WORKING PAPER
Energy security in the South Caucasus:
views from the region
Leila Alieva and Natalia Shapovalova (Editors)
Co-authors: Vahan Asatryan, Murman Margvelashvili and Jeyhun Veliyev
The research for this paper is funded by the European Union's Seventh Framework Programme
(FP7/2007-2013) under grant agreement n° 613354 - CASCADE Project (FMSH, Paris).
About the authors
Leila Alieva is director of the Center for National and International Studies,
Azerbaijan
Natalia Shapovalova is researcher at FRIDE, Spain
Vahan Asatryan is researcher at the International Center for Human Development,
Armenia
Murman Margvelashvili is founder of World Experience for Georgia and director of
the Institute of Energy and Sustainable Development at Ilia State University,
Georgia
Jeyhun Veliyev is researcher at the Center for National and International Studies,
Azerbaijan
November 2015
2
Abstract
The South Caucasus is often depicted as the main doorway to the energy-rich Caspian region in
the energy security narratives of the European Union and of other Western actors in the region.
But what are the views from the South Caucasus countries – Armenia, Azerbaijan and Georgia
– concerning their own energy security? This CASCADE working paper seeks to shed light on
energy security notions from South Caucasus governments and energy companies, as well as of
citizens and consumers. It finds that there are significant differences in the perceptions of the
different actors in the energy sector within each South Caucasus country that could lead to
political conflicts over energy security strategies.
Energy security in the South Caucasus: views from the region
3
Table of contents
1. Introduction
5
2. Armenia
8
3. Azerbaijan
12
4. Georgia
17
5. Implications for Regional Energy Security
21
6. Conclusion
24
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1. Introduction1
The South Caucasus is often depicted as the main doorway to the energy-rich Caspian region in
the energy security narratives of the European Union (EU) and of other Western actors in the
region. The EU’s energy security strategy2 considers Caspian hydrocarbons as a means to
diversify its energy supplies (and reduce its dependency on Russia in particular, which in 2013
accounted for over 40 per cent of the EU’s gas imports and a third of its oil imports) and the
South Caucasus as a strategic transit route connecting Caspian energy resources with European
markets. This paper does not focus, however, on the importance of the South Caucasus for the
EU’s or other international actors’ energy security. Instead, it analyses the views from the South
Caucasus countries – Armenia, Azerbaijan and Georgia – including perspectives of national
governments and energy companies, as well as of citizens and consumers.
The paper intends to portray the multiple stakeholders – industrial and household consumers,
international and national energy companies, governments, citizens and interest groups3 – in the
energy sector of each South Caucasus country and present their different perceptions of energy
security, instead of focusing on definitions and interpretations of state actors.4 Utility companies
are concerned about the security of supply of their services. Energy-producing companies are
interested in complying with the obligations deriving from regulations and contracts, and
building a sound reputation among customers. End consumers are interested in service delivery
at an affordable price. Citizens may also be concerned with the environmental and social
impacts of energy exploitation and use. In energy-rich countries, citizens care about how
revenues from energy exports are distributed, how energy exports affect their welfare and how
they are managed. While most governments tend to worry about the security of supply, for
energy-exporting states what matters most is the security of demand.5 States also care about the
wider impacts of energy security on the economy and society, the maintenance of critical energy
infrastructure and the level of influence from external actors.
1
The authors would like to thank Konstantin Golub for his input, as well as Jos Boonstra, Daniel
Keohane and Kataryna Wolczuk for their valuable comments on earlier drafts of this paper. Any errors
are the sole responsibility of the authors.
2
European Commission, European Energy Security Strategy, Communication from the Commission to
the European Parliament and the Council, COM (2014) 330 final, Brussels: European Commission, 28
May 2014.
3
See L. Chester, ‘Conceptualising energy security and making explicit its polysemic nature’, Energy
Policy, 38 (2010), 887-895; C. Winzer, ‘Conceptualizing Energy Security’, EPRG Working Paper 1123,
Cambridge Working Paper in Economics 1151, Cambridge: University of Cambridge, Electricity Policy
Research Group, 2011.
4
Little research to date has analysed the energy security of non-state actors in the South Caucasus. See L.
Alieva (ed.), The Baku Oil and Local Communities: A History (Baku, Qanun: The Center for National and
International Studies, 2009); T. Barrett, ‘Notes on the moral economy of gas in present-day Azerbaijan’,
Central Asian Survey, 33(2014), 517–530; J. Strakes, ‘Resource dependence and measurement
technology: international and domestic influences on energy sector development in Armenia and
Georgia’, Central Asian Survey, 33 (2014), 482-499.
5
D. Yergin, ‘Ensuring Energy Security’, Foreign Affairs, 85 (2006), 69-82.
Energy security in the South Caucasus: views from the region
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So what constitutes energy security in the South Caucasus? Four sub-questions emerge from
this overarching research question:
What are the main actors/stakeholders in each South Caucasus country?
What are their perceived risks and threats?
What are their strategies to manage/reduce these risks and threats?
How do they perceive the roles of other regional players (the EU, Iran, Russia and
Turkey) in relation to their energy security?
In order to provide ‘a workable framework for analysis of energy security policy’, Sovacool and
Mukherjee identify five dimensions of energy security: availability; affordability; technology
development and energy efficiency; environmental and social sustainability; and regulation and
governance.6 We draw on this framework to guide our research.
Table 1. Five dimensions of energy security
Dimension
Description
Availability
Having sufficient energy supplies; being energy independent; promoting a
diversified collection of different energy technologies; harnessing
domestically available fuels and energy resources; ensuring prudent reserves
to production ratios.
Affordability
Producing energy services at the lowest cost; having predictable prices for
energy fuels and services; enabling equitable access to energy services.
Technology
Development
and Efficiency
Capacity to adapt and respond to the challenges from disruptions;
researching and developing new and innovative energy technologies;
making proper investments in infrastructure and maintenance; delivering
high quality and reliable energy services.
Environmental
and Social
Sustainability
Minimising environmental damage; possessing sufficient water resources;
mitigating greenhouse gas emissions; adapting to climate change.
Regulation and
Governance
Having stable, transparent, and participatory modes of energy policymaking, and competitive markets; promoting trade of energy technology and
fuels; enhancing social knowledge about energy issues.
Source: Adapted from Sovacool & Mukherjee, op.cit. p. 5345.
B. Sovacool & I. Mukherjee, ‘Conceptualizing and measuring energy security: A synthesized approach’,
Energy, 36 (2011), 5343-5355.
6
November 2015
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The research for this paper followed a common analytical approach for the three South
Caucasus countries. First, the key stakeholders in the energy sector (state and non-state; local,
national and international) of each country were mapped. Second, based on semi-structured
interviews conducted during the summer of 20157 – as well as analysis of narratives on energy
security in media articles, expert discussions and policy documents – the authors analysed their
perceptions regarding energy security and the role of external actors. The questionnaire for the
interviews consisted of broad questions, such as what constitutes energy security, as well as
more specific ones concerning the five dimensions of energy security outlined by Sovacool and
Mukherjee.
The research is largely exploratory and aims to offer a new angle in the studies and policy
debates on energy security in the South Caucasus. In this sense, it presents a first sketch of how
energy security is perceived in the South Caucasus and what are the implications of these
perceptions for regional energy security. This 'pilot' study leaves ample room for further
research that could involve a larger number of stakeholders and adopt a mix of methods (for
example, semi-structured interviews, surveys and/or focus groups/workshops) in order to
generate a more nuanced analysis of energy security perceptions in the South Caucasus.
We found that there are significant differences in the perceptions of the different actors in the
energy sector within each South Caucasus country that could lead to political conflicts over
energy security strategies. State actors in the region share similar concerns about the security of
supply, especially in energy-poor Armenia and Georgia, as well as preoccupations over the
security of exports in Azerbaijan. Citizens and consumers think about energy security not only
in terms of uninterrupted supply, but also of fair and affordable prices and of the governance of
public energy goods.
This research also shows that while South Caucasus governments see benefits in regional
energy cooperation, they also see significant political and security obstacles. Therefore, their
energy security strategies tend to emphasise either energy independence or dependence on
powerful external players. Even though elements of interdependence are present in GeorgiaAzerbaijan cooperation, trilateral interdependence in the South Caucasus is still a distant
perspective.
7
A researcher from each South Caucasus country requested an interview with at least one representative
of each key stakeholder group identified in the mapping. If a request was denied or no response followed,
the researcher used open sources and/or materials of previously held seminar discussions on energy
security to identify and analyse stakeholders’ notions of energy security. On average, twelve interviews
were conducted in each South Caucasus country.
Energy security in the South Caucasus: views from the region
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2. Armenia
Armenia lacks indigenous resources and imports constitute around 75 per cent of the country’s
total energy supply.8 Natural gas, which accounts for two thirds of energy supplies, comes
mainly from Russia through Georgia, and smaller volumes of Iranian gas are swapped for
electricity. Armenia is also completely dependent on Russia for nuclear fuel, which is used to
generate over one third of the country’s electricity at Armenia's single nuclear power plant
(NPP) in Metsamor. Renewable resources account for 7 per cent of total energy supply.
Armenia produces and even exports electricity, but its key generation capacities are expected to
phase out in the coming years, as their operating lifetime expires and major investments are
needed to replace them.
Box 1. Key stakeholders in the energy sector
The Ministry of Energy and Natural Resources is the key state institution in charge of energy
policy. The Ministry of Nature Protection has a mandate to reduce CO2 emissions, by
promoting energy efficiency and a ‘clean-energy’ economy. The President of Armenia is
arguably the most powerful actor in energy security, since he can de facto overturn any
government decision. Moreover, he directly negotiates gas import deals with Russia,
including prices and the privatisation of key assets. Armenia's parliament does not have a
standing committee for energy issues, which means that legislation and oversight of these
questions is subject to various committees.
The Public Services Regulatory Commission is the key regulator in charge of licensing
energy companies, establishing tariffs and controlling the quality of services. The
Renewable Energy and Energy Efficiency Fund is tasked with facilitating investment,
including international assistance, in energy efficiency and renewable energy.
The gas and electricity markets are non-competitive, and increasingly dominated by Russian
state-owned companies. Gazprom's subsidiary Gazprom-Armenia holds a monopoly over
gas transmission, distribution and operation of underground storage. The Electric Network
of Armenia (ENA), previously a subsidiary of the Russian state-owned Inter RAO UES,
holds an exclusive licence for the distribution and sale of electricity and has recently
changed owners to the Cyprus-registered Liormand Holdings Limited. Moreover, Russian
companies (Inter RAO UES and RusHydro) own Armenia’s largest thermal and hydropower
generation facilities (the low efficient Hrazdan thermal power plant and the recently
constructed Hrazdan-5 unit, as well as the hydropower plant (HPP) Sevan-Hrazdan
Cascade), and operate the state-owned NPP in Metsamor. The Armenian state owns power
and heating generation facilities in the capital Yerevan. The only wind power plant in Lori
was constructed with Iranian investment. The private owners of over 170 HPPs are
represented by the Union of Small Hydropower Plants, allegedly closely linked with the
8
If not otherwise indicated, data on energy contexts in the South Caucasus countries (demand, supply,
imports, exports etc.) are taken from International Energy Agency, Eastern Europe, Caucasus and
Central Asia: Energy Policies Beyond IEA Countries (Paris: International Energy Agency, 2015), p. 470.
November 2015
8
governing party. In 2015, Vorotan Cascade, the second largest HPP in Armenia, was sold to
Contour Global Hydro Cascade, an American investor.
Households are the largest consumer group in Armenia, followed by the transport and
industry sectors. However, consumer groups are largely uninvolved in Armenia's energy
security policy. A notable exception was a civic protest bringing thousands of citizens
together to rally against a government decision to raise electricity prices in June 2015.
#ElectricYerevan, as it was dubbed in social media, has since evolved into several civic
groups such as ‘No to Plunder’, ‘Illuminator’ and ‘Stand up, Armenia’.
Official documents such as the National Security Strategy, as well as several government
representatives interviewed for this study, emphasise energy dependence as a major security
threat. To address this, the Armenian state aims to achieve energy independence by diversifying
energy supplies, creating new sources of energy (including nuclear) and developing a
sustainable and reliable export-oriented energy system.9 Strategic documents, such as Energy
Security Concept of the Republic of Armenia, identify the availability of supply as a prime
concern.10 The main policy priorities include increasing internal energy supply, including from
renewable resources and nuclear power; building modern energy installations; the
diversification of energy supplies and regional integration of energy systems; energy efficiency;
and improving the security and reliability of electric energy systems.
Several government representatives interviewed for this study opined that the availability of
natural gas is adequate. Russia is the main partner, and Iran was mentioned as a secondary and
alternative supplier. However, supplies are vulnerable to technical accidents, natural disasters,
growing instability in the conflict-torn region, and unfriendly policies of neighbouring states.
An energy ministry representative referred to the possible purchase of Georgia's state-owned
transit pipeline by an Azerbaijani or Turkish company as a key threat to Armenia’s gas supplies.
Government representatives also hope that once Iran's international isolation is over, ArmenianIranian energy cooperation will grow. Meanwhile, civil society representatives believe that
Armenia could become a transit route for Iranian gas to Europe. However, they fear that
Gazprom will use its control over Armenian gas infrastructure to prevent cooperation with Iran
– and that the Armenian government will not resist the pressure. The government's decision
announced in June 2015 to sell its section of the Iran-Armenia gas pipeline to Gazprom bolsters
such perceptions.
Government and civil society representatives seem to agree that the current availability of
electricity is satisfactory. However, both perceive the degradation of generation and
transmission infrastructure as a significant risk. Given the projected phasing out of old and low
efficiency capacities – such as the Hrazdan thermal power plant (TPP) and the Metsamor NPP –
9
National Security Strategy of the Republic of Armenia, approved at the session of the National Security
Council at the President’s Office of the Republic of Armenia on 26 January 2007.
10
Energy Security Concept of the Republic of Armenia, approved by Order of the President of the
Republic of Armenia No. NK-182-N dated 23 October 2013; Long-Term Development Strategy of the
Republic of Armenia for 2014 – 2025 (Annex to the Republic of Armenia Government Decree # 442-N
dated 27 March 2014); Long-Term Energy Security Strategy for Armenia, drafted with the financial and
technical assistance of the United States and officially introduced in late July 2015.
Energy security in the South Caucasus: views from the region
9
Armenia could face a deficit in electricity supplies.11 Government officials mentioned various
strategies for mitigating the risks of supply disruption, including the development of new
generation capacities, the modernisation of transmission infrastructure and improving tariff
structures for enhanced trade. The government hopes to attract large foreign investments. As a
matter of priority, Armenia's government seeks foreign investors to help construct a new nuclear
power unit and develop gas-fired thermal generating capacities.
There seems to be a broad consensus among stakeholders from the government, the industry
sector and civil society regarding the importance of nuclear power for Armenia's energy
security, in particular for reliability and diversification of supply. Views vary, however, on how
much the development of hydropower would enhance Armenia's energy security. For some, its
potential has already been fully exploited, while for others there is still huge potential. Views
also diverge on the environmental impact of hydropower. Whereas industry representatives
advocate for the exclusion of small HPP projects from mandatory environmental impact
assessments, environmental activists (and an official from the ministry of nature protection
interviewed for this project) pointed to the Yeghegis River as an example of the negative impact
of hydropower generation on fish and wildlife. Hydropower generation has turned the mountain
river into a conduit – a series of connecting pipelines.
Nonetheless, the government plans to attract private investors to build small HPPs. An energy
ministry representative interviewed for this study expressed hopes that the Armenian-Iranian
deal on the construction of the Meghri HPP on the Araks River will be fully realised after
international sanctions on Iran are lifted. However, some in Yerevan fear that Turkey's plans to
construct new reservoirs on the Kars and Araks rivers will deplete the downstream flow needed
for the Meghri HPP, as well as for the domestic and agricultural use of water.
Government officials and politicians feel that Armenia’s electricity system needs to operate
more harmoniously with those of Iran and Georgia – to avoid becoming an isolated energy
island. Limited regional connectivity and trade opportunities create considerable risks for
energy availability. Whereas the Armenian government is interested in electricity imports to
address the risk of shortages and in exports during the summer season, such opportunities
remain bleak in the absence of diplomatic relations with Turkey, the conflict with Azerbaijan
and Georgia's electricity balance.12
Government and civil society representatives agree that energy affordability is also a concern,
with continuing price increases seen as a key risk for the population’s energy security. The 2015
increase in electricity tariffs – which sparked #Electric Yerevan – affects every single Armenian
consumer, as the government is also discontinuing the subsidy for all households. Civil society
representatives claim that the tariff increase will also raise prices for most goods and services.
Commercial consumers complain that higher energy prices entail considerable risks for small
and medium enterprises, and will seriously decrease the competitiveness of several large
companies, such as the chemical Nairit Plant.
11
Interview with a representative of the Ministry of Energy and Natural Resources of Armenia.
Georgia’s electricity balance: Georgia generates most of its electricity from hydropower, which implies
a surplus in the summer season and a deficit in winter. For more information, see section on Georgia.
12
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According to energy-producing companies, in recent years electricity prices have frequently
been below breakeven level. Despite price increases, ENA has reported that profits have
critically decreased. Inter RAO UES and ENA blamed financial troubles on regulatory
practices. State officials refuted these charges by pointing to company mismanagement, among
other reasons (such as maintenance of power plants and the devaluation of the Armenian dram).
Still, as ENA insolvency could jeopardise supply, in May 2015 the Armenian government
backed ENA's request to raise electricity tariffs. A month later, however, public trust in the
company was hugely damaged after the release of a 3,000-page document outlining the
company's expenses, which revealed excessive spending on lavish housing and luxury car
rentals for Russian executives.13
Public pressure brought by #ElectricYerevan convinced Armenian President Serzh Sargsyan to
backtrack on the authorisation to increase prices and order an audit of ENA. In the meantime,
Inter RAO UES decided to sell ENA, a move that was widely perceived by Armenian civil
society as an attempt by the Russian state company to distance itself from the energy business
which provoked public unrest and avoid the audit. The process was marked by a lack of
transparency, highlighting the prevalence of vested interests in Armenia's energy sector. In the
absence of any open and transparent competition, in September 2015 the Armenian government
approved the sale to a Cyprus-based offshore company whose owners are allegedly associates of
Russian President Vladimir Putin.14
Even if price increases can be justified from the perspective of energy producers,15 they face
vocal political and social opposition since public trust in government decisions in the energy
sector is low.16 Many civil society representatives do not consider the energy regulator as duly
independent, and even the fines imposed on ENA have not helped change this negative image.17
Armenia's Power System Operator is perceived to be managed by ‘the hierarchy of phone
calls’.18 In this context, Armenian citizens are sceptical about ongoing and new investments
aimed at improving the reliability of energy supplies.19
13
Armenian NGOs played a key role in analysing the ENA expenses report and revealing these facts to
the broader public. See R. Demytrie, ‘Armenia energy protests: Electric atmosphere in Yerevan’, BBC, 26
June 2015, available at: http://www.bbc.com/news/world-europe-33286397.
14
‘Russian Rosneft Might Be Involved in Armenian Power Utility’s Sale: Press’, Independent
Journalists' Network Press.Am, 30 September 2015, available at:
http://www.epress.am/en/2015/09/30/russian-rosneft-might-be-involved-in-armenian-power-utilitys-salepress.html
15
According to the World Bank, large tariff increases will be needed in 2016-2026 in order to supply
electricity during NPP and Hrazan TPP phase out, as well as to cover the costs of building new generation
capacities. See Artur Kochnakyan et al., Armenia – Power sector policy note (Washington D.C.: World
Bank Group, 2014), available at: http://documents.worldbank.org/curated/en/2015/04/24421395/armeniapower-sector-policy-note.
16
According to a public opinion poll, 95 per cent of Armenians approved #ElectricYerevan, while about
60 per cent believed that the energy and natural resources minister's performance was negative. See
‘Gallup Poll: 95 per cent of Armenians Approve of Electric Yerevan Demonstrations’, Asbarez, 21
August 2015, available at: http://asbarez.com/138978/gallup-poll-95-of-armenians-approve-of-electricyerevan-demonstrations/
17
On 8 July 2015 the Public Services Regulatory Commission fined ENA $126, 000 for the ‘violation of
consumers’ rights’. See R. Gishyan, ‘An expert considers PSRC’s decision to fine ENA fictitious’,
RFE/RL, 10 July 2015 (in Armenian), available at:
http://www.azatutyun.am/content/article/27119938.html
18
Interview with a civil society expert on energy issues.
19
Kochnakyan, op.cit.
Energy security in the South Caucasus: views from the region
11
In sum, government perceptions on energy security – broadly shared by stakeholders in the
industry sector, consumers and civil society organisations – are tilted towards the availability of
supply over other dimensions of energy security (see Table 1). This seems to be a legacy of the
severe energy shortages of the 1990s. Issues such as the environmental hazards of energy
exploitation, growing import prices and corporate mismanagement are seen as less pertinent
compared to the threat of energy supply disruption. Efforts to develop technology and energy
efficiency are perceived mainly as a means to secure the availability of supply rather than an
end in itself. The environment and social sustainability dimension seems to be the last priority
in Armenia.
Given the country’s economic recession and widespread poverty, energy affordability is
becoming more salient. Civil society increasingly challenges the government’s narrative that the
threats to affordability are mainly caused by policy efforts to ensure the availability of supply.
For civil society and consumer interest groups, the risks in terms of affordability stem primarily
from mismanagement and corruption, which in turn brings the governance and regulation
dimension of energy security to the forefront of the debate. The poor governance and finances
of state energy companies (partly as a result of populist policies keeping energy prices below
breakeven level and continuous under-investment in infrastructure maintenance and upgrade)
back these perceptions. Amidst Armenians’ growing mistrust in how the energy sector is
governed, policy practice should ensure transparency and ownership of decisions by all
stakeholders, including civil society and consumer groups. Price increases will be needed to
face the long-term challenges of ensuring an adequate supply and attracting foreign investment.
Armenia's government, therefore, needs to establish a multi-stakeholder dialogue on energy
security.
3. Azerbaijan
With large oil and natural gas reserves, Azerbaijan is a major energy producer. Hydrocarbons
are mainly exported to European markets, and to a lesser extent to Russia and other countries in
the region. In 2013, energy accounted for 95 per cent of Azerbaijan's total export revenues, and
64 per cent of total fiscal revenues.20 These exports explain Azerbaijan’s rapid economic growth
over the last decade (34 per cent in 2006). However, in recent years economic growth has
sharply slowed down (2.8 per cent in 2014), reflecting the decline in oil production (as a result
of the drop in global oil prices) and slow growth in non-oil sectors.21
20
Centre for Social and Economic Development (CESD), Assessment of Effect of Declining Oil Prices on
Azerbaijan Economy (Baku: CESD Press, 2014), available at: http://cesd.az/new/wpcontent/uploads/2014/12/Assessment_of_Effect_of_Declining_Oil_Prices_on_Azerbaijan_Economy.pdf
21
World Bank Group, Azerbaijan Partnership Program Snapshot, April 2015, available at:
http://www.worldbank.org/content/dam/Worldbank/document/Azerbaijan-Snapshot.pdf
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Box 2. Key stakeholders in the energy sector
The state is the major stakeholder in Azerbaijan’s energy sector, with multiple institutional
mechanisms to control and supervise the domestic energy market and oil and gas
exploitation. The Ministry of Energy implements energy policy and regulations, while the
Ministry of Industry and Economy and the Tariff Council develop regulatory policies. The
State Agency for Alternative and Renewable Energy resources established in 2009 is the
main regulatory body for alternative and renewable resources, which currently account for
less than 2 per cent of Azerbaijan's energy supply.
In practice, however, the key institution is the State Oil Company of the Azerbaijan Republic
(SOCAR). It has close ties with the President and represents Azerbaijan in external energy
affairs. It is a shareholder in the major internationally-led upstream projects: it holds 20 per
cent of shares of the Trans-Adriatic pipeline (TAP) and 58 per cent of the Trans-Anatolian
pipeline (TANAP), the key elements of the EU's Southern Gas Corridor. SOCAR’s dual role
as a company and a government agency implies that commercial interests and energy policy
are intermixed in Azerbaijan's energy sector.22
As a result of Azerbaijan’s openness to international investments, dozens of large energy
companies such as BP, Exxon, Chevron, Statoil, Lukoil, NICO, TPAO and Total participate
in production sharing agreements such as the Azeri-Chirag-Guneshli (ACG), a complex of
oil fields, and Shah Deniz, Azerbaijan’s largest gas field. Foreign companies, with BP in the
lead, have also invested in oil and gas transit infrastructure such as the Baku-Tbilisi-Ceyhan
(BTC) oil pipeline, the South Caucasus Pipeline (SCP, also known as the Baku-TbilisiErzurum gas pipeline), TAP and TANAP.
The domestic gas and electricity markets suffer from monopolisation. The electricity sector
is dominated by state company AzerEnergy, which manages electricity production and
transmission. Supply to domestic consumers is provided by the state entities
Bakielecktrikshabaka in Baku and Azerishig in the regions. Azerigas holds the monopoly
over the gas market, including transportation, distribution, purchase and supply.
Households are the largest consumer group in Azerbaijan, followed by the transport,
industry and agriculture sectors. Moreover, hydrocarbon extraction impacts the lives, health
and safety of communities adjacent to the Caspian Sea. More broadly, citizens are affected
by the way in which energy exports revenues are distributed.
Several think-tanks, academic institutions and NGOs study the economic, social and
political impacts of the energy sector and participate in the Extractive Industries
Transparency Initiative (EITI) NGO coalition. However, efforts by civil society activists to
shed more light on energy governance in Azerbaijan have been severely restrained by the
authorities.
H. Kjaernet, ‘The State Oil Company SOCAR: A Microcosm of Azerbaijani Development?’, Caucasus
Analytical Digest 16 (2010), p. 7.
22
Energy security in the South Caucasus: views from the region
13
Government officials in Azerbaijan say that uninterrupted exports to international markets and
ensuring supply to the domestic market are the country’s key energy security concerns. Official
discourse states that Azerbaijan's energy security and that of Europe are closely intertwined.
President Ilham Aliyev stresses diversification of routes and supply sources as the main tenets
of energy security for both Azerbaijan and Europe, and energy security is depicted as a part of
national security.23 The president of SOCAR has defined diversification and security of
supplies, the deepening of energy market reforms, the modernisation of energy infrastructure,
energy efficiency and the use of renewable resources as key energy policy priorities for
Azerbaijan.24
The government wants to increase its importance for the EU’s energy security by becoming an
important transit country in addition to being a reliable supplier. The Azerbaijani energy
minister has expressed interest in involving Iran and other energy-rich states in Central Asia and
the Middle East in the Southern Corridor.25 Arguably, this would make Azerbaijan's heavy
investments in transit pipelines more lucrative and boost the country's position in Europe's
energy security. Partnership with Turkey is seen as beneficial as it would help turn the region
into a major energy hub, as well as ensure reliability of supply. While Azerbaijan is entering a
market that Russia has long dominated, the government in Baku has never openly expressed
concerns about Russia's intentions to preserve its position as the primary gas supplier to Europe
by constructing parallel pipelines, including the Turkish Stream. Regarding the security of
supply, government officials have raised concerns about physical threats to the transit systems,
such as terrorist attacks, or an escalation of the Nagorno-Karabakh conflict and broader
geopolitical complications in the region, including the war in Ukraine and Russia's aggressive
policies in the neighbourhood.
Power supply across the country is depicted as a key domestic issue. Addressing the Cabinet of
Ministers, President Aliyev acknowledged that despite the installation of new power plants and
generators, energy infrastructure in the regions remains obsolete, which causes supply
disruptions in stormy weathers. SOCAR is investing to provide access to gas to consumers in
rural areas. It is likely that making gas widely available could increase the amount of electricity
available for exports, as consumers prefer cheap gas over electricity. Thus, a reliable power
supply to the domestic market could also enhance Azerbaijan’s role as an electricity exporter to
neighbouring countries.
Security of production and supply is a major concern for energy companies operating in
Azerbaijan. Foreign energy companies are interested in keeping production levels stable and
delivering operations and projects safely and reliably. 26 The regional president of BP, a key
shareholder in the ACG oil field, is confident that this field has the potential to remain one of
the world’s largest producing fields for the coming decades. However, it will require continual
‘President Ilham Aliyev, President of the European Council, Donald Tusk made press statements’,
Azerbaijan State News Agency, 22 July 2015, available at: http://azertag.az/en/xeber/872433
24
‘SOCAR president gives interview to Greek Newspaper’, SOCAR webpage, 19 November 2014,
available at: http://www.socar.az/socar/az/news-and-media/news-archives/news-archives/id/7879
25
A. Tully, ‘Could Iran play a part in EU energy security?’, Oil Price, 4 June 2015, available at:
http://oilprice.com/Latest-Energy-News/World-News/Could-Iran-Play-A-Part-In-EU-EnergySecurity.html
26
‘Interview with Gordon Birrell, BP’s Regional President for Azerbaijan, Turkey and Georgia’, SOCAR
Plus, 2014, available at: http://www.socarplus.az/en/article/441/interview-with-gordon-birrellbp%EF%BF%Bds-regional-president-for-azerbaijan-turkey-and-georgia
23
November 2015
14
investment and increased efficiency.27 Similarly, Shah Deniz Stage 2 is expected to provide 16
bcm of gas per year, and drilling and construction works are running on schedule to start
deliveries in the second half of 2018.28
Major energy companies thus do not have serious concerns about resource availability and
possess the necessary technology to maintain stable production rates. However, physical
security remains a serious concern – several explosions have occurred, including in August
2015 in the Turkish sections of SCP, an incident that was blamed on Kurdish militants.
The political elite and society in Azerbaijan have different perceptions of energy security. As a
civil society representative put it, ‘energy security has been artificially exaggerated by the
political elite to become one of the top concerns in order to demonstrate the importance of
Azerbaijan for Europe, especially after the crisis in Ukraine’.29 Similarly, another interviewee
pointed out that ‘the government has no interest in the concerns of citizens, and the provision of
energy security serves to secure the power of the ruling elite’.30 Citizens are seen to play no role
in energy policy-making and the government lacks transparency and accountability. Whereas
Azerbaijan's government has boasted of its participation in the EITI, NGO experts and civil
society activists say that the reports submitted are biased. In 2015, the EITI downgraded
Azerbaijan to a candidate position due to its non-compliance with basic EITI principles and
rules, such as human rights and basic freedoms, after which the government in Baku threatened
to leave the initiative.
For Azerbaijani civil society activists and researchers, energy security is not primarily about
resource availability, security of demand or the physical security of pipelines. They opine that
insecurity emerges from the ‘resource curse’, whereby energy abundance leads to excessive
spending of energy export revenues and results in the destruction of the economy. Most civil
society interviewees underlined that the main threat to energy security is the lack of competition
as the market is monopolised by SOCAR (in other words, the government). As one activist put
it, ‘the government is not interested in the development of commerce or agriculture because
easy money comes from the oil and gas industry’.31 In fact, trade comprises only 8 per cent of
the GDP and agriculture 5 per cent, whereas the energy industry accounts for 41 per cent.32
Civil society activists and consumers stressed that the price of gas and electricity are barely
affordable for most people, and that tariffs are raised sharply rather than gradually (in less than
two years gas prices increased by 65 per cent, even though the electricity price remained
unchanged). Moreover, most interviewees argued that citizens did not directly benefit from oil
revenues, such as in the form of salary increases or employment opportunities, and that wealth
was unequally distributed. Most consumers believe that salary increases barely cover the
concomitant rise in electricity, gas and other bills, but living conditions do not actually improve.
‘Future Intentions: Azerbaijan’s ACG oilfield. Interview with Gordon Birrell, BP’s regional president
for Azerbaijan, Georgia and Turkey’, The Oil and Gas Year, 21 January 2015, available at:
http://www.theoilandgasyear.com/interviews/future-intentions-azerbaijans-acg-oilfield/
28
‘Interview with Joe Murphy BP’s vice president-Southern gas corridor’, The Caspian Barrel, 3 March
2015, available at: http://caspianbarrel.org/?p=27802
29
Interview with an independent expert on energy policy.
30
Interview with a representative of the Caspian Barrel Oil Research Centre.
31
Interview with a civil society expert and senior affiliate of Turan News Agency.
32
State Oil Fund of Azerbaijan (SOFAZ), SOFAZ Annual Report 2014 (Baku: SOFAZ, 2015).
27
Energy security in the South Caucasus: views from the region
15
Consumer representatives also underlined the importance of social cohesion and the
environment for energy security. Corruption and the lack of transparency were also widely
mentioned. 33 According to one interviewee, Azerigas representatives abuse their authority and
apply illegal additional taxation charges to households.34
A commercial energy consumer representative from a non-energy sector complained that
government spending is ineffective in the non-oil sectors and that public resources are wasted.35
For him, transparency, accountability and public access to information should be priorities in
energy security. A notable portion of the population living in poverty,36 an underdeveloped
social welfare system and an unaccountable government are perceived by citizens as
impediments to a more equal distribution of oil revenues. To avoid this trap and prevent serious
challenges to social and economic sustainability when hydrocarbon reserves become exhausted,
employment opportunities, technological development and investment in longer-term
sustainable areas of the economy should be the government's priority.37
Unsurprisingly, resource availability is not perceived as a prime concern for energy-rich
Azerbaijan. However, the availability dimension is not insignificant. Government and extracting
industry representatives see regional instability as a risk to the security of production, supply
and cross-border transit. Investments in technology development to keep up production rates,
diversify exports and ensure the security of critical infrastructure are perceived to be the main
challenges for improving energy security.
There are significant differences in the energy security perceptions of the government and the
energy industry on the one hand, and of consumers and citizens on the other. For civil society
groups and consumers, economic diversification and better spending of energy revenues is
closely linked with energy security. Customers worry mainly about affordability. Citizens also
emphasise non-transparency, corruption and an unequal distribution of oil revenues as risks to
energy security. They point out that larger energy revenues do not imply more employment and
social welfare. Moreover, citizens feel largely detached from state energy projects such as
export pipelines. Thus, along with energy affordability, governance is the most salient
dimension of energy security in the perceptions of civil society and consumers (see Table 1).
Many interviewees stressed that political corruption and the government’s monopoly over the
economy undermine Azerbaijan’s energy security, thereby exacerbating social and economic
problems. In contrast, fewer references were made about the environmental sustainability of
energy exploitation and use.
33
See also Barrett, op.cit.
Interview with a consumer representative. See also Ibid.
35
Interview with a consumer representative from the agriculture sector.
36
According to the Government of Azerbaijan, the percentage of the population living below the poverty
line dropped from over 15 per cent in 2007 to 5.3 per cent in 2013. However, civil society experts believe
that figures are not exact. See ‘Experts Do Not Agree with the Rosy Assessment from Ilham Aliyev’,
Contact, 10 January 2014, available at:
http://www.contact.az/docs/2014/Economics&Finance/011000064921en.htm#.VjAQTLfhAg
37
Oil reserves are expected to be depleted by 2035, and gas reserves by 2070. See International Monetary
Fund (IMF), ‘Republic of Azerbaijan: 2014 Article IV Consultation – Staff Report’, IMF Country Report
14/159, p.4.
34
November 2015
16
4. Georgia
Georgia is strategically located on the East-West and North-South energy trading routes, due to
its access to the Black Sea and land transit links to major energy exporter and importer
countries. Georgia lies within the EU's Southern Gas Corridor: SCP that traverses Georgia is
currently being expanded to link up with TANAP. Furthermore, transit agreements entitle
Georgia to preferential gas prices.
About two thirds of Georgia's primary energy supply comes from abroad. Natural gas is mainly
imported from Azerbaijan, and 10 per cent comes from Russia, previously the main provider.
Georgia possesses vast hydro resources that account for 17 per cent of its energy supplies and
80 per cent of its electricity generation. However, due to the seasonal volatility of hydropower
supply (excess in summer and deficit in winter), Georgia depends on regional trade, which
explains why it intensively develops interconnections with all neighbouring countries.
Box 3. Key stakeholders in the energy sector
The Ministry of Energy has a key role in Georgia's energy sector, as it is responsible for
energy policy formulation and market regulation. The National Energy and Water Supply
Regulatory Commission strives to become a strong and professional regulatory body, though
its decisions are subject to strong political influence. The role of the parliament and the
president in the energy sector is insignificant.
The government has established several initiatives to fund the development of energy
infrastructure. For example, the first combined cycle power plant recently built in Gardabani
was funded by the Partnership Fund, a state-owned investment facility, and the state-owned
Georgian Oil and Gas Corporation. The Georgian Energy Development Fund, founded by
the Ministry of Economy and Sustainable Development, develops renewable energy
projects, including hydropower and wind farms.
The Georgian state controls only some of the most sensitive assets in the energy sector.
These include high voltage transmission and dispatch, the Enguri HPP, the Gardabani
combined cycle power plant (which will be privatised) and the gas transportation network.
All electricity and gas distribution as well as hydro and thermal power plants have been
privatised and ownership lies mostly with foreign energy companies.38
The electricity market is almost entirely dominated by two major players: Energo-Pro, a
Czech investor owning the biggest distribution system and the majority of medium and big
HPPs, and the Russian state company Inter RAO UES that owns the Tbilisi electricity
distribution company 'Telasi', HPPs Khrami-1 and Khrami-2 and Georgia's biggest thermal
power plant 'Mtkvari' in Gardabani. The gas sector also has two major players. Azerbaijan's
state company SOCAR controls gas distribution in the regions through SOCAR Gas Georgia
38
G. Mukhigulishvili & M. Margvelashvili, Competition and Monopoly in Internal Energy Markets
(Tbilisi: World Experience for Georgia, 2012), available at:
http://weg.ge/wp-content/uploads/2012/12/Competition-and-monopoly-in-internal-energy-markets.pdf
Energy security in the South Caucasus: views from the region
17
and Sakorggas; and Kazakhstan's state company KazMunayGas owns gas distribution in
Tbilisi through KazTransGas.39
BP operates transit gas and oil pipelines, namely SCP, Baku-Supsa (also known as the
Western Route Export Pipeline) and BTC. The Kazakhstan state company KazMunayGas
owns an oil terminal and exclusive rights to the sea port in Batumi. Georgia has several
major oil suppliers: LUKoil (Russia), Wissol (Georgia), KazMunayGas, Gulf (Gulf Oil Int)
and SOCAR, among others. Whereas the oil products market is reasonably diversified, cartel
deals are still possible.40
The involvement of public interest groups in the sector is weak. There are no established
energy research institutes and civil society is not sufficiently informed and qualified to
provide a valuable contribution to the energy security discourse. Civil society advocacy (for
example, regarding access to the European Energy Community, or the development of
Georgia's energy strategy) has been limited. There are no consumer associations involved in
the debate on energy security or energy tariffs. While there is an energy ombudsman, it is
not independent because it is housed within the energy regulator. The low level of public and
parliamentary awareness and involvement in the energy sector leaves the Georgian
government without serious oversight, and strips it of incentives to improve the quality of
policy analysis, strategic planning and decision-making.
The National Security Concept of Georgia refers to energy security as a key component of
national security and a basic national interest.41 Improving Georgia's energy security via the
‘uninterrupted supply of various energy products under acceptable quantity, quality and price’ is
the government’s main objective.42 Most state officials interviewed considered Georgia's energy
sector to be dependent on hydropower and the attraction of foreign or private investments to
expand generation capacities as a crucial element of energy security, economic growth and
sustainable development.43 The availability of supply emerges as the key dimension of energy
security with resource availability, security of supply and energy independence featuring high in
the perceptions of state officials.
Whereas reliance on hydropower implies uncertainty given seasonal variations and climate
change (causing the reduction of water flows), geopolitical threats to the security of supply such
as instability in the region and the role of Russia – whose energy interests are seen contrary to
the free flow of Caspian hydrocarbons to the West – appear to be more salient.44 Moreover, the
large share of foreign state-owned (especially Russian) companies in Georgia’s energy sector is
39
Kaztransgaz Tbilisi is currently under special management by the Georgian government due to a
financial dispute with the Kazakh owners.
40
N. Japarashvilia, ‘Georgia’s Competition Agency Fines Major Fuel Retailers’, Georgia Today, 16 July
2015, available at: http://georgiatoday.ge/news/645/Georgia%E2%80%99s-Competition-Agency-FinesMajor-Fuel-Retailers
41
National
Security
Concept
of
Georgia,
23
December
2011,
available
at:
http://www.mfa.gov.ge/MainNav/ForeignPolicy/NationalSecurityConcept.aspx?lang=en-US
42
Main Directions of the State Policy in the Energy Sector of Georgia, 7 June 2007, available at:
http://www.energy.gov.ge/ministry.php?id_pages=12&lang=eng
43
Interviews with stakeholder representatives in Georgia were conducted with the help of Levan
Ushkhvani at the World Experience for Georgia.
44
Interview with a Georgian Oil and Gas Corporation representative.
November 2015
18
seen as a risk.45 The supply of Azerbaijani gas via Georgia (the SCP) has put an end to the
previous dependence on Russian gas, and has generated budget revenues. Moreover, energy
transit through Georgia is widely seen as a way of attracting more international interest in
support of political stability and security in the country.
Russia is also seen as a threat to critical energy infrastructure. This perception has been
enhanced after several pipeline explosions occurred on Russian territory close to Georgia's
border in 2006 and air strikes in the vicinity of the BTC oil pipeline during the 2008 RussiaGeorgia war. Three days prior to the war there was also an explosion at the Turkish section of
BTC, which was allegedly caused by a Russian cyber-attack.46 The recent moves of the
administrative border demarcation sites by Russian border guards in South Ossetia bringing
1,600 meters of the Baku-Supsa oil pipeline under Russian control aggravate the feeling of
insecurity. The involvement of other important external players, including the EU and the US,
investment from large financial corporations, banks and energy companies are seen to ‘increase
the political role of infrastructure and positively affect the stability of the region’.47
The impact of the unresolved conflict in Abkhazia is seen as hindering the security of supply for
the rest of Georgia. The Enguri-Vardnili hydropower cascade, which produces around 40 per
cent of Georgia’s electricity, is partly located on Abkhazian territory, de facto controlled by
Russia. Although there have been no serious problems reported to date, Abkhazia’s energy
consumption is growing, while supply to the rest of Georgia is decreasing.48 There is a concern
that the threat of supply interruption from the Enguri HPP could be easily used as a political
weapon. The lack of generation capacity and uncertainty regarding supply in winter force the
Georgian government to import electricity, which in turn affects affordability. State
representatives and electricity providers consider the construction of new HPPs as a solution to
the problem of availability.
This view is challenged by environmental groups, which claim that building HPPs will not
secure energy independence nor help economic development. Whereas the Georgian
government is interested in producing electricity to export, with Turkey considered the most
promising market, such plans are criticised by environmental NGOs as unrealistic since Turkey
is planning to boost its own exports. Civil society groups underlined the lack of strategic
planning to define energy priorities and financial resource allocations as a major obstacle for a
viable energy security strategy.
Whereas most state officials maintain that affordability is not an issue, as energy tariffs are one
of the lowest in Eastern Europe, consumer representatives polled for this research argued that
the price of electricity is not affordable for all societal groups. The recent devaluation of the
Georgian Lari and the concomitant increase in energy prices have made the issue of
affordability more pressing. However, it seems difficult to strike a balance between the needs of
the energy sector and the natural desire of consumers to pay less.
45
Interviews with representatives from the Georgian National Energy and Water Supply Regulatory
Commission and environmental NGOs.
46
T. Pataraia, ‘Energy Transit and Security Imbalance in South Caucasus: The Road Between Russia and
the European Union’, Heinrich Boll Stiftung South Caucasus, 30 March 2015, p.2, available at:
http://ge.boell.org/sites/default/files/uploads/2015/03/energy_eng-final_1.pdf
47
Ibid. p.8.
48
Interview with a representative of the Joint Stock Company Telasi.
Energy security in the South Caucasus: views from the region
19
Consumers and state representatives tended to agree that a part of the electricity distribution
network is in poor condition, producing recurrent shut-offs, and that the voltage of electricity in
the regions is very low. The lack of renovation of generation assets is seen as a threat to
electricity supply.49 Thus, the importance of effective investment in developing the energy
sector, especially in terms of renewable energy, is widely shared by different stakeholders in
Georgia. Energy experts also added that along with hydropower, other sources such as solar and
wind energy should be exploited as hydro resources may not be enough, especially in winter.
Moreover, investment should boost the energy market and improve the economy and social
welfare without damaging the environment. Civil society groups also underlined the need to
have a strategic environmental impact assessment for the development of renewable energy, and
strategic and resource planning for energy efficiency.
Governance and regulation is another important dimension of energy security in Georgia. A
majority of stakeholders opined that the energy sector is not liberal, transparent and competitive,
and called for more effective legislation and greater involvement of different interest groups in
energy policy-making. Civil society and energy companies have criticised the government for
signing memoranda with big utility companies, which is seen to violate basic principles of
unbundling and transparency, and lead to excessive payments. As a representative of an
environmental group put it, ‘we all see that the market is monopolised by the huge enterprises
and this of course is a big threat to our country’s energy security and economy’.50 The recent
fine of 51.6 million Lari (22.7 million USD) imposed by the Georgian Competition Agency on
Georgia’s top five petrol and diesel retailers for price manipulation is seen as a step forward.
One interviewed government representative admitted that the energy market is not competitive,
but argued that state policy and regulation should solve the problem.51 The implementation of
the EU-Georgia Association Agreement (concluded in 2014) and Georgia's accession to the
European Energy Community are seen as instrumental in obliging the government to make the
sector more transparent, and liberalise and deregulate the market by 2017 to allow users to
choose their energy providers. The interviewed consumer representatives believed that the
existence of several service providers would have a positive impact on prices.
The analysis shows that – according to the five-dimensional framework (see Table 1) – energy
availability is the most salient issue in Georgia. Electricity generation from hydro resources and
increased transit are seen as strategies to satisfy domestic demand. In this regard, regional
cooperation for energy transit and seasonal energy exchange are perceived as effective measures
to increase security. Moreover, the potential for Caspian gas transit to the EU is viewed as an
important factor for increasing Georgia’s international role, regional stability and security.
Energy affordability is also a major consumer concern. However, to a large extent, this is due to
low incomes in general rather than problems in the energy sector. Trust in the independent
regulator does not seem strong enough to encourage consensus on tariffs.
The main technological need is the rehabilitation of existing assets and the expansion of
hydropower capacities. The energy efficiency dimension is largely neglected by most
49
Interviews with representatives from the Georgian National Energy and Water Supply Regulatory
Commission and the Ministry of Energy, and consumers.
50
Interview with a representative of the Green Alternative NGO.
51
Interview with a Ministry of Energy representative.
November 2015
20
stakeholders. There is little information and demand for modern technologies, including
renewable resources, which remain underdeveloped in Georgia.
The social and environmental sustainability dimension of energy security draws less attention in
Georgia when compared to other dimensions. Concerns over the environmental and social
impacts of hydropower development are higher outside the energy sector. Environmental NGOs
and civil society groups are very vocal in raising environmental concerns; however, those
directly involved in the management of the energy sector seem to ignore most of them.
In contrast, the governance and regulation dimension of energy security features high in
Georgian discussions. The quality of energy legislation is widely viewed as substandard and
allowing for ‘grey areas’ and arbitrary action. The institutional weakness of the independent
regulator and the centralisation of power in the energy sector make the system vulnerable to
political influence and corruption. Many stakeholders also pointed towards the need to establish
an energy strategy – a long-term vision for energy security – which is still lacking. Most
stakeholders have a vague understanding of their own role in the energy sector. The energy
ministry is perceived by stakeholders as the only body responsible for energy security, whereas
the role of the regulator, parliament, civil society and consumers is neglected. Approximation to
the EU energy acquis (rules and standards) is considered to be the remedy to Georgia’s
regulation problems. However, the importance of reforms to attract investment and improve
energy security through the implementation of new transit projects seems underestimated by
most stakeholders.
5. Implications for regional energy security
National energy security strategies have implications for regional cooperation in the South
Caucasus, as well as cooperation with external players. Three different patterns of energy
security strategies are present in the region: independence, dependence on an external patron,
and interdependence.
State elites in the South Caucasus perceive the availability of supply as a pivotal dimension of
their energy security. Energy independence is considered important for mitigating energy
security risks, especially in energy-poor Armenia and Georgia. Increasing self-sufficiency and
developing domestic energy sources are among the key objectives of official energy security
strategies. In spite of Armenia's location in a highly-seismic zone, there is remarkably wide
agreement among Armenian stakeholders on continuing to rely on nuclear power. Azerbaijan's
strive for independence is evident in its approach, by not only securing diversified energy
exports, but also transit routes by investing in Turkey and Georgia.
Security of supply and transit is also sought by South Caucasus countries through diversification
strategies to decrease dependence on a single supplier or transit route. However, in the case of
Armenia, the official discourse and practice do not coincide, as dependence on one main
external regional player – Russia – has in fact increased. A lack of transparency and limited
civil society involvement in the governance of the energy sector seems to contribute to this
dynamics, as the ruling elite is allowed to conduct secret energy deals with no accountability.
Energy security in the South Caucasus: views from the region
21
The potential of greater interdependence to help regulate economic relations in the energy sector
and act as a guarantor of peaceful coexistence is undervalued in the South Caucasus.52 On the
one hand, government stakeholders express interest in regional energy cooperation. Trade in
electricity constitutes a common interest for the wider region, including Turkey and Iran. The
South Caucasus countries are interested in importing electricity to meet their seasonal shortages
or until their critical generation capacities are replaced, and in exporting electricity as a means
to boost their energy sectors and economies at large. Similarly, there is a growing interest in
trading more gas. Whereas Azerbaijan and Georgia are part of the Southern Corridor, there are
also hopes in Armenia that once Iran comes out of isolation, the country can improve its
security of supply and benefit from becoming a transit country too. This matches Iran's interest
in future possibilities for gas exports to Europe via Armenia and Georgia.
On the other hand, the geopolitical fragmentation of the South Caucasus into blocs is seen as a
major obstacle to energy security strategies oriented towards interdependence. While physical
barriers to trade in energy can be overcome through investment in new interconnections, spoiled
relations with neighbours (Azerbaijan-Armenia, Armenia-Turkey, Georgia-Russia) and
unresolved conflicts (such as Nagorno-Karabakh) further exacerbate the perceived risks to
energy security in the South Caucasus states. Possible economic benefits from cooperation do
not seem sufficient to improve political relations and contribute to conflict resolution.
Recurrent explosions in critical transit infrastructure, such as that occurred in August 2015 on
the Turkish segment of SCP, are seen as a common threat to the security of supply and transit in
all South Caucasus countries. Conflicts and subversive activities of militant organisations (such
as the Kurdistan Workers’ Party – PKK) and states (for example, Russia has been blamed for
pipeline explosions in Georgia and Turkey)53 are frequently identified by stakeholders in the
region as contributing to energy insecurity. Thus, promotion of energy security is closely linked
to the promotion of conflict resolution in the region.
Russia is widely perceived as a source of risk and threat to energy security in the South
Caucasus. In Georgia, Russia is seen as the main threat to the country's energy security.
Azerbaijan's government considers it as a spoiler of Caspian hydrocarbons transportation
projects to the EU. This serves as a solid basis for Azerbaijan-Georgia cooperation, as both need
each other in the supply chain. The energy transportation infrastructure that links such regional
pipelines and the Baku-Tbilisi-Kars railway strengthen this interdependence. Perceptions of
Russia's role are more ambivalent in Armenia. On the one hand, the government in Yerevan
pictures Moscow as a partner in energy security; on the other, Armenia's dependence on energy
imports is seen as a threat to national security. Moreover, the government's views are challenged
by civil society and consumer groups who do not necessarily regard Russia's domination of
Armenia’s energy markets as contributing to energy security.
Russia sees the South Caucasus gas market as of no interest for its energy security in terms of
imports diversification.54 Even the growing role of Azerbaijan in the European energy market is
not perceived as a real threat to Russia's position, given that current exports of Azerbaijan's
natural gas to the European markets constitute 6 bcm per year in comparison with Russia's 141
L. Aliyeva, ‘Imperial Legacy: Economics and Conflict’, Security Dialogue 27 (1996), 101-103.
Pataraia, op.cit.; Orhan Gafarli, ‘Could Russia Have Had a Role in Recent PKK Attacks on Turkish
Pipelines?’, Eurasia Daily Monitor 12 (170), 22 September 2015.
54
See more in K. Golub, Russia and Energy Security in the South Caucasus, November 2015, available
soon at: http://cascade-caucasus.eu/.
52
53
November 2015
22
bcm.55 Gas volumes extracted in Azerbaijan are expected to grow to 26 bcm per year from late
2018,56 but they are likely to be absorbed by growing demand in Turkey and the Western
Balkans. At the same time, Moscow sees supplying cheap gas to Russian citizens and allies in
the South Caucasus as essential – especially Armenian energy supply, and energy stability in
Georgia's breakaway regions of Abkhazia and South Ossetia. Moreover, Russia is interested in
preserving its economic presence in the South Caucasus energy markets as it gives it leverage
over those countries.
Whereas Azerbaijan and Russia compete on Turkish and European energy markets, the
construction of the Southern Corridor pipelines – TANAP and TAP – does not constitute a
serious menace for Gazprom market positions in Europe. Moreover, some in Moscow hope that
a future huge gas hub on the Greek-Turkish border at the end point of TANAP may facilitate
Gazprom's efforts to negotiate the re-routing of gas transit from Ukraine to the envisioned
Turkish Stream. However, a Trans-Caspian gas pipeline and the potential arrival of large
volumes of Turkmenistan gas is perceived by Moscow as highly undesirable (though less
probable) threat to Russia's energy security.
The Russian factor is essential for Turkish and Iranian policies towards the South Caucasus.
Both governments have so far refrained from challenging or upsetting Russian interests in the
region. The recent rift in Russia-Turkey relations over the war in Syria and the political shift in
the Turkish political scene – in particular the rise of the pro-Kurdish Peoples’ Democratic Party
which has openly spoken in favour of the opening of the Turkish-Armenian border, and the
weakening of the ruling Justice and Development Party – may gradually transform Turkey's
policies towards Russia and the South Caucasus. This may translate into difficulties in
negotiating the agreement on Turkish Stream.
The EU has a long-term interest in improving the energy security of the South Caucasus, since it
can contribute to stability in the EU’s neighbourhood. Since the 1990s, the EU has provided
technical and financial assistance to promote regulatory reform, energy efficiency and
renewable energy, nuclear safety and the development of infrastructure and interconnections.
Energy security is among the priority areas of the EU's Eastern Partnership (the framework for
EU policies towards Eastern neighbours), both in its bilateral and multilateral dimensions. The
image of the EU as a good governance promoter in the energy sector has been most evident in
Georgia. In general, however, the promotion of ‘markets and institutions’ in the South Caucasus
is overshadowed by the EU’s interest in Azerbaijan's hydrocarbons.57 The EU’s energy policy
towards the region has been conducted mainly through the prism of its diversification plans
after Russia's perceived reliability as a supplier was shaken in the 2006 and 2009 gas supply
disruptions.
55
Gazprom, The Power of Growth, OAO Gazprom Annual Report 2014 (Moscow: Gazprom, 2015).
G. Rzayeva, ‘The Outlook for Azerbaijani Gas Supplies to Europe: Challenges and Perspectives’, OIES
Paper 97, The Oxford Institute for Energy Studies, June 2015.
57
See R. Youngs, Energy security: Europe’s new foreign policy challenge (London and New York:
Routledge, 2009), p. 99-125; N. Babayan, ‘The Geek, The Bully, and The Freaks: Diversifying EU
Energy Sources Through and Exercising Influence in the South Caucasus’, in A. Boening, J. Kremer & A.
van Loon (eds.), Global Power Europe - Vol. 2. (Berlin, Heidelberg, Springer Berlin Heidelberg, 2013),
147-163.
56
Energy security in the South Caucasus: views from the region
23
In sum, while South Caucasus state elites declare a common interest in regional energy trade
and cooperation, mutual fears, mistrust, territorial conflicts and spoiled political relations serve
as major obstacles to greater collaboration. The different interests and strategies of external
players, especially Russia and the EU, only aggravate this situation. Russia wants to keep its
influence and dominant position in the South Caucasus and the EU energy markets. The EU
encourages interdependence through the promotion of regional cooperation, liberal markets and
good governance, but it also has a strong interest in increasing access to Caspian hydrocarbons
to help reduce its dependence on Russia. The patterns of energy cooperation reflect geopolitical
cleavages. The South Caucasus is divided into blocs: Armenia’s energy alliance with Russia;
and Georgia’s and Azerbaijan’s with Turkey and the EU. Thus, strategies seeking independence
or dependence on external players prevail over interdependence.
6. Conclusion
Energy security is a multi-faceted and complex concept that has different meanings for states,
energy producers and consumers. The notions of energy security in the South Caucasus are both
deep and wide. In a nutshell, among the five dimensions of energy security presented in the
introduction of this paper, availability, affordability and governance and regulation are most
salient in the notions of energy security in the South Caucasus. In addition, technology
development is often seen through the prism of supply availability. Whereas energy efficiency
and social and environmental sustainability of energy exploration and use feature high on the
EU's agenda, for South Caucasus countries they seem to be the ‘next generation's’ problems and
less important than other energy security concerns.
State elites in the South Caucasus countries put the security of supply (and exports in the case of
Azerbaijan) at the centre of energy security, with the availability of resources being particularly
important for Armenia and Georgia. Most often, they see investment in modern technologies for
domestic production, critical infrastructure and transit capacities as ways to boost resource
supply and/or energy exports. State elites also pursue energy security strategies aimed at greater
energy independence through the diversification of supplies and domestic production – which in
practice is implemented through reliance on support from external regional players such as
Russia, the EU, Turkey and Iran rather than interdependence within the South Caucasus region.
Political barriers to enhanced energy trade and cooperation within the South Caucasus play an
even greater role than insufficient physical interconnections.
In contrast, the affordability dimension of energy security is paramount for consumer groups
across the region. Increases in energy tariffs have hit impoverished populations in all the South
Caucasus countries. In turn, energy affordability is closely linked in many stakeholder
perceptions with governance and regulation issues. The risks related to governance and energy
regulation gain greater importance across an array of stakeholders in the industry sector, and
consumers and citizens in the South Caucasus, regardless of whether a country is endowed with
energy resources or lacks them, and whether it aims to liberalise its energy market or to preserve
(state) monopolies.
November 2015
24
The South Caucasus energy security discourse should not be considered a monopoly of the
states. Consumers and citizens have their distinct views and increasingly voice them on what
constitutes energy security and how threats should be mitigated. However, governments and
energy companies (often state-owned) are at the centre of energy policies. Citizens and
consumers still play a minor role in energy policies. This is a reflection of the region’s broader
democracy deficit, on the one hand, and the securitisation of energy policy that in the postSoviet context implies the dominance of state security above human security, on the other. Such
views are increasingly challenged from within, by civil societies that demand a transparent,
accountable and participatory governance of the energy sector, increased competitiveness of
energy markets, fair energy prices and fair distribution of energy export revenues. While all this
bears the risk of political conflicts in the short term, it may also contribute to a more inclusive
energy security policy oriented towards citizens in the South Caucasus in the long term.
Energy security in the South Caucasus: views from the region
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