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Does Chechnya Stand To Lose Out From Russian-Azerbaijani Oil Agreement?

Russian President Vladimir Putin (right) and his Azerbaijani counterpart, Ilham Aliyev, in Baku on August 13
Russian President Vladimir Putin (right) and his Azerbaijani counterpart, Ilham Aliyev, in Baku on August 13
The two agreements signed during President Vladimir Putin's one-day visit to Baku on August 13 between the state-owned Russian oil company Rosneft and Azerbaijan’s state oil company SOCAR mark the opening of a new chapter in economic cooperation between Russia and Azerbaijan.

They also exemplify the pragmatic "compartmentalization" of bilateral relations that enables Moscow and Baku to pursue mutually beneficial economic cooperation while ignoring other, more tense, and problematic areas, such as their failure last year to reach consensus on the terms for the continued use by Russia of Azerbaijan’s Gabala radar station. Whether and how those agreements will impact on Chechnya’s oil industry, and on the Daghestani ethnic minorities in Azerbaijan, is not immediately clear, however.

The presence of Putin and his Azerbaijani counterpart, Ilham Aliyev, at the signing of the twin agreements between the two oil companies underscores their strategic importance.

The first, framework cooperation agreement between Rosneft and SOCAR envisages the creation of a joint venture that would engage in exploration and exploitation of both oil and gas deposits, giving Rosneft the opportunity to participate in the Azerbaijani gas projects, and opening up new markets for both parties. The two companies also plan to cooperate in the use of pipelines and refineries and in the sale of oil and oil products.

The second agreement is more specific. It provides for the transportation of Urals crude or oil extracted elsewhere in the Russian Federation to Azerbaijan for either refining or re-export via the Baku-Supsa or Baku-Tbilisi-Ceyhan (BTC) export pipelines. It also envisages oil swaps under which Rosneft would provide crude for refining in Azerbaijan and receive in return an agreed quantity of Azeri oil at Ceyhan. According to Rosneft head Igor Sechin, his company could swap Urals crude for higher-quality Azeri Light.

Export-blend Urals oil has an American Petroleum Institute (API) gravity of 31-33 degrees and a sulphur content of 1.1-1.3 percent. By contrast, Azeri Light from the Azeri and Chirag offshore Caspian fields has an API gravity of 35-35.5 degrees and a sulphur content of 0.14 percent. Only crude with a sulphur content of less than 0.5 percent is classified as "sweet."

The second agreement also provides for the reverse use of the Baku-Novorossiisk export pipeline built in the late 1990s to export the "early oil" extracted from Azerbaijan’s Azeri field within the framework of the so-called "Deal of the Century" signed between SOCAR and a consortium of Western oil companies in October 1994. Under an Azerbaijani-Russian intergovernmental agreement signed in January 1996, Azerbaijan undertook to export 5 million tons of crude per year through that pipeline. The transport tariff was set at $15.67 per metric ton, far higher than that subsequently agreed on for the Baku-Supsa and BTC pipelines, which began operation in 1999 and 2005, respectively.

In addition, hundreds of thousands of tons of oil was stolen by thieves who illegally tapped into the Baku-Novorossiisk pipeline on Russian territory, according to Azerbaijani parliament deputy Rasim Musabekov. SOCAR progressively scaled back the amount of oil it exports via the Baku-Novorossiisk pipeline, to 1.2 million tons in 2008 and 2 million in 2012.
Transneft, the state-owned company that owns and manages Russia's export pipelines, proposed in 2011 amending the agreement to reduce Azerbaijan’s export quota via Baku-Novorossiisk to 3-3.5 million tons in light of the annual $50 million loss it was incurring as a result of the pipeline operating at less-than-full capacity.

Instead, however, in May of this year, Russian Prime Minister Dmitry Medvedev unilaterally annulled the agreement.

SOCAR President Rovnag Abdullayev told journalists days after the annulment that SOCAR would continue exporting oil via the Baku-Novorossiisk pipeline until the end of the year. He also mentioned the possibility of using the pipeline in reverse mode, to transport oil from Russia to Baku.

SOCAR and Rosneft are already negotiating the shipment annually to Baku via the Baku-Novorossiisk
pipeline of 5 million tons of crude extracted in Russia. SOCAR insists, however, that the crude in question should have a sulphur content not exceeding 1 percent. That would rule out the export to Baku of Urals crude, but not of the premium quality light sweet crude extracted in Chechnya by Rosneft subsidiary Grozneftegaz, in which Rosneft owns a 51 percent stake. The remaining 49 percent is the property of the Chechen government.

In the late 1970s, Chechnya produced up to 20 million tons annually of high-quality light oil, providing the bulk of the Soviet Union's aviation fuel. That figure declined sharply to approximately 3 million tons in the late 1980s, and to below 2 million tons on the eve of the first (1994-96) war, according to a U.S. study released in October 1996.

The second Russian invasion of Chechnya in late September 1999 compounded the material damage inflicted on the oil-sector infrastructure during the first war. In late 1999, Rosneft was tasked with restoring Chechnya's oil industry, and in the early months of 2000 launched an effort to extinguish burning wells and resume production.

According to official statistics, oil production in Chechnya rose steadily from some 750,000 tons in 2001 to 1.5 million tons in 2002, 1.75 million tons in 2003, and 1.9 million tons in 2004. But production subsequently peaked at around 2.1 million tons in 2006. By 2009, it had fallen to 1.5 million tons, and by 2012 to approximately 1 million.

Rosneft bears exclusive responsibility for the sale for export of the oil extracted by Grozneftegaz, and pays Chechnya's share of the revenues directly into the republic's budget, in an arrangement presumably intended to prevent the Chechen authorities from diverting that money for questionable purposes. In an apparent effort to increase the direct economic benefit to Chechnya from its oil reserves, the republic's leadership began lobbying intensively in 2008 for the construction in Grozny of an oil refinery with an annual capacity of 1 million tons.

Rosneft was supposed to begin construction of that refinery in 2010, but as of April 2011 work had not yet started, although the planned completion date was given as October 2013. In recent months, Chechen Republic head Ramzan Kadyrov has repeatedly criticized Rosneft for not paying taxes in Chechnya; for reducing by 200 the number of persons employed by Grozneftegaz; and for "not allowing us to develop our oil and gas industry the way we want."

At the same time, Kadyrov has also claimed that Chechnya is in a position to attract the required investment to build an oil refinery independently of Rosneft. Whether Rosneft has definitively abandoned its plans to build a refinery in Grozny and now intends to export the oil Grozneftegaz extracts in Chechnya for refining in Baku is still not clear, however.

Commenting on the signing of the August 13 agreements, Ilham Shaban of the Caspian Barrel Center for Oil Research noted that a new refinery will be built in Baku's Garadag Raion by 2020 with an annual capacity of 10 million tons. SOCAR currently extracts only 5-6 million tons of oil independent of its shares in various international consortiums. Shaban suggested that oil from Kazakhstan's Tengiz field could make up the shortfall. Tengiz crude has an API rating of 46.42 degrees and a sulphur content of 0.51 percent. But Chechen crude, too, would meet SOCAR's criteria.

If the agreements signed between Rosneft and SOCAR are merely the most visible manifestation of a broader rapprochement between Moscow and Baku, then the victims of that rapprochement could include the representatives in Azerbaijan of several Daghestani ethnic groups: the Lezgins, Avars, Tsakhurs, and Rutuls.

The Lezgins' historic homeland straddles the present-day Russian-Azerbaijani border. There are upwards of 337,000 of them in Daghestan. Estimates of the number of Lezgins in Azerbaijan range from 178,000 to 400,000, or even 850,000. The Avar minority in Azerbaijan numbers some 200,000.

Azerbaijan's Lezgins have lobbied sporadically for greater protection of their rights since the early 1980s. Some Lezgins in both Daghestan and Azerbaijan have gone so far as to propose creating an independent state that would encompass their historic homeland to the north and south of the river Samur that forms the border between the Russian Federation and the Azerbaijan Republic.

In June 2008, eight separate organizations representing the Avar, Lezgin, and Tsakhur minorities in Azerbaijan issued a statement claiming they are being subjected to systematic harassment and arrest.

For years, the Russian leadership has regarded the Lezgins as a useful instrument for pressuring Baku. But it may no longer consider that approach expedient. Indeed, the withdrawal of Russian support for Azerbaijani’s Lezgins may have been one of the unpublicized components of the new chapter in bilateral relations.

In the week immediately preceding Putin's visit to Baku, three relatives of leading members of the Moscow-based Federal Lezgin National-Cultural Autonomy (FLNKA), all of them Russian citizens, were arrested on their arrival in Azerbaijan. Three more Lezgins were arrested in Azerbaijan’s Oguz Raion earlier this week.

A joint UN and European Parliament delegation is about to visit Azerbaijan to determine whether and in what ways the rights of the Daghestani minorities are being violated.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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