Caspian Report - Issue 09 - Spring 2015

CASPIAN 

PUBLISHED BY CASPIAN STRATEGY INSTITUTE | SPRING 2015 ISSUE: 09 

Energy Union 

and the Caspian 

Countries 

Maros Sefcovic 

Strategic Perspectives of the 

EU’s Energy Union and the 

Southern Gas Corridor 

Frank Umbach 

Trilateral Strategic 

Cooperation Between 

Azerbaijan, Georgia and 

Turkey 

Nino Kalandadze 

Global Dynamics of Oil 

Price Fluctuations 

Ruchan Kaya

CASPIAN 

Publisher 

Caspian Strategy Institute, Secretary General 

Haldun Yavaş 

Editor-in-Chief 

Efgan Nifti 

Managing Editor 

Hande Yaşar Ünsal 

Editorial Board 

Siddharth Saxena, Gönül Tol, Bekir Günay, Efgan Nifti, Şaban Kardaş, Svante E. Cornell, Taleh Ziyadov, Amanda 

Paul, Mitat Çelikpala, Ayça Ergun, John Roberts, Fatih Macit, Şener Aktürk, Kornely Kakachia, Ercüment 

Tezcan, Vladimir Kvint, Joshua Walker, Sham L. Bathija, Emin Akhundzada, Ahmet Yükleyen, Mübariz Hasanov, 

Fatih Özbay, İbrahim Palaz, Friedbert Pflüger, Rüçhan Kaya, Matteo Verda 

Researchers 

Seda Birol 

Ayhan Gücüyener 

Emin Emrah Danış 

Seray Özkan 

Translator 

Cansu Ertosun 

Graphic Design 

Hülya Çetinok 

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Dear Readers, 

CASPIAN REPORT 

2 

On March 17 2015, the presidents of Turkey, Azerbaijan and 

Georgia gathered in the Turkish town of Kars for the groundbreaking 

ceremony of the TANAP project, a milestone in the 

realization of the Southern Gas Corridor. The ceremony marked 

a historic moment not only for the strategic trilateral partnership 

but also for European energy security. Europe currently imports 

53 percent of the energy it consumes. Russian President Putin’s 

surprise announcement regarding the cancellation of the South 

Stream project was another key policy decision in the energy 

world. 

The significance of these developments can be better understood 

in light of the objectives of the European Commission’s recently 

proposed Energy Union. In this regard, the cover story of the 

current issue of the Caspian Report provides an in-depth analysis 

of the Energy Union strategy and its internal and external impacts. 

The Vice President of the European Commission in charge of 

Energy Union, Maroš Šefčovič, has personally contributed with 

an article about the EU energy strategy to the cover story of the 

Caspian Report. 

Efgan NIFTI 

Editor-in-Chief 

Twitter: @enifti 

efgan.niḟtiẏev@hazar.org 

Šefčovič emphasises that the Energy Union is based on the three 

long-established objectives of EU energy policy: security of supply, 

sustainability and competitiveness. In this draft framework, 

the Caspian countries will be key EU partners, and therefore 

the EU will remain fully committed to strengthening high-level 

energy cooperation with the Caspian region to meet the common 

objectives of supply and source diversification. 

With a range of authors including Frank Umbach, Matteo Verda 

and Emin Akhundzada, we have sought to give voice to both

EDITORIAL 

internal and external views in order to deepen and enrich our 

analysis of the Energy Union. The authors underline the need 

for strong political commitment to the new energy strategy. 

Close collaboration between external and internal partners will 

be necessary in order to overcome the challenge of bringing all 

stakeholders to a common understanding. 

In order to further understanding of the current dynamic trends 

in regional energy developments, we also looked into countryspecific 

issues such as Georgia’s energy outlook and Azerbaijan’s 

investments in Turkey. Frequent contributors Liana Jervalidze, 

Mubariz Hasanov, Nino Kalandadze and Zaur Heydarov have 

contributed remarkable work to this end. Another distinguished 

scholar, Rovshan Ibrahimov, provides an incisive analysis of 

Azerbaijan’s foreign policy, defining its key principles as 3Ps: 

pragmatism, predictability and prevention. He emphasises that 

Azerbaijan is one of the few countries that has managed to pursue 

its national interest through a balanced foreign policy while also 

remaining an active member of the international community. 

Falling oil prices and threats to global energy security are among 

the other critical policy concerns addressed in our Spring edition. 

In interpreting the complex reasons for the decline in global oil 

prices, Ruchan Kaya suggests that the current situation seems to 

be the result of an oil glut, similar to what happened in the 1980s. 

Finally, articles by Mesut Hakki Casin and Angela Gendron provide 

valuable insights into the rising threats to energy infrastructure 

and security of supply. 

ŠEFČOVIČ EMPHASISES 

THAT THE ENERGY 

UNION IS BASED 

ON THE THREE 

LONG-ESTABLISHED 

OBJECTIVES OF EU 

ENERGY POLICY: 

SECURITY OF SUPPLY, 

SUSTAINABILITY AND 

COMPETITIVENESS. 

I wish you a pleasant read, and look forward to presenting you 

with our Summer 2015 issue.

CASPIAN 

CASPIAN REPORT 

4 

06 

MAROS SEFCOVIC 

Energy Union 

and the Caspian 

Countries 

10 

FRANK UMBACH 

Strategic Perspectives of 

the EU’s Energy Union and 

the Southern Gas Corridor 

26 

MATTEO VERDA 

The EU Energy Union and 

the Role of the Southern 

Gas Corridor 

36 

NINO KALANDADZE 

Trilateral Strategic 

Cooperation Between 

Azerbaijan, Georgia and 

Turkey 

48 

EMIN AKHUNDZADA 

Energy Security in South 

East Europe: The Role of 

the Southern Gas Corridor 

56 

MUBARIZ HASANOV 

ZAUR HEYDAROV 

Geopolitical and Strategic 

Rationale of Azerbaijan’s 

Investments in Turkey

TABLE OF CONTENS 

86 

LIANA JERVALIDZE 

Current Status of 

Georgia’s Energy Sector 

118 

ANGELA GENDRON 

The Militant Terror 

Threat to Global Energy Security 

136 MESUT HAKKI CASIN 

Uncertainties of the Arab Spring: Yemen 

Civil War and Energy Security in the Gulf 

Region 

102 

ROVSHAN IBRAHIMOV 

Foreign Policy of 

Azerbaijan: Adequacy and 

Predictability 

146 

RUCHAN KAYA 

Global Dynamics of Oil Price Fluctuations


6 

ENERGY UNION 

AND THE CASPIAN 

COUNTRIES 


VICE PRESIDENT OF THE EUROPEAN COMMISSION

The first dimension of the Energy Union 

is security of supply. The EU imports 

53% of the energy it consumes, and the 

diversification of energy sources and 

suppliers is a key means of improving the 

EU’s energy security. 

On February 25, 2015 the European 

Commission decided to launch the 

project to build a European Energy 

Union with a forward-looking climate 

policy. The Energy Union is one of the 

biggest steps forward for Europe in 

the field of energy since the European 

Community for Coal and Steel entered 

into force in 1951. 

The Energy Union is based on the 

three long-established objectives of 

EU energy policy: Security of supply, 

sustainability and competitiveness. 

To reach these objectives, the Energy 

Union should focus on five mutually 

supportive dimensions: Energy security; 

solidarity and trust; the internal 

energy market; energy efficiency as a 

contribution to the moderation of energy 

demand; decarbonisation of the 

economy; and research, innovation 

and competitiveness. 

SECURITY OF SUPPLY 

The first dimension of the Energy Union 

is security of supply. The EU imports 

53% of the energy it consumes, 

and the diversification of energy 

sources and suppliers is a key means 

of improving the EU’s energy security. 

The EU needs to diversify supply, moderate 

demand, and put in place new 

preventive measures and emergency 

plans at all levels. 

Exploring new supply regions for fuels, 

exploring new technologies, further 

developing indigenous resources and 

improving infrastructure to access 

new sources of supply are all elements 

that will contribute to the increased 

diversification and security of Europe’s 

energy sector. 

THE KEY ROLE OF THE CASPIAN 

REGION 

To meet the needs of ensuring secure 

energy, the Caspian countries remain 

a key partner for Europe – and the Energy 

Union strategy explicitly states 

that the EU wishes to establish strategic 

energy partnerships with increasingly 

important producing and transit 

countries. To this end, the strategy has 

reiterated that the work on the Southern 

Gas Corridor must be intensified 

to enable Central Asian countries to 

export their gas to Europe. The Southern 

Gas Corridor has been also identified 

as the priority corridor and its 

major projects annexed to the Euro- 

7 

CASPIAN REPORT, SPRING 2015


8 

pean Energy Security Strategy published 

in May 2014. 

Therefore, the EU remains fully committed 

to strengthened high-level 

energy cooperation with the Caspian 

area, to meet the common objective of 

diversification of sources and suppliers. 

To this extent, the Southern Gas 

Corridor – with its extended value 

chain, from gas production in the 

Caspian to the construction of infrastructure 

inside the European Union 

– remains a crucial project. The delivery 

of gas volumes from Azerbaijan to 

South-East Europe via the Southern 

Gas Corridor would significantly reinforce 

gas supply diversification in 

the region, which until now has been 

predominantly supplied by one major 

gas supplier. 

CONNECTING THE AREAS 

The EU will explore strategic energy 

partnerships to ensure the reliable 

and transparent gas transit of the energy 

carriers. The current Southern 

Gas Corridor value chain comprises 

three main projects: the Trans Adriatic 

pipeline (TAP), the South Caucasus 

Pipeline and, Trans-Anatolian Pipeline 

(TANAP). 

The Trans-Adriatic Pipeline will allow 

Azerbaijani gas exports to reach 

Europe, beyond Turkey. It will also 

strengthen the role of Turkey as a 

regional energy hub. The South-Caucasus 

pipeline currently connects 

Baku, Tbilisi and Erzurum, and will be 

expanded by building a parallel pipeline 

on the territory of Azerbaijan and 

compressor stations in Georgia. The 

TANAP, transporting gas from Azerbaijan 

through Turkey to Europe, will 

be a central part of the Corridor, which 

will connect the giant Shah Deniz II 

gas field in Azerbaijan with European 

markets through the expansion of the 

South Caucasus Pipeline on one end, 

and the Trans-Adriatic pipeline on 

the other. Most recently, on 17 March 

we witnessed a ground-breaking ceremony 

of the Trans-Anatolian pipeline 

held in Kars, Turkey with the participation 

of the Presidents of Azerbaijan,

Georgia and Turkey. This is thanks to 

successful regional cooperation between 

the countries concerned by the 

infrastructure that made it possible 

to reach that stage of infrastructure 

development. 

THE COMMITMENT OF EUROPE 

Given the potential supplies from the 

Caspian Region, the Middle East, and 

the East Mediterranean, the EU aims 

to increase the initial volume in the 

mid- and long-term. To this end, the 

Commission will continue its engagement 

with both Azerbaijan and Turkmenistan 

to facilitate the deliveries of 

gas from other Caspian countries to 

European markets via the Trans-Caspian 

pipeline, in accordance with the 

mandate received from the Council 

back in 2011. 

The EU is currently developing a strategy 

to better use the potential of liquefied 

natural gas and storage, and 

the establishment of liquid gas hubs 

with multiple suppliers in Central 

and Eastern Europe as well as in the 

Mediterranean. 

In order to enhance cooperation 

with the Caspian area, transit and 

consumer countries (such as Georgia, 

Turkey, Greece, Italy, Albania and 

Bulgaria), a Southern Gas Corridor 

Advisory Council was established and 

met for the first time on 12 February 

2015 in Baku. The Council will steer 

the implementation of the project at 

a political level in order to render the 

Southern Gas Corridor operational by 

2019-2020. 

and the Commission has taken the initiative 

to support this by setting up a 

High Level Group on Central and South 

Eastern Europe Gas Connectivity. 

EUROPE WILL ALSO ACCELERATE EFFORTS TO OPEN 

THE SOUTH EASTERN EUROPEAN MARKETS TO THE 

SOUTHERN GAS CORRIDOR 

Lastly, let me recall the Joint Declaration 

on the Southern Gas Corridor 

signed between President Barroso 

and President Aliyev back in 2011 

that committed all parties to building 

a dedicated, scalable, physical infrastructure 

link between the Caspian 

region and Europe. Four years on we 

are witnessing the corridor actually 

being built – the expansion of the 

South Caucasus pipeline, the inauguration 

of the Trans-Anatolian pipeline 

just weeks ago and the good progress 

over the Trans-Adriatic pipeline – this 

all illustrates the initial commitment 

of 2011 translated into reality. In this 

respect, I would like to emphasize the 

role of Azerbaijan, as the enabler of 

the Southern Gas Corridor and Turkey 

and Georgia - our key partners and the 

key transit countries for the Caspian 

gas to reach the European markets by 

2020. 

9 

CASPIAN REPORT, SPRING 2015 

Europe will also accelerate efforts 

to open the South Eastern European 

markets to the Southern Gas Corridor,

FRANK UMBACH 

10 

STRATEGIC PERSPECTIVES 

OF THE EU’S ENERGY 

UNION AND THE 

SOUTHERN GAS CORRIDOR 

FRANK UMBACH 

ASSOCIATE DIRECTOR, EUROPEN CENTRE FOR ENERGY AND 

RESOURCE SECURITY (EUCERS), KING’S COLLEGE

EU discussions on an Energy Union go back 

to the March/April 2014 proposals by former 

Polish Prime Minister Donald Tusk, just after 

his appointment as President of the European 

Council. He wanted to create a European Energy 

Union to ensure stable gas supplies and fair 

market-based gas prices as a more effective gas 

solidarity mechanism towards Moscow. 

INTRODUCTION 

On February 25, the European Commission 

publised its strategy for an 

Energy Union. It proposed package 

of gas and electricity infrastructure 

projects to secure the completion 

of an internal energy market, having 

passed the original December 

2014 deadline. In the words of the 

European Commission President 

Jean-Claude Juncker, delivered to the 

European Parliament after his election: 

“We need to pool our sources, 

combine our infrastructures and 

unite our negotiating power vis-àvis 

third countries.” 1 

The most difficult negotiations for 

the Energy Union strategy prior to 

the recent Riga summit (February 

6, 2015) were related to governance 

issues, as the European Commission 

seeks greater authority to move 

away from 28 national energy policies, 

and with member states still 

reluctant to relinquish sovereign 

power. The central pillar of the Energy 

Union, however, is the renewed 

focus on its gas sector and the need 

for more gas connectors to mitigate 

the risk of gas supply disruptions. In 

addition to new and already secured 

gas projects, the EU also wants to 

liberalise electricity markets and 

harmonise regulations across its 28 

member states. 2 

EU discussions on an Energy Union 

go back to the March/April 2014 

proposals by former Polish Prime 

Minister Donald Tusk, just after his 

appointment as President of the European 

Council. He wanted to create 

a European Energy Union to ensure 

stable gas supplies and fair marketbased 

gas prices as a more effective 

gas solidarity mechanism towards 

Moscow. His proposed Energy Union 

structure includes a controversial 

joint purchasing body that would 

seek to secure gas supplies on behalf 

of all 28 EU member states. The EU’s 

new energy security and diversification 

strategy has largely welcomed 

the idea of an Energy Union. 3 

Prior to the announcement of the 

Energy Union on February 25, the 

new Vice President in charge of the 

11 


1. Jean-Claude Juncker, A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change Political Guidelines for 

the next European Commission Opening Statement in the European Parliament, Plenary Session, 15 July 2014, p. 6. 

http://ec.europa.eu/priorities/docs/pg_en.pdf) 

2. See also Simon Evans, ‘Briefing: What Is the EU’s Energy Union?’, Natural Gas Europe, 7 February 2015. 

3. See European Commission (2014a). European Energy Security Strategy. Communication from the Commission to the e European 

Parliament and the Council. SWD (2014) 330 final, Brussels, 28 May COM (2014) 330 Final.

FRANK UMBACH 

12 

VLADIMIR PUTIN SURPRISED THE EU AND THE SOUTH 

STREAM CONSORTIUM BY ANNOUNCING THE 

CANCELLATION OF THE SOUTH STREAM GAS PIPELINE 

PROJECT 

Energy Union, Maros Sefcovic, travelled 

on February 12 to Bulgaria 

for the first session of the Advisory 

Council of the EU’s Southern Corridor 

project. There, he re-confirmed 

the overall strategic importance of 

the Southern Corridor, providing 

up to 20 per cent of the EU’s future 

gas import demand. Sefcovic also 

favours a new LNG strategy for Europe, 

a strategic alliance with Turkey, 

promotion of domestic energy 

resources (such as shale gas), accelerated 

progress on a Mediterranean 

gas hub, a new strategic partnership 

with Algeria, and the strengthening 

of the energy community in Southeast 

Europe. 4 

The EU’s Energy Union concept and 

debates are a direct consequence of 

a range of factors, including: Russia’s 

deployment of gas policies as 

geopolitical tools; Russian annexation 

of Crimea; the present Ukraine 

conflict and the ongoing destabilisation 

of Ukraine’s eastern regions; 

and insufficient solidarity among 

the 28 member states towards Russia, 

as highlighted by Russia’s South 

Stream project. 

On December 1, 2014 Russia’s President 

Vladimir Putin surprised the 

EU and the South Stream consortium 

by announcing the cancellation 

of the South Stream gas pipeline 

project at his meeting in Ankara 

with Turkish President Recep Tayyip 

Erdogan. He cited the Commission’s 

‘non-constructive approach’ 

and Bulgaria’s unwillingness to continue 

the construction. He put all responsibility 

for that decision to the 

EU in the hope of deepening the divisions 

among the 28 member states, 

given that Bulgaria, Hungary, Italy 

and Austria have spoken against the 

Commission’s policy towards the 

project. 5 As Gazprom CEO Aleksey 

Miller made clear in January, ‘South 

Stream is dead. For Europe there 

will be no other gas transit options 

to risky Ukraine other than the new 

‘Turkish Stream pipeline.’ 6 

The European Commission had refused 

to give Gazprom the legal exemption 

to operate the pipeline at 

full capacity, as required by the EU’s 

Third Energy Package, under which 

Third Party Access is capped at 50 

per cent. The project had also faced 

other challenges, including the fact 

that Bulgaria’s new interim government 

froze construction work on its 

territory in August 2014 under the 

pressure from the European Commission. 

Furthermore, the project 

struggled to raise financing for the 

14 billion Euro offshore pipeline 

section due to Western sanctions 

that have made European banks 

much more cautious about lending 

to a Gazprom-led consortium. 7 

The South Stream pipeline was the 

Kremlin’s most strategically important 

gas project in Europe. It was 

originally designed as a counterproject 

to the EU’s Nabucco gas 

pipeline, which planned to bring gas 

4. See also Sonja van Renssen, “The Energy Union: A Holistic Approach to the Energy Transition”, 

Energy Post, 13 February 2015. 

5. See Daniel Dombey, “Russia to Abandon South Stream Pipeline, Says Putin”, Financial Times, 1 

December 2014 and Andrew Roth, “In Diplomatic Defeat, Putin Diverts Pipeline to Turkey”, The New 

York Times (NYT), 1 December 2014. 

6. Quoted following EurActiv, “Russia Says It will Shift Gas Transit from Ukraine to Turkey”, 15 January 

2015. 

7. See also Jim Yardley/J Becker, “How Putin Forged a Pipeline Deal That Derailed”, NYT, 30 December 

2014.

supplies from the Caspian region 

(i.e. Azerbaijan) to Europe, dissolving 

Russia’s gas export monopoly 

over Caspian gas supplies to Europe. 

South Stream was also designed to 

circumvent Ukraine and maintain 

Russia’s gas monopoly in South Eastern 

Europe before other alternative 

non-Russian gas diversification options 

become available for Europe. It 

was designed to transport Russian 

gas from its Black Sea coast (near 

Anapa) via a very expensive sub-sea 

pipeline section to the Bulgarian 

coast, onwards to Hungary via Serbia, 

and then to Baumgarten (Austria) 

and northern Italy. 8 

In place of the original South Stream 

pipeline project, President Putin 

announced an alternative ‘South 

Stream 2.0’ gas pipeline project 

(known as ‘Turkish Stream’). It is 

projected to deliver 15.75 bcm of gas 

to Turkey and another 47 bcm to the 

Greece Black-Sea coast, where the 

EU needs to build a pipeline to transport 

this gas to European customers. 

Moscow has warned that the EU 

needs to build this pipeline as soon 

as possible, as time is running out. 

Russia wants to halt all Russian gas 

supplies transiting Ukraine by 2019 

(when its gas transit contract with 

Ukraine expires), due to the remaining 

high transit risks for Russian gas 

to European customers. 9 Although 

the Commission was surprised and 

shocked by this announcement, it 

has declared that Turkish Stream, 

transporting Russian gas to Europe 

via Greece, lacks a sound economic 

basis. It warned that this strategy 

shift change would harm Gazprom’s 

reputation as a reliable supplier 

and made clear that it would ‘not 

accept any blackmailing’ (Commission 

President Jean-Claude Juncker). 

The EC has questioned the economic, 

legal and technical viability of the 

Turkish Stream project. 10 

With this newly agreed Russian 

gas pipeline project to Turkey and 

the EU’s new Energy Union strategy, 

the EU-Russia ‘gas partnership’ 

has reached a new crossroads. Its 

already ambivalent relationship 

was already fraught with numerous 

conflicting and opposing energy interests 

prior to the current Ukraine 

conflict. 11 The conditions and circumstances 

for the EU’s Southern 

Gas Corridor are once again shifting. 

This article examines the EU’s 

emerging Energy Union concept, its 

new energy and gas supply security 

strategies, their implications for the 

EU’s Southern Gas Corridor project, 

and the role of Turkey in this complex 

geopolitical environment. 

THE EVOLUTION OF THE EU’S 

ENERGY UNION 

Confronted with Russia’s annexation 

of Crimea and the shutting off of this 

Russian gas supply line, on March 

21, 2014 the EU Council decided 

to diversify further its gas imports 

and reduce its gas supply dependence 

on Russia. It concluded that 

the EU’s efforts ‘to reduce Europe’s 

13 


8. See also F. Umbach, “Russia’s South Stream Pipeline Project Aims to Regain Geopolitical Influence”, 

Geopolitical Information Service (GIS - www.geopolitical-info.com), 1 October 2013. 

9. TASS, “Gazprom Informs EC Official on Transit Risks for European Customers on Ukrainian Territory”, 

Moscow, 14 January 2014. 

10. Quoted following Annemarie Botzki, “South Stream Cancellation Leaves Room for Alternative 

Routes”, Interfax-EPW, 11 December 2014. See also Roman Ivanchenko/Alexey Novikov, “Russia’s 

Turkish Stream Threat is a ‘Political Bluff’ – Naftogaz”, Interfax-NGD, 16 January 2015 and Andreas 

Walstad, “Sefcovic Reiterates Doubts over Turkish Stream”, ibid., 5 February 2015. 

11. See also F. Umbach, “European-Russian Gas Partnership Threatens to Unravel”, in: Energy Post, 30 

September 2013.

FRANK UMBACH 

14 

high gas energy dependency rates 

should be intensified, especially 

for the most dependent Member 

States.’ The European Commission 

was tasked with conducting an indepth 

study of EU energy security 

and developing a comprehensive 

plan for the reduction of EU energy 

dependency, accelerating further 

diversification of its energy supply, 

and increasing its bargaining power 

and energy efficiency by the beginning 

of June. 12 The EU’s new energy 

and gas strategy, based on this study 

(concluded at the end of May), 13 was 

approved and confirmed at the next 

European Council summit (June 26- 

27 2014). 14 On March 29 and then 

in an article in the Financial Times 

on April 21, Polish Prime Minister 

Donald Tusk proposed to the creation 

of a European Energy Union to 

ensure stable gas supplies and fair 

market-based gas prices as a more 

effective gas solidarity mechanism 

towards Moscow. 15 A ‘non-paper’ 

has further detailed the Polish proposals 

for a comprehensive ‘Energy 

Union’. According to Tusk, excessive 

dependence on Russian energy 

makes Europe weak. Russia’s individual 

gas prices for its different EU 

customers are often expensive, not 

based on real market factors, and 

reflective of its monopolistic market 

position. Under this strategy, the 

more dependent and less diversified 

the individual European gas buyer 

and country, the higher the gas price. 

This unfair gas price, also dependent 

on the extent to which the European 

gas consumer is politically 

allied with Russia in its foreign and 

security policies, is part of Moscow’s 

energy foreign policy strategy. This 

strategy uses gas dependencies and 

infrastructures as well as gas prices 

as a political weapon to advance national 

geopolitical interests. 

The Energy Union proposal centres 

on a joint purchasing body 

that would seek to secure gas supplies 

on behalf of all 28 EU member 

states. Key associated elements of 

this proposal include infrastructure 

development and modernisation in 

order to support diversification; law 

enforcement; enhancement of EU 

security of supply mechanisms; an 

increase of EU and Member States’ 

bargaining power vis-à-vis external 

suppliers; increasing European energy 

production; and enhancing energy 

security in the EU’s neighbourhood. 

THE POLISH VISION OF AN 

ENERGY UNION IN DETAIL 

Politically, the principal idea of an 

energy union is based on political 

solidarity and common economic 

interests. Instead of the public and 

political focus on an institutional 

body collectively buying gas from 

Russia, the much more comprehensive 

Tusk proposal is founded on six 

major pillars and principles, aimed 

at strengthening the common power 

of the EU-28: 

Strengthening the Bargaining Power 

of Member States and the EU vis-àvis 

External Suppliers: Developing a 

collective purchasing mechanism for 

jointly negotiating energy contracts 

with Russia must avoid any secret 

and market-distorting clauses. The 

Kremlin’s ‘divide-and-rule’ strategy 

12. See European Council, “Conclusions”, Brussels, 21 March 2014 EUCO 7/1/14 REV 1, CO EUR 

2, CONCL 1. 

13. See European Commission, “European Energy Security Strategy”. 

14. See European Council, “Conclusions”, Brussels, 27 June 2014 EUCO 79/14,CO EUR 4, 

CONCL 2. 

15. See Donald Tusk, “A United Europe Can End Russia’s Energy Stranglehold”, Financial Times, 

21 April 2014 and Polish Foreign Ministry, “Roadmap towards an Energy Union for Europe. Non- 

Paper Addressing the EU’s Energy Dependency Challenges”, Warsaw, 2014.

must also be avoided, which seeks to 

play individual EU members against 

each other, weakening the collective 

power of the EU. This could be introduced 

within antitrust procedures in 

the energy field towards companies 

that have abused their dominant position. 

The purchasing mechanism 

for collectively buying gas from Russia 

envisages sale of Russian gas in 

auctions organised by regional gas 

exchanges or through purchasing 

platforms (i.e. energy commodity 

exchanges), which would be in line 

with a more liberalised gas market. 

This issue is also the reason why 

the Commission is studying the proposal 

more in detail, as it would not 

automatically contradict its liberalisation 

efforts for the gas sector. 

In order to enhance the EU’s collective 

bargaining power, the role 

of Intergovernmental Agreements 

(IGAs) should be gradually curtailed 

and provide a sufficient level 

of transparency. An expanded list 

of abusive clauses, i.e. those causing 

inefficiency and segmentation 

in the European gas market, should 

be excluded from IGAs such as oil 

indexation, destination clauses 

(preventing Gazprom’s European 

customers from re-selling their gas 

to others), take-or-pay clauses (paying 

for import volumes regardless 

of actual demand and imports) and 

delivery points located inside the 

EU-15 instead of the borders of the 

EU-28/European Economic Area 

(EEA)/EEC etc. Furthermore, a list 

of compulsory provisions should be 

incorporated into every IGA in order 

to ensure that the future activities 

of single parties and member states 

will not constrain - directly or indirectly 

- the consistent application of 

EU law and energy regulations. 

Solidarity Mechanisms: These will 

include new mechanisms guaranteeing 

political solidarity between 

members in order to mitigate the 

risk of any new gas supply cuts or 

crises, better equipping states to 

cope with any such crisis. The mechanisms 

will include a regional risk assessment, 

an EU preventive plan, and 

an EU emergency plan based on new 

crisis and management capacities of 

the European Commission. The new 

crisis and management mechanism 

will also include ‘an option to introduce 

an EU-wide support system for 

efficient use of existing and planned 

storage capacities’. EU member 

states have been tasked with conduct 

test cases by September. 

Infrastructure: The EU needs to support 

the construction of adequate 

infrastructure in order to diversify 

its gas imports and reduce its dependence 

on Gazprom. More than 10 

THE ENERGY UNION PROPOSAL CENTRES 

ON A JOINT PURCHASING BODY THAT 

WOULD SEEK TO SECURE GAS SUPPLIES 

ON BEHALF OF ALL 28 EU MEMBER STATES. 

countries still depend on Gazprom 

for more than half of their consumption. 

These energy infrastructures 

should be supported by the EU 

through co-financing and streamlining 

‘Projects of Energy Community 

Interest’ (PECI) at the highest permitted 

level; 

Development of Indigenous Energy 

Sources in the EU: While every individual 

EU member state has the 

sovereign authority to decide on its 

national energy mix, each EU country 

should increase reliance on domestic 

energy resources, including indigenous 

fossil fuels (i.e. coal and shale 

gas). No country should be prevented 

from doing so in a sustainable, costeffective 

way. The use of coal based 

on clean-coal technologies (with the 

EU support through its R&D budget) 

should be ‘rehabilitated in the EU 

15 


FRANK UMBACH 

16 

THE PROPOSAL OF AN ENERGY UNION HAS LARGELY 

BEEN WELCOMED IN THE EUROPEAN PARLIAMENT AND 

THE EUROPEAN COMMISSION, AS WELL AS BY SOME 

MEMBER STATES. 

as contributing to the energy independence’. 

Diversification of Energy Supply (i.e. 

gas and oil) to the EU: It is key to 

strengthen gas import diversification 

through a pro-active energy foreign 

policy, and through agreements 

with newly emerging gas suppliers 

of conventional and unconventional 

gas (transported as LNG by new gas 

pipelines like its Southern Gas Corridor 

from the U.S., Canada, Australia, 

Africa etc.). 

Reinforcing the European Energy 

Community: The EU should support 

the EEC and Ukraine as well 

as Moldova to implement and apply 

the binding legislation under the Energy 

Community Treaty. In regard 

to Ukrainian and Moldovan implementation 

by the end of 2014, the 

EU should support gas reverse-flow 

on the Brotherhood pipeline, the 

upgrading, developing and technical 

integration of gas and electricity 

grids that border member states, 

Ukraine’s Gas Transit System, and 

the modernisation of interconnectors 

between the EU and EEC countries. 

In this context, the EU should 

also consider the establishment of 

an efficient early warning system 

with Ukraine on gas supply security. 

16 

EUROPEAN DEBATE OF AN 

ENERGY UNION 

The idea of an Energy Union, proposed 

by Polish Prime Minister Donald 

Tusk ahead of the Commission’s 

in-depth study on the EU’s energy 

security challenges and further diversification 

efforts, faced controversy 

following its public announcement. 

17 In Brussels, the proposal of 

an Energy Union has largely been 

welcomed in the European Parliament 

and the European Commission, 

as well as by some member states. 

In fact, Hungary backed discussions 

in the framework of the Visegrad 

Group of CEE countries. Additional 

support for an Energy Union came 

from French President Francois Hollande, 

Lithuanian Prime Minister 

Jerzy Buzek at an 

EU meeting 

16. See also Andrzej Bobinski, “Poland’s Say in the Future of Europe’s Energy Supply”, GIS, 25 June 

2014. 

17. See, for instance, Karel Beeckman, “Mr. Tusk, on What Planet Do You Live (and in Which 

Century)?”, Energy Post, 24 April 2014.

Algirdas Butkevicius and Latvian 

Prime Minister Laimdota Straujuma. 

On the other hand, Germany’s 

response has been more lukewarm 

– though some experts in the ruling 

CDU/CSU governmental party have 

welcomed the proposal. 18 

However, the Czech Republic’s centre-left 

coalition government did not 

fully the embrace the proposal, and 

in particular, the creation of a unified 

purchasing gas body. However, it 

is open to the possibility of a system 

to ‘aggregate demand on a voluntary 

basis (i.e. joining together private 

entities active in member states)’ 19 

The idea of a single purchasing body 

for Russian gas has also been criticised 

by some European gas companies 

because it would violate EU 

free market rules and competition 

law. 20 However, some of this criticism 

is overstated, as the Polish idea 

is based on an auction model. But 

the Euratom-model has its own 

limits, because in reality, Europe’s 

nuclear power companies negotiate 

with and buy their nuclear fuel 

themselves from a seller. The Euratom 

Supply Agency only reviews the 

already negotiated contracts; it then 

has the right to object if it believes 

a contract would jeopardise supply 

security. 21 

The idea of a collective purchasing 

mechanism for joint negotiation of 

energy contracts with Russia was 

not supported by the Energy Commissioner 

Guenther Oettinger, who 

emphasised that ‘gas is a product, 

not a weapon’. But he has previously 

viewed other components of 

the Energy Union idea positively, as 

a means of preventing Russia from 

playing one EU country off against 

another. 22 

While the idea of a single buying 

body is not the perfect instrument 

for a liberalised gas market and 

economic freedom, the EU faces a 

Russian gas price system that is not 

based on market logic or a liberalised 

economic order. Russia is using 

gas as a political weapon, a tactic the 

EU finds difficult to address in the 

absence of any common control. 23 

Poland’s Energy Union idea would 

have been even more influential 

within the EU-28, when it would 

have not presented as a national 

Polish idea, but rather as a common 

Visegrad group proposal. But 

in general, the Polish proposal has 

been very useful in sharpening the 

EU debates with concrete proposals, 

even when certain aspects have 

been met with resistance from other 

members and the European Commission. 

Many other components 

of the proposal will be developed in 

the coming months and years. Ultimately, 

the majority of the criticism 

has highlighted the lack of political 

solidarity in the European debate, 

and the fact that many EU member 

states still prioritise their own, often 

short-sighted, national energy 

security over - and at the expense of 

– that of the EU-28 bloc. 

17 


18. See also Joshua Posaner, “Polish Push for an Energy Union Attracts Support of Hungary”, 

Interfax-NGD, 6 May 2014, p. 3; Annemarie Botzki, “EU Must Press on With Energy Union 

– EESC President”, Interfax-Energy Policy Weekly (EPW), 19 June 2014, p. E2, and Stratfor, 

“Europe Discusses an Energy Union”, 25 April 2014. 

19. See Joshua Posaner, “Czech Republic Will Not Sign Up to Polish Union Plans”, Interfax-NGD, 

22 May 2014, p. 4. 

20. See Andreas Walstad, “Gas Union Is not a Solution to EU Supply Concerns – Industry”, 

Interfax-Energy Policy Weekly (EPW), 3 July 2014, p. E5 and idem, “Calls for Scepticism at 

National Level”, ibid., 22 May 2014, p. E1. 

21. See also Ivana Jemelova/Hans Hack, “Can Europe ‘Copy Paste’ an Energy Union?”, EurActiv, 

23 July 2014. 

22. See “Oettinger lehnt eine Energieunion ab”, Frankfurter Allgemeine Zeitung (FAZ), 15 May 

2014, p. 17. 

23. See also A.Gawlikowska/Mark McQuay/Roderick Parkes, “A Dummy Guide to Forming an 

Energy Union”, Natural Gas Europe, 12 June 2014.

FRANK UMBACH 

18 

The new energy security and diversification 

strategy has largely welcomed 

the Energy Union concept, 

and has favoured the idea of a joint 

purchasing mechanism, subject to 

further analysis. But an aggregating 

demand mechanism could increase 

the EU’s bargaining power, as the 

new energy strategy note. It has also 

reviewed the limits of the Euratom 

Supply Agency, in addition to highlighting 

the benefits of the increased 

transparency due to the notifications 

and information from member 

states. 

THE NEW COMMISSION’S VISION 

OF AN ENERGY UNION 

The new President of the European 

Commission, Jean-Claude Juncker, 

has justified the controversial merging 

of the commission’s climate and 

energy departments into a new 

portfolio with a Vice President for 

an energy union due to the ‘need 

to diversify our energy sources and 

reduce the high energy dependence’. 

This task has been given to the new 

Spanish Commissioner for energy 

and climate policies, Miguel Arias 

Canete, and will be overseen by the 

Commission’s new Vice President 

Maros Sefcovic. Since their appointment, 

the discussions have intensified. 

Germany still opposes a common 

mechanism for the purchasing 

of gas, as it would run counter to 

the liberalisation of gas markets in 

Europe. But it is in favour of ‘core 

areas of integration’ with a specific, 

robust and reliable governance 

structure as national energy policies 

of EU member states are increasingly 

connected physically, economically, 

and politically. Other countries 

such as United Kingdom and the 

Czech Republic support a less ambitious 

integration policy, with discussions 

on national energy plans to be 

conducted informally and bilaterally 

between member states and the 

Commission. In contrast to Germany, 

which wants to favour only renewables, 

many other EU member states 

also want to support all low carbon 

technologies (including advanced 

nuclear and CCS ones), rather than 

selecting specific ones for support. 24 

As of the beginning of 2015, the European 

Commission conceives its 

Energy Union strategy as a ‘holistic 

approach’ 25 with five principles and 

fundamental pillars: energy security, 

completion of the internal energy 

market, energy efficiency, climate 

policy, and research. A leaked internal 

paper of the Commission for the 

Energy Union of the end of January 

has listed twelve major action 

points: 

Miguel Arias 

Canete, EU 

Commissioner 

for Energy and 

Climate Policies 

24. See Roman Kilisek, “EU Energy Union: Fault Lines Emerge Between Pivotal Member States’ 

Design Proposals”, Natural Gas Europe, 31 January 2015. 

25. See also “Single Supervisor Mooted for Energy Union, as Sefcovic Pushes ‘Holistic Approach’”, 

EurActiv, 5 February 2015.

1. The Commission will develop a resilience and diversification package 

for gas, including facilitating a major increase in gas imports from the 

Southern route, the Mediterranean and Algeria. 

2. The Commission will propose legislation to manage electricity security 

of supply at the European level and fully open capacity mechanisms 

to cross-border participation. 

3. The Commission will propose a revision of the Decision on Intergovernmental 

Agreements to ensure more effective transparency and cooperation 

as well as full compliance with EU law. 

4. The Commission will develop legislative proposals for a new European 

market design based on fully integrated wholesale and retail markets and 

delivering a new deal for energy consumers. 

5. The Commission will propose legislation to improve the effectiveness 

of the European energy regulatory framework. 

6. The Commission will fully engage with Member States and stakeholders 

in the development of regional approaches to market integration, as a 

step towards or an integral part of an EU-wide integrated market. 

7. The Commission will propose new legislation to meet the 2030 energy 

efficiency target based on the revision of the energy efficiency and performance 

of buildings Directives. 

8. The Commission will develop a ‘Smart Financing for Smart Buildings’- 

initiative to make existing buildings more energy-efficient, facilitating access 

to existing funding instruments. 

9. The Commission will propose legislation to achieve the GHG reduction 

targets agreed at the October 2014 European Council in the ETS and non- 

ETS sectors. 

10. The Commission will speed up the decarbonisation and electrification 

of the transport sector and integrate the energy and transport systems. 

11. The Commission will propose legislation to meet the 2030 EU renewable 

target and ensure that the European renewable target is met costefficiently. 

19 


12. The Commission will develop a forward-looking, energy and climaterelated 

R&I strategy to maintain European technological leadership and 

expand export opportunities. 

Source: European Commission, Commission Internal: Energy Union - Discussion 

Paper’, Brussels, January 30, 2015 (Stollmeyer blog - http://stollmeyer. 

eu/?p=96). 

In regard to the controversial joint 

gas purchasing mechanism, the 

European Commission has taken a 

pragmatic stance; it has favoured 

the idea on a voluntary basis or in 

the event of a market failure or crisis 

as part of the EU’s efforts to reduce 

Russia’s negotiating power on

FRANK UMBACH 

20 

the European gas market. From the 

Commission’s perspective, such a 

joint purchasing mechanism can 

be justified under competition and 

internal market rules, as with the 

concept of the Caspian Development 

Corporation (CDC). This was a response 

on Turkmenistan’s offer to 

sell 30 bcm to Europe, but to a single 

buyer. But no single buyer in the EU 

wanted to import more than 5 bcm. 

Thus the CDC, heavily criticised by 

EU gas companies, was envisaged as 

an aggregate purchasing body in response 

to Turkmenistan’s insistence 

on a single buyer for its gas exports. 

But a joint gas purchasing mechanism 

is still dependent on sufficient 

investment in overcoming regulatory, 

financial and political obstacles 

to strengthen the EU’s resilience 

against Russia’s use of gas as a geopolitical 

instrument, as concluded 

by an EU Task Force report last December. 

26 However, the European 

industry has been much more open 

minded and supportive of the idea of 

collectively purchasing LNG cargoes 

as one of several measures to mitigate 

potential gas supply disruptions 

from countries such as Russia. 27 

THE EU’S SOUTHERN CORRIDOR 

AFTER THE CANCELLATION OF 

THE SOUTH STREAM PROJECT 

Along the announcement to build 

an alternative Russian Turkish Gas 

Pipeline, Russia and Turkey agreed 

on an additional 3 bcm of gas annually 

for Turkey at a discount for its 

Blue Stream pipeline. Blue Stream 

has a capacity of 16 bcm, but has 

never transported more than 13 

bcm of Russian gas during the last 

years. The new Turkish Stream pipeline 

with four pipes will have the same 

capacity as the original South Stream 

pipeline, 63 bcm per year. Russia 

hopes that the first gas supplies of the 

total capacity of 15.75 bcm to Turkey 

will go on-stream by December 2016. 

It will use the planned 660 km South 

Stream sub-sea route through the 

Black Sea and another 250 km for the 

new route to Turkey. 

Russia’s alternative gas pipeline to 

Turkey has also been explained by 

the fact that it has already invested 

around US$4.7 billion on the offshore 

and European sections of the South 

Stream pipeline, and even more for its 

own Southern corridor gas network 

on Russian territory. This network 

connects Russia’s gas fields by circumventing 

Ukraine with its projected 

subsea-gas pipeline, starting in Anapa 

at its Black Sea coast. In December 

2013, the official costs for this new 

gas pipeline network increased by 50 

per cent up to more than US$21 billion, 

without a detailed explanation. 28 

Even close advisers of Gazprom have 

warned that by re-routing Russian 

gas supplies to Europe and bypassing 

Ukraine, Russia may fail to fulfil its 

gas contracts with current European 

gas partners; the delivery of gas to a 

certain border in specific volumes is 

agreed in the contracts. Hence, the 

likelihood of European complaints towards 

Gazprom will grow 29 and lead 

to even greater mistrust in Russia’s 

energy policies. 

The present Ukraine-conflict has increased 

the strategic importance of 

26. See “EU Energy Boss Says Joint Gas Purchasing Would Have to be Voluntary”, EurActiv, 3 

February 2015. 

27. See also Andreas Walstad, “European Leaders Divided Over Single Gas Buyer”, Interfax-NGD, 9 

February 2015. 

28. See Tom Washington/Alexey Novikov, “Gazprom Raises South Stream Costs”, Interfax-NGD, 

10December 2013. 

29. So Andrei Konoplyanik from the Gazprom bank and an aide to the Gazprom’s general director at 

the annual Gaidar Forum in Moscow in January 2015 – see R.Ivancenk/A.Novikov, “Russia’s Turkish 

Stream Threat is a ‘Political Bluff’-Naftogaz”.

the Black Sea region to Russia. Turkey 

is a key player in Eurasia’s energy 

policies, and one of the most 

rapidly increasing gas markets 

worldwide. It is the only market in 

wider Europe projecting significant 

future gas consumption growth. It is 

already Russia’s second-largest gas 

export market after Germany. Furthermore, 

Turkey is now Europe’s 

most important transit state for 

Caspian and other potential future 

gas supplies from Iraq (Kurdistan), 

Turkmenistan and even Iran. This is 

due to Ankara’s bilateral Azerbaijani 

gas pipeline project TANAP and the 

TAP-gas pipeline from the Greece- 

Turkish border to Albania, Italy, Bulgaria 

and other prospective South- 

East European countries. 

For the European Commission, 

Ukraine and many EU member states, 

forcing European countries to buy 

Russian gas at the Turkey-Greece 

border instead of using Ukraine’s existing 

large pipeline infrastructure 

would abandon a well-functioning 

system in favour of investing billions 

of Euros in a new expensive 

infrastructure. For Europe, Turkish 

Stream – like South Stream – would 

only offer a route diversification, not 

real diversification of gas supplies, 

which is the major strategic rationale 

for its Southern Gas Corridor 

project. Russia’s gas supplies via the 

Turkish Stream pipeline would only 

maintain or even expand South- 

Eastern Europe’s gas dependence 

on Russia. 

Re-routing Russia’s original South 

Stream pipeline would also make 

Russian gas even more expensive 

for European customers, regardless 

of some provided gas discounting 

prices as Russia would be forced to 

price in the entire investment costs 

RE-ROUTING RUSSIA’S ORIGINAL SOUTH 

STREAM PIPELINE WOULD ALSO MAKE 

RUSSIAN GAS EVEN MORE EXPENSIVE FOR 

EUROPEAN CUSTOMERS. 

- given the combined effects of its 

own economic-financial crisis due to 

the 60% fall of oil prices since June 

2014 and Western sanctions. Those 

investment costs not only include its 

very expensive sub-sea gas pipeline 

circumventing Ukraine, but also its 

extremely costly investments in its 

own Southern Corridor gas pipeline 

networks. Ultimately, these factors 

would make Russian gas supplies 

via Turkish Stream even more expensive 

than via its old South Stream 

pipeline. 

Furthermore, the EU would have to 

abandon Ukraine geopolitically as 

well as in terms of the agreed energy 

and gas supply cooperation of 

March 2014, which also raises the 

political credibility of its agreed 

common energy (foreign) policy. It 

includes Ukraine’s huge gas energy 

infrastructures, which are becoming 

increasingly relevant to Europe’s 

energy security, offering free gas 

storage capacities and gas pipeline 

networks with new reverse-flow options. 

30 Even in the best-case scenario 

for the Turkish Stream gas pipeline 

project, Russia might be forced 

to use Ukraine’s gas transit network, 

as even supporters of the Turkish 

Stream project have admitted. 31 

Moreover, Europe no longer needs 

as much Russian gas, as its gas consumption 

and import demands have 

dramatically decreased, and are not 

projected to increase before 2030. 

In contrast to the IEA’s pre-2009 

forecasts of a need for increased 

21 


30. See F. Umbach, “Ukraine’s Future Energy Security Lies in Europe and the EU”, GIS, 27 January 

2015. 

31. See Jonathan Stern, Simon Pirani/Katja Yafimava, “Does the Cancellation of South Stream 

Signal a Fundamental Reorientation of Russian Gas Export Policy”, Oxford Energy Comment 

(Oxford: Oxford Institute for Energy Studies, January 2015).

imports from around 300 bcm in 

2010 to more than 500 bcm, Europe’s 

gas consumption will likely 

stagnate or further decrease. The 

EU’s new energy security strategy 

envisages a much smaller increase 

in import demand (stagnating even 

in volumes) with an overall declining 

gas consumption in the mid- and 

long-term, in contrast to the IEA’s 

projection, which has been revised 

downwards over the recent years. 

A reduced EU gas consumption and 

import demand will have significant 

implications for the EU’s gas strategy 

as well as for its Southern Gas Corridor. 

While it still needs to implement 

all the planned gas interconnectors 

between its member states as soon as 

possible, it does not necessarily need 

to implement all major LNG-terminal 

expansion plans and larger gas pipeline 

projects. A smaller European gas 

market would intensify the already 

increasing competition between various 

import projects and supply options 

– a very different outlook to that 

of just few years ago, notably during 

Figure: Total Gas Demand and Import Dependency of Natural Gas for 

Different Scenarios 

FRANK UMBACH 

22 

EU-28 PROJECTION 

(REFERENCE 

SCENARIO) 

2010 2020 2030 

TOTAL DEMAND 

(MTOE) 

IMPORT 

DEPENDENCY 

(%) 

444 

62% 

407 

65% 

400 

73% 

EU-28 

PROJECTION 

(2030 POLICY 

FRAMEWORK) 

TOTAL DEMAND 

(MTOE) 

IMPORT 

DEPENDENCY 

(%) 

444 

62% 

404 

65% 

347 

72% 

IEA-PROJECTION 

FOR EU-28 (WEO 

2013-NEW POLICY 

SCENARIO) 

TOTAL DEMAND 

(MTOE) 

IMPORT 

DEPENDENCY 

(%) 

446 

62% 

407 

73% 

442 

79% 

Source: European Commission, ‘In-Depth Study of European Energy Security. 

Commission Staff Working Document Communication from the Commission to 

the Council and the European Parliament, COM (2014) 330 final, Brussels, 28 

May 2014 SWD (2014) 330 final, Part 1/5. 

the 2009 Russian-Ukrainian gas supply 

crisis. For Europe and in particular 

for its energy intensive industries, it 

is becoming even more important to 

conduct a comparative analysis of the 

total costs of various future gas supplies 

in order to benefit economically, 

as the gas prices in Europe will 

remain 2-3 times more expensive as 

in the US.

The overall strategic importance of the 

EU’s Southern Gas Corridor has not 

changed for the new European Commission. 

The Ukraine conflict has rather 

increased its underlying strategic 

rational as the EU’s major gas diversification 

project alongside the completion 

of the internal energy market and 

its related gas interconnectors with 

reverse-flow capabilities. 

After cancelling South Stream, Bulgaria 

and some other countries have 

become ever more interested at the 

Nabucco-West pipeline project as a 

shorter version of the shelved Nabucco-project 

and for a gas hub in South- 

Eastern Europe. 32 The EU has also 

welcomed the plan of a ‘vertical gas 

corridor’ between Greece, Bulgaria 

and Romania by building a two-way 

gas pipeline with a capacity of 3-5 bcm 

per year. It has offered the possibility 

of funding through the Connecting Europe 

Facility programme with its 315 

billion Euro investment package announced 

last November. 33 

CONCLUSIONS AND STRATEGIC 

PERSPECTIVES 

For the time being, Russia’s cancellation 

of the original South Stream pipeline 

has strengthened calls in the EU 

for a real Energy Union. In the light of 

the Ukraine conflict and Russia’s annexation 

of Crimea, the EU has further 

strengthened its strategy and instruments 

for enhancing energy supply 

security and diversification of gas 

imports. According to some estimates, 

the EU’s new energy security strategy 

and agreed efficiency and energy conservation 

efforts will reduce the EU’s 

gas import demand from Russia by another 

12 per cent by 2030, in addition 

to the policies before and after the last 

severe 2009 Russian-Ukrainian gas 

supply crisis. 34 

A real Energy Union needs to be 

more than a common EU energy policy 

based on enhanced cooperation 

THE LACK OF SOLIDARITY IN THE EU’S COMMON 

ENERGY FOREIGN POLICY TOWARDS RUSSIA, FOR 

INSTANCE, IS ALSO THE RESULT OF THOSE SHORT- 

SIGHTED NATIONAL INTERESTS AND PREFERENCES. 

among 28 different energy policies, 

whereby national governments have 

still the control of their energy policies. 

An Energy Union means that the EU 

will guarantee common EU energy security 

and balance the flows of gas and 

electricity instead of national transmission 

system operators. Equally, it 

is neither acceptable nor reasonable 

for national governments to subsidise 

individual energy resources in the absence 

of bilateral and/or multilateral 

cooperation or fully accounting for 

geographical and other factors. The 

lack of solidarity in the EU’s common 

energy foreign policy towards Russia, 

for instance, is also the result of those 

short-sighted national interests and 

preferences. 35 

Alongside with China, Turkey has 

widely seen as the winner in the Western 

sanctions towards Russia; Ankara 

has exploited the rift to gain long-term 

Russian energy supplies at cheaper 

23 


32. See TASS, “Bulgarian PM Hopes European Energy Envoy’s Visit to Moscow Will Decide South Stream 

Future”, 14 January 2015.33. 

33. See Andreas Walstad, “Sefcovic Throws Weight Behind ‘Vertical Gas Corridor’”, Interfax-EPW, 11 

December 2014, p. E2. 

34. See Christian liver/Pilita Clark/Henry Foy, “EU Climate Change Deal Seen as Blow to Russia Exports”, 

FT, 25-26 October 2014. 

35. See Sami Andoura/Jean-Arnold Vinois, “From the European Energy Community to the Energy 

Union. A Policy Proposal for the Short and the Long-Term” (Brussels: Jacques Delors Institute, 

January 2015) and Jean-Arnold Vinois, “A ‘J’Accuse’ from an Ex-EU Official: Only a Real Energy Union 

Can Save the EU Energy Market”, Energy Post, 3 February 2015.

FRANK UMBACH 

24 

prices. But the recent gas accord with 

Russia will increase Turkey’s gas dependence 

on Russia, and Turkey already 

receives 60 per cent of its gas 

imports from Russia. Twenty per cent 

of its Russian gas is imported through 

Ukraine, Romania and Bulgaria. The 

Kremlin is not only hoping to expand 

its gas supplies to Turkey, but also to 

acquire greater influence over Turkey’s 

energy policy directions and 

Azerbaijan’s gas supplies via Turkey 

to Europe. There are already rumours 

that Turkey has halted the planned expansion 

of TANAP from 16 bcm to 23 

bcm by 2023 and 31 bcm by 2026 of 

gas supplies to Europe due to the new 

Russian offer. For Europe and Azerbaijan, 

the question now is whether the 

agreed Turkish Stream gas pipeline 

project is a tactical or even a strategic 

instrument of Turkey’s energy policies. 

A common energy alliance between 

Turkey and Russia would be directed 

against Europe, and disrupt its close 

bilateral relationship with Azerbaijan. 

In this case, Europe will be forced to 

downgrade its TANAP and TAP projects 

and look for alternative options 

for gas diversification. 

In this context, it is certainly reassuring 

that the Turkish government has 

made clear that its newly agreed gas 

supply contracts and planned projects 

with Russia will not take place at the 

expense of TANAP and TAP. But the EU 

and its member states will certainly 

watch and closely analyse Turkey’s 

future energy policies with Russia, as 

there is increased mistrust on the part 

of the EU and US. Russian experts have 

already noted that Turkey’s ‘total dependency’ 

on Russian gas was a key 

in preventing Ankara from taking a 

stronger stance against Russia 36 - including 

in regard to the new Russian 

suppression of Crimean Tartars, the 

annexation of Crimea, and a re-militarization 

of the Crimean islands even 

by deploying nuclear weapon systems 

such as Iskander-short range missile 

systems and TU-22 nuclear bombers, 

which will shift the military balance in 

the Black Sea region. 

36. See Maksym Bugriy, “Issues in Russia-Turkey Relations after Crimea”, Jamestown-Foundation-EDM, 

15 December 2014.

The situation for the EU and Europe, 

as well as Turkey and Azerbaijan 

may become even more geopolitically 

complicated as a consequence of the 

future energy and foreign policies of 

the new Greek government, which 

has very close personal ties to Russian 

oligarchs and high-ranking Kremlin 

officials. Athens has already used its 

close Russian ties and foreign policy 

options as a bargaining chip with the 

EU in relation to the extension of its 

rescue programme and the international 

bailout. 

25 


MATTEO VERDA 

26 

THE EU ENERGY UNION 

AND THE ROLE OF 

THE SOUTHERN GAS 

CORRIDOR 

MATTEO VERDA 

SENIOR FELLOW, ISPI, ITALY

The recent geopolitical instability in the post- 

Soviet space and in the Middle East-North 

Africa region has exposed the extent of the 

vulnerability of European countries. 

THE EUROPEAN ENERGY 

CONTEXT 

Historically, energy has been a core 

issue in the European integration 

process since the creation of the European 

Coal and Steel Community 

(1951) and the European Atomic 

Energy Community (1957). However, 

during the subsequent decades, 

energy was progressively side-lined 

as a European policy priority, and 

the evolution of energy markets in 

Europe followed a national rather 

than a continental pattern. The situation 

began to change again during 

the 1990s, when the creation of the 

single market prompted a new approach 

to the energy issue, eventually 

leading to the adoption of the First 

energy package during the second 

half of the decade. In 2003 and 2009, 

two more packages were adopted, 

with the final aim of liberalising energy 

markets and integrating them 

at the European level. 

EU legislation approached energy 

from an essentially economic perspective, 

and had a strong impact on 

the internal dynamic of energy markets. 

National and regional monopolists, 

often state-owned, were forced 

to open final markets to competition, 

to relinquish their control of gas and 

electricity transport infrastructures, 

and to accept more integration at regional 

and continental levels. 

In this context, the external dimension 

of energy policies received 

limited attention, remaining mainly 

under the influence of national governments 

and market incumbents. 

This situation created a policy decoupling: 

on the one hand, gas and 

electricity internal markets became 

more and more integrated and regulated 

at the European level, while 

international supplies remained 

substantially beyond the reach of 

European institutions. 

At the same time, European dependence 

on imported energy has progressively 

increased, from 43% in 

1990 to 53% in 2013. Today European 

nations are widely reliant on 

oil, gas and coal imports from international 

suppliers in order to meet 

final demand at competitive costs. 

Access to international markets is 

essential, since covering the entire 

energy demand through domestic 

production would entail a dramatic 

reduction of wealth and competitiveness. 

However, a high level of dependence 

on energy imports also entails vulnerability, 

because an interruption 

of energy supplies could have severe 

consequences not only for the economic 

competitiveness of European 

firms but also on security and social 

stability. 

The recent geopolitical instability in 

the post-Soviet space and in the Middle 

East-North Africa region has exposed 

the extent of the vulnerability 

of European countries. The creation 

27 


MATTEO VERDA 

28 

of a single market at the continental 

level, the breakup of monopolies, 

and above all the progressive 

dismantling of vertically integrated 

state-owned energy companies has 

weakened the traditional actors in 

the external dimension of energy 

policies. Indeed, over the past decades 

those companies have played a 

central role in dealing with international 

suppliers and developing import 

infrastructures, with constant 

ENERGY UNION AIMS TO ACHIEVE THE THREE 

TRADITIONAL OBJECTIVES OF EUROPEAN ENERGY 

POLICY: SECURITY OF SUPPLY; SUSTAINABILITY; AND 

COMPETITIVENESS. 

backing from their national governments, 

especially in the case of natural 

gas. 

This evolution of economic and political 

contexts in Europe, in particular 

with the introduction of the 

Euro, has given rise to an imbalance, 

whereby a progressively more integrated 

continental market coexists 

with a fragmented and heterogeneous 

political authority, preventing 

an effective decision making process 

and impeding the projection of political 

influence beyond EU borders. 

THE ENERGY UNION 

The Energy Union is a first and largely 

symbolic step towards a more 

consistent and centralised political 

approach to energy, also in regard 

to its external dimension. 1 With this 

communication, issued on February 

25th, the newly appointed European 

Commission (EC) has identified several 

lines of action, with the ultimate 

aim of enhancing the political weight 

of the Union as a complement to the 

single market. Currently, there are 

no legally binding provisions behind 

the Energy Union and it has no practical 

effect; however, it represents 

a political statement about future 

commitments by European institutions. 

2 

According to the communication, 

the Energy Union aims to achieve 

the three traditional objectives of 

European energy policy: security of 

supply; sustainability; and competitiveness. 

To reach these objectives, 

the Energy Union is built on five pillars: 

energy security, internal energy 

market, energy efficiency, decarbonisation 

of the economy, and increased 

investment in research and 

development. 

The first two pillars are particularly 

important for the external dimension 

of the energy policy. The security 

of supply is based on a diversified, 

reliable and competitive supply 

system, which in the case of natural 

gas is limited by the lack of flexibility 

entailed by a pipeline- based transport 

system. Projecting political influence 

outside EU’s borders is crucial 

to secure stability and safety for 

existing infrastructure and encourage 

the development of new import 

facilities. 

In May 2014, the EC published an 

Energy Security Strategy, which 

highlighted the vulnerability of European 

countries in regard to their 

dependency on particular fuels, 

energy suppliers and routes. 3 The 

Energy Union is expected to be the 

starting point in reducing this vulnerability, 

in particular by favouring 

diversification. 

1. EC, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate 

Change Policy, COM (2015) 80 final. 

2. The timeline of future actions is listed in the Roadmap for the Energy Union, Annex I to the 

Energy Union communication. 

3. EC, European Energy Security Strategy, COM (2014) 330 final.

The completion of the internal energy 

market is also relevant to the 

external dimension, since it provides 

a larger, more liquid and eventually 

more attractive market for 

energy exporters. Direct access to a 

well-regulated final market of 500 

million consumers has major potential 

to attract large investments and 

long-term commitment from international 

operators and governments 

of exporting countries. 

THE ROLE OF NATURAL GAS IN 

THE FUTURE EUROPEAN ENERGY 

MIX 

The Energy Union is relevant for European 

international supplies also 

because it reaffirms the political will 

to introduce a 40% reduction target 

for greenhouse gas (GHG) emissions, 

as preliminarily agreed in October 

2014 by the European Council. 4 The 

measures to be adopted include reductions 

by 2030 for sectors covered 

by the carbon market (the 

Figure 1: EU28 - natural gas production and imports (bcm) 

EU’s Emission Trading System) and 

those not covered (non-ETS sectors): 

respectively, 43% for the ETS 

and 30% for the non-ETS compared 

to 2005. 5 

As stated, the “domestic nature 

of the emission reduction target 

means that it has to be achieved via 

emission reductions happening in 

the EU”. Coupled with the ETS system 

and efficiency measures, this 

entails a substitution of high-emission 

fuels, such as coal, with lessemitting 

ones, such as natural gas. 

The effects on the European energy 

mix of these long-term policies can 

be seen in the last reference scenario 

released by the EC in 2013. 6 

In particular, natural gas is expected 

to be the only fossil fuel that will 

remain stable in the long term, consolidating 

its central position in the 

European energy mix. At the same 

time, natural gas domestic production 

is expected to progressively 

29 


Source: Elaboration of Eurostat [nrg_110a] and EC, Reference scenario 2013. 

4. European Council, Conclusions - 23/24 October 2014, EUCO 169/14. See also EC, The Paris 

Protocol – A blueprint for tackling global climate change beyond 2020, COM (2015) 81 final, a 

communication adopted together with the one relative to the Energy Union. 

5. EC, Energy Union Factsheet, 25 February 2015 

6. EC, EU energy, transport and GHG emissions trends to 2050. Reference scenario 2013.

MATTEO VERDA 

30 

and irreversibly shrink, due to the 

exhaustion of mature fields in the 

North Sea and in the Netherlands. 

Natural gas imports are expected 

to increase from 304 billion cubic 

metres (bcm) in 2013 to 343 bcm 

in 2030 and 390 bcm in 2050. This 

would lead to increased import dependence, 

from the current level of 

66% to 72% in 2030, and to 82% in 

2050. International supplies of natural 

gas will therefore become more 

and more important for the European 

energy security, accounting for a 

growing share of the overall energy 

imports. 

The increase in gas imports is expected 

to be substantial, but it will 

probably require only a limited expansion 

of European import capacity: 

expected import levels for 2030 

are analogous to 2010 levels, when 

the historical peak was recorded. 

Moreover, over the past five years, 

despite shrinking demand, several 

new projects have been commissioned, 

such as Medgaz from Algeria 

to Spain, or the liquefied natural gas 

(LNG) terminal in Livorno, Italy. In 

particular, despite a theoretical regasification 

capacity of 200 bcm/y, 

LNG imports amounted to less than 

50 bcm in 2013. Therefore, it is likely 

that during the current and future 

Figure 2: EU28 - share of natural gas as total production, consumption and imports of energy 

Source: Elaboration Eurostat [nrg_110a] and EC, EU energy, transport and GHG emissions trends to 

2050. Reference scenario 2013.

decades, a larger share of infrastructural 

development will go to intra- 

European interconnections, rather 

than to new import facilities. 

Moreover, unlike oil and coal, natural 

gas is mainly imported through 

pipelines, which require large investments 

for construction as well 

as constant cash flows for a significant 

time span to repay investors. 

Moreover, pipelines bind together a 

producer and a final market, creating 

mutual dependence and limited 

– if any – possibility of diversification 

in case of weak demand growth. 

Thus the construction of new pipelines 

entails a remarkable level of 

risk for private investors, limiting 

their willingness to pour capital into 

the expansion and diversification of 

European import infrastructure and 

thus preventing the improvement 

of the European energy security 

through diversification of supply. 

THE ROLE OF THE SOUTHERN 

GAS CORRIDOR 

Figure 3: Origin of natural gas consumed in the EU28 (2013) 

The Energy Union communication 

recognises the difficulties of investing 

in new import capacity, and 

states that “constructing the infrastructure 

to deliver new sources 

of gas to the EU involves many 

partners, and is both complex and 

expensive. Resolving these issues 

requires resolute action at EU level. 

The Commission will reinforce its 

support for this process through the 

use of all available Community funding 

instruments, in particular the 

future European Fund for Strategic 

Investments (EFSI), and fully involving 

European financial institutions.” 

The EC is particularly concerned 

with the origin of new imports and 

the structure of gas supplies to the 

EU market. Currently, in addition to 

the relevant but shrinking domestic 

production, two major suppliers 

are providing nearly half of the 

total volumes: Russia and Norway. 

Another significant source is Algeria, 

while other suppliers play only a 

minor role. Norway, the only major 

supplier fully integrated in the European 

market, is reaching the limits of 

its potential output. Thus in the absence 

of any intervention, the most 

likely outcome is an increasing mar- 

31 


Source: Elaboration of Eurogas, Statistical Report 2014.

MATTEO VERDA 

32 

ket share for Russian and Algerian 

suppliers. 

For the EC, this outcome could endanger 

European energy security 

by limiting supply diversification. 

Considering the European regional 

WORK ON THE SOUTHERN GAS CORRIDOR MUST BE 

INTENSIFIED TO ENABLE CENTRAL ASIAN COUNTRIES 

TO EXPORT THEIR GAS TO EUROPE. 

context and the limited scope for an 

increased LNG regasification capacity, 

7 European institutions have traditionally 

focused on the Southern 

Gas Corridor, the term commonly 

used to identify any gas transport 

facility running from Central Asian 

and Middle Eastern suppliers to the 

EU markets. 

The Energy Union communication 

reaffirms this focus, stating that 

“work on the Southern Gas Corridor 

must be intensified to enable Central 

Asian countries to export their gas to 

Europe”. A clear indicator of the relevance 

of this effort for the EC is the 

first point of the Joint press statement 

of the Southern Gas Corridor 

Advisory Council, signed in Baku on 

February 12, 2015: “the stability of 

supplies and security of the energy 

transportation to the world markets 

are the most important and essential 

factors of sustainable development”. 

A first step in this direction was represented 

by the final investment decision 

in the pipeline system bringing 

Azerbaijani gas to the EU market. 

The expansion of the South Caucasus 

Pipeline and the construction of 

TANAP and TAP will eventually create 

a completely new supply line, in 

terms of both origin and transit, corresponding 

perfectly with EC plans. 

Once completed, the overall capacity 

of this first pipeline system will 

amount to approximately half of the 

expected increase of imported volumes 

at 2030. Therefore, even with- 

Figure 4 – Composition of EU28 natural gas imports in 2013 (bcm) 

Source: Elaboration of Eurogas, Statistical Report 2014 and EC, Reference scenario 2013. 

7. As already stated above, there is currently overcapacity in regasification facilities in Europe. 

The problem here is not capacity but the higher price of LNG vis-à-vis gas imported through 

pipelines.

out a substitution of current suppliers, 

the EC sees an opportunity 

to further improve diversification 

through the construction of new facilities 

along the Southern Gas Corridor. 

The most controversial issue, in this 

case, would be the origin of the supplied 

volumes. At best, Azerbaijani 

resources could only supply the volumes 

for the expanded version of the 

TAP (20 bcm); larger flows will need 

additional suppliers. With its large 

reserves (more than 15.000 bcm) 

and its political stability, Turkmenistan 

is the first option, but a number 

of problems related to Caspian transit 

and Chinese competition could 

prevent access to those reserves, 

precluding their westbound exports. 

Other exporters, such as Iran or Iraq, 

are not viable partners due to the 

current geopolitical context, i.e. economic 

sanctions for the former and 

security problems for the latter. 

Therefore, despite the efforts of the 

EC to establish strategic partnerships 

in Central Asia and the Middle 

East, its ability to project the European 

political influence in support of 

the external dimension of its energy 

policies appears rather limited. The 

situation could change with a strong 

concentration of political power at 

the Union level, but despite the progress 

represented by the Energy Union 

communication; this is fairly unlikely, 

with weak foundations in the 

EU primary legislation. 

THE ENERGY UNION COMMUNICATION IS ONE STEP 

FORWARD IN A MORE CONSISTENT POLITICAL 

APPROACH TO THE EXTERNAL DIMENSION OF THE 

EUROPEAN ENERGY POLICY. 

A different situation is represented 

by Turkey, whose partnership 

with European countries is a wellestablished 

and long-term reality. 

However, as demonstrated by the 

final investment decision on the SCP- 

TANAP-TAP system, in this case the 

political commitment of the EC is 

not particularly relevant, since international 

companies and the governments 

of exporting and transit 

countries found the incentives to invest 

in the infrastructure purely on a 

market basis. 

In terms of impact, the volumes provided 

by the Southern Gas Corridor 

would amount to a significant but 

relatively small fraction of overall 

EU consumption, between 4 and 

8%. Nevertheless, these volumes 

could represent a far larger share 

of supplies to South Eastern Europe, 

33 


where dependence on a single supplier, 

namely Russia, represents a 

major vulnerability, as shown by the 

so-called stress test carried out by 

the EC in 2014. 8 

CONCLUSIONS 

MATTEO VERDA 

34 

The Energy Union communication is 

one step forward in a more consistent 

political approach to the external 

dimension of the European energy 

policy. Energy security, diversification 

of supplies, and the external 

projection of influence to underpin 

the development of trade are all elements 

of an overall energy policy 

which will need more integration at 

European level to be effectively conceived 

and executed. 

In other words, the evolution towards 

an effective Energy Union is 

part of a larger political process of 

integration whose pattern and outcome 

are currently far from defined. 

There is little scope for an effective 

energy policy, especially in its external 

dimension, as an autonomous 

process. 

In this context, as shown by the TAP 

case, private initiatives on an essentially 

commercial basis are the only 

projects which are likely to continue 

developing, largely autonomously 

from the economic and political incentives 

provided by the European 

institutions. 

8. See EC, Preparedness for a possible disruption of supplies from the East during the fall and winter 

of 2014/2015, COM (2014) 654 final.

35 



36 

TRILATERAL STRATEGIC 

COOPERATION 

BETWEEN AZERBAIJAN, 

GEORGIA AND TURKEY 


FORMER DEPUTY MINISTER OF FOREIGN AFFAIRS, GEORGIA

The Caspian Sea is an important hub for 

maritime routes, having served as both a 

link between the Volga and Iran as well as 

and Transcaucasia and Central Asia, once 

providing a corridor for Russian expansion 

into the Middle East and Central Asia. 

INTRODUCTION 

Historically, the Caspian region has 

historically been an important area 

due to its geopolitically strategic location. 

It is the Caspian Sea that defines 

the region’s geopolitical significance. 

The region includes the territories 

of Azerbaijan and Armenia, as well 

as parts of Russia, Kazakhstan, Iran, 

Turkmenistan, Georgia, and Turkey. 

The Caspian Sea, known as the 

World’s largest inland body of water, 

is located on the borders of Europe 

and Asia, which extends 1 200 km 

from north to south, containing over 

40% of the world’s inland waters. 

The Caspian Sea is an important hub 

for maritime routes, having served 

as both a link between the Volga and 

Iran as well as and Transcaucasia and 

Central Asia, once providing a corridor 

for Russian expansion into the 

Middle East and Central Asia. 

The major reason for the Caspian’s 

strategic importance, though, lies in 

its energy resources. 

The sea contains large amounts of oil 

and natural gas: an estimated 48 billion 

barrels of oil and 292 trillion cubic 

meters of gas in proven or probable 

reserves. 

For many centuries, the Caspian region 

served as a crossroads between 

Eastern and Western civilisations via 

the Silk Road. The Silk Road, which 

passed through the region, significantly 

contributed to the development 

of interactions between Oriental 

and Western civilisations through 

the exchange of goods, ideas and 

technologies. But with the disappearance 

of the Silk Road, this connection 

was lost. However, later, as oil 

and gas became the major driver of 

the global economy, the Caspian basin 

regained its strategic importance. 

Due to the Caspian’s large energy reserves, 

the West became increasingly 

interested in exploring the region. 

Of particular importance in this regard 

were the three South Caucasus 

countries: Armenia, Azerbaijan and 

Georgia. These three countries held 

the potential to help reconstruct the 

earliest, shortest and most reliable 

connection between Europe and Asia, 

and had just regained their independence 

from Russia following the 

dissolution of the Soviet Union in the 

early 1990s. These post-Soviet states 

were dependent on Russian pipeline 

infrastructure throughout the Soviet 

era, both for exporting and importing 

gas for domestic consumption, significantly 

undermining their political 

and economic autonomy, and providing 

Moscow with additional leverage. 

The West’s interest seemed very 

timely, given that the three countries 

37 



38 

were now trying to reorient themselves, 

looking for new alliances, and 

actively seeking to reduce Russia’s 

grip on their independence and sovereignty. 

Ongoing disputes between 

Turkey and Armenia, as well as Armenia 

and Azerbaijan, made it impossible 

for Armenia to turn its back 

on Russia entirely, and as a consequence, 

this alliance remains in place. 

However, Azerbaijan, and to an even 

greater extent, Georgia, began slowly 

but surely moving towards the West. 

At the same time there was Turkey, 

offering a new regional role and foreign 

policy in the wake of the Cold 

War. While Turkish foreign policy 

during the Cold War was characterised 

by a strong alignment with the 

West and a more cautious approach 

to neighbouring countries, at the 

end of the Cold War, Turkey adopted 

a firmer and more confident multidirectional 

foreign policy, aimed at 

creating good neighbourly relations 

in the region. The new geopolitical 

realities, together with the political 

attitudes of Georgia and Azerbaijan 

towards Russia and Turkey’s new 

position, these three countries were 

urged to consider deeper, more efficient 

and more targeted modes of 

cooperation, launching a debate on 

joint projects of collective strategic 

interest. Armenia was excluded from 

this debate, for the above mentioned 

reasons. 

COOPERATION BETWEEN TURKEY, 

AZERBAIJAN AND GEORGIA 

Initially, cooperation among these 

countries did not necessarily seem 

natural. While Turkey and Azerbaijan 

shared religious, linguistic and ethnic 

commonalities, Georgia was a largely 

Orthodox country, with a completely 

different language. Similarly, the 

shared Soviet past of Georgia and 

Azerbaijan entailed obvious social 

and economic discrepancies with regard 

to Turkey. While Turkey had a 

long experience of managing a free 

market economy, the two post-Soviet 

states had existed for decades as centrally 

planned economies. However, 

it is precisely this history of past hegemony 

in the region along with the 

particularities of the economic and

political demands that have created 

the logical preconditions for strong 

and viable trilateral cooperation. 

Azerbaijan, with its rich hydrocarbon 

reserves and increasing oil revenues 

is at the same time a landlocked country, 

which limits its ability to connect 

with the Turkish market and other 

world energy consumers. On the 

other hand, Turkey has long coastlines 

linking it to world markets, but 

is poor in terms of natural resources. 

Georgia has limited hydrocarbons 

resources, and its small-scale economy 

urgently needs financial inflows. 

Therefore, it is ready to offer a transit 

route through its territory. All these 

factors have created key preconditions 

for building a considered geostrategic 

triangle that has ultimately 

lead to trilateral cooperation that 

benefits all three actors. 

ECONOMIC AND POLITICAL 

COOPERATION 

As outlined above, all three countries 

have recognised the importance of 

trilateral cooperation. Key factors in 

this regard were Turkey’s new position 

after the Cold War and its potential 

to become a major regional 

player, together with the desires of 

Georgia and Azerbaijan to maintain 

their political and economic independence 

from Russia. This cooperation 

has been deepening on a day-by 

day basis ever since. Even though 

there are differences in their individual 

foreign policy objectives, all three 

share a vision of Western and European 

orientation. Turkey, a NATO 

member, envisages EU membership. 

Georgia aspires to join both EU and 

NATO. Azerbaijan has been much 

more cautious in this regard, but it 

does actively cooperate with the EU 

within the European Eastern Partnership 

Initiative. This common political 

ground, necessary for smooth 

cooperation, is further strengthened 

by shared understanding of political 

sensitivities and commitment to 

national sovereignty and territorial 

integrity. The latter is the ultimate 

precondition for cooperation with 

both Azerbaijan and Georgia, due to 

their respective territorial disputes 

with Armenia and Russia. Thus there 

is a clear basis for cooperation. Economic 

cooperation is also developing. 

Turkey remains Georgia’s largest 

trade partner, followed by Azerbaijan. 

Turkey and Azerbaijan have a 

solid track record of mutual FDIs, not 

least due to linguistic, religious and 

ethnic similarities and the exclusion 

of Armenia from regional projects. 

In particular, cooperation on energy 

projects has boosted investments in 

infrastructure. The driving force behind 

this close cooperation remains 

energy politics and collaboration on 

existing and planned energy projects, 

recognised by all three states as a 

collectively beneficial endeavour and 

a huge political opportunity for each 

state as well as the region as a whole. 

ENERGY PROJECTS 

THE BAKU-TBILISI-CEYHAN OIL 

PIPELINE 

The success of this trilateral cooperation 

was first demonstrated by 

the Baku-Tbilisi-Ceyhan (BTC) project 

- a 1,768 km Pipeline that connects 

Azerbaijan to Turkey via Georgia, 

transporting crude oil from the 

offshore Azeri-Chirag-Guneshli Oil 

Field in the Caspian Sea to the Turkish 

Mediterranean coast; the crude is 

then delivered onwards to European 

markets. The BTC agreement was 

signed by the presidents of Azerbaijan, 

Georgia and Turkey in 1999. Construction 

work was finally launched 

in 2002. By 2008 it was possible to 

39 



40 

transport 275 millions of barrels of 

Azerbaijani crude oil to the world oil 

markets through Georgia and Turkey. 

During the first nine months of 

2014, BTC exported 199 million barrels 

(26.4 million tonnes) of crude oil, 

loaded on 276 tankers at Ceyhan. 

The BTC Pipeline has, appropriately, 

been declared the ‘pipeline of the 

century’, since it is the first direct 

pipeline link between the landlocked 

Caspian Sea and the Mediterranean. 

In addition, it has brought substantial 

economic advantages to the regional 

THE BTC PIPELINE HAS, APPROPRIATELY, BEEN 

DECLARED THE ‘PIPELINE OF THE CENTURY’, SINCE 

IT IS THE FIRST DIRECT PIPELINE LINK BETWEEN THE 

LANDLOCKED CASPIAN SEA AND THE MEDITERRANEAN. 

states: it jumpstarted economic development 

in landlocked Azerbaijan 

and triggered huge infrastructural 

investments in the region. Azerbaijan 

gained the potential to deliver its 

oil to Turkish and European markets, 

while Georgia and Turkey, both poor 

in hydrocarbon resources, directly 

benefited from energy supply and 

transit fees. However, the real importance 

of the BTC project lies in its political 

implications and impact. It was 

the first energy project with no Russian 

involvement that was activated 

by Azerbaijan. In addition, Georgia 

gained an alternative supplier as 

well as the ability to independently 

negotiate the terms of the project, 

its routes and economic gains. BTC 

therefore became a defining factor in 

reinforcing Azerbaijani and Georgian 

political independence. In fact, BTC 

was the first hydrocarbon transport 

project not controlled by Russia, Iran, 

or any country in the Gulf. 

SOUTH CAUCASUS GAS PIPELINE 

Further, providing impetus to other 

energy projects, the BTC was soon 

followed by the South Caucasus Gas 

Pipeline, the Baku - Tbilisi - Erzurum 

pipeline, a route of almost 700 km 

running along the same corridor as

the BTC, delivering natural gas from 

Azerbaijan’s offshore Shah Deniz 

field to Georgia and then via Georgia 

to Erzurum, Turkey. In addition 

to providing benefits to the supplier 

state Azerbaijan, since 2006, Georgia’s 

domestic needs have been met 

almost exclusively by gas from Azerbaijan, 

with no further reliance upon 

Russia. The SCP will gain new importance 

with the recent EU initiative for 

the construction of the Southern Gas 

Corridor, an extension to this existing 

pipeline. 

THE SOUTHERN GAS CORRIDOR 

The Southern Gas Corridor (SCG) 

was proposed by the European Commission 

within the EU’s renewed diversification 

policy, seeking to secure 

an alternative gas delivery to Europe 

from the Caspian and Middle Eastern 

regions. The SCG plans to transport 

gas from Azerbaijan’s Shah Deniz 

Field Phase II across Azerbaijan, 

Georgia, Turkey, Greece, and Albania 

into the EU, terminating in Italy. The 

Corridor will consist of three major 

pipelines: (i) the existing South Caucasus 

Pipeline; the planned Trans 

Anatolian Natural Gas Pipeline (TAN- 

AP), (ii) a pipeline of approximately 

2000 km across Turkey, and (iii) the 

870 km long Trans Adriatic Pipeline 

(TAP) across Greece, Albania and 

along the seabed of the Adriatic Sea 

into southern Italy. Under current 

plans, TANAP will carry 16 bcm annually 

from the SCP, leaving 6 bcm 

in Turkey, and carrying 10 bcm onwards 

into EU territory. 

Opening up a fourth major gas corridor 

aims to create infrastructure 

to deliver natural gas to Europe that 

both circumvents Gazprom’s involvement 

and has the potential for future 

expansion. Sources indicate that 

THE SCP WILL GAIN NEW IMPORTANCE WITH THE 

RECENT EU INITIATIVE FOR THE CONSTRUCTION 

OF THE SOUTHERN GAS CORRIDOR, AN 

EXTENSION TO THIS EXISTING PIPELINE. 

there may be more natural gas in 

Azerbaijan with further exploration 

of the Shah Deniz fields. Moreover, 

there are other oil and gas rich countries 

in the region, such as Kazakhstan, 

Uzbekistan, most importantly 

Turkmenistan, which may be looking 

to diversify their export markets by 

turning westwards. Turkmenistan 

holds the largest natural gas reserves 

in Central Asia, approximately 

17 trillion cubic metters. With its involvement, 

the SGC could ultimately 

provide for Europe’s net demand. 

Finally, as described in the EU’s Energy 

Security and Solidarity Action 

Plan, the Southern Corridor has the 

potential to incorporate natural gas 

from Iraq. Should there be a change 

in current political conditions, even 

Iran - holding the world’s second 

largest gas reserves - could be connected 

. Needless to say, there will be 

benefits for both supplier and transit 

countries, both Azerbaijan and Georgia. 

The Southern Gas Corridor will 

further contribute to the region’s political 

and economic independence. 

Azerbaijan, as the supplier country, 

will reach European markets, while 

Georgia and Turkey will benefit from 

‘Russia-free’ supplies as well as substantial 

revenues as transit countries. 

Moreover, since good infrastructure 

and unimpeded delivery will be of 

major importance to all parties involved, 

the construction of a new 

corridor will inevitably require even 

closer cooperation between Georgia, 

Azerbaijan and Turkey on the one 

hand, and the EU on the other. This 

41 



42 

can only strengthen regional political 

and economic ties, boosting further 

regional engagement by Western allies, 

strengthening its economic and 

political independence from Moscow. 

This represents great opportunities 

for European energy security, as well 

as for the long term economic security 

and stability of the region. 

THE BAKU-TBILISI-KARS RAILWAY 

The Baku-Tbilisi-Kars (BTK) railway 

project is another component in this 

developing trilateral success story. 

BTK is a new corridor that will connect 

the Azerbaijani, Georgian and 

Turkish railways. The implementation 

of the project began in 2007, 

with construction launched by 2008. 

THE BAKU-TBILISI-KARS RAILWAY LINE WILL 

STRENGTHEN ECONOMIC RELATIONS BETWEEN 

AZERBAIJAN, GEORGIA AND TURKEY. 

It foresees the rehabilitation and reconstruction 

of the 178 km-long railway 

between Georgia’s Marabda and 

Akhalkalaki and the construction of a 

new railway from Akhalkalaki to the 

Turkish border. 

Georgian Railway company officials 

have announced the plans for opening 

a new rail-only corridor from the 

Caspian Sea to Europe via Turkey, 

eventually eliminating the need for 

sea transportation once the planned 

rail tunnel under the Bosporus Strait 

in Istanbul is complete. 

They have further stated that the 

Baku-Tbilisi-Kars project may also 

open up a North-South rail corridor 

linking Russia to Turkey, enabling 

both freight and passenger transport, 

and providing an alternative freight 

transport route to those that transit 

Iran. It is estimated that by 2015, this 

line will re-route at least two million 

tonnes of existing cargo flows (principally 

dry cargo currently transported 

by truck) between Turkey, the 

Caucasus, Russia and Central Asia. 

The Company Officials further believe 

that ‘increasing trade between 

Turkey and Central Asia provides the 

project with a significant opportunity 

to capture trade flows, particularly

aw materials imported into Turkey 

from Central Asia and finished goods 

exported by Turkey’. With respect to 

Turkey-Russian trade they believe 

that ‘there is an opportunity to capture 

additional volumes, particularly 

of dry cargo, that are currently 

shipped via Iran or the Russia-Black 

Sea route’. 

The Baku-Tbilisi-Kars railway line 

will strengthen economic relations 

between Azerbaijan, Georgia and 

Turkey. Further, Kazakhstan will also 

be able to increase its transit traffic 

from China. As described by Turkish 

railway company officials, the project 

aims to build a new ‘Silk Road’ between 

Europe and Central Asia, via 

‘the shortest, most effective, and most 

clean-carbon railway transit route between 

China and the Western world’. 

Needless to say, this new railway project 

will offer an even stronger base 

for the process of regional integration 

and political consolidation. 

CHALLENGES 

Against this background, trilateral cooperation 

between Azerbaijan, Georgia 

and Turkey is even more crucial. 

However, in order to maintain the 

success of existing common projects 

as well as securing the unimpeded 

implementation of future projects, regional 

stability and smooth trilateral 

political cooperation must be maintained. 

Currently there are no real 

causes for doubt in regard to strong 

future political cooperation. Given 

the geopolitical realities as well as the 

history of successful economic cooperation, 

all three countries seem fully 

aware of importance and necessity of 

maintaining close political ties. This 

has been clearly demonstrated by the 

fact that changes in governments (especially 

in Georgia and Turkey) have 

TWO REGIONS OF GEORGIA ARE OCCUPIED BY 

RUSSIAN MILITARY FORCES, WHERE TBILISI IS UNABLE 

TO EXERCISE ITS FULL JURISDICTION. 

not affected intergovernmental cooperation, 

and collaboration between 

these neighbouring states remains a 

significant part of the declared longterm 

strategies of all three countries. 

Maintaining stability in the region is 

a bit of a more challenge: the ‘frozen 

conflict’ between Azerbaijan and Armenia 

remains a barrier. Two regions 

of Georgia are occupied by Russian 

military forces, where Tbilisi is unable 

to exercise its full jurisdiction. 

Relations between Armenia and Turkey 

are less acutely tense, but pose 

difficulties nonetheless. 

While there are no immediate signs 

of escalation, the risks of ‘frozen conflicts’ 

becoming hot wars must not be 

underestimated. As the 2008 Georgia 

- Russia war clearly demonstrated, 

a dispute can escalate rapidly, and 

could jeopardise all the regional projects. 

Even more caution is required 

when it comes to Russia’s interest in 

maintaining its influence in and over 

the region. As often publicly stated by 

high-level Russian officials, the South 

Caucasus is still seen by Moscow as 

part of Russia’s so-called ‘sphere of 

influence’. Thus any further attempt 

by the South Caucasian countries to 

seek alliances other than Russia may 

entail risks. Again, the 2008 Georgia 

- Russia war was widely declared as 

a war that Russia fought against the 

independence of the Caucasus - particularly 

Georgia’s - and its European 

and Euro Atlantic integration. The 

same aggression is being witnessed 

in Ukraine today, following Kiev’s attempts 

to reorient its foreign policy 

vector. Russia also has a strategic in- 

43 



44 

terest in maintaining its control over 

all the possible energy routes that 

may offer a potential alternative to 

Russian supply to Europe, and could 

potential to threaten Russia’s nearmonopoly 

as a major hydrocarbon 

supplier for the EU. 

Nevertheless, Turkey has become a 

strong and important regional player, 

having invested heavily in developing 

strong economic and political 

ties with its neighbours in the South 

Caucasus. In addition, it has no luxury 

to sacrifice its relations with another 

country in the region. Therefore, 

since it is obviously well aware of 

the need for close engagement with 

the South Caucasus (at least with the 

states with which political cooperation 

is feasible), it can easily flex its 

political muscle as well demonstrating 

its objective interests. Europe 

too has vital interests in securing 

regional stability and contributing to 

the region’s Western engagement. Its 

energy diversification policy, especially 

via the Southern Gas Corridor 

and its potential for further expansion, 

might solve its dependency on 

Russia for good. With the launch of 

the SCG initiative, Europe no longer 

seems indifferent to exploring this 

opportunity. In addition, the current 

Ukraine crisis offers a historic opportunity 

for the West to demonstrate 

its commitment towards the region 

and push back against Russia on 

the South Caucasus, and to actively 

promote the peace process in Azerbaijan’s 

and in Georgia’s occupied 

territories. Bringing down Russian 

hegemony will clear the way for a major 

regional player such as Turkey to 

strengthen its economic and political 

presence in the South Caucasus and 

the entire Caspian region. The region’s 

economic development along 

with the political independence of the 

two Caucasus countries might even 

send positive signs towards Armenia, 

encouraging it to eventually join 

this fruitful cooperation and reduce 

its own political dependence on its 

current patron, Russia. If these challenges 

can be overcome, the political 

independence of the South Caucasus 

along with strong economic cooperation 

with Turkey and positive outlook 

towards more Caspian regional cooperation 

may well transform this trilateral 

collaboration into a well-func-

tioning economic conglomerate with 

significant potential to influence developments 

in the region and beyond. 

CONCLUSION 

Energy cooperation is a win-win 

game for all three countries, and clear 

pre-condition for Azerbaijani and 

Georgian integration with Europe, as 

well as to secure their political and 

economic independence from Russia. 

Additionally, it offers opportunities to 

reach both European and East Asian 

markets. Successful cooperation 

among these countries may furthermore 

give a substantial push to Armenia 

to join this strategic alliance at 

some point, and eventually free itself 

from its forced alliance with Russia. 

45 



46 

BIBLIOGRAPHY 

i Caspian Sea, Global International 

Waters Assessment 23, 2006, p.13, 

ISSN 1651-940X 

ii Shahida Aman, ‘The Economic 

and Geo Strategic Importance of 

The Caspian Sea’, research Journal 

of Area Study Centre, Central Asia, 

http://www.asc-centralasia.edu.pk/ 

Issue_63/04-THE_ECONOMIC-AND- 

GEO-STRATEGIC.html 

iii http://www.eia.gov/todayinenergy/detail.cfm?id=12911 

iv Badridze, ‘Regional Cooperation 

and the Future of The Caspian Region’, 

p.4, (GFSIS publication.) 

v Paula Sandrin, ‘Changing Turkey in 

a Changing World’ in http://changingturkey.com/2009/09/30/turkishforeign-policy-after-the-end-of-coldwar-%E2%80%93-from-securitizing-to-desecuritizing-actor-by-paulasandrin-university-of-westminster/ 

vi http://www.civil.ge/eng/article. 

php?id=27743 

vii http://www.economy.gov.tr/index.cfm?sayfa=countriesandregions& 

country=AZ&region=2 

viii http://pipelinesinternational. 

com/news/from_the_sea_to_the_ 

coast_the_baku_tbilisi_ceyhan_pipeline/069370/, 

June 2012 

ix Mehmet Dikkaya & Deniz Oezyakisi, 

‘Developing Regional Cooperation 

among Turkey, Georgia and Azerbaijan: 

Importance of Regional Projects’. 

Strategic Center for Research, Spring 

- Summer, p. 102 

x http://www.bp.com/en_az/caspian/operationsprojects/pipelines/ 

BTC.html) 

xi Badridze, ‘Regional Cooperation 

and the Future of The Caspian Region’, 

p.5 

xii http://www.naturalgaseurope. 

com/natural-gas-in-the-caucasusand-central-asia, 

April 25th 2015 

xiii http://www.bp.com/en_az/caspian/operationsprojects/pipelines/ 

SCP.html 

xiv MFA Georgia, http://www.mfa. 

gov.ge/index.php?lang_id=ENG&sec_ 

id=748 

xv EU Energy Security and Solidarity 

Action Plan, Second Strategic Energy 

Review, Commission of The European 

Communities, Brussels 2008, COM 

2008, 781 final, P. 4, http://eurlex. 

europa.eu/LexUriServ/LexUriServ.do 

?uri=COM:2008:0781:FIN:EN:PDF 

xvi http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz/ 

SDstage2.html, 

http://www.bp.com/en_az/caspian/ 

operationsprojects/pipelines/SCP. 

html 

xvii http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz/ 

SDstage2.html 

xviii Author’s opinion, previously 

stated in ‘The Southern Gas Corridor - 

Window of Opportunity or Challenge 

for the West?’, Caspian Report, Fall 

2014, p.63 

xix http://www.bp.com/en/global/ 

corporate/press/press-releases/ 

shah-deniz-final-investment- decision-paves-way.html, 

release date 

Dec. 2013

xx Europe’s Energy Security: Options 

and Challenges to Natural Gas Diversification, 

CRS, August 2013, P. 5, 

http://fas.org/sgp/crs/row/R42405. 

pdf 

xxi EU Energy Security and Solidarity 

Action Plan, Second Strategic Energy 

Review, Commission of The European 

Communities, Brussels 2008, COM 

2008, 781 final, P. 4, http://eurlex. 

europa.eu/LexUriServ/LexUriServ.do 

?uri=COM:2008:0781:FIN:EN:PDF 

xxii See more in Nino Kalandadze, 

‘The Southern Gas Corridor - Window 

of Opportunity or Challenge for the 

West?’, Caspian Report, Fall 2014, 08, 

pp. 56-68 

xxiii http://www.railway. 

ge/?web=0&action=page&p_ 

id=290&lang=eng, updated Feb. 2015 

xxiv http://www.naturalgaseurope. 

com/natural-gas-in-the-caucasusand-central-asia, 

April 25th 2015 

xxv http://www.azerbaijan.az/portal/WorldCommunity/ForeignPolicy/ 

foreignPolicy_e.html 

http://www.mfa.gov.tr/synopsis-ofthe-turkish-foreign-policy.en.mfa, 

http://www.economy.ge/uploads/ 

kanonmdebloba/strategia_2020/ 

saqartvelo_2020.pdf 

trying to include in this concept 

Georgia and Ukraine, further arguing 

that Russia’s invasion in Georgia 

in 2008 was nothing but an attempt 

to ‘re-establish the Russian sphere of 

Influence in the Former Soviet Union 

region,’ George Friedman, ‘The Russo 

- Georgian War and the Balance of 

Power’, STRATFOR, August 2012, 

http://www.stratfor.com/weekly/ 

russo_georgian_ war_and_balance_ 

power#axzz35lmn7LGM. This Notion 

is further strengthened by the statement 

of the then Russian President, 

Dimitry Medvedev, that by invading 

Georgia Russia had halted NATO’s 

eastward expansion (http://en.ria. 

ru/russia/20111121/168901195. 

html). Peter Beaumont, ‘Russia 

makes latest high-risk move to keep 

pieces of its ‘near abroad’ in check, 

The Observer, March 2014, 

http://www.theguardian.com/ 

world/2014/mar/02/russia-moveskeep-near-abroad-soviet-states-incheck 

xxviii Clingendaelng to International 

Energy Programme, Factsheet, Approximately 

30% of the EU’s net gas 

consumption is provided by Russia, 

p.1, 2, http://www.clingendaelenergy. 

com/files.cfm?event=files. 

download&ui=9C1DEEC1-5254- 

00CF-FD03186604989704 

47 


xxvi Andrew E. Kramer, ‘Russia 

claims its Sphere of Influence’, 

NYT, August 2008, http://www. 

nytimes.com/2008/09/01/world/ 

europe/01russia.html?_r=0 

xxvii George Friedman describes NA- 

TO’s enlargement concept by the US 

and EU as a move that Moscow understands 

as their strategy to ‘encircle 

and break Russia’, especially while

ENERGY SECURITY IN 

SOUTH EAST EUROPE: THE 

ROLE OF THE SOUTHERN 

GAS CORRIDOR 



ACADEMICS AND RESEARCH COORDINATOR, HASEN 

48

South East European (SEE) countries 

represent small-scale markets. Natural 

gas is a new source of energy for these 

countries, some of which lack even the 

basic natural gas infrastructure, including 

Albania, Kosovo and Montenegro. 

South East European (SEE) countries 

represent small-scale markets. 

Natural gas is a new source of energy 

for these countries, some of 

which lack even the basic natural 

gas infrastructure, including Albania, 

Kosovo and Montenegro. Due to the 

region’s infrastructure deficit, natural 

gas penetration rate is much lower 

than in other European countries. 

For example, the gasification rate in 

Bulgaria is less than 2% in households, 

compared with average rates 

of 27%-50% in the European Union. 

1 Currently, the region can cover 

around 37% of its gas consumption 

via indigenous production. The rest 

is imported almost exclusively from 

Russia, which poses a huge challenge 

for these countries in terms of 

single supplier dependency. The situation 

is better in Romania and Croatia, 

which are able to meet a significant 

proportion of national demand 

through domestic production. The 

region’s total natural gas consumption 

was 26 bcm in 2012, 10.9 bcm 

of which was produced by Romania, 

2 and 2 bcm by Croatia. Bulgaria 

and Serbia are also able to meet a 

small proportion of local consumption 

through domestic production. 

Natural gas consumption in South 

East European countries is expected 

to increase to 44 bcm by 2025, and 

50 bcm by 2030. In this regard, the 

region faces both opportunities and 

challenges. 

Opportunities in South East Europe 

1. Population growth is higher in 

this region than in the rest of Europe. 

Population growth in the EU is 

projected to slow dramatically, particularly 

after 2025, and the young 

population is expected to decrease. 

This will likely reduce the available 

labour force, and accordingly, the 

EU’s economic development. However 

this is not the case for SEE 

countries. The youth population is 

growing, promising to boost its economic 

development. 

49 


1. Alternative energy for clean nature”, Bulgarian Association Natural Gas, http://www.naturalgas.bg/infoen/9 (Accessed on 

January 28, 2015). 

2. BP Statistical Review of World Energy, June 2013, p. 24, http://www.bp.com/content/dam/bp/pdf/statistical-review/ 

statistical_review_of_world_energy_2013.pdf


50 

2. The SEE economies are expected 

to reach 2.5% annual growth rates, 

while European average growth is 

projected at around 1.5% per year 

up until 2030. Economic growth in 

South East Europe will also trigger 

the growth of the natural gas market. 

Furthermore, given that the SEE 

markets are still relatively undeveloped, 

there is significant potential 

for foreign investments, particularly 

in the energy sector, notably for the 

development of the necessary infrastructure 

components. 

3. The region has significant renewable 

energy capacity. For example, 

Albania can generate almost 100% 

of its electricity needs through hydro 

energy. As a net exporter of electricity, 

Bulgaria can generate a significant 

proportion of its electricity 

from hydro energy. 

CHALLENGES IN SEE 

1. The region is poor in terms of oil 

and gas resources. Some of the region’s 

countries are 100% dependent 

on oil and gas imports. Moreover, 

most of those countries are dependent 

on a sole supplier, namely Russia. 

This poses a threat to their energy 

and supply security. Given their dependence 

on a single supplier, there 

is no competition in these markets. 

As a result, they buy natural gas at 

the highest prices in Europe. 

2. The region lacks natural gas infrastructure 

and transmission systems. 

Consequently, these countries 

primarily consume carbon intensive 

energy fuels, particularly coal, which 

is not environmentally friendly. 

3. Some countries such as Serbia, Kosovo 

and Macedonia are landlocked. 

Thus, the LNG option - a means of 

ensuring their supply diversification – 

is not available to them. They can only 

purchase natural gas via pipelines. 

SOUTHERN GAS CORRIDOR AS A 

SOLID PROJECT 

The Southern Gas Corridor (SGC) 

project is a mega gas pipeline project 

that aims to transport Caspian natural 

gas to Europe. The project is composed 

of four components. 

1. Shah Deniz II Natural Gas Field 

2. South Caucasus Pipeline (SCP) 

3. Trans Anatolian Natural Gas Pipeline 

(TANAP) 

4. Trans Adriatic Pipeline (TAP) 

The Shah Deniz natural gas field is 

one of the world’s largest natural gas 

fields, and the largest in Azerbaijan. 

It is located 70 km from Baku in the 

offshore section of the Caspian Sea 

and holds almost 1.4 trillion cubic 

meters of natural gas. Shah Deniz I, 

the first stage of the Shah Deniz field, 

has been operational since 2006 and 

produces 9 billion cubic meters of 

natural gas per year, 3 of which almost 

6.6 bcm is delivered to Turkey. Shah 

Deniz II, the second stage of the Shah 

Deniz field, is a major source base 

and the upstream part of the Southern 

Gas Corridor. It is expected that 

the Shah Deniz II field will be operational 

by 2018. The project will supply 

natural gas to the European market 

directly from Azerbaijan for the 

first time, opening the Southern Gas 

Corridor. As part of the project, 25- 

year sales agreements were reached 

on September 19, 2013 for over 10 

billion cubic meters of natural gas 

per year from the Shah Deniz II field. 

Nine companies will purchase this 

3. See BP website, http://www.bp.com/en_az/caspian/operationsprojects/Shahdeniz/SDstage1.html 

(Accessed on January 28, 2015).

gas from Italy, Greece and Bulgaria. 4 

The Final Investment Decision (FID) 

was signed on December 17, 2013 for 

Shah Deniz II. 5 

The midstream part of the Southern 

Gas Corridor project has three components: 

the South Caucasus Pipeline, 

TANAP and TAP, with a total length 

of 3500 km. The length of the SCP 

pipeline is 691 km, with 443 km in 

Azerbaijan and 248 km in Georgia. It 

starts in Azerbaijan’s Sangachal terminal 

and ends at the Georgia-Turkey 

border. As part of the Shah Deniz 

Project, the SCP will be expanded. 

This will entail laying a new pipeline 

through Azerbaijan and constructing 

two new compressor stations 

in Georgia. 6 This will triple the gas 

volume transported via the pipeline, 

reaching over 20 billion cubic meters 

per year. TANAP will start at the 

Georgia-Turkey border and end at the 

Turkey-Greece border, passing 20 cities 

on its route through Turkey. With 

regard to its technical features, at 56 

inches in diameter, it is the second 

largest pipeline in the world. Its annual 

capacity will be 31 bcm, expandable 

to 60 bcm. 7 The Environmental 

Impact Assessment report (EIA) for 

TANAP has already been released, 8 

and the ground-breaking ceremony 

is scheduled for April 2015. 

TAP is the final step in the Southern 

Gas Corridor project: starting at the 

Turkey-Greece border, it will pass 

through Greece and Albania, under 

the Adriatic Sea, ending in southern 

Italy. The capacity of the project will 

be 20 bcm, and is expandable. TAP 

has received EIA reports from Greece 

and Italy. 9 

As this brief has demonstrated, the 

Southern Gas Corridor project is a 

51 


4. See BP website, “Shah Deniz Major Sales Agreements with European Gas Purchasers Concluded”, 

http://www.bp.com/en/global/corporate/press/press-releases/shah-deniz-major-salesagreements-with-european-gas-purchasers-c.html 

(Accessed on January 28, 2015). 

5. See BP website, “Shah Deniz Final Investment Decision Paves Way for Southern Corridor Gas Link 

with Europe”, http://www.bp.com/en/global/corporate/press/press-releases/shah-deniz-finalinvestment-decision-paves-way.html 


6. See BP website, “South Caucasus Pipeline”, http://www.bp.com/en_az/caspian/operationsprojects/ 

pipelines/SCP.html (Accessed on January 28, 2015). 

7. “Turkey to Increase its Stake in TANAP”, Daily Sabah, May 29, 2014, http://www.dailysabah.com/ 

energy/2014/05/30/turkey-to-increase-its-stake-in-tanap (Accessed on January 28, 2015). 

8. “TANAP için ÇED Raporunun Nihai Kabulü Yapıldı”, http://energyworld.com.tr/tanap-icin-cedraporunun-nihai-kabulu-yapildi.html 


9.“Italy, Greece approve TAP environmental Studies”, http://www.neurope.eu/article/italy-greeceapprove-tap-environmental-studies 

(Accessed on January 28, 2015).

Map of Southern Gas Corridor 


52 

Source: Caspian Strategy Institute 

well-planned and promising initiative 

that will significantly contribute 

to the energy and supply security of 

European countries. But this project 

is particularly important for the SEE 

countries, given their single supplier 

dependency. In this light, what will 

the Southern Gas Corridor bring to 

South East Europe? 

IMPORTANCE OF THE SGC FOR 

SEE COUNTRIES 

1. The total gas demand of SEE countries 

is expected to increase from 

26 bcm in 2012 to 44 bcm by 2025. 

TAP can supply the additional gas required 

to meet this growing demand. 

2. The Russia-Ukraine gas crises 

have increased the importance of access 

to new and reliable gas sources 

for SEE. TAP represents a reliable gas 

supply for these countries. Through 

the Ionian Adriatic Pipeline (IAP), 

TAP can bring natural gas to Bosnia 

and Herzegovina, Serbia, Kosovo, 

Montenegro and Croatia, and to Bulgaria 

and Romania via the vertical 

interconnector project, namely the 

Greece-Bulgaria-Romania interconnectors. 

3. TAP can provide natural gas to 

countries such as Albania, Kosovo 

Günther 

Oettinger, 

Former EU 

Commissioner 

for Energy

Map of Ionic Adriatic Pipeline 

Source: http://www.legislative-journal.com/wp-content/uploads/2013/11/iap.jpg 

and Montenegro, which do not have 

an indigenous natural gas market. 

4. TAP can pave the way for developing 

the natural gas markets of 

SEE countries by constructing networks, 

transportation systems and 

interconnectors among themselves. 

These projects are also part of the 

EU’s final energy package, aimed at 

creating an internal gas market. 

5. The SEE countries need to be prepared 

for potential supply disruption, 

which caused major problems 

when Russia cut off the natural gas 

flow to Ukraine in 2006 and 2009. In 

the event of a future disruption, TAP 

can activate its reverse capacity and 

provide natural gas to the region. 

6. Given that countries such as Macedonia, 

Kosovo and Serbia are landlocked 

and therefore cannot construct 

LNG terminals to provide supply 

diversification, they can only buy 

natural gas via pipelines. TAP can 

provide natural gas to those markets 

to ensure their energy security. 

7. The SEE countries are also at a 

disadvantage in terms of natural 

gas import prices. In 2012, Macedonia 

purchased the most expensive 

gas from Russia (USD 564.3), followed 

by Bosnia and Herzegovina 

(USD 515.2), Bulgaria (USD 501), 

Greece (USD 476.7) and Serbia (USD 

457.3). 10 TAP will ensure diversification 

for these markets and create 

a more competitive environment. 

Russia’s gas monopoly will be eliminated, 

and prices will decline accordingly. 

8. Some SEE countries are highly 

dependent on carbon intensive energy 

resources to meet their energy 

needs, especially oil and coal. Moreover, 

these countries are aspiring EU 

members, making it important to 

achieve a more environmentally balanced 

energy portfolio. The import 

prices in these countries are high 

due to their dependency on a sole 

53 


10. Gas prices to SEE countries are cited from: Izvestia, A map of prices of Gazprom in Europe, 

http://rbth.co.uk/multimedia/infographics/2013/02/08/a_map_of_prices_of_gazprom_in_ 

europe_22639.html


54 

MOST OF THE SEE SOUTH EAST EUROPA 

COUNTRIES ARE SUFFERING FROM A HIGH 

TRADE DEFICIT DUE TO HIGH NATURAL GAS 

IMPORT PRICES. 

supplier, and so they cannot substitute 

coal with natural gas. Given that 

TAP will provide a competitive environment 

in these countries and trigger 

a decline in natural gas import 

prices, they can easily substitute 

coal with natural gas. 

9. Most of the SEE countries are suffering 

from a high trade deficit due to 

high natural gas import prices. Given 

that the prices will drop with competition, 

national energy bills will 

decrease, which in turn will cause a 

boom in their manufacturing industries. 

Moreover, low import prices 

will reduce costs in energy-intensive 

industries and attract foreign direct 

investment. The increase in production 

will also reduce unemployment. 

In conclusion, SEE countries face 

both opportunities and challenges. 

The population growth of the region 

represents a significant advantage, 

and its economies are growing faster 

than in the rest of Europe. Although 

the markets in the region are small 

and relatively undeveloped, they 

are experiencing rapid growth. The 

region is rich in renewable energy 

capacity, particularly hydro, and the 

young populations are another key 

advantage. 

However, there are also several challenges. 

The region is poor in oil and 

gas resources, and imports almost 

63% of total oil and gas demand. 

With regard to natural gas, regional 

countries depend on a single supplier, 

which has given rise to a monopoly. 

Some countries, such as Bulgaria, 

Macedonia, Bosnia and Herzegovina, 

are almost 100% dependent on Russian 

natural gas. Due to this single 

supplier dependence, these countries 

consume the most expensive 

natural gas in Europe. High natural 

gas import prices also hinder the 

development of natural gas markets, 

obliging them to use cheaper carbon 

intensive fuels.

By bringing natural gas from alternative 

sources and suppliers, the 

Southern Gas Corridor, particularly 

the Trans Adriatic Pipeline, will significantly 

improve the energy and 

supply security of the region. With 

the entrance of a new supplier into 

these markets, the Russian monopoly 

will be eliminated and import 

prices will decrease. In turn, this will 

create a downtrend in the trade deficit 

of these countries and boost their 

economies. 

55 


MUBARIZ HASANOV, ZAUR HEYDAROV 

56 

GEOPOLITICAL AND 

STRATEGIC RATIONALE 

OF AZERBAIJAN’S 

INVESTMENTS IN TURKEY 

MUBARIZ HASANOV 

SENIOR FELLOW, CENTER ON ENERGY AND ECONOMY, HASEN 

ZAUR HEYDAROV 

EXPERT, SOCAR

Since 1996, Azerbaijan has successfully 

managed economic growth by reducing 

macroeconomic imbalances and 

strengthening financial stability. Two 

important factors triggered economic 

growth. 

Following the dissolution of the Soviet 

Union, Azerbaijan regained its 

state sovereignty in 1991. Since then, 

its economy has undergone several 

cycles of development: a deep recession 

period (1992-1995); a stabilization 

and development period 

(1996-2003); and a boom period 

(2003-2009). During the first years 

of independence, the country faced 

significant macroeconomic imbalances. 

Real GDP declined around 

66% between 1992 and 1995, at 

time when hyperinflation eroded 

real incomes, unemployment became 

widespread, production declined 

sharply, foreign reserves 

were exhausted, and deficit of current 

account balance increased. The 

recession was seriously aggravated 

by three major factors. First, the 

collapse of traditional financial and 

trade relations among former Soviet 

member states damaged production 

capacity and trade terms. The 

centrally planned economic system 

of the Soviet Union had encouraged 

trade interdependency among 

member states without considering 

productivity. Many manufacturing 

enterprises only continued to function 

during that period because of 

trade inter-dependence and subsidies. 

The collapse of the Soviet Union 

revealed the scale of inefficiency 

and resource transfers. Although 

rich in mineral resources, Azerbaijan 

had inherited outdated and uncompetitive 

technology. The second 

factor was the military aggression 

by the Republic of Armenia, which 

resulted in occupation of 20% of the 

territory of Azerbaijan and hundred 

thousands of refugees and internally 

displaced persons. The majority 

of refugees from Armenia and 

IDPs from Nagorno-Karabakh and 

its adjacent regions were forced to 

settle in refugee camps. The war seriously 

damaged national infrastructure 

(housing, schools, hospitals, 

roads). Third, political instability 

was fuelled by power struggles and 

attempted coups d’etat. From 1991 

to 1993, there were four changes 

of government. Shortly after taking 

office in 1993, former president 

Heydar Aliyev faced two attempted 

coups d’etat. 

As a result of these factors, gross 

domestic product (GDP) growth 

declined by 11-23% annually from 

1992 to 1995. The breakdown of 

relations among former Soviet countries 

led to supply scarcity, lack of investments 

and poor management of 

factories and plants, which severely 

affected industrial output. 

The liberalisation of foreign current 

account and price policy during 

57 


Table 1. GDP growth rates of selected CIS countries, 1992-2000 

COUNTRY 1992 1993 1994 1995 1996 1997 1998 1999 2000 

AZERBAIJAN -22.6 -23.1 -19.7 -11.8 0.8 6.0 10.0 11.0 6.2 

ARMENIA -41.8 -8.8 5.4 6.9 5.9 3.3 7.3 3.3 5.9 

GEORGIA -44.8 -25.4 -10.4 2.4 10.5 10.6 2.9 3.0 1.9 

BELARUS -9.6 -7.6 -11.7 -10.7 2.8 11.4 8.4 3.3 5.8 


58 

KAZAKHSTAN -5.3 -9.2 -12.6 -8.2 0.5 1.7 -1.9 2.7 9.8 

RUSSIA -14.5 -8.7 -12.7 -4.0 -3.6 1.4 -5.3 6.4 10.0 

UKRAINE -9.7 -14.2 -22.9 -12.2 -10.0 -3.0 -1.9 -0.2 5.9 

Source: Telatar and Hasanov (2009) 

that period led to hyperinflation in 

Azerbaijan from 1993 to 1995. The 

consumer price index increased by 

1130% in 1993, by 1664% in 1994, 

and then fell significantly to 412% 

in 1995. 

Since 1996, Azerbaijan has successfully 

managed economic growth by 

Table 2. Inflation rate %, 1992-1995 (end-year change in Consumer Price Index %) 

COUNTRY 1992 1993 1994 1995 1996 1997 1998 1999 2000 

AZERBAIJAN 1395 1294 1788 85.0 6.5 0.4 -7.6 -0.5 2.2 

ARMENIA 1341 10.896 1761 32.2 5.8 21.8 -1.3 2.1 0.4 

GEORGIA 1177 7488 6474 57.4 13.7 7.3 10.7 11.0 4.6 

BELARUS 1559 1997 1960 244.0 39.3 63.1 181.7 251.2 107.5 

KAZAKHSTAN 2984 2169 1158 60.4 28.6 11.2 1.9 17.8 9.8 

RUSSIA 2506 840.0 204.4 128.6 21.8 10.9 84.5 36.8 20.1 

UKRAINE 2730 10.155 401.0 181.7 39.7 10.1 20.0 19.2 25.8 

Source: Telatar and Hasanov (2009)

educing macroeconomic imbalances 

and strengthening financial 

stability. Two important factors triggered 

economic growth: first, structural 

reforms aiming to accelerate 

transition to the market economy; 

and second, new investments by 

multinational companies in the oil 

sector. Furthermore, a ceasefire 

agreement with Armenia over the 

Nagorno-Karabakh conflict signed 

in 1994 and political stability after 

Heydar Aliyev’s accession to power 

helped to restore economic growth. 

Figure 1: Foreign Direct Investment in Azerbaijan’s economy, 1996-2003 

Azerbaijan initiated a range of structural 

reforms to reverse GDP decline, 

to reduce inflation to single digit 

levels, to limit budget and current 

account deficits, and to build up substantial 

foreign reserves. Azerbaijan 

adopted a comprehensive privatisation 

program aimed at transforming 

public enterprises into joint stock 

companies and distributing state 

land among the population. As a result 

of collaboration with the International 

Monetary Fund (IMF) and 

the World Bank, fiscal and monetary 

policies were tightened, and the exchange 

and trade regimes were liberalised. 

Since the 1990s, foreign energy companies 

have been keen to to invest in 

the Azerbaijani oil sector. Azerbaijan 

has signed several production sharing 

agreements (PSA) with multinational 

energy companies to explore 

and develop the country’s hydrocarbon 

resources. The first PSA with 

foreign partners was signed in 1994 

to develop the Azeri-Chirag-Guneshli 

oil fields, commonly referred as 

the “Contract of the Century”. The 

following year, Azerbaijan adopted 

the “Law on Protection of Foreign Investments” 

which played a decisive 

role in attracting foreign investment. 

Since then Azerbaijan has signed 21 

PSAs with international partners to 

develop the country’s mineral resources. 

As a result of these reforms and 

foreign investments Azerbaijan 

achieved strong economic growthaveraging 

8.4 percent over the 1996- 

2003 period, combined with single 

digit inflation. 

59 


Source: SSCRA

Investments in the energy sector 

served as an engine of economic 

growth, which also stimulated the 

development of the services, transportation, 

agriculture and communication 

sectors. Between 1996 and 

2003, foreign direct investments 

(FDI) in the national economy steadily 

increased from $375.4 million 

to $2754.5 million. The State Oil 

Figure 2: GDP growth, 1996-2003 


60 

Source: SSCRA 

Fund (SOFAZ) was established as an 

extra-budgetary fund to ensure efficient 

management of revenues from 

PSAs, in order to preserve funds for 

future generations and to finance 

strategically important projects 

(before Azerbaijan’s massive oil revenues 

began to flow in.) 

THE OIL BOOM AND ECONOMIC 

DEVELOPMENT 

From 2003, the Azerbaijani economy 

entered a new phase of economic 

growth, with the oil sector 

playing a crucial role. The energy 

sector, which historically has been 

the dominant component of the 

Figure 3. Annual GDP growth, mln AZN, 2003-2013 

economy, started to boom when 

Azerbaijan began exporting crude 

oil via the Baku-Novorossiysk pipeline 

in 1997 and later through the 

Baku-Supsa pipeline in 1999. In fact, 

neither of those pipelines was large 

enough to meet the country’s full export 

capacity, and in that regard the 

launch of the Baku-Tbilisi-Ceyhan 

crude oil pipeline construction was 

a milestone for this period. With 

the inflow of oil revenues, the Azerbaijan 

economy entered a period 

of high economic growth: GDP increased 

by a factor of eight between 

2003 and 2013, from AZN 7.1 billion 

to AZN 57.7. 

Source: SSCRA

All these developments should be 

analysed as the results of the national 

economic policy, designed to 

transform the ruined economy and 

update the obsolete technology inherited 

from the Soviet Union; to 

utilise its hydrocarbon resource for 

development purposes; and to integrate 

into the global economy. Since 

the 1990s, Azerbaijan has capitalised 

on its energy resources, aiming 

to build up the economy and create 

strong relations with the West 

through Turkey, escaping the Russian 

sphere of influence. “The Contract 

of the Century” and other PSAs 

with Western multinational energy 

companies demonstrate the central 

Figure 4. SOFAZ Assets, bln USD, 2001-2013 

role of energy strategy in Azerbaijan’s 

economic policy. 

The establishment of the SOFAZ 

as an independent fund for oil revenues 

- aimed at preserving macroeconomic 

stability, stimulating 

development of the non-oil sectors, 

and ensuring socio-economic development 

by financing strategically 

important projects - served as 

an effective economic policy tool. 

Similarly, the accumulation of huge 

oil revenues in the sovereign wealth 

fund was also intended to protect 

the country from the effects of the 

natural resource curse, and diversify 

the economy. With the first oil exported 

to the European markets in 

61 

Source: SOFAZ 

2006, enormous oil revenues began 

flowing into SOFAZ. 

As a result of oil revenues, the government 

of Azerbaijan has adopted 

a number of strategies and programmes 

to increase social welfare 

and ensure development of the 

non-oil sector and regions. The first 

oil revenues were spent on improving 

the socio-economic status of the 

approximately one million refugees 

and IDPs forced to leave their houses 

as a result of the occupation of Nagorno-Karabakh 

and seven adjacent 

regions by Armenia. Over the 2001- 

2014 period, SOFAZ spent over $2.1 

Figure 5: SOFAZ investments in improving the socio-economic conditions of refugees and IDPs, AZN 

mln, 2001-2013 


Source: SOFAZ


billion to build housing for refugees 

and IDPs, including the necessary 

social and technical infrastructure, 

across various regions of the country. 

Figure 6. Decline in unemployment, 2003-2013 

sify the economy. As a result of these 

programs, double-digit growth in 

non-oil sector was achieved, and 

in 2013, non-oil GDP constituted 

56.6% of overall GDP. 1 Furthermore, 

significant progress was made in 

reducing poverty and unemployment. 

The poverty rate declined 

from 44.7% to 5.3%, while unemployment 

has dropped from 9.1% to 

4.9% in period of 2003-2013. These 

developments are the result of high 

growth rates, strong growth in terms 

62 

Source: SSCRA 

Furthermore, the “State Program for 

Poverty Reduction and Economic 

Development of the Republic of 

Azerbaijan” and the “State Program 

for Social-Economic Development of 

the regions of the Republic of Azerbaijan” 

were adopted in order to 

reduce the poverty rate and diverof 

real wages, and the introduction 

of a targeted social benefit system. 

The income of population increased 

from AZN 5.7 billion to AZN37.5 billion 

over the 2003-2013 period. 2 

Furthermore, SOFAZ has financed 

several nationwide and regional 

projects, including the reconstruction 

of the Samur-Absheron irrigation 

system, the construction of the 

Oguz-Gabala-Baku water pipeline, 

and the Baku-Tbilisi-Kars railway. 

The Fund also sponsors the “State 

Program on Education of Azerbaijani 

Youth Abroad in the 2007-2015”, 

contributing to the development of 

human capital. 

After these remarkable successes 

in reducing poverty and unemployment 

and improving the welfare of 

refugees and IDPs, Azerbaijan’s investment 

policy is entering a new 

phase. In order to generate sustainable 

economic growth and stability 

of income inflows, Azerbaijan has 

declared new policy objectives: to 

reduce reliance on oil and gas exports; 

to diversify the economy; and 

to become a well-developed industrial 

economy. In pursuit of this aim 

Azerbaijan decided to invest in the 

production of value-added petrochemical 

and petroleum products 

both domestically and abroad. 

1. SOFAZ, Annual Report, 2013 

2. SSCAR database

TURKEY’S ECONOMIC 

DEVELOPMENT SINCE 1980 

The Turkish economy has made significant 

progress in the past three 

decades. The country has achieved a 

remarkable success in developing an 

industry-based economy, building 

a dynamic private sector, strengthening 

its financial sector, and integrating 

with the world economy. 

Solid economic growth over the past 

decades has its roots in economic 

reforms initiatives implemented 

in the 1980s. At the time, Turkish 

economic policy has shifted from 

the protective and inward-oriented 

import substitution growth model, 

Figure 7: Real GDP at chained PPPs, 1981-2001 (mln USD) 

to an export-led growth strategy. 

The Turkish government initiated 

reforms in several directions, gradually 

liberalising the financial sector 

by lifting controls on financial markets 

and liberalising foreign trade. 

Furthermore, all sorts of subsidies 

were abolished except for subsidies 

to promote exports and the state’s 

share in economic activity was significantly 

reduced. The Turkish 

economy underwent a significant 

transformation as a result of the liberalisation 

of capital account at the 

end of 1989. 

With the adoption of the export-led 

growth model, Turkey experience 

63 

Source: World Pen Table 

In 1988, the Turkish economy entered 

a very volatile period, and the 

economy fell into several recessions 

between 1990 and 2001. A period of 

high growth was followed by macroeconomic 

instabilities caused mainly 

by unsuccessful monetary and fiscal 

policies aimed at bringing down 

inflation, to finance the deficits. 

Furthermore, the volatility of shortterm 

capital flows significantly exacerbated 

boom-bust cycles as the 

Turkish economy became dependent 

on short-run capital inflows 

as a source of funding. In fact, large 

fiscal deficits produced upward 

pressure on public debt, forcing the 

government to monetise the deficits 

and inflate prices. 

Another factor that contributed to 

the instability was the significant 

increase in government debt during 

the 1988-2000 period from $4 billion 

to $53.8 billion. There were four 

main reasons for the accumulation 

public debt: inefficient subsidies 

for agricultural and state-owned 

enterprises; employment policy; 

unproductive expenses of public 



64 

administration; and losses incurred 

by state-owned banks. Lack of fiscal 

discipline and monetisation of public 

debt led to high real interest rates 

and inflation. 

The liberalisation and reforms of the 

1980s were not accompanied by the 

necessary macroeconomic policies 

or institutional reforms, and in particular, 

the weak regulatory and supervisory 

framework of the financial 

sector made the Turkish economy 

vulnerable to domestic and external 

shocks. As a result of macroeconomic 

imbalances, the economy experienced 

several crises in 1991, 1994, 

1999, and worst of all 2001. 

TURKISH FINANCIAL CRISIS IN 

2001 AND AFTERMATH 

Prior to the financial crisis, the Turkish 

economy was in turmoil, heavily 

reliant on short-term capital inflows 

and exposed to boom-bust cycles. 

Turkey has experienced volatile economic 

growth, fluctuating between 

-5.5% and 9.3% and inflation rates 

ranging around 70% during the 

1990s. 3 Volatility in the exchange 

rate, interest rate and financial markets 

also contributed to boom-bust 

cycles. 

Early signs of the crisis appeared in 

November 2000, when some banks 

suddenly stopped supplying credit 

to vulnerable banks, prompting investors 

to withdraw funds from the 

market. Weak investor confidence 

combined with political turmoil in 

early 2001 led to the loss of credibility 

of the IMF-initiated stability 

program, and crisis ensued. Speculative 

attacks against the Turkish lira 

resulted in the fall of the Istanbul 

Stock Exchange by 14%; interbank 

overnight lending rates reached 

3. Turkish Statistics Agency. 

several thousand percent. The government’s 

attempts to defend the 

Turkish lira depleted the foreign exchange 

reserves of the Central Bank, 

and ultimately, the government unpegged 

the lira from the US dollar. 

As a result, the lira lost one-third its 

value against the US dollar. The financial 

crisis hit the Turkish economy 

very hard; GDP fell by 5.7%; GDP 

per capita declined by 6.5%; and 

public debt reached 74% of GDP in 

2001. 

Shortly after the crisis erupted, the 

Turkish government initiated a 

broad range of programmes to restore 

confidence by introducing 

new reforms to stabilise the budget 

deficit, the exchange rate, to control 

inflation, and to repair the banking 

sector. A new stand-by agreement 

was signed with the IMF to implement 

new reforms, which included 

reconstructing the state-owned 

banks, liquidating failed private 

banks, strengthening the regulatory 

and supervisory framework 

of the banking system, privatising 

the state-owned enterprises including 

those in telecommunications, 

energy, tobacco and sugar sectors, 

giving the Central Bank autonomy, 

switching to free-floating exchange 

rate regime of the Turkish lira, and 

introducing an income policy than 

included tight control of public sector 

wages. 

After the implementation of this 

wide-ranging reform programme 

and introducing structural changes 

in 2001, the Turkish economy recovered 

from its deep recession and 

recorded 6.2% GDP growth in 2002. 

Since then the economy has experienced 

a stable and relatively high 

growth rate, averaging 7.2% during 

2002-2006 and 3.5% in 2006-2013.

Figure 8: Comparison between real GDP growth rates of selected EU countries and Turkey 

(2001=100) 

Source: OECD 

substantial economic growth over 

the 1981-1988 period. The annual 

average GDP growth rate during that 

period was 5.8%, and annual average 

industrial output growth was 

even higher, averaging 8.1%. 

The Turkish economy has experienced 

a dramatic shift, moving away 

from low-productive informal and 

agriculture sectors into high productive 

industry and services sectors. A 

shift of resources and increased public 

and private investments in manufacturing 

sectors led to substantial 

productivity gains, increased volume 

of value-added products, and 

greater competitive capacity. 

65 

Figure 9: Growth of GDP per capita (USD), 2002-2013 


Source: TURKSTAT 

Turkey has achieved remarkable 

success in reducing the central government 

budget deficit and general 

government debt stock, and controlling 

inflation. The government’s 

2003 austerity program planned to 

reduce public spending, increase 

state-owned enterprises, and simplify 

tax legislation with an aim of 

generating additional tax revenues. 

Commitment to fiscal discipline significantly 

reduced the budget deficit, 

which fell from 11.9% to 1.2% of 

GDP over 2001-2013.

Figure 10: Central Government Budget Deficit (% of GDP) 


66 

Source: Ministry of Finance of the Republic of Turkey 

Steady economic growth during this 

period had a positive impact on the 

prosperity of population, doubling 

the size of middle class, reducing 

poverty rates (from 30.3% to 

2.06%) 4 and income inequality, and 

increasing GDP per capita threefold 

Figure 11: General Government Gross Debt Stock (EU defined,% of GDP) 

(from $3492 to $10.807). At the 

same time, the country’s steady GDP 

growth coupled with increased export 

volumes considerably reduced 

the debt to GDP ratio. In the period 

of 2002-2013, public debt declined 

from 74% to 36.2% of GDP, while 

Source: Undersecretariat of Treasury of the Republic of Turkey 

To secure macroeconomic balance 

and support, economic growth the 

government implemented longterm 

measures to control inflation, a 

major concern for the Turkish economy 

since the 1980s. The Central 

Bank’s inflation targeting regime, 

adopted after the 2001 crisis, successfully 

managed to keep the inflation 

rate at around 10% during the 

2002-2013 period. Furthermore, the 

Central Bank had accumulated $108 

billion in international reserves by 

the end of 2013. 

4. Below 4.3$ per capita per day

Figure 12: Average Inflation in Periods (%) 


Economic and political stability, coupled 

with declining public debt, the 

budget deficits, lower poverty rates, 

relatively low inflation rates, and 

business-friendly market policies 

enabled Turkey to attract $136.6 

billion of foreign direct investment 

(FDI) between 2003 and 2013. 

Figure 13: Foreign Direct Investment Inflows (bln USD) 

67 

Source: CBRT 


Over the last decade, the financial 

sector attracted the largest share of 

FDI ($39.4 billion), followed by the 

manufacturing sector (approximately 

$21.8 billion), and the energy sector 

($12.2 billion). 

Table 3: Sectoral Distribution of FDI inflows, 2002-2012 (mln USD) 


68 

SECTOR 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2002-2012 

AGRICULTURE 0 0 4 5 6 9 41 48 81 32 43 269 

INDUSTRY 166 447 343 908 2.988 5.037 5.187 3.887 2.887 8.037 5.479 35.366 

MINING 2 13 74 41 123 336 145 89 136 146 213 1.318 

MANUFACTURING 96 347 206 865 1.701 4.131 3.972 1.640 924 3.596 4.342 21.820 

ELECTRICITY, GAS. 68 87 63 2 1.164 567 1.055 2.153 1.824 4.293 924 12.200 

SERVICES 405 249 843 7.622 14.645 14.091 9.520 2.331 3.288 8.067 5.236 66.297 

CONSTRUCTION 0 8 2 81 215 287 337 209 310 301 1.427 3.177 

WHOLESALE AND 

RETAIL TRADE 73 177 36 78 456 234 2.088 389 435 709 221 4.896 

TRANSPORTATION 1 0 6 21 453 679 96 230 183 222 130 2.021 

INFORMATION AND 

COMMUNICATION SER- 

VICES 61 2 670 3.263 6.353 472 97 173 36 36 133 11.396 

FINANCIAL AND INSUR- 

ANCE ACTIVITIES 249 54 127 3.856 6.954 11.717 6.136 817 1.621 5.883 2.084 39.498 

REAL ESTATE ACTIVI- 

TIES 0 0 1 216 79 448 453 210 241 300 173 2.121 

HUMAN HEALTH AND 

SOCIAL WORK ACTIVI- 

TIES 3 3 0 26 71 176 147 105 112 232 546 1.421 

Source: CBRT

Turkey’s net external debt declined 

from 39.9% to 29.2%. During this 

period, Turkey managed to reduce 

the public debt ratio to below 60% 

of GDP, as envisioned by the EU’s 

Maastricht Treaty criteria, outperforming 

the EU countries. The global 

financial crisis of 2008 significantly 

affected Turkey’s economy. The 

economy experienced a sharp output 

fall; GDP growth rate declined to 

-4.8%; unemployment increased to 

13.1%; exports decreased by 22.6% 

in 2009; and accelerating short-term 

capital outflow further depressed 

the economy. However, the banking 

sector, reconstructed after the 2001 

crisis, withstood the effects of the financial 

crisis, and the next year saw 

the return of growth. 

In 2011, Turkey set an ambitious 

plan to become one of the top ten 

Figure 14: Unemployment (%), 2005-2013 

economies of the world by 2023. It 

aims to triple the size of the economy, 

to increase exports to $500 

billion, and raise GDP per capita to 

$25,000 over the next decade. To 

meet this objective Turkey needs 

at least 5% of annual average GDP 

growth, based on strong export 

growth rather than domestic demand. 

Turkey needs to address the 

structural problems of its economy, 

and to shift from a consumptionoriented 

economic model to an 

export-led growth model in order 

to spur the export of sophisticated 

goods and services, sustain growth 

and create employment. Despite its 

substantial GDP growth, the Turkish 

economic growth model has failed 

to promote job creation, and thus 

unemployment has remained high 

over the last decade, at around 10%. 

69 



Furthermore, the current account 

deficit (CAD) remains one of the 

structural problems of the economy. 

The CAD is driven by structural factors 

such as low savings rates, and 

heavy reliance on imports of capital 

and intermediate goods, as well 

as oil and gas. Turkey’s economic 

growth increases demand for investment 

which cannot be met by domestic 

savings. It needs short-term 

speculative capital inflows (“hot 

money”) to finance CAD. The global 

financial crisis has revealed the 

Turkish economy’s heavy reliance 

of on speculative financial flows. Imports 

have increased $51.6 billion 

to $251.7, while exports increased 

from $36.1 to $151.8 billion in period 

of 2002-2013.

Figure 15: Current Account Balance/GDP (%), 2003-2013 


70 


ENERGY AND PETROLEUM 

MARKET OUTLOOK 

Over the last decade, Turkey’s energy 

demand has risen considerably in 

line with its economic development, 

driven mainly by population growth, 

urbanisation and industrialisation. 

Between 1973 and 2013, Turkey’s 

total primary energy supply (TPES) 

increased by a factor of five, from 

24.4 million tonnes of oil equivalent 

(Mtoe) to 120.09 Mtoe. The average 

annual increase of Turkey’s energy 

consumption in the past decade 

was 4.4%, much larger than the 

world and EU average which was 

1.6%. 

Figure 16: Turkey’s total primary energy supply, (Mtoe), 1973-2013 

Source: IEA and own calculations 

The composition of primary energy 

consumption has significantly 

changed over 1980-2013; the share 

of coal (including lignite) increased 

from 22.1% to 32.7%, the share of 

natural gas increased from 0.1% to 

31.1%, and the share of oil dropped 

from 50.5% to 26.0%.

Figure 17: Development of primary energy consumption in Turkey, (Mtoe), 1980-2013 

Source: Turkish National Council of WEC and own calculations 

In 2013, Households and Services of primary energy, together accounting 

for 52% of all energy consump- 

along with Transmission and Energy 

sectors were the largest consumers tion. 

Figure 18: Distribution of primary energy consumption by sector, 2013 

71 

Source: Ministry of Energy and Natural Resources 

Turkey’s primary energy demand is 

expected to increase by around 90%, 

to reach 218 Mtoe by 2023. The 

share of coal and lignite is forecasted 

to reach 37% while shares of nuclear, 

renewable and other sources 

Figure 19: Primary energy demand forecast, (Mtoe), 2002-2023 

of energy are expected to increase to 

4%, 4% and 6% respectively. At the 

same time, the share of natural gas 

is expected to fall to 23%, with the 

oil share projected to remain stable 

at around 26%. 


Source: Ministry of Energy and Natural Resources

Over the last decades, not only has 

the composition of Turkey’s primary 

energy consumption changed; its 

dependence on imported energy 

has also increased. As a result of the 

development of the automotive 

industry and transportation demand 

for energy, imports increased 

and dependence on imported energy 

rose from 25% to 79% in the 

period of 1970-2011. 

Figure 20: Development of primary energy imports, (Mtoe), 1970-2011 


72 

Source: Turkiye Is Bankasi, Economic Research Department 

ELECTRICITY MARKET 

Demand for electricity in Turkey 

has been growing in line with economic 

development in the last de- 

cade. Electricity consumption has 

increased from 132.6 billion kWh 

to 245.5 billion kWh. Electricity demand 

rose by 9.4% in 2011, 5.2% in 

2012 and 1.2% in 2013. 

Figure 21: Electricity consumption, (billion kWh), 2002-2013 


Natural gas was the largest source 

of electricity, accounting for 43.7%, 

followed by coal (26.2%) and hydro 

(24.7%). 

Figure 22: Sources of electricity generation in 2013 

Source: EUAS

At the same time, installed capacity 

has almost doubled, increasing from 

31.846 MW to 69.860 MW from 

2002 to 2013. 

Figure 23: Development of installed electricity generation capacity, (MW), 2002-2013 


Hydro remains the largest source of 

Turkey’s installed electricity capacity 

at 34.8%; the share of natural gas 

is 31.6%, the share of coal is 19.4% 

and multi-fuels comprises 7.9% of 

overall capacity. 

Figure 24: Distribution of installed capacity by sector, 2013 

73 



COAL MARKET 

Turkey holds significant reserves of 

hard coal and lignite; the country’s 

1.3 billion tonnes of hard coal and 

13.8 billion tonnes of lignite reserves 

accounts for 1.7% and 6.9% of the 

total world reserves, respectively. 

Due to ever-growing energy demand 

and increasing energy prices 

Turkey has started to utilise indigenous 

resources. Utilisation of local 

energy resources may contribute to 

regional development, reducing the 

foreign trade deficit and electricity 

costs, while increasing supply security 

and employment. However, Turkey’s 

coal production only increased 

by 49.8%, failing to meet the 53% 

rise in overall energy consumption 

in the last decade. The ratio of coal 

production to energy consumption 

declined from 21.4% to 14.2% in the 

1992-2012 period.

Figure 25: Turkey’s energy consumption and shares of total energy production and coal production 

Source: TKIK 


Turkey’s hard coal production has 

been steadily declining since the 

1980s. Coal production declined 

from 3.5 million tons to 1.9 million 

tons during the 1980-2004 period, 

Figure 26: Turkey’s hard coal production, 1973-2013 

and increased slightly in 2012, up to 

2.3 million tons. Production of hard 

coal has declined by 17.4% in 2013, 

dropping to 1.9 million tons. 

74 

Source: TKIK 

Oil price shocks in the 1970s and 

growing electricity demand stimulated 

investments in lignite production. 

Lignite production increased 

from 5.8 million tons to 65 million 

tons in the 1970-1998 period. However, 

due to natural gas imports, lignite 

production fall to 43.7 million 

tons in 2004, but then rose again, 

reaching 68.1 million tons in 2012. 

Figure 27: Turkey’s lignite production, 1973-2013 

Source: TKIK

The share of coal in the electricity 

production is expected to increase 

in the coming decade. 

NATURAL GAS MARKET 

Turkey is one of the largest natural 

gas markets in the European region; 

in 2013, its annual consumption was 

45.9 bcm. It is heavily dependent on 

imports of natural gas, mainly from 

Russia, Iran, Azerbaijan, and also imports 

LNG from Algeria and Nigeria. 

Turkey’s natural gas consumption 

been increased from 22.3 bcm to 

45.9 bcm in the 2004-2013 period. 

Due to its rapid economic growth, 

Turkey’s natural gas consumption 

is expected to increase by 2030, up 

to 70 bcm. Turkey’s average GDP 

growth is expected to remain at 

around 4-5%, while average growth 

in the EU is expected to increase 

by around 1-2% in the next decade. 

Households, power generation and 

industrial sectors will be the main 

drivers of natural gas demand. 

Figure 28: Natural gas consumption (bcm), 2004-2013 

75 

Source: OIES 

In 1987, Turkey started to import 

natural gas from neighbouring 

countries and its dependence on gas 

imports has continued to rise since 

then. Dependence on natural gas 

imports reached 98.5%, or 45.2 bcm, 

while domestic natural gas production 

has declined, falling to 537mcm 

or 1.5% in 2013. 

Figure 29: Natural gas imports and domestic production (bcm), 2004-2013 


Source: TPAO

Natural gas imports have declined 

by 1.42% in 2013 compared to 2012. 

Turkey imported around 26.2bcm 

(58%) of natural gas from Russia, 8.7 

bcm (19%) from Iran and 4.2 bcm 

(9%) from Azerbaijan, 3.9 bcm (9%) 

from Algeria, 1.2 bcm (3%) from Nigeria 

and 0.8 bcm (2%) from several 

other countries. LNG imports constituted 

6.08 bcm (13%) of total natural 

gas imports, mainly from Algeria, 

Nigeria, Qatar and Spot markets in 

2013. 

Figure 30: Import of natural gas by country origin, (%), 2013 


76 

Source: EPDK 

Natural gas is mainly consumed by 

sectors such as power generation 

21.05 bcm (45.8%), households 9.54 

bcm (20.7%) and industry 8.62 bcm 

(18.77%), which together accounted 

for around 85% of total natural gas 

consumption in 2013. 

Table 4: Natural gas consumption by sectors, (%), 2013 

Sectors 

Volume 

Transmission 21.053 

Industry 8.621 

Organized Industry Area 2.907 

Households 9.540 

Energy 591 

Transportation 88 

Services 3.035 

Other 77 

Losses 6 

45.918 

Source: EPDK 

Demand for natural gas experienced 

significant growth between 1987 

and 2013. Power generation and 

households are the main drivers of 

demand. Household demand for natural 

gas has been increasing by 1-2 

bcm annually, and expected to grow 

no more than 1 bcm within the next 

five years, up to 13-14 bcm. Population 

growth and the modernisation 

of urban infrastructure in cities such 

as Istanbul, Ankara, Izmir and Ad-

ana will further stimulate demand. 

Furthermore, Turkey’s rapid GDP 

growth in the coming years suggests 

that demand in the industrial sector 

will continue to grow, reaching 14.1 

bcm by 2030. The electricity sector, 

however, is expected to be the 

main driver of the demand, likely to 

increase by 6-7% annually to reach 

30-33 bcm by 2030. 5 

OIL MARKET 

Oil is one of the main sources of 

energy in Turkey, accounting for 

Figure 31: Turkey’s domestic crude oil production, (bbl/day), 2004-2013 

almost 26% of total primary energy 

consumption. Turkey does not 

hold significant proven oil reserves 

- around 296 million barrels (43.1 

million tons) as of 2013. Domestic 

crude oil production was 48,000 

barrels per day (6500 tonnes/day), 

meeting 9.6% of total oil consumption 

while demand for crude oil was 

20,920 mt in 2013. Turkey’s domestic 

oil steadily declined during the 

1991-2013 period, from 4.5 to 2.3 

mt. 

77 

Source: TPAO 

According to data for 2013, Turkey 

imports 18.554 million tons or 

90.4% of its crude oil mainly from 

Iraq (32%), Iran (28%) and Saudi 

Arabia (15%). Due to economic 

embargos, Iran’s share in crude oil 

Figure 32: Import of crude oil by country origin, (%), 2011-2013 

imports dropped from 51% in 2011 

to 39% in 2012, and then to 28% 

the following year. Iraq’s share increased 

from 17% to 32%, while 

Saudi Arabia’s increased from 11% 

to 15%. 


Source: EPDK 

5. G. Rzayeva, “Natural Gas in the Turkish Domestic Energy Market: Policies and Challenges”, OIES 

Paper: NG82

Demand for crude oil is mainly driven 

by the transport (50%), industry 

(24%) and commercial/agriculture 

(14%) sectors. The petro-chemical 

and construction sectors accounted 

for 31% and 33% of the industrial 

sector’s demand in 2010. 

According to the Turkish Petroleum 

Industry Association (PETDER), demand 

for crude oil is expected to increase 

in parallel with GDP growth, 

at an annual growth rate around 3.7 

during the 2010-2020 period. 

Figure 33: Turkey’s gross domestic petroleum products consumption forecast (%), 2012-2017 


78 

Source: EIU 

As Turkey’s major domestic company, 

the Turkish Petroleum Company 

(TPAO) produced around 75% 

of crude oil in 2013. TPAO conducts 

production and exploration activities 

abroad, in Azerbaijan, Kazakhstan, 

Iraq and Libya. 

The Turkish Oil Industry Association 

(PETDER) is active in retail and 

wholesale for oil products, and encompasses 

75% of the domestic 

market. PETDER represents 15 major 

companies in the sector of distribution 

and filling stations. 

PETROCHEMICAL AND REFINED 

OIL PRODUCTS 

The petrochemical industry in Turkey 

was established in 1960s, aimed 

at meeting growing demand for petrochemical 

and refined products. 

Since then, import dependence on 

refined products and raw materials 

has increased, along with economic 

growth. Currently, Turkey relies 

heavily on imports of chemical, petrochemical 

and refinery products, 

which together constituted 16% of 

total imports in 2014. In total, their 

collective share of the current account 

deficit was 35.3%, or $38.7 

billion, more than natural gas and 

crude oil imports ($34.8 billion). 

Since 1996, Turkey has experienced 

a solid import growth of primary 

energy and refinery products. On 

average, imports of crude oil, natural 

gas and other mining products 

increased by 11.03% while imports 

of refinery products and coke 

increased by 16.29%. The rise in 

imports of chemical products was 

9.43%. 

Figure 34: Current account deficit and distribution of chemical sector deficit, 2013 

Source: Petkim

TÜPRAŞ is the largest company in 

the field of refinery, operating four 

refineries with a capacity of 28.1 

million tonnes (mt). The capacities 

of the Izmit and Izmir refineries are 

Table 5: Refining capacity, 2011-2013 

11.0 mt, and the capacities of Kirikkale 

and Batman are 5.0 mt and 1.1 

mt respectively. The net capacity of 

all four is 75.1%, according to 2013 

figures. 

Source: EPDK 

Figure 35: Turkey’s export/import of refinery products (mt), 2009-2013 

The main refined products are: LPG 

(794 thousand tonnes), gasoline and 

naphtha (4.720 thousand tonnes), 

jet and kerosene (3.637 thousand 

tonnes), diesel (5.248 thousand 

tonnes) and gas oil (395 thousand 

tonnes). With exception of jet, gasoline 

and residual fuels, domestic production 

is unable to meet Turkey’s 

growing demand for gas oil, diesel, 

LPG and ethane. Therefore Turkey 

imports diesel, LPG and other products 

from Russia (56%), Italy (12%), 

Ukraine (10%) and Greece (4%). 

79 


Source: TÜPRAŞ 

Along with Turkey’s GDP growth, 

demand for refined products is expected 

to increase by 2020. Strong 

automobile sales, infrastructure investments 

and development of road 

and air transportation are expected 

to drive demand for refined products.

Figure 36: Refinery products demand forecast (mt), 1993-2020 


Source: TÜPRAŞ 

Petkim is the leading petrochemical 

company, producing over 60 

products for use in the construction, 

agriculture, automotive, electrical, 

textile, and pharmaceutical 

sectors. The petrochemical industry 

Figure 37: Share of Domestic Petrochemical Production 

is also heavily reliant on imported 

raw materials. Domestic production 

(Petkim) has steadily declined since 

1990, and currently meets 20% of 

demand for petrochemical products; 

80% of raw materials are imported. 

80 

THERMOPLASTIC PRODUCTS 

Source: Petkim 

AZERBAIJAN’S INVESTMENTS IN 

TURKEY 

Turkish-Azerbaijan relations have 

gained new momentum through energy 

partnerships. The acquisition 

by the State Oil Company of Azerbaijan 

Republic (SOCAR) of shares 

of Turkey’s petro-chemical manufacturing 

company Petkim in 2008 

marked a new page in bilateral relations, 

by increasing Azerbaijan foreign 

direct investments in Turkey. 

SOCAR was established shortly after 

Azerbaijan regained independence 

in 1991, with the aim of developing 

the energy industry. It remains Azerbaijan’s 

main tool in the efficient 

management of its energy resources. 

Over the last two decades, SOCAR 

has evolved from local oil company 

to a fully integrated international 

energy company, active in all segments 

of oil and gas industry with 

offices in various countries. Through 

this strategy, SOCAR seeks to attain 

maximum economic benefits and 

enhance efficiency by becoming a 

global value-chain energy company, 

producing not only crude oil but

value-added petro-chemical and 

petroleum products. To accomplish 

this goal, SOCAR has begun to invest 

heavily in oil and gas processing and 

distribution businesses, both locally 

and internationally. 

SOCAR’s first major international 

investment destinations were countries 

along the BTC transit route 

connecting Azerbaijan with Europe. 

SOCAR Georgia was established in 

2006, and acquired a local gas distribution 

network, Kulevi Oil Terminal 

(Black Sea Terminal), which transports 

oil to Western markets and 

high standard petrol stations. In the 

same year, SOCAR acquired Turkey’s 

largest petro-chemical company 

Petkim, marking its entrance into 

the Turkish market. 

The intergovernmental agreement 

on the construction of the Trans- 

Anatolian pipeline (TANAP) gave a 

new impetus to Azerbaijan’s investments 

in Turkey. Azerbaijani energy 

giant SOCAR acquired 58% of 

the shares of TANAP, while Turkish 

BOTAŞ and TPOA hold 30%, and BP 

12%. Considering the total of TANAP 

to be 12 billion dollars, Turkey is 

expected to receive around 5 billion 

dollars of investment. Furthermore, 

SOCAR is building a new STAR refinery 

to supply Petkim with intermediate 

goods and produce fuels 

for local and international markets 

in Izmir. Overall, SOCAR is expected 

to invest around 5.6 billion dollars 

in the STAR refinery. In addition to 

these investments, Petkim subsidiary 

Petlim is constructing a new 

port on the Aegean coast with a capacity 

of 1.5 million TEU. SOCAR will 

invest around 400 million dollars in 

the Aegean Gateway Terminal. SO- 

CAR aims to develop the Petkim post 

as the biggest fully integrated port in 

Turkey. Overall, SOCAR is planning 

to invest 17-20 billion dollars in Turkey 

by 2023. As a result of these investments, 

Azerbaijan has emerged 

one of the biggest investors in the 

Turkish economy, focused mainly on 

petro-chemical products, refineries, 

electricity generation and port operation. 

These investments serve the strategic 

interests of both countries. Turkey 

benefits in several key ways from 

Azerbaijan’s investments. First of all, 

Turkey aims to become an energy 

hub, and TANAP marks a significant 

step forward in terms of transforming 

the country into an energy hub. 

Due to its geographic location in between 

the resource rich regions of 

the Middle East, the Caspian region, 

Central Asia and energy dependent 

Europe, Turkey plays an important 

role in the transportation of hydrocarbon 

resources. Turkey is already 

host to several crude oil and natural 

gas pipelines (the Baku-Tbilisi- 

Ceyhan and Kirkuk-Ceyhan crude 

oil pipelines, Baku-Tbilisi-Erzurum 

natural gas pipeline, Interconnector 

Turkey-Greece) and serves as a transit 

route for transportation of substantial 

volumes of crude oil via the 

Bosporus. In terms of future growth, 

the successful implementation of 

the Southern Gas Corridor will enable 

Turkey to become an energy 

corridor, contributing to EU energy 

security, and strengthening its role 

as a regional power. Furthermore, 

the launch of TANAP creates additional 

opportunities to deliver the 

vast natural gas resources of Turkmenistan, 

Iran, northern Iraq and 

the Eastern Mediterranean if the political 

instability in these regions can 

be addressed. 

81 


Figure 38: Petroleum and gas production 


82 

Source: BP Statistical Review 2013 

Secondly, SOCAR investments will 

create additional jobs in Turkey. 

According to BP’s estimates, the 

construction of TANAP will create 

15000 additional jobs (mostly temporary) 

in Turkey. In addition, SO- 

CAR investments in petrochemical 

industry will bring around 16000- 

17000 temporary employment in 

2016-2017. Further, investments 

in Petkim, Petlim and the STAR refinery 

will create 4000 permanent 

jobs in Turkey. 6 Thirdly, gas imports 

via TANAP will reduce Turkey’s dependence 

on expensive Russian and 

Iranian natural gas imports. Currently, 

Azerbaijan gas imports constitute 

9% of Turkey’s total natural 

gas demand. Following the completion 

of TANAP, this share could rise 

to 15-25% of Turkey’s total gas imports 

by 2018. 7 This will increase 

Turkey’s bargaining power vis-à-vis 

Russia and Iran, enabling it to benefit 

from further reductions in gas 

prices. In 2014, Turkey paid $487/ 

tcm and $418/tcm to Iran and Russia, 

respectively. 8 Turkey’s import 

prices are higher than the EU average. 

However, the price of Azerbaijani 

gas is relatively cheap ($349/ 

tcm) and additional gas imports via 

TANAP will reduce the country’s natural 

gas import bill. 9 

Fourthly, investments in petrochemical 

industry will help Turkey 

to reduce its dependence on petrochemical 

materials and fuels, thereby 

contributing to the reduction of 

the current account deficit. Turkey 

remains a net importer of petrochemical 

and refined products, 

spending around $15 billion to meet 

its growing industrial production. 10 

Thus when finished STAR refinery 

will produce 1.3 million tonnes of 

naphtha, 5 million tonnes of diesel, 

1.7 million tonnes of jet fuel, 698 

6. http://www.zaman.com.tr/ekonomi_petkim-limanina-ilk-gemi-eylul-2015te-yanasacak_2241333. 

html Accessed on 29.01.2015 

7. BP estimates Azerbaijan’s gas share to reach 25% of total gas imports of Turkey. But, according 

to Nifti, the share of Azerbaijani gas is expected to reach 15% of Turkey’s total imports. See, http:// 

www.hazar.org/analizdetail/analiz/shah_deniz_agreement_in_geostrategic_context_2__552. 

aspx, Accessed on 29.01.2015 http://www.bp.com/content/dam/bp/pdf/Press/shah_deniz_2_ 

brochure_english.pdf Accessed on 29.01.2015 

8. http://www.zaman.com.tr/ekonomi_iste-iran-ve-rusyadan-alinan-dogalgaz-icin-odenen-fahisfiyatin-belgesi_2263268.html 

Accessed on 29.01.2015 

9. http://enerjienstitusu.com/medya/turkiye-dogalgaz-ithalatifiyatlari-fiyati.jpg Accessed on 

30.01.2015 


html Accessed on 30.01.2015

thousand tonnes of petroleum coke, 

261 thousand tonnes of LPG and 

158 thousand tonnes of sulphur. 11 

The STAR refinery is expected to refine 

10 million tonnes of Azeri-Light, 

Kirkuk and Ural crude oil. Petkim 

continues to increase its production 

capacity, and is projected to reach 6 

million tons from 3.4 million tonnes 

annually. All these investments will 

help Turkey to reduce its current 

account deficit $2.5-$5 billion annually. 

12 

Overall, Azerbaijan’s investments 

will enhance prosperity by creating 

new jobs, increasing savings, reducing 

the current account deficit, and 

helping Turkey achieve its goal of 

becoming an energy hub. 

Azerbaijan’s decision to invest in 

the Turkish energy sector will allow 

SOCAR to become an active player 

in the energy market. Baku’s investments 

will naturally increase the 

company’s position in midstream 

dynamics, and enhance the company’s 

profile as a global energy company. 

In addition, Turkey’s economic 

growth and growing energy demand 

will boost SOCAR’s profits and diversify 

its revenue sources. In fact, Petkim’s 

25% market share is expected 

to reach 40%, driven by the demand 

for petro-chemical products in the 

next decade. The company’s pre-tax 

and interest payment profits are expected 

to reach $1 billion by 2018. 13 

SOCAR aims to transform Petkim 

into a vertically integrated petrochemical-refinery-logistics 

complex 

by replacing outdated production 

technology and utilising its full production 

capacity. This will enable 

Azerbaijan and SOCAR in particular 

to benefit not only from exporting 

crude oil and natural gas exports, 

but to produce value-added products 

to increase company’s profits. 

All these developments demonstrate 

Azerbaijan’s strategic calculations. 

Azerbaijan’s decision to initiate and 

finance TANAP project indicates Baku’s 

growing self-confidence in regional 

energy geopolitics. SOCAR’s 

investments in TANAP and Petkim 

clearly show the company’s willingness 

to play an active role in midstream 

and downstream processes. 

By investing in TANAP, Azerbaijan 

will be able to transport its natural 

gas to the European market on 

its own terms. TANAP is so far only 

the direct pipeline linking Azerbaijan 

with Europe. Russia fiercely opposed 

the proposed Nabucco pipeline, 

resulting in its South Stream 

pipeline initiative as an alternative 

to the Nabucco. From a geopolitical 

perspective, TANAP has reduced 

Russian concerns over supplying 

Azeri gas into the European markets, 

where Russian Gazprom maintains 

a monopoly. TANAP is also expected 

to transport Turkmen, Iraq and possibly 

Eastern Mediterranean natural 

gas to European markets in the future. 

Any additional transportation 

of natural gas via TANAP will enable 

Azerbaijan to become not only a supplier 

of natural gas, but also a transit 

country. 

Azerbaijan’s investments in Turkey’s 

petrochemical industry are driven 

by economical and strategic factors. 

Since 1990s Azerbaijan has capitalised 

on its energy resources with the 

aim of strengthening its political and 

economic independence by leaving 

Russian sphere of influence and creating 

strong relations with the West 

through Turkey. Azerbaijan’s decision 

to sign a production sharing 

83 


11. http://www.hurriyet.com.tr/ekonomi/27389313.asp Accessed on 29.01.2015 


html 

13. Ibid.


84 

agreement - known as “the Contract 

of the Century” - with several Western 

multinational energy companies 

to produce and deliver its oil reserves 

to Western markets cemented 

its Western-oriented policy. The 

project was backed by Turkey, and a 

Turkish company had a limited stake 

in the project. The Baku-Tbilisi-Ceyhan 

(BTC) pipeline played a major 

role in establishing and developing 

bilateral energy relations. Cooperation 

in the oil sector was followed 

by “Baku-Tbilisi-Erzurum” natural 

gas and “Baku-Tbilisi-Kars” railway 

projects. Those projects have laid 

strong, strategic foundations for bilateral 

relations, and opened new 

perspectives for developing the relationship, 

which has been further 

strengthened by recent investments 

in the Turkish petro-chemical industry. 

From a wider perspective, Baku’s 

decision to link TANAP with the TAP 

will enable Azerbaijan to become 

an active player in European energy 

security. Azerbaijan’s ability to deliver 

sustainable and secure energy 

to the European markets (including 

Turkey) and investments abroad 

should be analysed as part of its 

multi-dimensional foreign policy, 

which entails multiple partners and 

supporters, and avoids depending 

on any one power, particularly Russia. 

This policy overlaps with the interests 

of the Balkan states, Turkey 

and Ukraine, who rely heavily on 

Russian energy imports and wish to 

reduce their dependence. 

CONCLUSION AND POLICY 

RECOMMENDATIONS 

Azerbaijan experienced a deep economic 

recession during the first 

years of independence as a result 

of the disintegration of traditional 

trade-financial links with other former 

Soviet republics, military aggression 

on the part of Armenia, and 

internal political instability. With 

its natural resources wealth, Azerbaijan’s 

goals were to transform its 

devastated economy and outdated 

Soviet technology, to utilise its hydrocarbon 

resources for development, 

and to integrate into the world 

economic system. 

In 2003, the Azerbaijani economy 

entered a new phase of economic 

growth, with the oil sector playing a 

crucial role in this period. Remarkable 

successes were achieved in 

poverty and unemployment reduction, 

and improving the situation 

of refugees and IDPs. To generate 

sustainable economic growth and 

ensure revenue stability, Azerbaijan 

has declared new economic objectives: 

to reduce reliance on oil and 

gas exports, to diversify its economy 

and become a well-developed industrial 

economy. In order to achieve 

this goal, Azerbaijan is investing 

in the production of value-added 

petro-chemical and petroleum products 

both domestically and abroad. 

SOCAR’s first major international 

investment destinations are countries 

along the transit route of the 

BTC pipeline, connecting Azerbaijan 

with Europe. In 2008, SOCAR acquired 

Turkey’s largest petro-chemical 

company Petkim, marking its entrance 

into the Turkish market. The 

agreement on the construction of 

the TANAP pipeline provided an additional 

impetus for Azerbaijan’s investments 

in Turkey. Further to this, 

Turkey’s rapid economic growth and 

growing domestic demand for natural 

gas have made the Turkish market 

more attractive for SOCAR as an 

investor. 

These investments serve the strategic 

interests of both countries. Overall, 

Azerbaijan’s investments will 

boost prosperity by creating new 

jobs, increasing savings, and reducing 

current account deficit, as well 

as helping Turkey achieve its goal of 

becoming an energy hub.

Azerbaijan’s decision to invest in the 

Turkish energy sector will enable 

SOCAR to become an active player 

in the Turkish energy market. These 

investments will increase the company’s 

position in the midstream 

dynamic and enhance its profile as 

a global energy company, as well as 

increase its profits and diversifying 

its revenue. SOCAR’s investments in 

the petrochemical industry expand 

its development opportunities, putting 

it in a strong position to complete 

the value-chain and become 

active in all segments of the market, 

including transportation, processing, 

distribution and marketing. 

POLICY RECOMMENDATIONS: 

• In order to generate higher revenues 

and become a fully integrated 

energy company, SOCAR must complete 

the value chain by increasing 

its presence midstream and downstream, 

including in regard to retail 

and wholesale of petrol products. 

STAR refinery will produce diesel 

and fuel, enabling SOCAR to construct 

a network of high standard 

petrol stations, retail and wholesale 

of fuels to end-consumers. 

• In the natural gas market, delivering 

natural gas to the end-consumers 

may be considered as an important 

step forward completing the 

value chain. SOCAR’s subsidiary SO- 

CAR Gas has started to market and 

sell Azerbaijan gas in Turkey, and 

SOCAR Power is delivering electricity 

to Petkim. Thus it is highly likely 

that SOCAR will consider entering 

the electricity market by supplying 

natural gas to households and industry, 

since electricity generation 

in Turkey is highly reliant on natural 

gas. 

• SOCAR’s international investments 

should encourage Azerbaijani companies 

from various sectors, including 

banking, logistics and construction, 

sectors to invest abroad, 

particularly in Turkey. Recently, 

Azerbaijan’s Pasha Bank entered the 

Turkish banking sector through the 

acquisition of a majority stake in 

TAIM Bank. Azerbaijani companies 

from various sectors may enter the 

Turkish market by acquiring local 

enterprises or forming partnerships. 

The entrance of Azerbaijani companies 

into the Turkish market may 

stimulate cooperation between SO- 

CAR and those companies. 

• Turkey has set itself an ambitious 

goal of becoming an energy hub, 

which requires increasing its natural 

gas storage capacity. Importers 

are legally required to store 10% of 

gas imports; however, current total 

storage capacity of Turkey is around 

2.6bcm. Turkey needs to double its 

natural gas storage capacity. This 

creates additional investment opportunities 

for SOCAR. 

• To meet the “Turkey 2023” targets, 

several reforms must be implemented, 

including liberalising the natural 

gas market, and adopting a legal 

framework that will enable Turkey 

to become an energy hub and attract 

greater volumes of FDI to the energy 

market. 

• Providing investment incentives 

and easing bureaucratic obstacles 

will help increase investments in the 

energy sector. Creating an investment 

friendly business climate is 

important for attracting long-term 

private investments to the energy 

sector. 

85 


CURRENT STATUS 

OF GEORGIA’S ENERGY 

SECTOR 


RESEARCH SCHOLAR, GFSIS, GEORGIA 


86

Under the Soviet Union, Georgia’s energy grid 

was part of the South Caucasus energy system. 

After the collapse of the USSR, Georgia’s 

energy sector was developed as a single entity. 

However, it managed to preserve all its power 

and gas interconnections with neighbouring 

FSU countries as well as building new 

interconnections with Turkey. 

Georgia is located on the southern 

slope of the Caucasus Mountains and 

on the eastern shore of the Black Sea. 

Due to its location, Georgia is rich in 

hydro resources, although no significant 

oil or gas reserves have been discovered 

as yet. Thus, Georgia is heavily 

dependent on imports in terms of 

natural gas and oil products. In 2014, 

Georgia became a net importer of 

power (for the first time since 2011). 

The country has potential to develop 

its renewable energy resources, such 

as wind, solar and geothermal; however 

to date there has been little progress 

on this front. Firewood is the 

only renewable resource that has 

been used extensively in the country. 

Very few -if any- steps have been 

taken with regard to promoting energy 

efficiency. 

Georgia, together with Turkey, is a 

transit country for Azerbaijani oil and 

gas to Western markets via the BTC 

and SCP pipelines. Kazakhstan sees 

the South Caucasus energy corridor 

as a potential transportation route for 

its oil. If the Trans Caspian gas pipeline 

is built as the European Commission 

advises, Turkmenistan may also 

begin to transport its abundant natural 

gas resources via Georgia. Thus, 

due to its geographical location, 

Georgia is positioned as an expanding 

transit corridor for exports of oil, 

natural gas and electric power. This 

represents major potential in terms 

of economic growth and development. 

However, direct income from 

the transit of energy resources is per 

barrel/day, per billion cubic metres 

(bcm) per annum dependent. As 

the existing infrastructure (BTC and 

SCP) is only partially loaded, Georgia’s 

gains from transit of oil and gas 

are limited. 

Under the Soviet Union, Georgia’s 

energy grid was part of the South 

Caucasus energy system. After the 

collapse of the USSR, Georgia’s energy 

sector was developed as a single 

entity. However, it managed to 

preserve all its power and gas interconnections 

with neighbouring FSU 

countries as well as building new 

interconnections with Turkey. Georgia’s 

power sector operates in parallel 

with the Russian, Azerbaijani 

and Armenian power sectors much 

like it did under the USSR, and it is 

87 



88 

currently considering opportunities 

for parallel operation with Turkey’s 

energy system. Georgia has signed 

an Association Agreement with the 

EU, and negotiations on full membership 

in the Energy community are 

ongoing. Both associate and full EU 

membership represent opportunities 

for Georgia in terms of becoming 

a unique hub for transit of energy and 

other commodities across the Black 

Sea, either via Turkey or bypassing it. 

It is assumed that Georgia’s short and 

medium term energy security targets 

have been met. The Ministry of Energy 

of Georgia has been working on a 

long term energy security strategy in 

line with the country’s commitments 

under the EU Association Agreement 

and the EC full membership Agreement 

(underway). However, there 

are some challenges in terms of geopolitical 

and domestic regulations 

that require immediate government 

attention. These include: operations 

on the Enguri HPP and Namakhvani 

cascades beyond the Georgia /Abkhazia 

administrative border; increasing 

Georgia’s overdependence on natural 

gas imports; shortfalls in demand 

side management; the absence of an 

energy efficiency strategy; and deforestation 

as a result of extensive use of 

firewood in the regions. 

GEORGIA’S ENERGY BALANCE 

– INCREASINGLY IMPORT 

DEPENDENT COUNTRY 

According to research funded by US- 

AID and developed by Deloitte in 

2013, Georgia’s energy mix included 

domestically-produced hydro, biomass, 

a very small share of coal, and 

imported natural gas and oil products. 

Two-thirds of Georgia’s gross 

energy demand is covered by imported 

energy (over 65% in 2012). 

During 2010-2013, natural gas was a 

rapidly increasing source in Georgia’s 

primary energy supply, while hydropower 

remained stable.

Figure 1: Georgia’s Energy Balance 2012 

Source: USAID, Energy Strategy of Georgia, White Paper, 2014 

Figure 2: Primary Energy Supply of Georgia in 2010-2013 

89 

Source: Ministry of Energy 

Georgia’s dependence on imported 

natural gas grew by 58% in 2011, 

reaching 41% of the country’s total 

primary energy supply. 1 The share 

of imported fossil resources in the 

energy balance for 2012 was 72%. 

Out of domestic energy sources, hydro 

resources comprised 15% of the 

total balance, wood 13%, and coal 

6%. Hydro takes 70-75% in power 

generation depending on hydrology 

of the year, while the remaining 

20-25% of power generation is based 

on imported natural gas. 

The representation of energy consumption 

below shows the dominance 

of household consumption, 

which is almost equal to the combined 

consumption of the industrial 

and commercial sectors. This demonstrates 

that Georgia is still economically 

a weak country. 

Georgia ranks almost 100 by per 

capita consumption, which is approximately 

2000 kWh per annum, 

165 kWh per month, or just 6 kWh 

per day. Georgia is also low-ranking 

in terms of energy intensity. 2 Further- 


1. Ministry of Energy, Energy Department, June 2014. 

2. www.iea.org/publications/Key World Energy Statistics 2014.

Figure 3: Energy Consumption by Sector 

Source: Ministry of Energy 


90 

more, according to the International 

Energy Agency (IEA), the share of energy 

efficiency in GDP of Georgia is 

0.7% compared to the world average 

of 0.31% (2008). 3 

ECONOMIC GROWTH AND INCREASED 

PRODUCTION CAPACITY SHOULD INVOLVE 

IMPROVING THE EFFICIENCY OF HOUSEHOLD 

CONSUMPTION. 

Over two consecutive years, an increase 

of consumption has been 

observed in both the power and gas 

sectors. 

SHORTCOMINGS IN DEMAND 

SIDE MANAGEMENT 

Challenge – The Absence of 

a National Energy Efficiency 

Strategy 

There are various projections for 

GDP growth rates in Georgia. The 

Ministry of Finance forecasts a 5% 

GDP growth rate for 2014-2017, 

while the Economic Council anticipates 

growth of about 6.6%. 4 The 

World Bank’s projection estimates 

between 5% and 6% over the next 

four years. 5 However, there has not 

been any research focusing on sectorspecific 

growth or elasticity, and in 

that respect it is unrealistic to project 

increased energy use. 

Economic growth and increased production 

capacity should involve improving 

the efficiency of household 

consumption. Georgia is an import 

dependent country, and energy efficiency 

measures would improve 

security and the energy intensity of 

GDP. However, the government has 

not adopted a national energy efficiency 

strategy, nor any programmes 

or measures to promote energy 

savings within a market oriented 

framework. 

Thus, high energy intensiveness of 

GDP and low per capita consumption 

highlights the need to: 

• Improve energy intensiveness of 

GDP and energy efficiency; 

• Build new generation capacities to 

fuel economic development which 

will be accompanied by increased 

demand on power by household sector 

too. 

Hydro Power Sector: Georgia is rich 

in hydro resources; some hydrolo- 

3. www.energycharter.com.publications /Georgia 2012. 

4. Socio-Economic Development Strategy of Georgia, “Georgia 2020”, June 2014. 

5. The World Bank, Country Partnership Strategy for Georgia FY2014-FY2017, 9 April 2014.

gists in Georgia estimate that only 

about 30% of the country’s hydro 

resources have been utilised, and 

that there is potential to produce an 

additional 22 TWh of hydro power 

per annum. Between September 

2013 and August 2014, Georgia produced 

10,494 GWh: 8,013 by hydro, 

and 2,481 by thermal power plants. 

Thermal power plants operate as 

regulating (balancing) plants. Out of 

the existing HPPs, Enguri HPP is the 

largest and operates as a regulating 

(balancing) HPP, although originally 

it was designed as peak HPP. 6 Enguri 

HPP and Vardnili HPP together produce 

about 4 bln kWh - 40% of total 

power produced in Georgia. Both are 

located beyond the Georgia/Abkhazia 

administrative border. 7 

From September 2013 to August 

2014, Georgia exported 595 million 

kWh: 170 to Russia; 279 to Turkey; 

and 73 to Armenia. It imported 782 

million kWh from Russia. For the 

first time since 2011, Georgia imported 

more power than it exported. 

Thus, unless new HPPs are not developed 

quickly, Georgia - already heavily 

dependent on natural gas and oil 

product imports - may become a net 

power importer as well. 

The Ministry of Energy of Georgia is 

fully aware of the future challenges 

that the power sector may eventually 

face. The ministry has adopted 

a hydropower development strategy 

which envisages the construction 

of new large and medium size HPPs 

on a “build/own and operate” principle, 

offering favourable conditions 

to private investors. In exchange, the 

investors must commit to supplying 

the domestic market with a certain 

amount of power during three winter 

months when there is a supply deficit 

(for an agreed price which does not 

exceed 5 cents). 

The following HPPs have been approved 

or have to be built during 

the 2013-2020 period: Khudoni 

HPP – with the installed capacity of 

750 MW and generation of 1.5 billion 

KWh; Cascade of Namakhvani 

HPPs - with the installed capacity 

of 450 MW and generation of 1670 

million KWh; Faravani HPP - with 

the installed capacity of 78 MW and 

generation of 425 million KWh; Cascade 

of HPPs on the rivers: Chorokhistkali, 

Lukhuni, Tekhura, Gubazeuli, 

Mtkvari, Bakhvistskali da etc. In total, 

there are construction agreements 

for 21 HPPs (total installed capacity 

of 1 583 MW and generation of 5.5 

billion KWh). The majority of the 

above HPPs are seasonal, except for 

Khudoni, Namakvani and some others. 

The investment requirements 

for the construction of the new HPPs 

amount to USD 2.4 billion. 8 

Khudoni, the largest HHP project, has 

an installed capacity of 750 MW and 

generation capacity of 1.5. The project 

has stalled due to objections by 

a large green movement in Georgia. 

Khudioni HPP is to be built in the upper 

part of Enguri River, higher up 

in the valley than Enguri HPP. The 

opponents of the project insist that 

a new HPP will destroy the natural 

and cultural heritage of the Svaneti 

region. The government is continuing 

to negotiate with environmental 

91 


6. Thus losing its value as peak power is more expensive than base load. 

7. Power Balance Georgia 2014, Geostat.ge 

8. Ministry of Energy, Annual Report, November 2014.


92 

activists as well as the company selected 

to develop Khudoni HPP. 

According to estimates by Georgia’s 

Co-Investment Fund, the country’s 

power demands might increase by 

40-50% by 2020 in line with forecasted 

economic growth at 5-6% 

per annum. If an additional 1583 

MW or 5.5 billion kWh is brought on 

stream by 2020 - as envisaged under 

existing plans - Georgia will have a 

surplus of power, which could be exported 

to Turkey during the summer 

months. TEIAS (Turkish State Electricity 

Transmission Company) forecasts 

that Turkey will have a power 

deficit of 82-118 TWh by 2020. 9 

Based on the above assumptions, 

the new HPPs are export-oriented, 

and target the Turkish market and 

beyond (following the opening of 

transit routes across Turkey to the 

EU). The presence of Turkish FDI in 

HPP development in Georgia reveals 

Turkey’s interest in Georgia’s hydro 

resources. 

Furthermore, the governments 

of Turkey and Georgia signed the 

Cross Border Energy Trading Agreement 

(CBETA) in January 2012. The 

CBETA sets out the terms of cross 

border trading of electricity on the 

Black Sea Transmission line, a high 

voltage direct current (HVDC) transmission 

line that connects the power 

systems of Georgia and Turkey. However, 

the parties have not yet agreed 

on the sales point; while Turkey 

wants the sales point to be located 

on the border, Georgia would like to 

have access to the Turkish Power Exchange, 

the establishment of which 

is planned for 2015. 

In the meantime, there are emerging 

questions regarding the Enguri HPP 

and Vardnili cascade. 

9. Facilitating Regional Power Trade, Fatih Kolmek, Energy Expert, EMRA-Turkish Regulatory Authority, 

Conference Materials, 13th. Georgian International Oil, Gas, Infrastructure and Energy Conference, 

26-27 March 2014, Tbilisi, Georgia.

Challenge - Enguri HPP and Vardnili 

Cascade are Located Beyond the 

Georgia Abkhazia Administrative 

Border, Preventing Access 

This entails a potential loss of almost 

40% of power generation and 25% of 

power supply to the rest of Georgia. 

Enguri HPP is the largest hydropower 

station in the entire South 

Caucasus, with an installed capacity 

of 1300 MW. It was commissioned 

in 1978 and was intended to supply 

pick power to the entire North 

and South Caucasus. Enguri HPP 

has been the major source of power 

since Georgia’s independence. Enguri 

HPP is located along the disputed 

Abkhazia administrative border; 

the water reservoir is located 

on the Georgian side and the power 

house is on the Abkhaz side. In these 

circumstances neither the Georgian 

nor the Abkhaz side can assume full 

control over Enguri HPP. Because 

both parties are invested in keeping 

it running, they have somehow managed 

to cooperate in this regard. The 

Abkhaz side previously took about 

40% of the power generated by Enguri 

HPP; about half was consumed 

domestically with the remaining 

20% exported to Russia. For a number 

of years, the Abkhaz side refused 

to pay for the power produced by Enguri 

HPP and consumed in Abkhazia 

or exported to Russia. 10 During this 

time, the cost of power generation 

was borne by the rest of Georgia. 

Problems emerged after the Russia/Georgia 

military conflict in 2008 

when the Abkhaz side insisted on 

a 50% ownership stake in Enguri 

HPP, threatening to stop it functioning. 

In order to avoid this, the Ministry 

of Energy in Tbilisi negotiated 

and signed a memo with RAO US of 

Russia on the joint management of 

Enguri HPP. The Ministry of Energy 

leadership estimated that RAO US 

would be a more reliable partner 

than the Abkhaz authorities. RAO 

US holds 75% of the shares in Tbilisi 

power distribution and 50% of high 

voltage transmission lines in Georgia. 

It was assumed RAO US would not be 

PROBLEMS EMERGED AFTER THE RUSSIA/ 

GEORGIA MILITARY CONFLICT IN 2008 WHEN THE 

ABKHAZ SIDE INSISTED ON A 50% OWNERSHIP 

STAKE IN ENGURI HPP, THREATENING TO STOP IT 

FUNCTIONING. 

interested in endangering its assets 

in the rest of Georgia over a dispute 

on Enguri HPP management. The 

Memo between the Georgian Ministry 

of Energy and RAO US on the joint 

management of Enguri HPP is a classified 

document and has never been 

published. The terms of this memo 

have become available through an 

interview with Alexander Khethaguri, 

Georgia’s Minister of Energy. 11 

Thus, as a result of the negotiations, 

the parties agreed on the joint 

management of Enguri HPP while it 

remained entirely under Georgian 

ownership. In addition, the parties 

agreed to split the Enguri HPP generation 

on a 60/40% basis. The Rus- 

93 


10. There were rumors under Shevardnadze that some officials of Georgia had been in corruption 

deal with the Abkhaz side Enguri HPP power sales and commerce, however no investigation was 

conducted so far. 

11. The author’s interview with the Minster Khethaguri in October 2009.


94 

sian side committed to pay $15 million 

for 40% of Enguri HPP power, 

which the Abkhaz side would be 

eligible to take and use. In exchange 

the Georgian side committed to allow 

Russian power transit to Turkey 

through its transmission network. 

RAU US guaranteed to fulfil its commitments 

under the memo through 

its assets in Georgia, in particular the 

capital city Tbilisi power distribution, 

energy generation units operating 

on natural gas 9 and 10, and medium 

size HPP Khrami 1 and 2. Rao 

US is also a 50% owner of Georgia’s 

high voltage 500 kW transmission 

lines. 

The terms of the memo between the 

Ministry of Energy of Georgia and 

RAO US have been termed a success 

of the Ministry of Georgia. However, 

no further steps have been taken 

to sign a legally binding agreement 

based on the principles spelled out 

in the memo. In fact, the terms of 

the memo have never been fulfilled. 

However, the Georgian and Abkhaz 

sides have continued to cooperate on 

Enguri HPP based on a verbal ‘gentlemen’s 

agreement’. Indeed, from 

2009 to 2014 the Georgian side had 

free access to Enguri HPP and the 

Namakhvani cascade through the 

Georgia/Abkhazia administrative 

border, where Russian peacekeepers 

have been stationed from 2008; 

no problems have been observed in 

this regard. 

In October 2014 it emerged that Russia 

and Abkhazia were intending to 

sign an interstate agreement on a 

close strategic partnership, including 

cooperation in economic, military 

and humanitarian spheres. Under 

this agreement, the Georgia/Abkhazia 

administrative border would 

become a state border and a joint 

Russian/Abkhaz military coalition 

would assume border control duties. 

The agreement has been under ne-

gotiation and the extent of the Russia 

–Abkhazia military cooperation 

remains unknown. However, experts 

have raised concerns over whether 

the terms of the verbal agreement on 

Enguri HPP regulation will remain in 

effect. 

The Enguri HPP and Vardnili cascade 

provide about 25% of Georgia’s 

power supply. Furthermore, they 

operate as regulating (balancing) 

entities and provide about a third of 

the base load in Georgia (except for 

Abkhazia). The revision of the existing 

verbal arrangement in terms of 

ownership or reduction of Georgia’s 

share in the generation or restriction 

of access to these facilities would 

render Georgia import dependent in 

the short and medium term, before 

the new HPPs are brought on-stream. 

Additionally, since the majority of the 

new HPPs are seasonal or peak, even 

when they are built, without Enguri 

HPP in balance, Georgia will need to 

import base load power in winter. 

In order to avoid this scenario, the 

Ministry of Energy plans to build a 

new 230 Mw capacity gas-fired thermal 

plant, as well as some coal fired 

thermal plants. As Georgia has no gas 

resources, the new 230 MW gas fired 

power plant will rely on imported 

gas, 12 while the coal fired plant will 

be working on locally produced coal. 

These facilities are expected to become 

available in 2018-2020 and 

will provide base load power. 

NATURAL GAS – INCREASING 

IMPORT DEPENDENCE 

Consumption: Georgia covers twothirds 

of its gross energy demand 

GEORGIA COVERS TWO-THIRDS OF ITS GROSS 

ENERGY DEMAND THROUGH IMPORTED 

ENERGY. 

through imported energy; this indicator 

was over 65% in 2012. During 

2010-2013, natural gas has provided 

a rapidly increasing proportion of 

Georgia’s primary energy supply. 

Georgia’s dependence on imported 

natural gas grew by 58% in 2011, 

reaching 41% of the country’s total 

primary energy supply. In 2013, 

Georgia consumed approximately 2 

bcm of natural gas. Natural gas represents 

a 25-30% share of power 

generation. 

Georgia’s natural gas sector is growing 

rapidly in the rural areas of the 

country, where currently it is mainly 

used for cooking. Under existing 

market regulations, few entities 

have been allowed to trade at the 

wholesale level. According to the 

“Main Directives of State Policy in the 

Power Sector”, adopted by the Parliament 

of Georgia in 2006, the natural 

gas market is to be fully opened by 

December 31, 2017 and all consumers 

and all new sources of natural 

gas are to be liberalized. Existing gas 

purchase agreements are exempt. 

GAS SUPPLY 

Challenge- Long Term (10-12 

years) Contracts with Limited 

Volumes of Gas 

Georgia is surrounded by natural 

gas producer/exporter counties: 

Russia, Iran, Azerbaijan, Kazakhstan 

95 




96 

and Turkmenistan. However, due to 

geopolitical complications, Georgia’s 

natural gas demand is met entirely 

through imports from Azerbaijan. 

Georgia receives natural gas from 

three different sources: 

• Optional and supplemental gas supplied 

by the Shah Deniz consortium 

through the South Caucasus Pipeline 

(SCP), under long term supply contracts 

where supplemental gas will 

be available for Georgia up to 2025, 

while optional gas will be available 

during the lifetime of Host Government 

Agreements with Shah Deniz 

and the South Caucasus Pipeline 

consortium. 

• From SOCAR’s own production 

from various fields in Azerbaijan, under 

a long term gas supply contract 

valid until 2028; 

• Gas for transit of Russian gas to 

Armenia. 

It is assumed that the above three 

sources of gas supplies provide for 

Figure 4: Gas Supply Demand in Georgia 

Georgia’s short and medium term 

gas supply security. However, the 

above contracts are subject to volume 

limitations, with the exception 

of supplies of optional gas provided 

Shah Deniz Consortium by SOCAR. 

The contract with the Shah Deniz 

consortium provides for the supply 

of 5% of optional gas transported 

from Azerbaijan to Turkey through 

the South Caucasus gas pipeline 

(minimum 4.7 maximum 6.6 bcm 

per annum) and maximum of 500 

million cubic metres of gas 13 as 

supplemental gas. Georgia is eligible 

to receive 10% of Russian gas 

transported to Armenia through 

the North-South gas pipeline, which 

never exceeds 2 bcm per annum, so 

Georgia receives a maximum of 200 

million cubic metres of Russian gas 

per annum. Any incremental demand 

is met by supplies of SOCAR’s 

own production in Azerbaijan. As 

the transit of Azerbaijani gas to Turkey 

has never exceeded 5 bcm per 

Source: Georgian Oil and Gas Corporation 

13. This gas is priced at about $60 escalating to $65 per thousand m3- HGA with Shak Deniz 

Consortium.

annum, Georgia receives about 250 

million cubic metres of optional gas 

per annum. In 2013 gas consumption 

in Georgia was slightly over 2 

bcm, of which about 950 million cubic 

metres was supplied by the Shah 

Deniz consortium and Gasexport for 

Russian gas transit to Armenia, while 

the remaining 1.1 bcm was covered 

by SOCAR. 14 

Currently, the gas supply structure 

outlined above allows Georgia to 

maintain a relatively moderate price 

for gas, which stands at 445 GEL 

(about $250) per 1000 cubic metres 

for households, and at about 0.05 

GEL per KWh for power generation. 

According to some estimates, economic 

growth will cause gas consumption 

in Georgia to increase, possibly 

up to between 3 and 3.5 billion 

cubic metres by 2025. By this point, 

some parts of the contract with the 

Shah Deniz consortium will have expired 

(eligibility for supplemental 

gas –maximum 500 million cubic 

metres), and Georgia may not be 

eligible for optional gas – gas in kind 

collected for Azerbaijani gas transit 

to Turkey, nor Russian gas transit to 

Armenia (under third energy package 

the gas transit is cost based). 

rent geopolitical conditions change 

dramatically. 

Distribution: There are two major 

distribution companies in Georgia: 

SOCAR, which provides gas to 

the whole of Georgia and manages 

distribution in the regions; and 

Kaztrangas, which is the distributor 

in the capital city of Tbilisi. Kaztransgas 

also depends on SOCAR’s 

gas supplies. SOCAR supplies gas to 

commercial entities too. Thus, SO- 

CAR, the Azerbaijani State Oil Company, 

is not only the largest supplier 

of gas but also a distributor and 

wholesaler on Georgia’s domestic 

gas market. 

SOCAR in Georgia - Georgia remains 

one of the most important strategic 

partners to Azerbaijan and the two 

countries continue to enjoy a mutually 

beneficial political, economic 

and social relationship. 

SOCAR - the State Oil and Gas Company 

of Azerbaijan launched its foreign 

investment activity in Georgia 

in 2007 and since then has invested 

approximately USD 870 million in 

the Georgian economy via its subsidiaries, 

and paid over USD 660 million 

in taxes. 15 

97 


By that time, gas supplies to Georgia 

may become commercial, which 

means that the domestic gas supply 

tariffs will increase unless the market 

is opened for competition, and 

various suppliers including Iran, Kazakhstan, 

Russia and Turkmenistan 

make gas supplies available. This 

will not happen indeed unless cur- 

Today, SOCAR’s operations in Georgia 

include the distribution of oil and 

gas products, management of energy 

transit related infrastructure (BTC & 

BTE) and logistics (BST), and social 

projects. Over the last three years 

SOCAR has enjoyed a leading position 

in terms of volume of investments, 

taxes paid to the Georgian 

14. www.geostat.ge 

15. Afgan Isaev, Presentation “SOCAR -Investing in Oil & Gas Infrastructure in Georgia” The 12th 

Georgian International Oil, Gas, Infrastructure & Energy Conference, 26 March 2013 Tbilisi, Georgia.

Figure 5: Car Conversion from Petroleum to Natural Gas in 2010-2014 


98 

Source: USAID’s survey of dynamics in gas sector development 

budget, and number of jobs created 

(5000). 

SOCAR in Transportation - In recent 

years the natural gas sector has been 

expanded to transportation; natural 

gas stations for cars are being developed. 

USAID’s survey of gas sector 

development shows that the rate 

of car conversion from petroleum 

to natural gas is increasing (Figure 

3). The increase of gas consumption 

has been instrumental in Georgia’s 

increasing overdependence on 

imports. 

Challenge – High Seasonality of 

Demand, Need for Gas Storage 

Due to the county’s seasonal-based 

demand for heating in winter and 

the lower levels of generation from 

run-of-river HPP’s, natural gas import 

levels during winter are comparatively 

high. However, the terms 

and conditions of the long-term contract 

with gas suppliers (Shah Deniz 

Consortium) do not provide for balancing 

seasonal supply and demand. 

In addition, Georgia has no gas storage 

to ensure a seasonal supply/demand 

balance. 

In response to this problem, the 

GOGC/SOCAR contract on gas supply 

provides for SOCAR’s use by of its 

gas storage in Azerbaijan, in order to 

balance the seasonality of gas supply/demand 

in Georgia. Experts at 

GOGC highlight the need for Georgia 

to build gas storage with a capacity 

of 200 million cubic metres in order 

to enhance its energy security. GOGC 

has been seeking investors for gas 

storage construction in Georgia. 

RENEWABLES – BIOMASS 

Challenge – Excessive Use 

of Firewood and Threat of 

Deforestation 

Biomass is the second largest energy 

source produced domestically in 

Georgia. Out of local sources of energy, 

hydro resources comprise 15%,

wood 13% and coal 6% of the total 

balance. While there have been some 

initiatives to develop wind power, 

new renewable resources like solar, 

wind and geothermal remain largely 

underdeveloped. 

Figure 6: Average annual use of firewood by a household in Georgia 

USAID’s energy end-use survey 

developed by AYPEG showed that 

across Georgia, 57% of households 

use firewood year round for water 

heating, space heating and/or 

cooking purposes. According to the 

same survey, 97% of rural settlements 

consume firewood. The study 

revealed that wood consumption is 

five times higher than indicated in 

official statistics from the National 

Statistics Office of Georgia. In the 

absence of any initiative to plant fast 

growing poplar plantations, such 

extensive use of firewood will eventually 

result in deforestation. 16 Deforestation 

has been observed in a 

number of areas in south-east Georgia, 

namely Dedoflistskaro. 

The reason for this is the lack of a 

legal and sustainable forest management 

programme. If the current 

firewood practices are maintained, 

the supply of wood will gradually 

decline and result in shortages in the 

regions. The survey also showed that 

the public awareness of efficient use 

of wood is very limited. 

The Ministry of Energy of Georgia is 

aware of wasteful use of firewood 

and has initiated a project on the 

gasification of rural areas, where 

wood is primarily used for space 

heating and cooking purposes. The 

Ministry hoped that gasification 

would help to reduce firewood use. 

SOCAR - the main supplier of gas in 

the regions - has been engaged in 

the gradual gasification of villages in 

Georgia. 

The project started in 2011, and in 

2013, 50 million GEL invested in the 

project. As a result, 65% of households 

have been provided with access 

to pipeline gas. 17 However, no 

99 


16. Caucasus Environmental NGO Network (CENN). 



100 

significant improvement in the use 

of firewood has been observed. Due 

to low purchase capacity in the regions, 

the population is continuing 

to use cheap or free firewood rather 

than pipeline gas, which remains 

relatively expensive. 

CONCLUSIONS 

• Short and medium term energy security 

targets are being met, but the 

sector remains vulnerable to internal 

as well as regional geopolitical 

challenges; 

• Power and gas demand forecasts 

remain unreliable, as there is no 

available research on projected sector-specific 

growth or elasticity. The 

absence of accurate demand forecasts 

makes it impossible to project 

future energy use growth; 

• There is a need for a clearly defined 

energy efficiency strategy in order to 

improve the energy intensiveness of 

GDP; 

• There is a need for a forest management 

action plan to prevent further 

deforestation. 

The Ministry of Energy of Georgia 

has been working on long term energy 

security strategy in line with 

the country’s commitments under 

the EU Association Agreement and 

the EC full membership agreement 

(underway). The implementation of 

the Third Energy Package under the 

latter requires ownership unbundling, 

guaranteed third party access 

to regional transportation networks, 

and cost based transit of natural gas. 

These all create new challenges for 

Georgia’s energy sector. The Ministry 

of Energy must create the terms and 

conditions for building a modern, 

secure, stable and resilient national 

energy sector.

REFERENCES 

www.menr.ge 

www.esco.ge 

www.geostat.ge 

www.gogc.ge 

www.socar.ge 

www.iea.org/publications/Key 

World Energy Statistics 2014 

www.energycharter.org/publications/Georgia 

2012 

Ministry of Energy, Annual Report, 

November 2013 

Ministry of Energy, Annual Report, 

November 2014 

Socio-Economic Development Strategy 

of Georgia, “Georgia 2020”, Government 

of Georgia, June 2014. 

Energy Strategy for Georgia (2015- 

2018), USAID, Hydro Power and Energy 

Planning Project, Produced by 

Deloitte, July 2014. 

The Cross Border Energy Trading 

Agreement (CBETA) between the 

Governments of Turkey and Georgia 

signed in January 2012. 

Afgan Isaev, Presentation “SOCAR 

-Investing in Oil & Gas Infrastructure 

in Georgia” Conference Materials, 

the 12 th Georgian International Oil, 

Gas, Infrastructure & Energy Conference, 

26 March 2013, Tbilisi, Georgia. 

101 



102 

FOREIGN POLICY OF 

AZERBAIJAN: ADEQUACY 

AND PREDICTABILITY 


HANKUK UNIVERSITY OF FOREIGN STUDIES

The current international system is the 

product of its main actors: nation states. 

But these states have varying degrees of 

impact in terms of enacting changes within 

the system. Although all nation states are 

legal equals, they have significantly different 

political and economic potential. 

INTRODUCTION: THE FOREIGN 

POLICY OF SMALL POWERS 

IN THE CONTEMPORARY 

INTERNATIONAL SYSTEM 

The current international system is 

the product of its main actors: nation 

states. But these states have 

varying degrees of impact in terms 

of enacting changes within the system. 

Although all nation states are 

legal equals, they have significantly 

different political and economic 

potential. Along with the big powers 

that determine the nature of the 

system, there are many small powers 

whose influence is either negligible 

or limited to their specific 

region. 

It is worth noting that the modern 

international system, formed after 

1945, guarantees the availability of 

all existing states. The disappearance 

of any state from the world 

map is only possible if there is 

agreement among its constituent 

parts. This is how the Soviet Union, 

Yugoslavia, Czechoslovakia, and 

Sudan, for instance, ceased to exist. 

Furthermore, despite the fact that 

the modern system of international 

relations is based on the de jure recognition 

of the territorial integrity 

of all nation states, this is not always 

de facto guaranteed. 

In addition to losing control over 

parts of their territory, small states 

or powers are often compelled to 

limit or delegate their sovereign 

rights, either voluntarily or by forcibly, 

even if maintain their territorial 

integrity. In fact, the relinquishment 

of rights is not always negative process: 

usually, voluntary delegation 

of sovereignty takes place with the 

aim of securing other national interests. 

Quite often this occurs in order 

to protect national interests. 

As a result, the main focus of small 

powers in today`s world is not so 

much the struggle to survive, but 

rather to maintain a favourable status 

quo. This may entail the protection 

of territorial integrity and /or 

the preservation of sovereignty. 

103 



104 

Small powers are more heavily dependent 

on the systemic factors 

that influence the formation of foreign 

policy. Their room for manoeuvre 

is very narrow, and the wrong 

actions can lead to catastrophic 

consequences. Achieving key national 

objectives will depend on 

the ability to act in an appropriate 

and timely manner, in accordance 

with the particular geopolitical and 

geo-economic conditions, and with 

regard to emerging external events. 

It is crucial for governments to correctly 

assess national capacity, and 

to act in accordance with those 

capabilities. 

At the same time, it is worth noting 

that in a bipolar system, small and 

medium-sized powers have much 

greater scope for manoeuvre than 

in a unipolar system. In a unipolar 

system, small powers must reckon 

with the aims of the “super state”. In 

this regard it is important to note 

that although the United States is 

the world’s only superpower, its 

influence has not spread equally all 

over the world. 

THE FORMATION OF NEW 

RELATIONSHIPS BETWEEN THE 

MAIN ACTORS AND THE NEW 

INDEPENDENT STATES (NIS) 

SINCE 1991 

As a result, there are regions where 

the influence of Western states is 

less noticeable. Thus, almost the 

whole post-Soviet region (with the 

exception of the three Baltic States: 

Lithuania, Latvia and Estonia) is 

seen as Russia’s sphere of interest. 

Following the dissolution of 

the Soviet Union in 1991, the West 

sought to build a relationship with 

Russia whereby Moscow would not 

feel insecure due to the collapse of 

its empire. Thus Russia retained its 

influence over the former Soviet 

republics. In February 1993, Russia 

announced a new foreign policy 

doctrine towards the former Soviet 

republics - the “near abroad policy”, 

declaring this region as its “sphere 

of interest”. This entailed Moscow’s 

responsibility for the fates of 

twenty-five million of compatriots 

(mainly Russians) who remained 

outside of its borders following the 

disintegration of the Soviet Union, 

and who are living as minorities in 

the NIS. 1 

Russia’s position and expectations 

were accepted by the West. The 

parties had reached a kind of gentleman’s 

agreement, according to 

which the countries of the former 

Eastern Bloc (Central and Eastern 

Europe Countries (CEEC)), were released 

from Russian influence and 

military control. Immediately, these 

states proclaimed the “return to Europe” 

as their main foreign policy 

goal and expressed interest in joining 

the Euro-Atlantic structures. 

This interest was greeted enthusiastically 

in the West, which started to 

provide assistance to the CEEC for 

their transition to democracy and 

for full integration into NATO and 

the newly created (1992) EU. 2 

1. Pami Aalto, Post-Soviet Geopolitics in the North of Europe, Post-Cold War Identity Politics: 

Northern and Baltic Experiences, edited by Marco Lehti, David J. Smith, Frank Cass Publishers, 

Portland, Oregon, 2005, p. 253. 

2. Frank Schimmelfennig, The EU, NATO and the Integration of Europe, Rules and Rhetoric, 

Cambridge University Press, 2003, p. 164.

As for the NIS, relations between 

Euro-Atlantic structures and the 

former Soviet republics were 

geared around Russia. Thus, during 

the Clinton administration, the 

main architect of the policy toward 

the former Soviet republics was 

Ambassador-at-Large and Special 

Adviser to the Secretary of State 

Warren Christopher on the NIS 

Strobe Talbott. His proposed policy, 

was termed a “Russia first” policy, 

under which Russia was considered 

the main partner and the interests 

of NIS were completely ignored. 3 

Talbott believed that this approach 

would contribute to the success of 

liberal reforms in Russia, which in 

turn would promote reforms in the 

former Soviet republics. 

As a result, the West was fairly 

passive in terms of building relations 

with the NIS, not wishing to 

be bound by any responsibilities. 

The programs that were proposed 

for the NIS had very limited objectives. 

For instance, it was not until 

1994 that NATO developed a new 

Partnership for Peace (PfP)-programme, 

involving practical bilateral 

cooperation with individual 

Euro-Atlantic partner countries. 

The programme supports reforms 

in the partner countries through 

a mix of policies, programmes, action 

plans and other arrangements, 

without full membership perspectives. 

4 The EU, which built its relationship 

with the NIS through the 

TACIS programme, only developed 

a legal framework for cooperation 

with these countries in 1996: Partnership 

and Cooperation Agreement 

(PCA). The main goal of the 

PCA is to strengthen democracies 

and economies through coopera- 

105 


3. Abram Chayes, Lara Olson & Georg Raah, The Development of U.S. Policy Toward the Former 

Soviet Union, Managing Conflict in the Former Soviet Union: Russian and American Perspectives, 

editors, Alexey Arbatov, Abram Chayes, Antonia Handler Chayes, Lara Olson, Harvard University, 

1997, p. 512. 

4. Partnership for Peace (Partnership Tools), 13.11.2014, http://www.nato.int/cps/en/natohq/ 

topics_80925.htm.


106 

tion with partner states in different 

areas via political dialogue. 5 

IN JOINING THE INTERNATIONAL SYSTEM, 

AZERBAIJAN ANNOUNCED WESTERN VALUES 

AS THE BASIS OF ITS CONSTITUTIONAL 

PRINCIPLES. 

As with the PfP, PCA did not provide 

the EU membership prospects for 

these countries. Limited technical 

assistance without the offer of conditional 

membership to the Euro-Atlantic 

structures (as with the CEEC) 

failed to yield the expected results. 

Over time, the difference between 

CEEC and NIS in implementing reforms 

has become more apparent. 

AZERBAIJAN: THE BEGINNING OF 

POST-INDEPENDENCE FOREIGN 

POLICY FORMATION 

As mentioned above, the collapse 

of the Eastern Bloc and the Soviet 

Union marked the unconditional 

victory of the West and its values: 

multi-party democracy, human 

rights and free market economy. 

The US became the only superpower, 

causing the international system to 

transition from a bipolar to a unipolar 

structure. The emergence of a 

unipolar world was accompanied by 

the appearance of about two dozen 

new states, due to the collapse of 

the Soviet Union, Yugoslavia and 

Czechoslovakia. 

One of the NIS that gained independence 

in 1991 was Azerbaijan. 

In joining the international system, 

Azerbaijan announced Western values 

as the basis of its constitutional 

principles. 6 The country hoped that 

the transition period would see the 

necessary external assistance, and 

that it would eventually become 

a wealthy member of the international 

community. As a new state, 

it was not able to accept all of the 

features of the international system 

and the full support of the West 

was seen as necessary. However, 

like the other NIS, Azerbaijan did 

not receive the expected response: 

it did not received the necessary 

support from the West in order to 

strengthen its statehood and successfully 

implementation reforms 

in the transition period, as had been 

the case with the CEEC. In general, 

Azerbaijan was alone in tackling the 

political and economic problems 

inherited from the Soviet Union. 

The situation deteriorated due to 

political instability and economic 

collapse. In the period between 

1991 and 1993, three different governments, 

with polarised views on 

domestic and foreign policy, held 

power in Azerbaijan. This seriously 

damaged attempts to create stability 

and order. 

The situation was aggravated by 

the emerging problem of Armenian 

separatists in Nagorno-Karabakh, 

who demanded unification with Armenia. 

This confrontation, inherited 

5. Partnership and Cooperation Agreements (PCAs): Russia, Eastern Europe, the Southern Caucasus 

and Central Asia, http://europa.eu/legislation_summaries/external_relations/relations_with_ 

third_countries/eastern_europe_and_central_asia/r17002_en.htm.4. Partnership for Peace 

(Partnership Tools), 13.11.2014, http://www.nato.int/cps/en/natohq/topics_80925.htm. 

6. The Constitutional Act on the State Independence of the Republic of Azerbaijan, 18.10.1991, 

http://azerbaijan.az/portal/History/HistDocs/Documents/en/09.pdf.

from the Soviet Union, escalated 

into war. As a result, Nagorno Karabakh 

and its seven adjacent regions 

are occupied by Armenia. Armenia’s 

military gains were due to Yerevan’s 

loyalty to the regional leader – Russia 

- in contrast to Azerbaijan, where 

the Popular Front government was 

in power (March 1992-June 1993). 

This party was known for its anti- 

Russian and pro-Western (through 

close relations with Turkey) foreign 

policy. 7 Russia also wanted to maintain 

the desired status quo in the 

region: a balance between Azerbaijan 

and Armenia. Given that Azerbaijan 

has much greater potential 

than Armenia, and that the Popular 

Front government was anti-Russian 

and pro-Turkish, Russia began to 

provide greater assistance to Armenia. 

Russia also started to view 

the relationship between the two 

South Caucasian countries through 

the Armenian lens. This approach 

continued even after the change of 

government in Azerbaijan. Despite 

the fact that Azerbaijan has taken a 

more constructive position towards 

Russia, there has been no major 

change in its foreign policy. 

Russia had unlimited influence on 

the developments in the region. 

With geopolitical interests in the 

South Caucasus, Russia sought to 

prevent attempts by regional countries 

to build closer ties with the 

Euro-Atlantic sphere. Given the lack 

of interest of the West in the region, 

Russia has not encountered much 

difficulty in controlling the situation. 

As mentioned previously, Russia 

declared its “near abroad policy” 

over the former Soviet republics, 

and sought to maintain its influence 

over this region. Adopted in February 

1993, this policy became known 

as “Russia`s Monroe Doctrine “. 8 

107 


7. Emmanuel Karagiannis, Energy and Security in the Caucasus, 2002, RoutledgeCurzon, London, pp. 

112-113. 

8. Michael Slobodchikoff, Russia’s Monroe Doctrine just worked in Ukraine, 21.11.2013, 

http://www.russia-direct.org/opinion/russia%E2%80%99s-monroe-doctrine-just-worked-ukraine.


108 

THE ENERGY FACTOR IN AZER- 

BAIJANI FOREIGN POLICY: GAME 

CHANGER 

It was only after Heydar Aliyev, a 

veteran of the Soviet infrastructure 

came to power that Azerbaijan gradually 

managed to regain political 

leverage, and began to apply a balanced 

policy. Aliyev made attempts 

towards rapprochement with Russia, 

but this did not change Russia’s 

perception of the balance of power 

in the region, formed under the Popular 

Front. In addition, tensions between 

the two countries continued. 

Aliyev clearly understood that the 

resolution of the Nagorno Karabakh 

problem entails multiple internal 

and external factors. As for external 

factors, the involvement of different 

actors to decrease Russia’s influence 

in the region was needed in 

order to resolve the Nagorno Karabakh 

conflict and strengthen state 

independence. For this purpose, it 

was first of all necessary to achieve 

stability in the country. At the beginning, 

it was necessary to end 

the military confrontation with Armenia, 

which brought losses rather 

than gains. Thus, in May 5 1994, the 

conflict parties signed a ceasefire 

(the Bishkek Protocol). 9 

However, the occupation of Azerbaijani 

territories continues to this 

day. The main reason for this is 

the geopolitical interests of third 

countries (primarily Russia) in the 

South Caucasus, and the desire to 

maintain the post-ceasefire status 

quo. Aliyev realised that in order 

to achieve political balance, it was 

necessary to change the perceptions 

and attitudes of the Western 

states towards Azerbaijan. To this 

end, it was important to deploy 

Azerbaijan’s trump card – its energy 

resources. Attracting Western energy 

companies to operate oil fields 

was seen as a way to changing the 

foreign policy priorities of Western 

governments. 10 

This perception was not groundless. 

There are many examples of how 

energy companies’ involvement led 

to foreign policy changes in their respective 

countries. 

In fairness, it should be noted that 

the post-independence Mutalibov 

and Elchibey governments also 

tried to attract foreign companies 

to sign contracts to develop national 

energy deposits. However, Mutalibov’s 

attempts made to sign oil 

agreements with Western companies 

led to his resignation on March 

6, 1992, after the Armenian armed 

forces with the support of the 366th 

infantry regiment of the former 

Soviet army staged a massacre in 

Azerbaijani city of Khojaly (25-26 

February 1992). As a result of the 

bloody attack, more than 600 civilians 

were killed, hundreds were injured 

and maimed, hundreds more 

were missing. 11 The next Elchibey 

government fell following a coup 

led by the self-styled Colonel Suret 

Huseynov in Ganja, backed by Russian 

support. 12 A few days before 

9. Karabakh, Official site of the President of the Republic of Azerbaijan, http://en.president.az/ 

azerbaijan/karabakh/. 

10. Rovshan Ibrahimov, Azerbaijan`s Energy History and Policy: From Past Till Our Days, Energy and 

Azerbaijan: History, Strategy and Cooperation, edited by Rovshan Ibrahimov, Baku, SAM, 2013, p. 18. 

11. Swante E. Cornell, Azerbaijan Since Independence, M.E. Sharpe, New York, 2011, p. 63. 

12. Thomas De Waal, The Caucasus: An Introduction, Oxford University Press, 2010, pp. 117-118.

the unrest, the Russian 104th infantry 

regiment stationed in Ganja left 

the city six months ahead of schedule, 

leaving all of their weaponry 

and equipment. 13 The main mistake 

of these two presidents was that 

they failed to accurately assess the 

realities of the international situation 

and ignored Russian interests. 

As a result, both presidents not only 

failed to sign energy contracts, but 

also fell from power. 

Heydar Aliyev learned from the 

unfortunate experiences of his predecessors 

and along with foreign 

companies he also invited the Russian 

energy company Lukoil to sign 

a contract. Although some groups 

in the Russian government opposed 

this, Azerbaijan succeeded in reaching 

an agreement with this company. 

As a result, on 20 September 

1994 the “Contract of the Century” 

on the development of the Azeri- 

IT WAS IMPORTANT TO DEPLOY 

AZERBAIJAN’S TRUMP CARD – ITS ENERGY 

RESOURCES. 

Chirag-Guneshli offshore oil fields 

was signed in Baku. This marked 

a major success for Azerbaijani 

diplomacy. In addition, Aliyev enlisted 

the support of Russian Prime 

Minister Viktor Chernomyrdin and 

Energy Minister Yuri Shafrannik. 

Notwithstanding the signing of the 

contract, the situation in Azerbaijan 

remained critical. Suret Huseinov, 

Prime Minister of Azerbaijan, rebelled 

against President Aliyev with 

Russian support. Aliyev appealed to 

the people via a national television 

broadcast to prevent another state 

coup d’état. Thousands of people 

gathered around the presidential 

palace, forming a human shield. 

Thanks to this display of public support, 

another coup was averted. 14 

109 


13. Swante E. Cornell, ibid, p. 63. 

14. Swante E. Cornell, ibid, pp. 85-86.


110 

The signing of the “Contract of the 

Century” and the involvement of 

Western energy companies in the 

exploitation of oil fields formed the 

basis of Baku’s balanced foreign 

policy. As expected, the Western nations 

and institutions began to engage 

in Azerbaijan. The US played a 

very significant role in this regard, 

playing an active role in reducing 

Russian influence in the implementation 

of the energy projects in 

Azerbaijan. The participation of the 

Western energy companies in the 

exploitation was only the first step 

in the transformation of regional 

geopolitics, whereby Azerbaijan 

would strengthen its independence. 

In order to achieve this goal, it was 

necessary to build alternative transport 

corridors to export Azerbaijani 

oil to world markets. Azerbaijan’s 

desire to diversify transport corridors 

coincided with Western interests. 

The Clinton Administration 

was actively involved in determining 

the export route for the “early 

oil” from the Azeri-Chirag-Guneshli 

oil field. This “early oil” was the 

crude oil produced at the Azeri- 

Chirag-Guneshli oil fields, which 

did not require additional infrastructure 

for exploitation. It was exported 

at the end of the 1990s, before 

the main exploitation began. 15 

There were two options for the 

exportation of the “early oil”: the 

Baku-Novorossiysk pipeline and 

the Baku-Supsa pipeline. Both 

pipelines link the Azeri-Chirag- 

Guneshli oil field with the Russian 

and Georgian ports in the Black 

Sea via the Sangachal terminal on 

the Caspian Sea. While most of the 

Baku-Novorossiysk pipeline was 

already in place, the Baku-Supsa 

pipeline still had to be constructed. 

From these two ports Azerbaijani 

oil would be transported via tanker 

through Turkish straits to the Mediterranean 

Sea, and then onto world 

markets. There was no doubt that 

the .S Administration was interested 

in transporting oil through 

a Georgian corridor for bypassing 

Russia, thereby diversifying oil 

routes and reducing dependence on 

a single country. In October 1995, 

President Clinton sent a private 

letter to President Aliyev with the 

former adviser on national security, 

Zbigniew Brzezinski, expressing 

US support for the construction 

of the Baku-Supsa pipeline. 16 As a 

result of this active participation 

and the reluctance of Azerbaijan to 

complicate relations with Russia, a 

decision was made to use both corridors 

for the export of the “early 

oil”. This was a significant event: for 

the first time in the post-Soviet era, 

one of the republics had gained access 

to European markets without 

crossing Russian territory. 17 With 

political support from the US, the 

Baku-Tbilisi-Ceyhan oil pipeline 

(which crosses through the territories 

of Georgia and Turkey to the 

Mediterranean Sea) was chosen as 

main transport corridor for exporting 

Azerbaijani offshore oil. The US 

provided a guarantee in order to ensure 

the project’s implementation 

15. Rovshan Ibrahimov, Azerbaijan`s Energy History and Policy: From Past Till Our Days, ibid, p. 32. 

16. Rovshan Ibrahimov, U.S. – Azerbaijan Relations: A View from Baku, Rethink Paper No 17, Rethink 

Institute, Washington DC, October, 2014, p.8. 

17. Rovshan Ibrahimov, Azerbaijan Energy Strategy and the Importance of the Diversification of 

Exported Transport Routes, Journal of Qafqaz University, No 29, 2010, p. 26.

and mitigate potential geopolitical 

challenges and risks. 18 

On July 13 2006 the Baku-Tbilisi- 

Ceyhan oil pipeline was officially 

opened for operation. It has had an 

overwhelming geopolitical and geoeconomic 

impact. Azerbaijani foreign 

policy began to aim at reducing 

unwanted influence by medium 

and big powers with interests in the 

South Caucasus. Azerbaijan became 

a dominant power in the region; 

nowadays, it is impossible to implement 

any regional projects without 

Baku’s involvement. Armenia, however, 

has been alienated from all regional 

projects, now an outcast. 

RELATIONS WITH EURO- 

ATLANTIC STRUCTURE: FROM 

EUPHORIA TO PRAGMATISM 

The development of Azerbaijan’s 

energy strategy coincided with the 

pursuit of relations with the Euro- 

Atlantic institutions. As noted above, 

in 1994, NATO launched a new PfP 

program for cooperation between 

European countries and the former 

Soviet republics of the Caucasus and 

Central Asia. The program ensures 

cooperation between the Alliance 

and partner countries in areas such 

as training, exercises, disaster planning 

and response, science and environmental 

issues, professionalization, 

policy planning, and relations 

with civilian government. On May 4, 

1994, Azerbaijan signed an agreement 

with NATO, becoming the second 

country after Austria (in total, 

34 countries participated). 

Azerbaijan’s active participation 

and interest reflected Baku’s perceptions 

of international politics 

in the early 1990s. In the country 

there was euphoria at based on the 

belief that NATO had changed its 

policy towards NIS and intended 

to provide for closer integration. 

Azerbaijan believed that full membership 

in the organization would 

ensue. This was not an unreasonable 

view; there was precedent. 

The program had also included the 

CEEC, for which the West had more 

specific targets: full integration into 

the Euro-Atlantic structures. In the 

1999 -2009 period, the 12 countries 

in the region, formerly partners in 

111 


18. Rovshan Ibrahimov, U.S. – Azerbaijan Relations: A View from Baku, ibid, p.9.


112 

AZERBAIJAN’S STRATEGY REMAINED 

CONSISTENT: BALANCE BETWEEN 

DELEGATION OF POLITICAL AND ECONOMIC 

INDEPENDENCE AND EXPECTED BENEFITS. 

the PfP, became full members of 

NATO. However, the expectations 

of Azerbaijan and other post-Soviet 

states were not met. It became increasingly 

evident that the PfP program 

had two main goals: preparation 

of CEEC for membership and 

retention of the former Soviet Union 

countries (including Russia) in 

the Alliance’s orbit. 

An even clearer indicator is the relationship 

between the EU and the 

former Eastern Bloc states. The 

EU originally developed different 

programs for the CEEC and the former 

Soviet republics. For the CEEC, 

the EU initially built relationships 

based on achieving full integration, 

19 while relations with NIS 

were limited to technical and financial 

assistance. 20 Subsequently, the 

EU developed a new legal instrument, 

the PCA, which formed the 

basis for relations between the EU 

and the NIS. 21 Azerbaijan signed 

the PCA in on 22 April 1996 in Luxembourg, 

together with the other 

South Caucasus republics (Georgia 

and Armenia). In signing the 

PCA, Azerbaijan clearly understood 

that this document should not be 

regarded as a step towards full integration 

with the EU. Azerbaijan’s 

interest in signing such a document 

was aimed at deepening relations 

with the EU, which have been seen 

as a means of developing its balancing 

foreign policy. Azerbaijan did 

not want to pursue integration with 

the same fervour as its neighbours 

in the region (especially Armenia). 

As a consequence, relations with 

NATO and the EU were based on the 

willingness of those organizations 

to take more concrete steps. 

There are several reasons for this. 

First of all, Azerbaijan, in accordance 

with its balanced foreign 

policy, did not want to develop relationships 

under which the tone 

would be imposed by one of these 

two structures. Baku sought, equal 

relations based on mutual interests. 

Neither the NATO nor the EU was 

ready to provide full membership 

for Azerbaijan. This was evidenced 

by the refusal of the Georgian and 

Ukrainian applications for recognition 

as candidates for NATO membership 

at the Bucharest Summit 

in April 2008. 22 Azerbaijan did not 

believe that it would benefit sufficiently 

from delegating its political 

and economic sovereignty to these 

structures. Azerbaijan’s approach 

has also included the implementation 

of programmes proposed by 

19. Rovshan Ibrahimov, EU External Policy Towards the South Caucasus: How Far is it From 

Realization?, SAM, Baku, 2014, p. 30. 

20. Rovshan Ibrahimov, EU External Policy Towards the South Caucasus: How Far is it From 

Realization?, ibid, p. 87. 

21. Partnership and Cooperation Agreements (PCAs): Russia, Eastern Europe, the Southern 

Caucasus and Central Asia,http://europa.eu/legislation_summaries/external_relations/ 

relations_with_third_countries/eastern_europe_and_central_asia/r17002_en.htm. 

22. Bucharest Summit Declaration Issued by the Heads of State and Government Participating in the 

Meeting of the North Atlantic Council in Bucharest on 3 April 2008, http://www.nato.int/cps/en/ 

natolive/official_texts_8443.htm.

the EU and NATO, namely the NATO 

Individual Partnership Action Plan 

and the EU Eastern Partnership, 

which Azerbaijan joined in 2008. 

Despite the fact that both organisations 

proposed closer cooperation 

within the framework of these 

programmes, Azerbaijan’s strategy 

remained consistent: balance between 

delegation of political and 

economic independence and expected 

benefits. 

The second factor is the effect of 

Azerbaijan relations with Euro- 

Atlantic structures upon relations 

with Russia. Delegation of sovereign 

rights is also relevant here. Azerbaijan 

is not ready to spoil relations 

with Russia due to vague benefits 

promised through relations with 

these Euro-Atlantic structures. As 

stated earlier, Russia considers NIS 

as its near abroad and is very sensitive 

about any external “infiltration”. 

It should be noted that the reluctance 

of NATO and the EU to offer 

full membership of NIS also stems 

from the fact that these structures 

are not willing to deal directly with 

Russia. The ultimate goal of these 

organisations in their relations with 

the NIS is to create a buffer zone 

with Russia. This zone is comprised 

of the partner states of the Eastern 

Partnership: Ukraine, Moldova, Belarus, 

Azerbaijan, Georgia and Armenia. 

The situation is aggravated 

by the fact that that some of the 

Eastern Partnership countries see 

this programme as a step towards 

full integration. This entailed high 

costs for Georgia, Ukraine and Moldova 

– the countries most actively 

participating in the Eastern Partnership. 

As a result, all three countries 

saw relations with Russia deteriorate 

to varying degrees. 

Moldova, the smallest among these 

three states, suffered when it lost 

its traditional export market for 

113 



114 

wine, fruit, vegetables and meat. 

Additionally, Russia has threatened 

to cut off energy supplies and prevent 

Moldova`s migrant workers 

from entering Russia, which would 

have a negative impact on the welfare 

of Moldovan citizens, for whom 

remittances comprise a significant 

portion of income. 23 In turn, Georgia 

saw its two separatist regions 

(Abkhazia and the South Ossetia) 

recognized by Russia as independent 

states in 2008; this has seriously 

jeopardised the possibility 

of achieving territorial integrity 

within Georgia’s internationally recognised 

borders. Ukraine has faced 

the largest losses. Its active policy 

in relation to the EU first of all led 

to a change of government, then the 

annexation of Crimea by Russia, and 

now an active military confrontation 

in the east. 

As for Armenia, another country 

seeking active cooperation with the 

EU, was forced by Russian pressure 

to dramatically change the course 

of its foreign policy. Yerevan abandoned 

the creation of a free zone 

with the EU and joined the Russianled 

Eurasian Union. 

nor with the EU, with which Azerbaijan 

prefers to build relations on 

a bilateral and mutually beneficial 

basis. In the same way Azerbaijan 

is developing relations with Russia 

without joining the Eurasian Union, 

preferring bilateral relations. 

This has not irritated Russia, which 

prefers to develop relations with 

a neutral rather than antagonistic 

Azerbaijan. 

CURRENT SITUATION: 

DIVERSIFICATION OF FOREIGN 

POLICY 

In general, it should be noted that 

as a small power, Azerbaijan seeks 

to minimise geopolitical risks and 

challenges through a clear, predictable, 

and national interest-oriented 

foreign policy. It is no secret that 

the cost of failure for small power 

is very high. However, this does not 

mean that Azerbaijan prefers a cautious, 

passive policy based on the 

principle of non-interference and 

remoteness. While maintaining parity 

in relations and balanced foreign 

policy, Azerbaijan continues to expand 

and deepen its relations in the 

international arena. 

These developments illuminate the 

prudence of Azerbaijan’s foreign 

policy choices. Thanks to its pragmatic 

approach, Azerbaijan did not 

face problems of the same scale as 

its neighbours. At the same time, it 

has neither abandoned its relations 

with NATO (with whom relations 

are considered to be very active), 

A significant moment in Azerbaijan’s 

foreign policy was its nonpermanent 

membership of the UN 

Security Council in 2012-2013. In 

this position, Azerbaijan participated 

directly in resolving global 

challenges. 24 It also marked the 

beginning of the relationships new 

regions such as South America, Af- 

23. Judy Dempsey, Moldova Is Next Battleground for Russia and EU, 04.12.2014, http://www. 

themoscowtimes.com/opinion/article/moldova-is-next-battleground-for-russia-and-eu/512583. 

html. 

24. Эльмар Мамедъяров: “Председательство Азербайджана в СБ ООН запомнилось рядом важных 

резолюций и обращений”, 10.01.2014, http://news.day.az/politics/457625.html.

ica and South-Eastern Asia. Over 

the past few years, Azerbaijan has 

opened embassies in such countries 

as Brazil, Argentina, Ethiopia, Algeria 

and Vietnam. The Azerbaijan 

mission has begun its activities in 

the African Union. It is also in Africa 

that the country has very successfully 

tested the activity of the Azerbaijan 

International Development 

Agency (AIDA), established in September 

2011 under the Ministry of 

Foreign Affairs of Azerbaijan. AIDA 

represents successful “soft power” 

leverage, a new element in the foreign 

policy of Azerbaijan. AIDA has 

implemented international humanitarian 

projects and provided technical 

assistance. During 2014, as part 

of the “Fight Avoidable Blindness” 

campaign, a series of pro-bono surgical 

operations on cataracts were 

undertaken in Mali, Niger, Chad, 

Benin, Burkina Faso, Cameroon 

and Djibouti. As a result, more than 

3000 people have fully or partially 

regained sight. Through the United 

Nations Relief and Works Agency 

for Palestine Refugees in the Near 

East AIDA helped Gaza, as well as 

providing disaster relief to Saint 

Vincent and the Grenadines, the 

Philippines and Pakistan. 25 

An important development in 

Azerbaijan’s foreign policy is the 

increased focus on the development 

and implementation of geo-economic 

projects. The reason for this 

is the country’s growing economic 

potential, strategically located at 

the crossroads of regional transport 

corridors. 

AN IMPORTANT DEVELOPMENT IN AZERBAIJAN’S 

FOREIGN POLICY IS THE INCREASED FOCUS ON 

THE DEVELOPMENT AND IMPLEMENTATION OF 

GEO-ECONOMIC PROJECTS. 

The development of non-oil sector 

is an additional factor. 

On September 20, 2014, exactly 

twenty years after the signing of 

the “Contract of the Century”, the 

ceremony of laying the foundation 

of the Southern Gas Corridor was 

held in Baku. The initial stage of this 

project was a Joint Declaration on 

the Southern Gas Corridor signed 

between the EU European Commission 

and Azerbaijan in 2011 during 

the visit to Baku by European 

Commission President Barroso. 

However, the current role of the EU 

in the implementation of this corridor 

is minimal; the main actors are 

Azerbaijan and Turkey, who agreed 

in 2012 to launch the construction 

of TANAP (Trans-Anatolian Natural 

Gas Pipeline). The project includes 

the expansion of the existing Baku- 

Tbilisi-Erzurum pipeline, the construction 

of TANAP (which will pass 

through Turkish territory up to its 

border with Greece) and the Trans 

Adriatic Pipeline (TAP) (originating 

from the Turkish-Greek border, 

passing through Albania, and running 

until Italy) to export Azerbaijani 

gas from Shah Deniz offshore 

field to European markets. It is expected 

that the gas will start flowing 

to Europe in 2020. 26 In the first 

stage, Azerbaijani gas will be exported 

to countries such as Greece, 

115 


25. Итоги внешней политики Азербайджана в 2014 году, 17.01.2014, http://www.1news.az/ 

politics/20150117120757839.html. 

26. Azerbaijani President: “Southern Gas Corridor is a project of energy security”, 14.02.2015, http:// 

en.apa.az/xeber_azerbaijani_president___southern_gas_cor_223095.html.


116 

Italy and Bulgaria. After 2022, it will 

also possible to reach countries in 

the Balkans such as Albania, Croatia, 

Serbia and Montenegro. 27 

The implementation of this major 

project will contribute to closer cooperation 

with the Balkan region, 

serving as an impetus for cooperation 

in other sectors of the economy. 

The implementation of the Southern 

Gas Corridor will be the basis 

of a new economic region from the 

South Caucasus to the Western Balkans. 

Additionally, the Baku-Tbilisi- 

Kars railway will support the development 

of closer cooperation and 

trade relations between these two 

regions, as well as between the EU 

and the Far East. Construction will 

be completed in 2015. 28 With these 

and other transportation projects 

Azerbaijan will be able to develop 

its non-oil sector. Thus, according 

to the country’s development strategy: 

“Azerbaijan 2020: Look into the 

Future”, exports of non-oil sector in 

2020 should reach $1,000 per capita, 

or $10 billion. 29 For comparison, 

the non-oil products exports in 

2014 amounted to just $ 1.6 billion. 

Export of non-oil production per 

capita was $ 166.8. 30 It is expected 

that in 2015, the export of non-oil 

sector will amount to $ 2.7 billion. 31 

Another new geo-economic aspect 

is the development of trilateral 

relations, notably the Turkey- 

Azerbaijan-Georgia, Turkey-Azerbaijan-Iran, 

and Turkey-Azerbaijan- 

Turkmenistan formats. 32 Turkey 

and Azerbaijan, already have experience 

in a number of regional 

transport projects and are working 

on future prospects. In addition, the 

active partners in the implementation 

of these projects became 

Georgia. Now, Turkey and Azerbaijan, 

thanks to increasing economic 

potential, are trying to develop economic 

relations on a tripartite level 

with Iran and Turkmenistan. The 

parties are convinced that trilateral 

regional cooperation can generate 

synergies in implementation of 

joint projects and trade between 

the countries. For this purpose, the 

parties are holding tripartite summits 

on a regular basis. A similar 

format can be also applied in regard 

to relations with Kazakhstan. 

SUMMARY: FUTURE 

PERSPECTIVES 

Azerbaijan is an excellent example 

of how a small power can achieve 

its goals within the international 

system through the skilful analysis 

and management of internal and 

external factors. In general, recent 

years have seen the diversification 

of Azerbaijan’s foreign policy. 

This diversification has occurred 

27. Ильхам Шабан: “Южный газовый коридор будет служить процветанию не одной-двух стран, а 

целого региона”, 13.02.2015, http://caspianbarrel.org/?p=27182. 

28. На линии Баку-Тбилиси-Карс запущен первый тестовый поезд, 04.01.2015, http://www. 

vestikavkaza.ru/news/Na-linii-Baku-Tbilisi-Kars-zapushchen-pervyy-testovyy-poezd.html. 

29. “Azerbaijan 2020: Look Into the Future” Concept of Development, http://www.president.az/files/ 

future_en.pdf , p. 9. 

30. Азербайджан: Падение добычи и доходов от нефти продолжится и в 2015 году, 22.10.2015, http:// 

contact.az/docs/2015/Economics&Finance/012200103793ru.htm#.VN_xn_msWJA 

31. “Azerbaijani govt keeping focus on non-oil sector”, 21.01.2015, http://www.azernews.az/ 

analysis/76370.html. 

32. Итоги внешней политики Азербайджана в 2014 году, 17.01.2014, http://www.1news.az/ 

politics/20150117120757839.html.

in both a geographical and sectoral 

sense. Azerbaijan’s national interests 

require a broader reach. With 

the strengthening of its economic 

potential, expanded experiences in 

the international arena, Azerbaijan 

is increasingly involved in the formation 

of international policy. 

In this case, two major patterns can 

be identified. The first is a foreign 

policy based on the three Ps: pragmatism, 

predictability and prevention, 

in order to reduce the risks 

of possible geopolitical security 

threats. The second is the use of 

national energy potential to realise 

geo-economic interests, in order to 

facilitate the development of alternative 

regional economic integration 

processes based on mutual 

benefits. In this way, Azerbaijan is 

strengthening its independence, 

building stability, and strengthening 

its leading position in the South 

Caucasus. At the same time, Azerbaijan 

is using its potential to become 

a hub of inter-regional transportation 

and logistics. 

In addition, the successful implementation 

of regional economic 

projects also serves as a defence 

against geopolitical challenges 

and risks, enabling the country 

to develop its new and emerging 

interests. 

117 


Note: This work was supported by 

Hankuk University of Foreign Studies 

Research Fund of 

2015”


118 

THE MILITANT TERROR 

THREAT TO GLOBAL 

ENERGY SECURITY 


SENIOR FELLOW, THE NORMAN PATERSON SCHOOL OF 

INTERNATIONAL AFFAIRS, CANADA

The likelihood of a major attack severely 

crippling energy infrastructure is perceived 

as low risk, yet the potential for catastrophic 

and cascading consequences across other 

critical infrastructure sectors has prompted 

a reappraisal of existing risk management 

policies by the governments of industrialised 

and producer countries. 

The 21 st century has witnessed a 

growth not only in the complexity 

and diversity of threats but also in 

their scope, global reach and potential 

for harm. These threats may be 

physical or cyber-implemented, and 

facilitated or perpetrated by an ‘Insider.’ 

Among the many threats to 

critical infrastructure, international 

terrorism has been designated high 

priority. This paper focuses on the 

targeting of energy infrastructure 

by militant jihadists, particularly al- 

Qaeda and its affiliates, and the Islamic 

State of Iraq and al-Sham (ISIS), 

also known as Islamic State. 

While the traditional, defensive response 

to threats has been site specific 

and designed to protect physical 

assets from unauthorized outside 

intruders, cyber space now provides 

opportunities for asymmetric attacks 

to be launched remotely by a 

range of disparate actors. Terrorists 

are just one threat group with an interest 

in carrying out disruptive or 

destructive attacks against energy 

infrastructure. Such groups include 

states or state-sponsored groups 

engaged in intelligence gathering 

intrusions for political or economic 

advantage; transnational organised 

criminal networks motivated 

by profit, insurgents, individuals or 

‘lone wolves’, and malicious hacktivists 

who, perhaps as part of a protest 

group, seek to disrupt energy 

supplies to draw attention to their 

agenda. 

The likelihood of a major attack severely 

crippling energy infrastructure 

is perceived as low risk, yet the 

potential for catastrophic and cascading 

consequences across other 

critical infrastructure sectors has 

prompted a reappraisal of existing 

risk management policies by the 

governments of industrialised and 

producer countries. 

After reviewing the stated intentions 

and demonstrated capabilities 

of militant jihadists, the paper 

concludes by commenting on some 

of the policy changes and countermeasures 

which have been proposed 

and implemented to protect critical 

infrastructure in the current threat 

environment. 

THE CHARACTERISTICS AND 

VULNERABILITIES OF THE 

ENERGY SECTOR 

The energy and utilities infrastructure 

sector encompasses oil and 

natural gas extraction and refining, 

pipelines, electricity generation and 

transmission, and nuclear power


120 

generation. Electricity generation 

and oil refining in particular tend to 

operate at near or full capacity with 

little, if any, redundancy available. 

Any sudden loss in capacity due to 

major damage to energy infrastructure 

or disruptions in service would 

be likely to cause an immediate supply 

shortage and a correlated price 

spike. This would also lead to cascading 

consequences for other critical 

infrastructure sectors and society 

ENERGY SECURITY IS THEREFORE A MAJOR 

CONCERN AT NATIONAL AND INTERNATIONAL 

LEVELS BECAUSE OF ITS CRITICAL IMPORTANCE 

FOR SOCIETAL WELL-BEING. 

more broadly, due to the dependence 

of user industries such as transportation 

and health. 

Energy security is therefore a major 

concern at national and international 

levels because of its critical importance 

for societal well-being, the 

safety and security of citizens and 

their confidence in government. By 

the same token, energy infrastructure 

is also a particularly high value, 

high profile target for terrorists and 

other actors who have an interest 

in causing damage or disruption to 

the industrial sectors of a nation’s 

economy. 

The physical concentration of a plant, 

as well as the remote geographic location 

and dispersion of some assets 

can make the energy sector an easy 

and high value target for physical attacks. 

Plant and supply lines in some 

parts of the world are frequently targeted 

by terrorists, pirates and insurgents. 

Besides interdependencies, the high 

level of cyber connectivity within the 

industry also entails significant vulnerabilities. 

While there are efficiency 

gains attached to the widespread 

adoption of supervisory control and 

data acquisition systems (SCADA) 

that enable companies to remotely 

control and monitor industrial processes, 

they also provide an attack 

vector for those with malevolent intentions. 

The transnational and multi-jurisdictional 

nature of the energy sector, 

which is predominantly privately 

owned and operated, is less likely 

to develop the cohesive and coordinated 

regulatory and security 

regime necessary to close vulnerability 

gaps. Information-sharing can 

be problematic, and a divergence 

in public-private sector interests is 

likely to arise in a sector that is of 

major importance to national and 

economic security, and yet is essentially 

the domain of profit-motivated 

entrepreneurs. Since high security 

expenditures must be justified on 

commercial criteria rather than national 

interest, an under-investment 

in security may result. 

No country is entirely self-sufficient 

in meeting its energy needs. 1 Over 

time, there has been a tendency towards 

the integration of energy systems 

between neighbouring states or 

countries within a politico-economic 

bloc. Protecting the energy nodes of 

integrated energy markets such as 

those of the EU and North America 

requires a sound understanding of 

current threats and the development 

and constant review of energy security 

policies as well as regulatory and 

pricing frameworks. 

THE INTERNATIONAL TERRORIST 

THREAT 

As both a highly concentrated as well 

as globally distributed phenomenon, 

1. Frank Verrastro and Sarah Ladislaw, “Providing Energy Security in an Interdependent World,” The 

Washington Quarterly, Vol. 30, No. 4, Autumn 2007, p. 99.

terrorism is a major, if not the major, 

national security risk for many countries. 

The recent rise of ultra-violent 

groups such as the Islamic State of 

Iraq and al-Sham (ISIS) in Syria and 

Iraq - with territorial ambitions including 

Syria, Lebanon, Israel, Jordan, 

Palestine and Southern Turkey - increases 

the risk of further destabilisation 

in the Middle East. 

In November 2014, jihadist groups 

killed more than 5000 people. 2 The 

majority of claimed deaths from terrorist 

attacks in 2013 were claimed 

by four terrorist organisations: ISIS, 

al-Qaeda and its affiliates, Boko Haram 

and the Taliban. The common element 

for all four groups is a religious 

ideology based on extreme Wahhabist 

interpretations of Islam – though 

their strategic aims may differ. Although 

religious ideology accounts 

for the increasing level of terrorist 

activity over the past year, political, 

nationalistic and separatist aspirations 

are also significant drivers. 

AL QAEDA AND THE ISLAMIC 

STATE OF IRAQ AND AL-SHAM 

(ISIS) 

“[Jihadism] is an increasingly ambitious, 

complex, sophisticated and 

farreaching movement one that 

seems to be in the middle of a 

transformation.” 3 

Although ISIS is the most deadly 

group, and the conflict in Syria and 

Iraq is the ‘battle zone’ with the 

largest number of recorded fatalities, 

jihadist groups have carried 

out attacks in 13 other countries 

with the majority of victims being 

Muslim non-combatants. The wider 

variety of tactics being employed today 

compared to the mass casualty 

bombings associated with New York, 

121 


2. ICSR/BBC World Service study. Of the 664 incidents recorded in November 2014, the majority of 

deaths were in Iraq followed by Nigeria, Afghanistan, and Syria. The overall death toll was 5,042, or 

an average of 168 deaths per day. After Iraq, Nigeria, Afghanistan, and Syria, Yemen was fifth in the 

number of deaths, tying with Somalia, with 37 incidents each. 

3. ‘The New Jihadism: A Global Snapshot’


122 

Madrid and London includes ambushes, 

shelling and shooting. This 

reflects the increased emphasis on 

territorial gains by ISIS and its declaration 

of the caliphate in Iraq and 

Syria. 

In the past, the international terrorist 

threat from jihadism was primarily 

associated with al-Qaeda, but this 

no longer holds true. While Jabhat 

al Nusra in Syria and al Qaeda in the 

Arabian Peninsula (AQAP) still play 

an important role, the core leadership 

has lately been overshadowed 

by ISIS, to which it has lost some of 

its former following to ISIS. 4 Secular 

discontent in the Middle East has attracted 

fighters from across the spectrum 

of jihadist groups worldwide 

to engage in militant jihad in the region. 

Many of these foreign fighters 

are networked into the ‘global jihad’ 

through various jihadist organisations, 

but have sworn loyalty to ISIS 

and fight in defence of the territorial 

gains it has made and its self-proclaimed 

caliph or supreme ruler of 

the Muslim world. 

The rift between al-Qaeda and ISIS 

has recently been patched by an 

agreement between them to co-operate 

operationally, both in the region 

and beyond. For both, the overarching 

goal of militant jihad is to reestablish 

a pan-Islamic caliphate, a 

Dar ul-Islam, which eventually will 

encompass the world. While they 

subscribe to the same broad ideology, 

they differ over strategy. However, 

under pressure from US air strikes, 

ISIS stands to gain from reaching out 

to the ‘mother organisation’ in order 

to lay claim to its historic roots and 

benefit from its global networks. 

This development increases the risks 

to Western interests given that both 

groups have urged their supporters 

and affiliates to perpetrate attacks 

in the West by whatever means are 

available to them, whether “militarily, 

economically or in the media.” 

The likelihood of a continuation or 

return to a focus on the global jihad 

increases as these battle hardened 

foreign fighters, armed with bombmaking 

skills and weapons training, 

return to their countries of origin. 

4. ISIS is itself an offshoot of al-Qaeda in Mesopotamia which was later renamed ‘The Jihadis’ Advisory 

Council in Iraq.’ The Council was headed by Abdallah bin Rashid al-Baghdadi. Abu Mus’ab al-Zarqawi 

pledged allegiance to al-Qaeda in 2004 but a rift developed with the core al-Qaeda leadership over 

his brutal methods and deviation from al-Qaeda’s ideology.

Two central tenets held by al-Qaeda’s 

core leadership have been compromised 

by the movement’s cooperation 

with ISIS. The priority of the 

global jihad as articulated by Osama 

bin Laden, was to fight the ‘far enemy’ 

5 rather than the ‘near enemy’ 

or leaders of apostate local Muslim 

regimes whom he viewed as supported 

by the West and doing its 

bidding; secondly, that the Islamic 

world would be weakened by being 

divided into nation states. The current 

focus on territorial gains and 

the overthrow of the ‘near enemy’ in 

Iraq and Syria by ISIS and by local 

groups such as Ansar al Sharia in Tunisia 

and Libya, challenge al-Qaeda’s 

ideology while emulating its tactics. 

THE GLOBAL TERROR: THREATS 

TO CRITICAL INFRASTRUCTURE 

Al Qaeda and its affiliated networks 

and groups have been innovative and 

flexible in selecting targets and exploiting 

vulnerabilities in pursuit of 

their militant jihad against the West 

and its critical assets in the Middle 

East and elsewhere. They have attacked 

or plotted attacks against critical 

economic assets such as energy 

infrastructure, urban transportation 

systems, civil aviation, tourism, commercial 

areas and public facilities in 

their asymmetric battle against the 

more powerful and resource-rich 

West: 

“If we are not able to produce weapons 

equal to the weapons of the Crusader 

West, we can sabotage their 

complex economic and industrial 

systems and drain their powers… 

[AQ leader, Dr. Ayman al Zawahiri] 

The strategic objective of what Al 

Qaeda calls the ‘Economic Jihad,’ is 

to: 

“Confuse and suffocate (their) economy…” 

“Threaten (their) economic 

and political future…” “(Destroy) 

wealth belonging to disbelievers 

with known animosity towards Muslims.” 

6 

TARGETING ENERGY SYSTEMS 

Al Qaeda’s attacks against the US and 

its Western allies have focused on 

four critical infrastructure sectors: 

Energy, Transportation, Financial 

and Information. 

Attacks on energy supplies, anywhere 

in the world, will always have 

the potential to harm US interests 

despite its own attempts through 

domestic oil production and natural 

gas exploitation to become energy 

independent (vis-à-vis Middle East 

sources of oil). Although the US is a 

leading major oil producer, it is also 

the largest consumer of oil, and like 

any developed economy, susceptible 

to the effects of price changes. 

In targeting petroleum installations 

as a legitimate target of economic jihad, 

Al Qaeda’s intention is to harm 

international economies by disrupting 

oil supplies from Iraq and 

the Gulf and causing prices to soar. 

Available evidence suggests that this 

accords with the goals and objectives 

set out in the seven stages of Al 

Qaeda’s Twenty-Year Strategic Plan 

which envisaged a definitive victory 

by the year 2020 7 with the establishment 

of a global Caliphate. 

123 


5. The ‘far enemy’ refers to those states hostile to the Islamic world and includes the USA and the rest 

of the West; Israel, Russia, India and China. 

6. Adeeb al-Bassam, “Bin Laden and the Oil Weapon”, Sawt al-Jihad, Muharram 28 AH, (February 2007) 

p. 9. 

7. Information given to journalist Fou’ad Husseyn by al-Zarqawi and AQ security chief Sayaf al Adil. See 

also Rudner, “Al Qaeda’s Twenty Year Strategic Plan: The Current Phase of Global Terror,” Studies in 

Conflict & Terrorism, 36:953–980, 2013.


124 

Al Qaeda legitimises these attacks on 

the basis of what purports to be a jurisprudential 

summary of the Islamic 

laws of war pertaining to energy 

infrastructure entitled “The Ruling 

on Targeting Oil Interests.” 8 Denying 

unbelievers the benefits of ‘Muslim’ 

oil is part of a strategy to achieve victory 

over American aggression for 

oppressed Muslims everywhere, and, 

in the words of Osama bin Laden, to 

“bleed America to the point of bankruptcy.” 

9 

In the first issue of “Resurgence,” a 

new Al Qaeda English-language publication 

aimed at Muslims in the diaspora, 

the group makes clear that it is 

still intent upon plotting the destruction 

of America and its allies i.e. the 

‘far enemy.’ 

An article entitled “On Targeting the 

Achilles Heel of Western Economies,” 

by Hamza Khalid states that the way 

for Al Qaeda to weaken the US is to 

carry out a “multi-pronged strategy 

that focuses not only on attacking 

American military presence in the 

Muslim world, but also on targeting 

the super-extended energy supply 

lines that fuel Western economies 

and helps to sustain their military 

strength.” 

“Even if a single supertanker… were to 

be attacked in one of the chokepoints 

or hijacked and scuttled in one of 

these narrow sea lanes, the consequences 

would be phenomenal…” 

Other identified targets are “Western 

workers working in oil companies in 

the Muslim World, (…) oil facilities, 

including terminals and pipelines 

which export oil to western countries,” 

and “attacks on the U.S. Navy.” 

The ruling “On Targeting Oil Interests” 

identifies different types of oil 

facilities. Oil pipelines and refineries 

are regarded as legitimate and easy 

targets while oil wells, deemed to be 

more sensitive to negative publicity, 

are considered a valuable resource 

which should if possible be left intact 

for the future benefit of Muslims. 

PIPELINES 

As remote as some pipelines might 

be, ease of access for insurgents and 

terrorists is far greater in the Middle 

East than other regions of the world 

and, given the anti-Western stance 

of Al Qaeda and other transnational 

terrorist groups, the focus of attacks 

against energy infrastructure 

in the Arabian Peninsular has been 

infrastructure owned or managed by 

Western firms. 

In Iraq, insurgents have caused severe 

damage to the economy in terms 

of curtailing production, cutting local 

supplies and disrupting exports. Oil 

exports have proved to be particularly 

vulnerable to disruption because 

of the availability of only two 

transportation corridors through for 

exporting oil from Iraq: the pipeline 

from Kirkuk to Ceyhan in Turkey, or 

shipment by sea from Basra to international 

markets. The fact that ISIS 

now controls much of northern Iraq 

only adds to the disruption, as well 

as allowing the group to make millions 

per day selling oil on the black 

market. 

Unknown assailants have repeatedly 

carried out attacks against a natural 

gas pipeline that supplies an Egyptian 

industrial zone in central Sinai. 

8. Al-Qaeda in Saudi Arabia: Excerpts from “The Laws Targeting Petroleum-Related Interests, Global 

Terror Alert, March 2006 (http://www/globalterroralert.com). The manifesto was released under the 

imprint of the al-Qaeda network in June 2004. 

9. Information given to journalist Fou’ad Husseyn by al-Zarqawi and AQ security chief Sayaf al Adil. See 

also Rudner, “Al Qaeda’s Twenty Year Strategic Plan: The Current Phase of Global Terror,” Studies in 

Conflict & Terrorism, 36:953–980, 2013.

This has halted gas exports to Israel 

and Jordan, which the pipeline also 

feeds. 10 

Beyond the Middle East, intelligence 

reports have indicated that a number 

of terrorist groups have both the intention 

and capability of carrying out 

attacks against oil and natural gas facilities 

in places such as Pakistan, Colombia, 

Nigeria and Turkey in order 

to cripple their economies and undermine 

political stability. Terrorists 

have also struck at the Iran-Turkey 

natural gas pipeline; Pakistan’s natural 

gas pipeline across Baluchistan; 

and, in a separate insurgency, at oil 

production facilities in Nigeria’s Niger 

Delta operated by Royal Dutch 

Shell in a joint venture with the federal 

government. Attacks by Nigerian 

militants have significantly reduced 

the country’s regular daily output 

and contributed to rising oil prices. 

The most recent major attack was 

that against the In-Amenas Gas facility 

in Algeria in 2013 by Al Qaeda in 

the Islamic Maghreb (AQIM). 

More generally, there have been a 

number of attacks which cannot be 

attributed to a particular group. Attacks, 

or foiled attacks, against energy 

infrastructure often remain 

shrouded in secrecy in order to conceal 

sensitive counter-terrorism information 

from adversaries. Those 

which have been made public include 

attacks against British natural 

gas pipelines and electric power facilities; 

a gas pipeline near Cairo in 

Egypt; a gas distribution facility in 

central Israel; Jordan’s primary electricity 

generating plant; pipelines in 

Chechnya, Dagestan and elsewhere 

in Russia; oil refineries in Turkey 

and energy facilities in at least three 

states in the USA; Indian nuclear facilities 

and oil refineries; Australia’s 

nuclear reactor and Sydney’s electricity 

grid. 

Al Qaeda’s grand strategy is as much 

about weakening the economies of 

the United States and its Western 

allies as achieving military defeat. 

125 


10. ‘Gas pipeline attacked in Egypt’s Sinai’, Ahram Online [Egypt], February 11, 2014. http://english. 

ahram.org.eg/NewsContent/1/64/93951/Egypt/Politics-/Gas-pipeline-attacked-in-Egypts-Sinai. 

aspx


126 

Given the intention to target the fuel 

supply lines of Western economies 

because it believes these help sustain 

their military strength, a major 

attack on an energy installation in 

North America, Europe or Asia could 

occur at any time. 

OVER THE PAST DECADE, THE STRUCTURE OF 

THE ELECTRICITY INDUSTRY HAS UNDERGONE 

SIGNIFICANT CHANGE. 

PROCESSING AND STORAGE 

FACILITIES 

Oil pipelines may be an easier target 

but a greater economic impact is 

achievable by targeting a processing 

facility such as Abqaiq (attacked in 

February 2006) or one of the many 

other processing and storage sites 

around the world. Since refinery 

capacity is already stretched, expensive 

and time-consuming repairs to 

a major facility would likely have 

major economic and political consequences. 

An attack on these critical 

nodes, however, would present more 

of a challenge because a point target 

is easier to protect than a linear one. 

Nevertheless, the potential benefits 

in terms of the impact of a successful 

attack may well be deemed to outweigh 

the difficulties. 

OIL TANKERS AND CHOKE POINTS 

Choke points, and vessels which can 

carry over two million barrels of oil 

are also single point targets identified 

as attractive targets in Hamza 

Khalid’s article. He referred to oil 

chokepoints, like the Straits of Gibraltar, 

the Straits of Hormuz, the Suez 

Canal, or the Bab El Mendab Strait 

at the mouth of the Persian Gulf, all 

of which are sufficiently narrow in 

places for insurgents to launch RPG 

attacks on passing ships. In July 2010, 

an Al Qaeda affiliated group – the 

Abdullah Azzam Brigades – claimed 

responsibility for an attack on a Japanese 

oil tanker which was damaged 

near the shipping lane in the Straits 

of Hormuz. The Strait handles 40% 

of the world’s seaborne oil. 

Disabling ships 11 or hijacking tankers 

transiting these lanes would delay 

oil deliveries to world markets. 

The same would be true of attacks 

against port facilities where tankers 

are loaded and off-loaded. Studies 

have been commissioned to consider 

the vulnerabilities of liquid natural 

gas (LNG) tankers and the risk of 

cascading failures in the tanks of carriers. 

Generally speaking, the risks 

were assessed to be low. Aside from 

the impact on global energy markets, 

and depending on the method 

and location of the attack, there is a 

risk of mass casualties and deaths 

as occurred during attacks on the oil 

tanker SS Limburg and the USS Cole. 

Istanbul, for example, would be at 

risk from a large offshore explosion 

in the Turkish Straits. 

ELECTRIC GRIDS 

Traditionally, critical energy infrastructure 

protection was concerned 

with physical attacks and focused on 

‘guards and gates’ to prevent access 

to physical sites and energy assets. 

Many of these assets are remotely 

situated and difficult to protect. An 

electrical substation in California 

was subject to a number of rounds 

of sniper fire in April 2013. Considerable 

damage was caused, putting it 

out of operation for nearly a month. 

Since the shooters disappeared before 

they could be apprehended and 

no claim was made, the motive and 

11. Following a raid on Osama bin Laden’s Abbatobad hide-out in Pakistan, documents were 

discovered which revealed that al-Qaeda had considered bombing oil tankers to create “an extreme 

economic crisis.”

identity of the attackers remains unknown. 

Over the past decade, the structure 

of the electricity industry has undergone 

significant change. In many 

countries, the ‘unbundling’ of the 

generation, transmission and distribution 

functions of electric utilities 

into separate organisations has increased 

the role of the private sector. 

The use of advanced communications 

electronic devices, from automated 

meters to synchrophasors, 

has introduced new vulnerabilities 

into grid systems. These technologies 

can become threat vectors enabling 

cyber attackers to gain access 

to computer systems or other communications 

equipment. 

Security companies have claimed 

that the US energy industry trails 

others when it comes to security best 

practice and system maintenance. 

Its power infrastructure uses old 

technologies that are not designed 

to withstand modern cyber attacks. 

The claim is that they are not being 

upgraded, in order to avoid interruptions 

in service. On the other hand, 

while old technologies are vulnerable 

to attack, closing down a city’s 

power would require the co-ordinated 

efforts of an army of hackers because 

energy companies use so many 

different types of machines. Another 

potential vulnerability arises when 

Critical Infrastructure Protection 

(CIP) standards for Bulk Energy Supply 

(and other energy sector services) 

lack specific requirements and 

are open to subjective and ambiguous 

interpretations. 

Despite concerns in the US about the 

fragility of electric grids, the greatest 

risk of power disruptions is probably 

still weather rather than a terrorist 

attack. 

NUCLEAR POWER PLANTS 

Energy analysts who support the 

construction of new nuclear power 

plants insist that the probability of a 

terrorist nuclear attack by land, sea, 

or air is extremely low. They reject 

arguments by nuclear power opponents 

that terrorist groups may one 

day attack a nuclear plant, or build 

an improvised nuclear bomb using 

materials stolen from a nuclear pow- 

127 



128 

THE GREATEST RISK TO NUCLEAR 

INFRASTRUCTURE PROBABLY ARISES FROM 

CYBER ESPIONAGE AIMED AT STEALING TRADE 

SECRETS. 

er plant. These arguments have been 

used by both sides in the debate on 

the development of nuclear power 

and the appropriate response of governments. 

Energy experts have concluded that 

the likelihood of a fuel-laden jet 

crashing into the containment dome 

of a new nuclear facility, damaging 

the reactor core and releasing radioactivity 

sufficient to affect public 

health and safety is low. They also 

reject the possibility that terrorists 

could build an improvised nuclear 

bomb using materials stolen from a 

nuclear power plant. 12 

Attempts to steal such materials are 

considered likely to fail because of 

the heavy physical and electronic 

security measures used to protect 

Western nuclear power plants. Furthermore, 

such materials may be relatively 

useless for an improvised nuclear 

device because the radioactive 

materials are hazardous to transport, 

and fuel stolen from a reactor might 

be poorly enriched. In addition, it 

would be necessary for terrorist 

groups to have sophisticated equipment, 

facilities and expertise. The 

most practical materials for such a 

purpose are used in medical applications 

far from any nuclear plant. 

It has been said that there has never 

been a terrorist attack on a nuclear 

plant, and there appears to be no evidence 

that a plan to attack a nuclear 

power plant has ever moved beyond 

the basic planning phase. The only 

reported successful intrusions of a 

working nuclear facility have been 

by activists who sought to send antinuclear 

messages. 

Although terrorist organizations including 

Al Qaeda are assessed as having 

only a limited capability in terms 

of their ability to acquire and utilise 

weapons of mass destruction, there 

are nevertheless concerns about the 

availability of radioactive materials 

in Libya, Iraq and North Korea 

through illicit networks akin to that 

12. ‘Nuclear terrorism: risks of terrorists attacking, or using materials from, a nuclear power plant are 

low’: Homeland Security Newswire, December 4, 2014.

formerly operated by the rogue Pakistani 

scientist AQ Khan. The threat 

of ‘dirty bombs’ being detonated by 

groups such as Al Qaeda attracted 

headlines in 2004, when Dhiren 

Barot, described in a British court 

as a member or close associate of Al 

Qaeda, was arrested and jailed for at 

least 40 years after pleading guilty to 

plotting attacks against the UK and 

USA using radiation devices. 

More recently, the International 

Atomic Energy Authority (IAEA) 

downplayed the significance of a seizure 

of 40 kg of radioactive material 

by ISIS after it overran a university 

complex in the city of Mosul. Experts 

have nevertheless expressed the 

view that even low-grade material 

could still be mixed with conventional 

explosives to make ‘dirty bombs.’ 

The fact that nuclear energy infrastructure 

is traditionally wellprotected 

probably explains why Al 

Qaeda has made concerted efforts to 

obtain CBRN materials using “Insiders” 

who work in facilities that house 

radioactive materials. 13 However, the 

greatest risk to nuclear infrastructure 

probably arises from cyber espionage 

aimed at stealing trade secrets. 

CYBER ATTACKS AGAINST 

CRITICAL INFRASTRUCTURE 

It is useful to distinguish actions in 

the cyber domain which are carried 

out for political or ideological purposes, 

i.e. deliberate attempts to alter, 

disrupt, deny, deceive, degrade or destroy 

computer systems and services 

and which render them unavailable 

or unreliable, from those which are 

launched for surreptitious, intelligence 

gathering purposes. 

Since threats to critical infrastructure 

can be implemented in the cyber 

as well as the physical domain, 

the possibility of militant jihadists 

developing a cyber warfare capacity 

against the West is one of the reasons 

why identifying and countering 

cyber threats is now a top priority. 

CYBER TERRORISM 

There has for some time been an ongoing 

debate about Al Qaeda’s interest 

in developing cyber terrorism capability 

as well as its ability to carry 

out a sophisticated cyber attack. One 

definition of cyber terrorism is: 

“The premeditated, politically motivated 

attack against information, 

computer systems, computer programs, 

and data which result in harm 

against non-combatant targets by 

sub-national groups or clandestine 

agents.” 14 

Physical harm or damage need not 

result from a cyber terror attack; 

severe economic damage from an 

attack is enough to be considered as 

cyber terrorism. 

It has been argued that a sophisticated 

cyber attack causing significant 

economic damage or physical harm 

is well beyond the capability of Al 

Qaeda or other terrorists who have 

an interest in targeting the West’s 

critical assets. As far as is known 

from information in the public domain, 

there have been no known cyber 

terrorist incidents in the West, although 

information recovered from 

laptops in Afghanistan confirmed Al 

Qaeda’s interest in electronically attacking 

critical infrastructure targets. 

129 


13. Diplomatic cables obtained by Wikileaks were the basis of a report in the [UK] Daily Telegraph on 

February 1, 2011 regarding attempts by al-Qaeda and other terrorists groups to acquire WMD and 

recruit the needed expertise. 

14. Mark M. Pollitt, ‘Cyberterrorism Fact or Fancy? Computer Fraud & Security’. Vol. 1998, Issue 2 

(February 1998), pp. 8-10.


130 

THE ABSENCE OF CYBER TERRORISM IS 

GENERALLY ATTRIBUTED TO A LACK OF 

CAPABILITY RATHER THAN WILL. 

Al Qaeda has called on its supporters 

to participate in an ‘Electronic Jihad’ 

which it declares is religiously endorsed 

as a “legitimate and blessed 

act” intended to ‘spite the enemy’ 

by destroying electronic devices or 

...surreptitiously taking valuable information 

from these devices.” However, 

while interest in developing 

cyber war capability is clearly articulated 

in Al Qaeda’s rhetoric, such 

statements do not demonstrate a capability. 

The absence of cyber terrorism is 

generally attributed to a lack of capability 

rather than will, but because 

jihadists have long been innovative 

in their use of the Internet for operational 

support purposes such as 

fund-raising, propaganda, recruitment 

and intelligence gathering, it 

is likely that international terrorists 

could well be in the process of acquiring 

the cyber skills necessary to 

launch attacks against critical infrastructure 

and other sensitive institutions 

in the West, either remotely 

or by gaining employment within an 

agency or organisation. 

The expectation meanwhile is that jihadists 

will continue to plot physical 

attacks using ‘conventional’ methods 

such as suicide bombings, shootings 

and vehicle bombs, but it may only be 

a matter of time before a significant 

cyber terrorist attack is launched 

against critical infrastructure. 

There are factors that militate against 

such a development, chief of which 

is the ‘propaganda of the deed’. An 

aspiring martyr is likely to prefer a 

suicide bombing to a cyber attack because 

the former has more impact on 

the public, generates more fear and 

has more appeal to a jihadist seeking 

glory rather than the anonymity 

of the cyber domain. It has also been 

argued 15 that the cost of a sophisticated 

cyber attack, of the sort that 

could do physical damage, is greater 

than is generally supposed. 

High actual and opportunity costs 

must be balanced against what 

might be perceived as low returns or 

benefits. That balance might change 

as technology costs fall, especially 

if there is a return to ‘the long war,’ 

for example, if the momentum ISIS 

has achieved in Iraq and Syria slows 

and support dwindles. Terrorists 

are aware of the Western World’s 

dependence on cyber systems and 

have taken steps to legitimise cyber 

operations as part of their militant 

jihadist strategy. It must therefore 

be expected that they will try to exploit 

this vulnerability at some point, 

especially if a state-sponsor can be 

found. 

State-sponsored terrorist groups or 

state proxies have already engaged 

in cyber attacks on energy and other 

critical infrastructure elsewhere 

in the world. Attacks include the 

Iranian-linked ‘Cutting Sword of Justice’- 

believed to be responsible for 

the Shamoun virus attack on Saudi 

Aramco (2012) and the Qatar RasGas 

attack (2012); the Izz ad-din al-Qassam, 

another Iranian linked group 

which launched continuing distributed 

denial of service attacks against 

US financial institutions in 2013; 

and attacks on the water supply system 

of the City of Haifa in Israel and 

Western media organizations (2013) 

which have been attributed to the 

Syrian Electronic Army. 

15. See Giacomello G (2004). Bangs for the buck: a cost-benefit analysis of cyberterrorism. Studies 

in Conflict Terrorism 27(5): 387–408.14. Mark M. Pollitt, ‘Cyberterrorism Fact or Fancy? Computer 

Fraud & Security’. Vol. 1998, Issue 2 (February 1998), pp. 8-10.

A number of energy companies in 

the Middle East have improved their 

security as a consequence of these 

attacks but there continues to be a 

tendency for many oil and gas companies 

around the world to react to 

attacks rather than being proactive 

in seeking to prevent them. Companies 

can also be averse to high expenditures 

on risk mitigation measures 

for ‘one-off,’ low probability evens 

however catastrophic the impact 

might be. 16 

THE INSIDER THREAT 

Since any and all threats to critical 

infrastructure can be facilitated or 

perpetrated by someone inside the 

organisation, the ‘Insider’ threat has 

been identified by major companies 

as one of the most significant. 17 The 

insider risk arises from careless or 

rogue employees rather than online 

ex-filtrators of data who take advantage 

of weak passwords or software 

vulnerabilities. 

It is easier and more reliable for an 

Insider to use network access to gain 

specific data relating to a company’s 

systems than for an outside hacker. 

Insiders who download company 

data onto a USB and provide it to 

outsiders may be motivated by ideology, 

profit, grievances or coercion. 

The information they obtain about 

the vulnerabilities of networks and 

industrial control systems can assist 

outsiders to launch a successful 

cyber attack (perhaps on industrial 

control systems) while security information 

about the site itself and access 

codes might be used to enhance 

the effectiveness of a physical attack. 

Insiders could be any one of the 

threat actors previously mentioned 

though the energy sector in the West 

is particularly vulnerable to environmentalists 

who oppose company 

131 


16. Vincent Lavergne, Director, Field System Engineering for South Europe, Middle East and Africa, at F5, 

a company that provides data protection services to multinationals by phone. 

17. But note that an insider attack may also be profit-motivated or perpetrated by an employee with a 

grievance against the company.


132 

pipeline plans or government energy 

policies. They seek intelligence to assist 

their campaign and/or use their 

access to orchestrate disruptions in 

supply and impose costs on the organization. 

Various Al Qaeda strategists and 

ideologues such as Abu Bakr Naji 

(aka al-Suri), have called on the most 

ideologically committed of aspiring 

jihadists in Western countries to eschew 

‘conventional’ martyrdom operations 

in favour of waging jihad by 

infiltrating key critical infrastructure 

sectors and other sensitive establishments. 

There have been a number of 

examples of such infiltrations. In al- 

Suri’s words, “We should infiltrate 

the police forces, the armies …the petroleum 

companies (as an employee 

or engineer)…” The purpose of infiltration 

was seen as providing intelligence 

but, as al-Suri hypothesises, 

“it may even end in a martyrdom operation 

designed to destroy an infiltrated 

position or ...in targeting some 

individuals.” [The Management of 

Savagery]. 

A REAPPRAISAL OF CRITICAL 

INFRASTRUCTURE PROTECTION 

(CIP) POLICIES 

The risk management strategies 

which have been adopted to assure 

critical infrastructure against all 

threats and across all sectors have 

attracted criticism from security experts 

concerned not only with mitigating 

the impact of attacks but preventing, 

pre-empting and deterring 

aggressors. The criticality of the energy 

sector, the risks to national and 

economic security and the welfare of 

citizens has prompted a reappraisal 

of risk management regimes which 

are essentially defensive and reactive: 

“Today, information and cyber security 

threats are becoming increasingly 

complex and are evolving at a rapid 

pace. At the same time, traditional 

risk management regimes used by 

government are no longer adequate 

to mitigate against this threat. (UK 

Cabinet Office, 2011) 18 

As an example, Canada’s integrated 

approach to national security with 

respect to securing critical infrastructure 

focuses on improving resilience 

(preparedness and recovery), 

supply assurance (continuity 

of essential services), and mitigation 

measures (minimizing the impact 

of a natural event or deliberate attack). 

It is a strategy which accepts 

the reality that a successful attack 

or a natural disaster will inevitably 

occur; that security resources are 

finite; and that therefore what is 

needed are comprehensive, multilayered 

security measures against all 

hazards (natural and intentional) to 

enhance the resilience of society as a 

whole. 

The call for a more robust, proactive 

and intelligence-led approach to critical 

infrastructure protection (CIP) 

has come in response to the current 

threat environment which is such as 

to require a capacity to prevent, preempt 

and deter the actions of a growing 

array of threat actors. A crucial 

element in developing and applying 

appropriate counter measures is the 

capacity to determine the identity, 

intentions and capabilities of threat 

actors, especially those in the cyber 

domain. 

Changes in organisational culture 

and behaviour, public law and policy 

will be needed as well as threat intelligence 

and the analytical skills and 

resources which reside in national 

18. Cabinet Office, Government ICT strategy—Strategic Implementation Plan: Moving from the ‘what’ 

to the ‘how’. Cabinet Office, London (2011), p. 53.

intelligence agencies. Although private 

sector owner/operators of energy 

infrastructure are best suited 

to the task of protecting their own 

assets and networks, because it is 

they who have the necessary expertise, 

local knowledge and motivation, 

unless they have access to available 

threat information, both specific to 

the industry and across other critical 

sectors more broadly, there will be 

gaps in security. 

National security strategies and action 

plans generally recognise the 

necessity for federal agencies to 

work closely with private sector energy 

and utility companies in order 

to monitor and counter national security 

threats. Canada, the US, and 

the UK provide security clearances 

to private sector security personnel 

so that sensitive threat intelligence 

can be shared with them – not for 

securing economic advantage – but 

for safeguarding assets and services 

against sophisticated attacks which 

often emanate from foreign states. 

Equally, public sector agencies need 

to learn from private sector experience 

concerning the incidence and 

nature of cyber intrusions and physical 

attempts to disrupt or destroy energy 

infrastructure. The informationsharing 

must be two-way. 

Information is often shared informally 

within the private sector through 

industrial associations and trusted 

contacts, but there is a reluctance to 

share it with public sector agencies. 

The reasons given refer to issues 

such as due diligence, reputation, access 

to information and competition 

policy. Legal clarification and/or reforms 

may be needed, but in some 

situations at least, it is not the law 

but rather ignorance of the law and a 

risk averse mindset that constitutes 

the impediment. 

The public sector has a role to play 

as a facilitator and contributor to the 

security of energy infrastructure. It 

can help to establish trusted information-sharing 

networks, ensure 

that an appropriate legal framework 

is in place to facilitate and protect 

information-sharing initiatives, and 

identify vulnerabilities which may 

need, for example, initiatives to improve 

industry standards or financial 

incentives to avoid underinvestment 

in security. 

Measures to counter threats to energy 

and other critical infrastructure 

sectors must ensure both physical assets 

and the confidentiality, availability 

and reliability of the information 

upon which they depend. Protecting 

the information infrastructure upon 

which the energy and other critical 

sectors depend is a task which 

has been described as central to the 

protection of the information society 

as a whole. It is the task that is 

now causing both public and private 

sectors to re-examine the adequacy 

of current provisions for countering 

the threats. 

133 


CASPIAN

ESSAYS

UNCERTAINTIES OF THE 

ARAB SPRING: YEMEN 

CIVIL WAR AND ENERGY 

SECURITY IN THE GULF 

REGION 

MESUT HAKKI CASIN 


SENIOR FELLOW, CENTER ON FOREIGN POLICY AND SECURITY, 

HASEN 

136

Yemen is a small country with a 

sophisticated and unbalanced political 

structure. In this context, in order to have 

a real and objective understanding about 

today’s developments; one should remember 

what has happened in its historical 

background and what the competition 

scenarios of big powers are. 

INTRODUCTION 

Arab Spring, as the wind of political 

change in the Middle East and North 

Africa, has spread regional conflict 

and instability throughout the Gulf 

region. In Yemen, Saudi Arabian led 

military intervention has escalated 

the tension to sectarian civil war as 

the fighting continues. According to 

health department director, at least 

185 dead and 1,282 wounded have 

been counted in hospitals in Aden 

since March 26. 1 This conflict has 

made an impact on the oil markets, 

leaving investors wondering how 

the Yemen crisis will affect oil prices. 

In an urgent letter to UN, President 

Hadi granted permission for the 

intervention of “voluntary forces”. 

President Hadi also conveyed his request 

to the Gulf Cooperation Council 

and Arab League, which Saudi 

Arabia responded affirmatively. As 

a result of the withdrawal of US and 

European diplomats and Houthi suicide 

attack to a mosque during the 

Friday prayer killing 140 people 

paved the way to a new process 

started by Arab and Egyptian air 

strikes. Saudi King Salman bin Abdulaziz 

el-Suud announced that the 

“Decisive Storm” operation will last 

as long as security and stability is 

assured in Yemen. Houthi rebels and 

their allies in Yemen have stormed 

the presidential palace in Aden. The 

rebels pushed through to the heart 

of the port city using tanks and armored 

vehicles, despite air strikes 

by a Saudi-led coalition. 2 This civil 

war can be expected to last for years 

causing violence together with religious 

terrorist activities and affect 

the energy security negatively. 

Can the new military alliance in the 

Middle East after Arab-Israel wars 

be successful? Can the Yemeni crisis 

create results that can affect the 

energy security and global energy 

prices? 

WHY THE ARAB SPRING WIND IS 

ESCALATING THE YEMEN CIVIL 

WAR? 

Yemen is a small country with a 

sophisticated and unbalanced political 

structure. In this context, in 

order to have a real and objective 

understanding about today’s developments; 

one should remember 

137 


1. Yemen conflict: UN considers calls for ‘humanitarian pause’, 5 April 2015, http://www.bbc.com/news/ 

world-middle-east-32187861 

2. “Yemen crisis: Rebels Storm Presidential Palace in Aden”, BBC News, 3 April 2015, http://www.bbc.com/news/ 

world-middle-east-32157994.


138 

what has happened in its historical 

background and what the competition 

scenarios of big powers are. In 

political history terms, Yemen was 

under the control of the rising Rassite 

dynasty, imams of the Zaidi sect 

who built the theocratic political 

structure. Yemen was a part of the 

Ottoman Empire under the name 

Vilâyet-i Yemen. Since the country’s 

geopolitical structure resulted in a 

critical challenge between the Great 

Britain and the Ottoman Empire on 

the Arab peninsula. Britain pushed 

Arab nationalism against the Turks. 

At the end of the 19th century, the 

Zaidis rebelled against the Turks under 

the leadership of Imam Mohammed 

İbn Yahya and Idris. However, 

Ottomans managed to defeat the 

rebels. But at the end of the WW-I 

and the following 1918 Armistice 

of Mudros, Ottoman Empire had to 

leave the country. 

Today, the country’s population is 

24 million; 30% of which consists of 

Houthis closer to Sunni Islam. 93% 

of Yemeni people are living in rural 

areas. The government has faced 

serious economic problems, high 

level of unemployment and the political 

opposition of young people. In 

terms of ideology, the search for a 

democratic model have changed the 

direction, bringing forward the risk 

of separatism as well as religious 

and sectarian clashes which are likely 

to have impacts on the Arab society 

for years. At this point, Yemen is 

the fourth country after Syria to be 

dragged into a civil war as a result 

of the collapse of state bureaucracy. 

As it is known, the revolution movement 

after the 1962 coup moved to 

another dimension with the Shia 

Houthi insurgency in 1994 in Yemen. 

Formerly in 1962 the Yemen 

Revolution failed and turned to civil 

war. Egyptian nationalist leader Jamal 

Abdul Nasser deployed 30.000 

troops and soldiers in Yemen during 

the civil war. Within the five year period, 

Egyptian Army could not manage 

to capture the capital city Sanaa 

and finally withdrawn its troops 

during the ‘67 Arab-Israel War. 

Today, Egypt economically depends 

on the coalition of Saudi-Gulf States. 

Saleh was the president until the 

Arab Spring. Due to the political vacuum 

emerged after the Arab Spring, 

President Saleh had to seek asylum 

to Saudi Arabia. Saudi Arabia continued 

to support Saleh despite powerful 

opposition actions. They lost 

200 soldiers in the battles in 2008. 

6000 people were killed during the 

turmoil and chaos in the country between 

2004 and 2009. Effects of the 

Arab Spring and the intervention 

of Saudi Arabia and Iran deepened 

the polarization in Yemen. Regarding 

the instability next to its borders 

as a threat to its national security, 

Saudi Arabia intensified its support 

for Sunni tribes. Yemen was confronted 

with a new threat of instability 

towards the Sunni-Shia sectarian 

conflict backed by the protests of 20 

thousand people against President 

Ali Abdullah Saleh in 2011. Ali Abdullah 

Saleh left his seat to Abd Rabbuh 

Mansour Hadi in the 2012 elections. 

However, internal conflicts have 

intensified since September 2015. 

Restraining from a Sunni-Shia war, 

the leader of Al-Islah party resigned 

and fled to Aden. Thus, Houthis dissolved 

the parliament on February 6 

and captured Sanaa, which pushed 

the crisis out of control. Houthis occupied 

the south of the country and 

came closer to Aden. This in turn 

brought the country on the verge of 

a civil war. 

INTERVENTION OF ARAB JOINT 

FORCES IN YEMEN 

Although it is a bit early to talk about 

a coalition in Yemen different from 

Libya, in an equation where Saudi 

Arabia and Egypt are at the forefront 

and Iran remains at the opposite

side, USA is likely to follow a cautious 

policy. USA is also faced with 

the fight against Al Qaeda in Yemen. 

Al Qaeda in the Arabian Peninsula 

is already effectively controlling the 

pockets of Southern Yemen. Considering 

recent developments, USA 

evacuated its 100 military personnel 

from Al Anad. 3 Obama administration 

supports Saudi Arabia’s 

airstrikes in Yemen. Can the intervention 

of Arab joint forces solve the 

Yemen conflict? Will Arab military 

forces ensure stability and reach 

a turning point in the region? Or if 

Iran becomes a part of this challenge, 

is there a possible threat that civil 

war in Yemen may turn to a wider 

regional conflict? Will Great Powers 

have more influence on Yemen than 

Arab Nations have? Will Tehran take 

the advantage of establishing a “Shia 

crescent” and controlling the Arab 

Peninsula? 

Saudi forces aimed to capture Aden 

and secure the control of the 2000 

kilometer border with Yemen, the 

main concerting point in world oil 

exports. Coalition’s air forces attacked 

hospitals and schools, causing 

many civilian casualties. Under 

the leadership of Saudi Arabia, allied 

forces of Gulf States have launched 

a military operation with 100 warplanes 

in Yemen against the Houthi 

insurgencies in Sanaa and other cities. 

After the 6 Day War with Israel 

half a century ago, Arab states combined 

their armed forces again. Recently, 

Yemen’s undeclared civil war 

is spreading from the key southern 

battleground around Aden. Radical 

groups such as Al Qaeda as well 

as Iranian-backed militants have 

found safe haven on the borders of 

Saudi Arabia. Houthis began their 

extensive offensive to control Sanaa 

and expand towards al-Hadida, Taiz, 

and finally Aden. 4 Yemen has been 

gripped by the growing turmoil 

since Houthi rebels launched a power 

takeover in the Yemeni capital Sanaa 

in February. Houthi rebels, also 

known as Ansar Allah (the Supporters 

of God), belong to the Zaidi sect, 

a relatively obscure branch of Shia 

Islam. Houthi forces control most of 

Western Yemen including the capital 

city Sanaa. Houthi forces have allied 

themselves with army units loyal 

to the former Yemeni President Ali 

139 


3. David D. Kirkpatrick: “Yemeni Fighters Close In on President’s Refuge Amid Reports He Has Fled”, New 

York Times, 25 March 2015. 

4. Regarding the Yemen conflict emerging the Houthi religious-political-military movement was born in 

the in 1980’s northern region of Saada under the leadership of Husayn Al Houthi, a Shiite. They were 

ruled by the Imamate in northern Yemen. After the resignation of President Ali Abdullah Saleh in 2011, 

the Houthis managed to take over the control of a vast area, to the retreat of army units still loyal to 

Saleh. In doing so they defeated the Sunni militias linked to the Islah Party. The Houthis now control 

most of the Yemeni military, including its aircraft, giving them a military advantage against the forces 

still loyal to Mr. Hadi.

Egypt and 

other Arab 

states put 

efforts to 

resolve crisis in 

Yemen 


140 

Abdullah Saleh. Yemeni president 

Abd Rabbuh Mansour Hadi fled to 

Aden. Houthi rebels have seized Al 

Anad airbase in Taiz – Yemen’s third 

largest city which fell under rebel 

control – and Hadi’s stronghold of 

Aden in a renewed push for the control 

of the country’s south. 5 In terms 

of the legitimacy of the military operation, 

Saudi Ambassador to USA 

Adel Al Jubeir explained the purpose 

of the military operation in perspective 

“to protect and defend the legitimate 

government” of Yemen’s president, 

Abd Rabbuh Mansour Hadi. 6 

Houthis expand their control in 

the North-South vertical side of 

the country including the airport. 

Houthi rebels took a bigger part of 

Yemen and its capital city Sanaa city, 

and they also aim to capture Aden. 

However, this movement was not 

well organized. Would the military 

intervention under the Saudi-Egypt 

leadership named “Operation Decisive 

Storm” end the conflict and restore 

the order in Yemen or create 

a new disorder and terrorist waves 

turning to thunderstorm? It is hard 

to estimate the future scenarios if 

“Pandora’s Box” opens up in the Gulf 

of Aden. Because, in terms of the 

domestic balance of power, ongoing 

political developments show that 

the Southern and Northern tribes in 

Yemen have recently supported Hadi 

but they have not been effective because, 

in Yemen, Iran backs the rebel 

while Saudi Arabia supports President 

Hadi. 

President Abdel Fattah Sisi said that 

the Egyptian Army, the largest army 

in the Arab world, is ready to send 

ground troops “if necessary”. 7 Will 

Iran’s Shia movement constitute a 

threat in the Arab Peninsula and 

the sea route from the Persian Gulf, 

Aden and Red Sea to the Mediterranean? 

According to Saudi side; Iran 

is sending weapons and providing 

financial assistance to Houthis via 

the sea routes. Iranian military supports 

the Shia regime of Bashar al 

Assad and the Hezbollah, which is 

fighting alongside his forces in the 

Syrian civil war. Moreover, Iran’s revolutionary 

forces have been fighting 

in Iraq at the Tikrit front. What response 

alternatives does Iran have? 

According to the Iranian Minister of 

Foreign Affairs Mohammad Javad 

Zarif, “Saudi-led airstrikes should 

5. “Saudi Arabia launches Yemen air strikes as alliance builds against Houthi rebels”, The Guardian, 26 

March 2015. 

6. “Saudi and Arab allies bomb Houthi positions in Yemen”, Al Jazeera, 26 March 2015. 

7. David D. Kirkpatrick: “Egypt Says It May Send Troops to Yemen to Fight Houthis”, New York Times, 26 

March 2015.

stop immediately and it is against 

Yemen’s sovereignty.” Thus, we can 

say that the traditional position was 

accurate until Iran became a key 

player or lost the game in the Middle 

East and the Gulf. Russian President 

Putin called Iranian President Hassan 

Rouhani and asked for “immediate 

cessation of military activities” 

in Yemen. 

POSSIBLE IMPACTS OF THE 

YEMEN CASE ON ENERGY 

SECURITY 

It should be noted that Great Powers 

and oil companies have been closely 

following the situation in terms of 

the security of the energy corridor 

of Gulf of Aden – Red Sea – Suez Canal 

linking the Gulf energy resources 

to Western markets. On the other 

side, a possible solution in the nuclear 

talks between USA and Iran may 

be reflected on the Yemeni problem. 

There have been lots of questions 

and analysis about the impacts of 

this crisis on the local and global 

economy. However, there is a critical 

economic reality on the table that 

Yemen is the poorest country in the 

Middle East. In addition to the coup 

forces, Al Qaeda and other extremist 

groups are active in Yemen, which 

threatens the international sea 

commerce as well as the stability of 

neighboring countries. 8 Conflict in 

Yemen has triggered a dual impact: a 

threat to global energy security and 

the increase in oil prices. Internationally 

traded Brent crude futures 

were $US58.44 per barrel at 1.11pm 

AEDT, down US75¢ from their last 

settlement. US crude was down 

US88¢ at $US50.55 a barrel. 9 Investors 

fear that the Gulf region may be 

regarded as unstable and they may 

seek safe havens elsewhere. Last 

week, concerns over Saudi oil supply 

pushed prices up by 5%. The big 

concern is that the crucial shipping 

route of the Strait of Bab el-Mandeb 

would be closed by the conflict. It is 

estimated that around three million 

barrels destined for USA, Europe 

and Asia pass through the narrow 

waters between Yemen and Djibouti 

every day. 

Why Yemen civil war is important 

for energy security? We believe that 

the relationship between Yemen and 

the Gulf is more than just reciprocal. 

As we mentioned above, Yemen’s 

security is part of the energy trans- 

141 


8. “Mahmoud Rimawi: “Decisive Storm: a Turning Point for the Middle East”, Al-Araby, 27 March, 2015. 

9. “Oil Price Slips as Market Dismisses Yemen Conflict”, Financial Review, 

27 March 2015, http://www.afr.com/markets/commodities/energy/ 

oil-price-slips-as-market-dismisses-yemen-conflict-20150327-1m9ahe.


142 

portation security. Yemen is a minorleague 

oil producer. 

The U.S. Energy Information Administration 

estimates that Yemen’s 

crude oil production was about 

100,000 barrels per day (bpd) in 

March 2014. The country exports 

about 1.4-1.5 million barrels of Masila 

crude each month, mainly to 

China. French energy company Total 

is the largest foreign investor in 

Yemen and operates the Balhaf gas 

export facility, which mainly exports 

natural gas to Asia and Europe. 10 

Furthermore, geopolitically Yemen 

has the control of a critical location 

on the gate of the Bab el-Mandeb 

Strait. It is reflecting a narrow choke 

point between Yemen and the Horn 

of Africa through which big energy 

tankers and other ships pass as they 

head around the Arab Peninsula and 

up the Red Sea toward the Suez Canal. 

According to the Energy Information 

Administration, an arm of 

the United States government, about 

%7 of world maritime oil trade 

went through that passage in 2013. 

There are different views about the 

possibilities if the conflict in Yemen 

further escalates. First idea is that it 

may increase the energy prices. In 

terms of critical infrastructure protection, 

if belligerent parties attack 

Saudi’s oil facilities, it would be very 

Source:http://www.yourmiddleeast.com/news/saboteurs-blow-up-yemeni-export-oil-pipeline_17959. 

10. “ UPDATE 1-Saudi Arabia, Kuwait to strengthen oil security after Yemen strikes”, Reuters, 26 March, 

2015 .

difficult to estimate the possible impacts. 

11 Second idea is that the Saudi 

air strikes in Yemen would have little 

effect on oil supplies as the country 

was only a small crude oil exporter 

and tankers could avoid passing its 

waters to reach their ports of destination. 

12 Moreover, the passage into 

the Red Sea is pretty much secured 

by international navy operations. 13 

Furthermore, U.S., NATO, EU, China 

and other countries’ naval forces 

are cruising around the chokepoint 

in the Aden-Gulf-Red Sea waters for 

preventing oil cargo tankers. Naval 

activity in the region by regional and 

international actors can be expected 

to continue for the foreseeable future. 

Possible future naval missions 

could include patrols designed to 

prevent Iran’s resupply of Houthi 

forces from the sea. 14 However, we 

must remember that the parties 

sunk many oil tankers during the 

Iraq- Iran war. 

In terms of political history, can a 

consensus be built between Houthis 

and the Yemeni government via military 

intervention, when we consider 

the failure of Saudi Arabia and Egypt 

in 1962 coup d’état? The Gulf States’ 

air operation aims to make the participants 

not only an economic force 

in the region but also a political and 

military force. The military action 

of the regional states points out the 

formation of a new coalition that 

will take initiative against threats to 

their stability. There is an important 

point in terms of the longer-term 

market impact of rising geopolitical 

tensions in the Middle East and also 

in terms of energy security. Possible 

future developments are not very 

easy to estimate in Yemen since it 

may result in deepening the power 

vacuum as experienced before. If the 

international community does not 

pay enough attention to the problem, 

Yemen would become an arena 

of intensified regional struggle and 

143 


Source: http://cimsec.org/the-roles-of-navies-in-the-yemeni-conflict/15901 

11. “ If the strikes continue for a long time, there be might some negative effects on the reserves 

amid declining crude oil prices, which might lead to a lower reserves. However, Saudi Arabia has 

a massive amount of reserves and we believe that war will not affect the regional markets in the 

coming period. So we believe negative sentiment will be limited, and again we noticed how the 

markets reacted positively to Arab League meeting in Egypt. Dalleen Hassan: “Yemeni Conflict’s 

Impact on Gulf Markets”, Euronews, 30 March, 2015, http://www.euronews.com/2015/03/30/ 

yemen-conflict-s-impact-on-gulf-markets/ 

12. “Oil prices ease as market downplays supply threat from Yemen’’, Peak Oil News, 28 March 2015. 

13. Fred Imbert: “Don’t worry too much about Yemen conflict: Oil analyst”, CNBC, 26 March 2015. 

14. Claude Berube, Stephanie Chenault, Louis M-v, Chris Rawley: “The Role of the Navies in the 

Yemeni Conflict”, Center for International Maritime Security, 31 March 2015, http://cimsec.org/ 

the-roles-of-navies-in-the-yemeni-conflict/15901.


144 

it is likely that endless violence and 

a new big sectarian conflict would 

erupt between the Shia and Sunni 

tribes. 

CONCLUSION 

Collapse of the Yemeni government 

may create an attractive arena for 

terrorist movements, as observed 

in Syria and Iraq for a long time. On 

the other hand, the use of force by 

neighboring countries as military interventions 

and arms supply methodologies 

may result in turning the 

threats into a regional war. Bombing 

even the civil targets pose the 

danger that civil war may deepen 

the conflict. In our opinion, the first 

and most important step is to make 

the UN ensure ceasefire between 

the parties in Yemen. Constructive 

peace talks may be launched under 

the mediation of the UN Secretary 

General Ban Ki Moon. The intervention 

is attracting regional actors 

from Morocco to Qatar and Pakistan. 

We see that the Yemen and Gulf of 

Aden crises are turning into an extremely 

complex, multifaceted, long 

and dangerous civil war. This would 

also have a spillover effect on Sudan, 

Egypt, the Horn of Africa, Saudi Arabia 

and the Gulf Region. At this point, 

religious groups in North Sinai simultaneously 

attacked two army 

checkpoints before dawn, killing at 

least 13 Egyptian soldiers and two 

civilians. 15 The conflict may lead to 

an interruption in all hydrocarbon 

exporting activities. 

The Saudi side has pushed the red 

alert button in Yemen. But, we think 

15. ““Militants Carry out Deadly Attacks on Army Checkpoints in North Sinai”, New York Times, 2 April 

2015, http://www.nytimes.com/2015/04/03/world/middleeast/egypt-militants-attack-sinaicheckpoints.html?_r=0.

it is not easy to estimate when and 

how this bloody turbulence could 

end. We are also afraid that the ongoing 

conflict may trigger a new 

humanitarian crisis and turn into a 

mass refugee movement as seen in 

Syria. Combating states target Yemen’s 

critical infrastructures, collapsing 

the country’s economy, fuelling 

unemployment and triggering 

dangerous radical religious terrorist 

movements. The naval blockade option 

will prevent food and medical 

aid traffic for the civil population, 

especially children and babies. 

145 


MESUT RUCHAN HAKKI KAYA CASIN 

146 

GLOBAL DYNAMICS 

OF OIL PRICE 

FLUCTUATIONS 

RUCHAN KAYA 

SENIOR RESARCH FELLOW, ENERGY AND INTERNATIONAL 

RELATIONS EXPERT, HASEN

The crude oil saw the lowest price levels 

since 2009 and has a few economic and 

political reasons behind the drop. The 

dramatic increase in the supply side is one of 

the main factors. 

Within the past year or so, only one 

thing is certain about the oil prices 

and that is the uncertainty of the future 

price levels. In June 2014, the 

end of the year price predictions of 

Barclay’s was $109 per barrel. However, 

by that time, in January, the 

price was around $50 per barrel. 

In early 2015 Goldman Sachs and 

Bank of America Merrill Lynch made 

even more worrisome price estimates 

down around $35-45 range 

in their Q1 projections. However, in 

early March, the oil prices oscillated 

Figure 1. Crude Oil Prices in 1861-2013 ($) 

around $55-60 levels and are currently 

hovering around $65. Looking 

at these numbers and future estimates, 

clearly, we cannot predict 

the price of oil perfectly, but we can 

identify the reasons of current trend 

of decline, therefore lowering the 

amount of uncertainty in future estimations 

and policy behavior. 

One of the first things to recognize 

is that it is important to be aware of 

the fact that history of oil already includes 

such price booms and busts. 

147 


Source: BP Statistical Review of World Energy, 2014

RUCHAN KAYA 

148 

As Figure 1 shows, recent low prices 

of oil are nothing new as sharp declines 

have existed in the past. Although 

the crude oil price has been 

increasing historically since 1860s, 

looking at the adjusted prices with 

2013 dollar values, similar price 

booms and busts appear to have happened 

in the past. 

The most recent sharp price decline 

occurred in 2009. Another one was 

in the 1980s, after historically high 

levels in 1970s due to two major 

supply crises. The supply crises that 

increased the oil prices in the 70s 

were due to regional conflicts, Arab- 

Israeli War and Iranian Revolution, 

respectively. The first crisis emerged 

because of an OPEC embargo which 

quadrupled the price of oil from $3 

to $12 per barrel in about six months, 

starting late 1973 and ending in 

early 1974. The second crisis was 

also a supply crisis due to the Iranian 

Revolution in 1979. Figure 2 demonstrates 

the decline in supply levels. 

The Iranian production fell from 5.3 

million barrels per day in 1978 to 

1.5 and 1.3 barrels per day in 1980 

and 1981, respectively. This sharp 

decline in production levels more 

than doubled the crude oil price, rising 

from $14 per barrel to over $30 

levels. Figure 3 displays world oil 

supply as well as the variation in regional 

production levels and shows 

the decline in production from 66 

million in 1979 to 56.6 million barrels 

per day in 1983. 

Although the prices have soared 

immensely following these two international 

supply crises of the 70s, 

over the course of a year, the oil 

prices once again have decreased 

from $27 per barrel in 1985 to $14 

in 1986. The levels of $27 per barrel 

did not reach to the same levels 

until the 2000s. As Figure 1 displays, 

$27 at the time of the Iranian Revolution 

was almost equivalent to the 

astronomic levels following the Iraqi 

war. The main reason for such price 

decline in the 80s was oversupply 

in the market which attracted non- 

OPEC producers to increase their 

production. As Figure 3 shows, non- 

OPEC production was around 19 million 

barrels in 1972 and reached up 

to 25 million in 1980. In terms of the 

market share, non-OPEC production 

was 36 percent in 1972 and reached 

up to 51 percent in 1985. 

Figure 2. Oil Production in Iran 

Source: BP Statistical Review of World Energy, 2014

Figure3. World Oil Supply by Regions and Groups (barrels per day) 

Source: BP Statistical Review of World Energy, 2014 

POTENTIAL REASONS BEHIND 

THE FALL OF OIL PRICES 

The crude oil saw the lowest price 

levels since 2009 and has a few economic 

and political reasons behind 

the drop. The dramatic increase in 

the supply side is one of the main 

factors. While Libya already quadrupled 

its production levels after 

the sharp decline during the Arab 

Spring, Iraq increased its production 

with new investments. Beyond these 

two countries, by improving shale 

oil production, the US increased its 

production capacity from 6.8 million 

barrels to above 10 million barrels 

per day while more than doubling 

domestic rig count within five years. 

In total, world production of oil has 

increased from 81.3 million to 86.2 

million barrels per day from 2009 to 

2013. 1 While global oil supply has 

increased in the past few years, economic 

growth has plummeted. After 

picking up with growth following the 

negative effects of the 2008 global 

financial crisis, growth rates have 

decreased again especially among 

the developing countries. Within the 

BRICS countries, which usually drive 

the energy demand, the economic 

growth rate has slowed down after 

2010 and in turn the oil demand has 

experienced a decline as well. 

Although the price decline has been 

hurting the revenues of the producers, 

there are a few reasons behind 

their refusal to cut back production, 

especially driven by Saudi Arabia 

and the Gulf states. The official position 

of these countries is not to lose 

their market share to rising Iraqi and 

Iranian production. Among these 

countries, especially Saudi Arabia 

is unwilling to cut back production. 

However, according to BP figures, it 

has been consistently increasing the 

production levels since 1985, rising 

from 3.6 million to just below 11.5 

million barrels per day in 2013. In 

terms of the share of the market, 

Saudi Arabia accounted for 6 percent 

of the world oil production in 

1985 and increased its share since 

then, currently accounting for 13 

149 

CASPIAN REPORT, SPIRING 2015 

1. “BP Statistical Review of World Energy 2014.

RUCHAN KAYA 

150 

percent of the world supply. Therefore, 

the claim that the country does 

not want to lose its market share is 

rather unwarranted; rather, pushing 

for more market share seems like a 

better description. Another economy 

based claim, attempting to bankrupt 

producers with higher break even 

costs is a more plausible explanation. 

The Saudis have very low production 

costs ($4-5 per barrel) compared to 

their competitors in North America. 

Furthermore, having Sovereign 

Wealth Funds over $800 billion, the 

country has the luxury to sustain 

lower crude prices despite losing 

substantial export revenues. 

THE CONSEQUENCES OF LOWER 

PRICES 

Russia 

Being a major oil producer in the 

world, Russia is also one of the main 

losers of the current oil price bust. 

The Russian finance minister estimated 

a loss of around $100 billion 

a year when oil prices were around 

$76 at the end of November last 

year. Since then the prices kept going 

down further and currently for 

2015, IEA expects the oil price to 

range around $55 per barrel. With 

such estimates the Russian financial 

loss from the oil prices could go up to 

$183 billion for 2015 due to the decline 

in oil prices. Furthermore, Gazprom’s 

natural gas contracts are tied 

to oil prices, mostly with a six-month 

lag. 2 Because of these agreements 

Gazprom and Russia will experience 

the negative effects of the price 

shocks with a six month delay. Russia 

is one of the largest oil producers 

in the world with a capacity of 10.8 

million barrels per day and the largest 

natural gas exporter with 225 

bcm export in 2013. Oil and natural 

gas revenues also account for more 

than half of the Russian state budget. 

Therefore, relying on such natural 

resources as primary source of income 

–not to mention the financial 

loss due to the Western sanctions 

over Crimea annexation- will exacerbate 

the consequences of the falling 

oil prices on Russian economy. 

North America 

Although the United States is one 

of the largest oil producers in the 

world, unlike Russia, it is also one of 

the major winners of low oil prices, 

especially on the political side of the 

spectrum. Domestically the consumers 

enjoy lower gasoline prices. EIA 

estimates an additional $750 savings 

per household due to cheap gas 

while families which use heating oil 

may enjoy another $750 advantage 

over the year of 2015. This is a major 

boost for lower and middle income 

families and a major political advantage 

for the current administration. 

Internationally too, US is able 

to hurt its global adversaries like 

Russia, Iran, and Venezuela through 

lower prices. A similar strategy was 

followed in the 1980s where Saudi 

Arabia started to increase its oil supply 

dramatically, helping to lower the 

price of oil in order to hurt Iran-- and 

also the Soviet Union. At the time 

these pricing policies of the Kingdom 

received criticism from bin Laden 

who wrote a letter to King Fahd and 

accused him for serving American 

interests and consumers while hurting 

the Saudi economy. 3 

Unlike the United States, its northern 

neighbor, Canada appears to 

struggle as the price of oil plummets. 

2. “Kramer 2015. http://www.nytimes.com/2015/02/28/world/europe/russia-and-ukraine-calm-feudover-natural-gas-payments.html?emc=edit_tnt_20150227&nlid=61706155&tntemail0=y&_r=0 

3. Gamal and Jaffe p. 66.

With high oil prices and the availability 

of new technology, Canada 

invested over $150 billion in oil industry 

and now struggling due to 

low oil prices. The Canadian central 

bank lowered the interest rates and 

the currency depreciated close to 20 

percent. Given the current situation, 

the already unpopular conservatives 

might lose the federal elections after 

9 years in the upcoming elections in 

October 2015 if the price of oil stays 

this low. 

Looking Ahead 

It is hard to predict the direction of 

the volatility in oil prices. Even the 

major players in the markets fail 

to make healthy short or long term 

predictions. However, taking lessons 

from the history might help us 

better understand the political and 

economic dynamics behind such 

drastic price fluctuations. Looking at 

the major price declines in the past, 

Figure 1 displayed how similar ups 

and downs have happened in the 

past. However, these fluctuations 

had different dynamics like supply 

crises, oversupply, major political 

disagreements or wars. The current 

price decline seems to be a product 

of oil glut which is similar to what 

happened in the 80s. The question 

is whether major oil producers will 

continue to fight for market share 

and force to bankrupt small drilling 

companies or agree to cut back the 

supply in the short term. For now 

the latter appears to be a far-fetched 

idea. Another possibility is a potential 

increase in oil demand through 

a financially healthy Eurozone and 

growing BRICS economies. 

151 

CASPIAN REPORT, SPIRING 2015

CASPIAN 

CALL FOR PAPERS 

152 

Caspian Strategy Institute calls for individual policy paper proposals for its Caspian 

Report journal. Caspian Report aims to facilitate dialogue and exchange of ideas 

between policy makers, scholars and researchers whose research is related to 

Caspian, Central Asia, Caucasus, Turkey and broader Eurasia. The program aims to 

contribute to the diversity of voices and analytical perspectives on abovementioned 

geographies. For further information, visit www.caspian-report.com 

We welcome individual paper proposals on policy-relevant issues from disciplines 

such as history, political science, international relations, public policy, economics, 

sociology, and conflict resolution. While papers can be from a broad range of topics, 

we emphasize that the subject matter should have policy implications. 

Please submit your paper and a short bio page as separate word document 

attachments to paper@hazar.org by July 15, 2015. 

www.hazar.org

Caspian Report - Issue 09 - Spring 2015

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