Azerbaijan can keep developing energy for export but needs an entrepreneurial business environment at home.

In November 2012, Rovnag Abdullaev, president of the State Oil Company of the Azerbaijani Republic (SOCAR), told an Atlantic Council summit that Azerbaijani gas exports would reach at least 40-50 billion cubic metres per year (bcm/y) by 2025. A few weeks ago the deputy energy minister, Natig Abbasov, extended this horizon to 2050.

The first projection may charitably be called unrealistic, and the second optimistic. What do they mean, particularly in light of statements (for example, by Finance Minister Samir Sharifov in May 2015 to the Asian Development Bank) that Azerbaijan is revising its economic development strategy in light of the fall of world energy prices, Europe’s economic stagnation and its attempts to turn to renewable energy sources?

The question has always been present: How can Azerbaijan transform its natural resource wealth into generalized economic development? From 2005 through 2008, public spending roughly doubled each year. This much-needed increase went mainly to high-priority infrastructure, but it was built on oil and oil revenues. Azerbaijan has made important strides in reducing poverty, but the question is how to sustain and consolidate them. Job creation outside oil construction is absolutely necessary.

Highly qualified Azerbaijani economists have been working with international financial institutions for more than a few years to move toward a growth model for a more diversified economic structure. This has to include creating a business environment enabling innovation, facilitating investment and fostering entrepreneurship. A new and well-educated generation of Azerbaijanis is ready to accomplish these tasks if the right market institutions are quickly built.

What the unexpected fall in world energy prices means is that Azerbaijan must begin this transition rather earlier and rather more rapidly than expected. The 50 bcm/y export figure is not necessarily out of the question in the long run. If the demand is there, Azerbaijan can develop the resources, but it will not do so unless the purchase contracts are signed. However, Azerbaijan could supply enough gas to Europe to satisfy most if not all of Europe’s gas demand from the region, even under the most optimistic expectations of European economic growth. This would mean that Turkmenistani, Iranian or Iraqi use of the Trans-Anatolian Gas Pipeline (known as TANAP) to Europe would be minimal. Maybe the projection is a statement by Azerbaijan that it is ready to take up the entire slack of Russia’s gas exports to Europe, if Europe chooses to free itself from contracts with Russia by then.

Such a statement it may well be. But Baku is also at pains to indicate that it does not wish explicitly to exclude other countries’ use of TANAP. When it signed an agreement with Moscow last week to buy 3-5 bcm/y for injection into offshore wells, to increase oil output, there was speculation even in the informed energy press that this signified the end of the Trans-Caspian Gas Pipeline project, under the sea between Azerbaijan and Turkmenistan. Turkmenistan has “stranded gas” in its own offshore, developed by Malaysia’s Petronas, which could produce up to 8-10 bcm/y for easy transfer to the Azerbaijani sector. But quick clarifications followed from semi-official Azerbaijani sources and official Turkmenistani sources that their trilateral talks, with the EU’s sponsorship, were still under way and expected to succeed.

Indeed, the EU confirmed its earlier projection that the gas would begin flowing by 2019. This would require the Turkmenistani leadership to show the political will that has been lacking for almost the last decade in this regard, and it would also mean that it would have to turn its attention at least partly away from prospects for the still more unlikely Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline that has really been at the centre of its attention for the last year or so.

The Turkmenistani leadership can apparently really deal with only one such major project at a time, because of a lack of sufficient expertise. Indeed, at some point it will have to overcome its resistance to real cooperation with major international firms and change its policy of insisting on selling gas at its border. It is probably this policy that partly stood in the way of the Petronas offshore gas getting to Azerbaijan.

In a few years, plans will be drawn up for exploitation of Shah Deniz Three, the third phase of the vast offshore gas deposit. There are in addition a half-dozen others, some with signed Western partnerships, waiting for development.

And just recently, even China’s CNPC has expressed interest in being involved in a wider range of projects than heretofore, notably the important Oil and Gas Processing and Petrochemical Complex project that SOCAR is already implementing near its Sangachal terminal. This will create needed jobs in the near term, but again only in the oil and gas sector, which Azerbaijan must make strides to transcend. The greatest obstacle may be the institutional culture of vested interests of large organizations that may seek to “crowd out” newcomers in whatever economic sector.

Kazakhstan had this problem for many years, but in the 21st century it has developed a more or less economically vibrant middle class in some of the larger cities. But Kazakhstan’s economic geography differs from Azerbaijan’s. Notably, Kazakhstan has benefited from the exodus of Russian-speakers to Russia over the last quarter-century, creating possibilities for the remaining population. But one of the largest underplayed problems is the economic burden on Azerbaijan of continuing to provide for a million refugees from Nagorno-Karabakh and Armenia, equivalent to 10 percent of the population, and now their next generation.

Photo: Ververidis Vasilis / Shutterstock.com

 


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