “Head of Azerbaijan National Academy of Sciences Highlights Site of First Nuclear-Investigation Reactor in Country”, 26 September 2007, Trend; “Nuclear energy is prestigious”, Rosatom Press Center of Nuclear Energy and Industry, http://www.rosatom.ru/en/comments/6150_19.09.2007 305 “Turkey will construct own NPP with US support”, Regnum News Agency, 02 March 2006, http://www.regnum.ru/english/584196.html 306 “Nuclear energy possibilities in Turkey”, by Fevzi Saffet Bora, 18 March 2007, Turkish Weekly, http://www.turkishweekly.net/comments.php?id=2537 307 The term “nuclear power” is used not only to define the nuclear industry used to generate nuclear energy but also in reference to the nuclear club of states possessing nuclear weapons. 308 “A nuclear Turkey: An issue on paper of vision”, by Huseyin Bagci, 1st May 2006, http://www.turkishweekly.net/comments.php?id=2068 304 ©NATO Defense College 2008 69 Following the recent positive shift in attitudes towards the use of nuclear energy all over the world, including the U.S. and Europe, public opinion is more in favour of constructing NPPs. The proponents of nuclear energy underline that nuclear energy is environmentally friendly as it emits negligible greenhouse-gas emissions, unlike hydrocarbons. Nuclear power produces far less waste than fossil-fuel based power.309 Although it is expensive and time-consuming to build NPPs but relatively cheap to operate them, compared to fossil fuel based power plants such as TPPs. This makes the overall costs of NPPs attractive.310 Besides, most of the world’s oil and gas is in the hands of “hostile or shaky” governments. Their prices have been rising, and their reserves will be exhausted in few decades. Uranium, from which nuclear fuel is produced, is mostly located in Australia and Canada, and is estimated to be sufficient for a longer period of time than hydrocarbons. Solar and wind energy are expensive and economically unviable. They don’t represent a serious alternative to fossil fuels. And lastly, nuclear energy significantly reduces the energy import dependence of the country, making it self-sufficient.311 309 Nuclear power: http://en.wikipedia.org/wiki/Nuclear_power See IAEA website, http://www-pub.iaea.org/MTCD/publications/PDF/te_1404_web.pdf ; “Energy and nuclear power planning study for Armenia”, IAEA-TECDOC-1404, July 2004. p. 5. 311 For more on this debate see: “Is nuclear energy a viable option for all?”, by Alvin Chew, for RSIS, 24 October 2007, ISN Security Watch; “Nuclear power’s new age”, 6 September 2007, http://www.economist.com/opinion/displaystory.cfm?story_id=9767699 310 ©NATO Defense College 2008 70 CONCLUSIONS Energy security, security policies and Euro-Atlantic integration are closely linked in the Southern Caucasus. The three countries in the region have different opportunities for ensuring their energy security and contributing to the energy security of other states. The range of choices, opportunities or limitations significantly affects their prospects of EuroAtlantic integration. Azerbaijan is becoming a major oil and gas producer, becoming both self sufficient and an exporter of both commodities. It has gained importance in the global energy market with the completion of the BTC. Through the BTE pipeline, Azerbaijan has started supplying gas to Georgia and Turkey, from where it will be transported to Europe. Azerbaijan’s gas is also considered to be key to the first phases of the planned Nabucco and Trans-Caspian natural gas pipelines. In parallel with progress in the exploitation of oil and gas, Azerbaijan has increased significantly its defence budget. Thus, having gained confidence based on oil revenues, Azerbaijan seems unwilling to compromise and agree to solutions proposed by the OSCE MG but is rather trying “to win time,” shifting the military balance in its favour. The risk of war is increased by Dutch disease. Poverty and corruption persist in the country, disfranchised people in the region do not benefit from oil revenues, and Islamic fundamentalism such as wahhabism fills the gap, posing a major challenge to the government. There is concern that Azerbaijan might restart war over NK in order to divert the attention of its people. Armenia is excluded from the BTC and BTE pipelines because of the NK conflict and its lack of diplomatic relations with Turkey. The BTC was originally a political project, as it was part of the U.S. strategy to increase the cooperation of involved states and the interdependence of the Southern Caucasus with Europe, and most importantly, to enable the states in the Southern Caucasus to choose their foreign and security ©NATO Defense College 2008 71 policy orientation, free from Russian pressure. Being left out of the project had a negative impact on the economic development of Armenia and also deprived the country of an equal opportunity to be free in its foreign and security policies. Thus, the pipeline, designed to play a role similar to the PfP, deepened divisions within the Southern Caucasus. At the same time, a decision was made to construct a new NPP as the only alternative to replace the existing one and overcome dependence on foreign resources. The decision was boosted by the confirmation of commercial uranium reserves in Armenia, sufficient both for domestic use and also for export. Armenia needs significant international support for the ambitious project. Russia and the United States have shown clear interest in supporting the project, while France has signalled it more vaguely. In spite of not having significant energy resources, Georgia is privileged to be an important transit country, thanks to its geographical position as well as its close relations with Azerbaijan and Turkey. Recently it has also started considering the option of utilizing nuclear energy. Having severe political problems with Russia, it seeks to reduce its gas dependence on Gazprom, mostly relying on the gas coming from Azerbaijan. It has also signalled interest in receiving Iranian gas through the Iran-Armenia pipeline, but its diameter does not allow it to be a transit pipeline for the time being. Besides, the U.S. attitude towards Georgia’s long-term energy deals with Iran is negative. In 2005-2006, all three states had gas price disputes with Russia but each of them handled it differently. Georgia issued radical statements, refusing to buy the gas at the new “political price”, although subsequently it changed its mind. Azerbaijan proclaimed a change in foreign policy orientation, stopped buying Russian gas, and announced that it would stop using the Baku-Novorossiysk pipeline, though not completely. Thus, Georgia and Azerbaijan tried to extract political credit from the gas dispute in the West. Armenia handled the gas dispute by making a deal with Gazprom under which it ceded important energy assets to the Russian company. The financial management of ANPP was handed over to Russia in exchange ©NATO Defense College 2008 72 for the debt for nuclear fuel. Gazprom also has the rights to the Armenian section of the Iran-Armenia pipeline. Over the last few years, all three South Caucasus states have made significant progress in Euro-Atlantic integration. Georgia has submitted a request to become a NATO member, and Azerbaijan and Armenia have become increasingly active NATO Partners. Georgia has an Intensified Dialogue with NATO, all three states have launched political dialogue and military reform within IPAP and PARP, and all three contribute to NATO-led peace-support operations. Armenia does not have NATO membership aspirations. Over the last years it has become an increasingly active Partner, having joined all major initiatives within the PfP. However, current circumstances do not allow Armenia to further advance its Euro-Atlantic integration for a number of reasons. First, there seems to be no imminent prospect of the normalization of Armenian-Turkish relations and the settlement of the NK conflict. Turkey and Azerbaijan coordinate their policies towards Armenia, including land blockade and exclusion of Armenia from regional energy and transportation projects. Besides, in parallel with the growing military threat represented by Azerbaijan, and the adherence to the “one nation, two states” policy by Azerbaijan and Turkey, Armenia feels threatened by Turkey as well. To counterbalance those challenges, it continues its military cooperation with Russia and participation in the Collective Security Treaty Organization. At the same time, it develops practical cooperation and interoperability with NATO, which would allow it to advance its Euro-Atlantic integration once relations with Turkey are normalized. However, there will be limitations on Armenia's choices of foreign and security policies, even if its relations with Turkey are normalized, unless it diversifies its energy sources, thus reducing its strategic energy dependence on Russia and preventing its emerging energy dependence on Iran. ©NATO Defense College 2008 73 The West needs Azeri oil and gas. At the same time, the West needs the Euro-Atlantic integration of the Caucasus rather than a divided and unstable region that is a potential source of instability for the EuroAtlantic area. And if the current tendencies continue, the Caucasus will be divided, including along the lines of energy alliances. So it is time for the Euro-Atlantic community to take more responsibility for the Southern Caucasus. ©NATO Defense College 2008 74 RECOMMENDATIONS The construction of a new NPP in Armenia sponsored by a NATO Ally Either the U.S. or France should be lead the project. This does not rule out the participation of the other country or of Russia as a junior partner. By reducing Armenia’s dependency on Russia and Iran, the plant will give Armenia greater freedom of choice in its foreign and security policies, deepening its Euro-Atlantic integration. The plant should address not only Armenia’s domestic needs but also supply energy to Georgia and possibly other states in the region. Apart from bringing commercial benefits to Armenia that would counterbalance the lack of economic development opportunities resulting from its non-participation in Caspian pipelines, it will also contribute to regional cooperation. By supplying energy to Georgia, the plant will help to diversify Georgia’s energy sources, reducing its gas dependence on both Russia and Azerbaijan. Prevention of the deepening of Georgia’s strategic energy dependence on Azerbaijan is important for more balanced relations between the three states in the region. Potentially, Armenia can also supply electricity to Turkey and Azerbaijan, as it did during the Soviet era, which might contribute to the normalization of relations. The plant will also reduce the region's overall dependence on hydrocarbon production. Pressure by the U.S. and the EU on Turkey and Azerbaijan to make Armenia part of the planned pipelines This recommendation will be conditional on Iran’s participation in Nabucco. If sanctions against Iran are waived, and Iran becomes involved in Nabucco, the U.S. and the EU should put pressure on the involved parties to make the Iran-Armenia pipeline part of the project. Armenia’s inclusion in the planned pipelines traversing the region will be a major step to break the regional cooperation ban imposed by Turkey and ©NATO Defense College 2008 75 Azerbaijan. The Euro-Atlantic community should be firm in promoting regional cooperation in the Southern Caucasus, instead of giving up and expressing hopelessness over the settlement of conflicts.312 It is unlikely that conflicts and tensions in the Southern Caucasus will be solved in the near future. However, regional cooperation, including in the field of energy, should not be held hostage to unsettled conflicts, and can contribute to the decrease of tensions. The Euro-Atlantic integration policy cannot be implemented individually, without cooperation between the states in the region. How can NATO’s role in the energy security of Partners be increased? Up to now, discussions in NATO on energy security have been mostly about the uninterrupted energy supply for NATO Member counties. Energy security needs of NATO Partner countries have been touched upon as well, but mainly in the context of security of pipelines in the territory of oil or gas producer or transit countries. Gal Luft has referred to the necessity of collaborative efforts with non-member countries, using PfP mechanisms, specifying energy producers such as Kazakhstan, Azerbaijan and Turkmenistan as well as transit states like Georgia.313 However, NATO Partner countries also need to ensure their energy security through diversification of their energy sources in order to reduce dependence on oil or gas supplier countries and be free in their foreign and security policy choices. NATO's cooperation with Partners in energy security should not be limited to cooperation with energy producer or transit Partner states. The mechanism of political consultations with Partners can be used for recognizing the interdependence of Partners' energy and security policies, thus also identifying their energy security needs and communicating them to the capitals of individual Allies for possible assistance. 312 In spite of traditional tensions in Turkish-Greek relations, a pipeline between the two countries is under construction, largely supported by the U.S. Administration. Gal Luft vs. Christophe Paillard, “Should NATO play a major role in energy security?”, NATO Rebiew, Spring 2007, http://www.nato.int/docu/review/2007/issue1/english/debate.html 313 ©NATO Defense College 2008 76 Besides, energy security discussions have been mainly about oil and gas. However, nuclear energy can play a significant role by contributing to a country’s energy independence. As Christophe Paillard has pointed out, the Baltic states have realized that to reduce their energy dependence on Russia, they need to construct an NPP, which would be a real alternative to Russian oil and gas and much more practical than a hypothetical NATO security umbrella.314 While NATO, as an alliance, cannot do much towards the development of nuclear energy, individual Allies can. The countries with advanced nuclear industry and able to assist other countries, including NATO Partners, to construct new NPPs, are mostly NATO Allies. NATO can also contribute to the energy security of Partners through its consultations with the EU on the connection between energy security and Euro-Atlantic integration for the states that are both NATO Partners and part of the European Neighbourhood Policy. If NATO specifies the role of the nuclear power in the political independence of those states, antinuclear moods might diminish in the EU. Within its political consultations with Partners, NATO should be assertive in emphasizing the importance of democracy, good governance and human rights in oil- and gas-rich countries such as Azerbaijan and Central Asian states. While discussing defence reform and interoperability within IPAP and PARP, the Allies should pay special attention to the purpose of increased military expenditures. Finally, Allies should emphasize that the possible resumption of military actions by Azerbaijan over the Nagorno Karabakh conflict is unacceptable and contradicts the PfP spirit, and will also undermine the security of pipelines transporting oil and gas to NATO member states. NATO can contribute to the protection of critical energy infrastructure – both pipelines and power plants as well as crisis response in the Southern Caucasus. However, it should not deploy military forces for that purpose. As Andrew Monaghan argues, certain NATO roles in energy security 314 Gal Luft vs. Christophe Paillard, op. cit. ©NATO Defense College 2008 77 “could complicate NATO’s relations with partner countries and other third parties” and “generate real concerns in some states about its intentions.”315 Defence of pipelines by NATO in the Southern Caucasus will raise questions about NATO's political motivation and create confrontation with Russia. Instead, NATO’s role should be limited to the training of the local security forces in the region protecting pipelines and power plants, within the Civil Emergency plan, and provision of assistance by the Euro-Disaster Response Coordination Centre. 315 Andrew Monaghan, “Energy Security – What Role for NATO?”, op. cit., p. 2 and p. 7. ©NATO Defense College 2008 78 BIBLIOGRAPHY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. Baku-Tbilisi-Ceyhan: Oil Window to the West. Edited by S. Frederick Starr and Svante E. 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