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Strategic Shift

But the plot actually goes far beyond ACG, and to the core of where Aliyev wants to position Azerbaijan as the leading Caspian energy player. While it’s true that Azerbaijan might become increasingly ‘oil poor’ over the next few years, it’s also becoming increasingly ‘gas rich’ through Umid, Absheron, and most vitally, the Shah Deniz II field that’s approaching final investment decision. No prizes for guessing that BP also happens to be the key player on Shah Deniz II, or that the British company is in a fierce battle with Baku as to where the gas should go in Europe, and what kind of pricing formulas should be used. Relations have turned so sour that SOCAR, Azerbaijan’s state based oil major, has been openly briefing media that it expects Exxon Mobil and Conoco to come into pre-existing and potentially new plays in the Caspian. And to do so on the ‘largest possible fields’.

Whether that means the likes of BP are going to be kicked out to make room for others remains to be seen. But at the very least, Baku is lining up as many international companies as they can to divide, rule and cash in decent returns on its oil and gas plays across the board. Using BP as the cannon fodder for contractual shotgun isn’t just designed for London’s consumption, but to keep all IOCs and aspiring NOCs entering Azerbaijan on their toes. FIDs have to go ahead, and they have to do so on Baku’s terms. Fail to play the game, and go looking for upstream concessions elsewhere.

What’s more, Azerbaijan expects significant help in pushing its ‘vertical integration’ interests beyond Caspian shores, across Turkey and deep into European markets, not to mention drawing on Kazakh oil and eventually Turkmen gas (albeit with others paying the infrastructure bills) to become the energy hub of choice in the Caspian. ‘Hydrocarbon bit player’ becomes ‘lynchpin energy hub’ standing up to Turkey and even Russia, all while cashing in on lucrative arbitrage potential across the Eurasian landmass.

Baku Blues

Epic stuff, other than Mr. Aliyev runs the risk of catastrophically over playing his hand. Although it’s open season bashing BP these days, if he thinks he can start playing off IOCs to Baku’s gain, he could be in for a nasty shock. Azeri oil reserves are significant, but by no means elephant fields – especially when you consider unconventional gains cropping up elsewhere in far easier to reach places. Exxon certainly won’t be signing up to whatever terms they’re offered in Baku, and especially when it comes to gas. Condensates aside, Shah Deniz II looks an increasingly expensive field to take forward, with SOCAR putting eventual costs (including pipeline construction) up to $50bn for a mere 16bcm of gas. What’s more, it only has European markets to realistically sell gas into due to the geographical confines of the Caspian Sea choking off Asia. And as BP has inconveniently pointed out to SOCAR, the only way they’ll be able to do that is by linking Azeri gas to European spot market prices: forget developing expensive fields and oil indexed pipelines into the European mainland by the 2020s. Spot based benchmarks and LNG cargoes will be continental norm by then.

That might mean Azerbaijan has to try and bring other fields online alongside Shah Deniz II to offset larger volumes against cheaper prices. But whichever way Baku goes, all of it requires international assistance and international investment, not to mention navigating the enormous contractual and transit risks involved in bringing gas from the Caspian to Europe. If the Azeris are smart they’ll get the Georgians to develop LNG options for them to hedge against Turkish pipeline options, but once again, SOCAR isn’t exactly known for its LNG credentials.

So as much as BP might be on borrowed time in Azerbaijan with all IOCs expecting a harder contractual time ahead, President Aliyev needs to firmly keep in mind who he is and where Azerbaijan sits on the world energy map. IOCs can ultimately live without Azerbaijan if they decide he’s crossed the line, but Mr. Aliyev can’t live without them, or indeed the revenue they provide. BP might well fall in Baku, but it wouldn’t be that long before Aliyev goes with them if he gets too big for his limited energy boots. After all, what has SOFAZ (the State Oil Fund of Azerbaijan) done with all the money from when times were good? I’d say that still reads IOCs 1: Baku 0.


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