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Azerbaijan: Baku Bows To Pressure On Pipeline Plans

Azerbaijan's plan to import gas from Russia may help to ease the country's energy shortage this winter and avoid the threat of contractual fines for failing to pump enough oil through a Russian pipeline. RFE/RL correspondent Michael Lelyveld says that Baku may also be playing into the hands of a deliberate Moscow strategy to discourage development of alternate pipeline routes.

Boston, 19 September 2000 (RFE/RL) -- Azerbaijan appears to be bowing to the pressures of the coming winter and Kremlin political strategy with a decision to buy Russian gas so that it can ship more oil through a Russian pipeline.

Speaking in Washington last week, the president of the Azerbaijani state oil company SOCAR, Natig Aliev, told the ITAR-TASS news agency that the purchase of Russian gas for the country's power plants would allow it "to resume major transit of Caspian oil via the Baku-Novorossiisk pipeline across the Russian territory."

Last month, the Dow Jones news agency reported that Azerbaijan was also considering a German company as a possible gas supplier. It is unclear whether Aliev's statement represents a final decision or only an argument for sourcing from Russia. In either case, gas would have to reach Azerbaijan through Russian pipelines. Azerbaijani officials have said that deliveries will start next month.

Aliev's recommendation to buy Russian gas is the outcome of a series of problems since unexpected fuel shortages hit Azerbaijan last winter, leaving much of the country without electricity. In spite of the country's Caspian oil production, Azerbaijan ran low on both fuel oil and gas as power stations turned from one source to another in an effort to keep up with winter demand.

Russia added to the pressure in March by opening an oil pipeline around Chechnya and suddenly declaring that Azerbaijan was breaking a 1996 contract by not pumping oil through the pipeline to Novorossiisk. Moscow claimed that Baku owed it $29 million in fines as a result.

Azerbaijan has since supplied only small amounts of oil for the pipeline, trying to keep enough for refining so that it does not run out of power this winter again. Foreign oil companies in Azerbaijan choose to ship most of their Caspian oil through Georgia to avoid the high Russian tariffs on the Novorossiisk line.

So far this year, only about 250,000 tons of oil has moved through the Russian pipeline compared with some 2 million tons in all of 1999, according to Dow Jones. Buying gas from Russia would allow Azerbaijan to free up another 2 million tons of oil to ship through the pipeline, said Natig Aliev.

Azerbaijan is hard-pressed because it has enormous amounts of Caspian gas that it cannot yet use. The country is making plans to pipe gas to Turkey from its offshore Shakh Deniz field. But the project will not be ready until late 2002, leaving Azerbaijan with two more tough winters without enough fuel.

But the sequence of events that began last year with Russia's decision to build the bypass line around Chechnya suggests that Moscow may have pursued a careful strategy to put Baku on the defensive about how much oil it can provide. The amount of available oil is critical to the U.S.-backed plan for the Baku-Ceyhan pipeline to Turkey, which would compete with Russia's route to Novorossiisk. Unless enough oil is found, the line to Ceyhan may not be built.

When Russia's then-Prime Minister Vladimir Putin ordered construction of the Chechnya bypass during the heaviest fighting of the war, he seems to have had two objectives in mind. The first was simply to keep Russia's oil route open as an option for Caspian exports. The second was to use Russia's contract with Azerbaijan to reduce the amount of oil that would be available for Baku-Ceyhan.

That strategy may now have a chance to succeed, even though Azerbaijan is likely to have plenty of gas for its power plants by the end of 2002. Under the reported terms of Russia's 1996 contract with Azerbaijan, Baku is required to increase its oil shipments to Novorossiisk each year.

It is supposed to send 2.3 million tons of oil through the line this year, increasing the volume to 5 million tons two years from now, according to a report by the Reuters news agency. Natig Aliev's statement suggests that Baku feels obliged to honor the contract.

Azerbaijan will almost certainly fall short of its target this year, even if it does buy gas from Russia to substitute for oil. The goal of 5 million tons in 2002 also looks difficult, putting Baku in the position of asking for more time or revised terms under the pressure of fines.

Moscow is unlikely to give up its claims easily, considering that it is competing both with Baku-Ceyhan and Azerbaijan's plans to sell gas to Turkey, where Russia remains the largest supplier.

Azerbaijan cannot afford to pay fines. At the moment, it is unclear that it can even afford to pay for Russian gas. But if it seeks to delay the oil volumes that it has promised to Russia, the problem could get even worse because an oil shortage could stall the start of the Baku-Ceyhan project.

The predicament appears to give Moscow a strong advantage in its dealings with Baku, which could make Russian gas a costly source of power for Azerbaijan.