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Azerbaijan: Cooperation With Russia Seems To Be Paying Off

Azerbaijan has been earning more from its oil by substituting Russian gas at its power plants this year. Both countries appear to be benefiting from cooperation, but the competition in the Caspian region may still be going on as before.

Washington, 20 November 2001 (RFE/RL) -- Azerbaijan has increased its oil income by buying gas from Russia, the head of the country's oil company says, suggesting that Baku is reaping new benefits from cooperation with Moscow.

The imports from Russia have allowed Azerbaijan to run its power stations on gas rather than oil. Natig Aliev, president of the state-owned oil company SOCAR, said the substitution has freed up Azerbaijan's valuable crude for exports and earnings.

In the first nine months of this year, according to the Turan news agency, SOCAR's revenues rose to $762 million, a 38 percent gain over the year-earlier period. The company's payments to the state budget have risen by a similar amount.

The increases seem all the more remarkable because SOCAR's oil production is up only 0.2 percent this year, according to the Caspian News Agency.

The real gain for Azerbaijan is hard to determine, because the country must pay more for the gas than the fuel oil it once used at its power plants. Most of the gas supplied by the Russian trading company Itera is purchased from Turkmenistan.

Baku's benefits from exporting more of its oil may be a measure of its improved relations with Moscow during the past year. There are also clear advantages for Russia, since SOCAR oil is being shipped through Russia's pipeline to its Black Sea port of Novorossiisk, generating transit fees.

In the first 10 months of 2001, Azerbaijan pumped 2.3 million tons of oil through the Russian pipeline, putting it on target to meet its pledge to provide 2.5 million tons this year under a 1996 contract.

Russian Deputy Prime Minister Viktor Khristenko said recently that exports through Russia will double in 2002 under the contract, and Moscow would like to negotiate an extension to boost shipments even more after that.

The cooperative trend has continued on a series of issues since Russian President Vladimir Putin visited Baku last January. The two countries have adopted similar positions on dividing the Caspian Sea, while Azerbaijan has grown more responsive to Russia's concerns about rebels from Chechnya.

Visiting Baku in mid-November, Khristenko told the RIA-Novosti news agency that a package of 10 cooperation agreements is being prepared for President Heydar Aliev's visit to Moscow in early 2002.

Recently, there have been signs that Russia may also be easing its opposition to the Baku-Ceyhan oil pipeline project, which has been one of Aliev's primary goals. The industry publication "Oil daily" recently quoted industry sources as saying the Russian company LUKoil will soon join the project as a sponsor.

But while cooperation is growing, it is also barely a year old, raising questions about how close it will be.

Last November, Azerbaijan's agreement to buy gas from Russia seemed to have troubling implications. In July 2000, the Russian pipeline company Transneft had threatened SOCAR with $29 million in fines for failing to pump enough oil through the Novorossiisk pipeline.

Azerbaijan was squeezed because it had run out of fuel for its power plants during the previous winter, leaving it without enough oil for its own use. Russia also demanded a tariff that was five times higher than the one that foreign oil companies enjoyed on their own line through Georgia to the Black Sea.

The solution of substituting gas for the power plants backfired badly when Russia blocked the shipments for obscure customs reasons at the start of the winter. Protests broke out in Azerbaijan over fuel shortages following a disputed parliamentary election, leading to concerns about manipulation by Moscow.

Putin's visit last January began a new chapter in relations, but only after Azerbaijan backed Russia's formula for division of the Caspian. What Russia seems to want now is a doubling of Azerbaijani oil shipments on its route, year after year.

It is unclear whether that goal will be compatible with Baku-Ceyhan, particularly if Russia keeps trying to channel Caspian oil from other sources into its pipelines. Even if interests continue to converge, the basic question of a main export pipeline from Azerbaijan has yet to be resolved.

Khristenko also said on 14 November that Russia still doubts that Baku-Ceyhan will be economically viable. Moscow, he said, "does not see economic interest in this project," considering that Russian routes already exist.

The position is much the same as Moscow's policy for the past several years, making it seem that cooperation has yet to replace competition.