Azerbaijan: A linchpin of European energy diversity and security
The ‘Contract of the Century’ brought many positive outcomes for Baku.
By ARYE GUTTHE FLAME Towers in Baku are a symbol of the new and independent Azerbaijan.(photo credit: AZERTAC)
Historically, countries that have large reserves of energy resources have always attracted interest. Among these countries is Azerbaijan, whose oil industry dates back 130 years. Industrial oil production Azerbaijan began in 1871 at the Balakhani and Bibi-Heybat fields, using a mechanical method of drilling wells.Oil production in Azerbaijan has experienced ups and downs, associated with political upheavals of the 20th century, such as the First World War, the October Revolution in Russia, the massacre of Azerbaijanis by Armenian dashnak terrorist groups in 1918, the occupation of the Azerbaijan Democratic Republic, the introduction of the XI Red Army in 1920, the nationalization of the oil industry of Azerbaijan, and the Second World War. The Armenian-Azerbaijani Nagorno-Karabakh conflict at the end of the 20th century resulting in the occupation of 20% of the territory of sovereign Azerbaijan also caused a downturn in oil production.At the time of the collapse of the USSR, the volume of oil production in Azerbaijan was small. After a difficult transformational crisis, the country had to start over, carry out reforms and attract foreign investment capital. Coupled with its abundance of oil and the increase in world hydrocarbon prices, Azerbaijan was able to achieve high rates of economic growth. After the restoration of independence in 1991, it was necessary to restore the oil industry of Azerbaijan and develop large oil and gas fields discovered in the Azerbaijani sector of the Caspian Sea as well as explore promising structures. This required large capital investments and the introduction of modern engineering and technology into the oil and gas production practice as a whole.This difficult but rewarding path began on September 20, 1994 in Baku, when the first international agreement “on the joint development of the Azeri, Chirag and Guneshli oil fields in the Azerbaijani sector of the Caspian Sea was signed. Due to its importance, this agreement has been called the “Contract of the Century.”The first oil contract was a 30-year agreement, and was signed by 12 companies from eight countries. According to preliminary calculations, the recoverable oil reserves at the Azeri and Chirag fields and the deep-water portion of the Guneshli field amounted to 511 million tons; subsequently, based on new estimates, oil reserves were set at 630 million tons. Moreover, the production of additional gas is 70 billion cubic meters.AZERBAIJAN’S OIL strategy has increased the country’s geopolitical status in the South Caucasus, in the Caspian region and around the world. Azerbaijan is currently considered one of the world’s oil centers and an artery in the flow lines through Asia, the Caucasus and Europe.This contract was of great strategic importance, since the South Caucasus is of economic, political, geographical and geostrategic interest for major states.A state that can develop economic power in the region ultimately helps ensure political stability in the area. Western countries with investments and other economic and technological advantages in the exploitation of Azerbaijani oil created favorable conditions for promoting their strategic interests in the region. At the same time, Azerbaijani diplomacy has gained additional opportunities for evolution. Regarding the meaning of the Contract of the Century, then-president of Azerbaijan Heydar Aliyev best expressed its value.“By signing this contract, we once again demonstrated to the world that Azerbaijan is a completely independent state and that its people control their own resources. We have created relations with the developed countries of the world, with their largest oil companies, and the basis for the integration of Azerbaijan into the world economy and the creation of a free market economy.”In accordance with the Contract of the Century, 31 international contracts have been signed with the world’s largest oil companies regarding other fields in the Azerbaijani sector of the Caspian Sea. There are now three pipelines delivering Azerbaijani oil to world markets. The Baku-Tbilisi-Ceyhan oil pipeline has become a reality.
In addition to being one of Azerbaijan’s main oil clients, Israel has further important reasons to seek stronger relations with Baku. A significant portion of the oil consumed by Israel (an estimated 65%) is imported from Azerbaijan or by way of Azerbaijan through the Baku-Tbilsi-Ceyhan (BTC) major oil export pipeline. Azerbaijan also serves as the linchpin for energy diversity and security for European and Western markets. It is not only the major energy and transport hub in the region, but a major producer of oil and natural gas, thus presenting Europe with a non-Russian, non-OPEC and non-Iranian energy alternative.The signing of the Contract of the Century also gave Azerbaijan the opportunity to become a producer and exporter of gas. Until 2007, Azerbaijan purchased about 4.5 billion cubic meters of gas per year, but since then it has begun to export gas through four different pipelines to Russia, Georgia, Iran and Turkey.THE CONTRACT of the Century went down in history as the first comprehensive economic decision adopted by Heydar Aliyev, which determined the main priority in the policy of his administration – the oil strategy.However, the value of the contract was not limited to the expected financial profit. In the early 1990s, Azerbaijan began to gradually emerge from its catastrophic situation on the basis of the project of Heydar Aliyev. In those years, the Azerbaijani state was supposed to inherit the historical Azerbaijani statehood, taking full responsibility not only for its short period of independence, but also for the entire experience of Azerbaijani history.The Contract of the Century inevitably led to a change in the scale of social actions in Azerbaijan. The people had a chance to leave behind past difficulties and embark on the path of development through the influx of large financial resources. The contract has become the driving force behind modernization and has acquired a long-term practical meaning. Since the signing of the Contract of the Century, another 26 contracts have been signed with 41 oil companies, representing 19 countries all told.The exploitation of this giant block of fields was to be carried out in three stages. The first oil was produced on the Chirag platform on November 7, 1997. To fulfill the terms of the contract on time and to supply growing volumes of produced oil to international markets, new pipelines were built and commissioned.At the end of 1997, oil began to be exported to the Black Sea via the Baku-Novorossiysk pipeline. In 1999, an oil pipeline from Baku to the Black Sea port of Supsa was laid and commissioned. In addition, in December 1999, the first tanker with Azerbaijani oil was launched on world markets. In 2002, as a result of the persistent efforts of the national leader, Heydar Aliyev, the foundation was laid for the Baku-Tbilisi-Ceyhan oil pipeline, envisaged in the “Contract of the Century,” which many had considered a myth. The construction of an excellent oil pipeline was an important step toward turning Azerbaijan into an energy corridor.On May 25, 2005, the opening ceremony of the Baku-Tbilisi-Ceyhan oil pipeline was held with the participation of President of the Republic of Azerbaijan, Ilham Aliyev, and in 2006 transportation of Azerbaijani oil from the Turkish port of Ceyhan began.The following pipelines were built to supply Azerbaijani oil from the Caspian Sea to world markets: Baku-Novorossiysk (1,330 kilometers), Baku-Supsa (833 kilometers) and the main export pipeline Baku-Tbilisi-Ceyhan (1,768 kilometers).By 2017, investments worth about $33 billion were invested in the development of Azerbaijan’s offshore oil resources; 3.2 billion barrels of oil were produced in Azeri-Chirag-Guneshli. In addition, 30 billion cubic meters of associated gas was produced and delivered to the Azerbaijani government on the block of the Azeri-Chirag-Guneshli fields.IN RECENT years, the economic policy of Azerbaijan has been aimed at sectoral diversification of the country’s economy. For example, from 2011 to 2014, the non-oil sector accounted for an average of 60% of value added to the economy, and from 2015 to 2017, it increased to 70%. The structural reforms implemented in the country are designed to stimulate non-oil exports and private enterprise and to develop the agricultural and manufacturing sectors. Despite the reduction in revenues from oil export deliveries following the results of 2017, the non-oil economy of Azerbaijan showed an increase of 2.8%.In order to effectively manage hydrocarbon revenues, ensure their fair distribution and channel these funds to the development of priority sectors, the State Oil Fund of the Azerbaijan Republic was established. The State Oil Fund, in a short period, has become one of the most transparent funds in the world, providing long-term financial returns for current and future generations thanks to efficient and transparent management of funds. In recent years, Azerbaijan has carried out many reforms that are designed to modernize the country and develop dynamically. The economic growth dynamics of the Azerbaijani economy are evidence of the successful implementation of this strategic course. The direction of oil revenues to the non-oil sector has led to great success in the development of this industry. In addition, the opening of new production sites and the creation of jobs in the non-oil sector, the unprecedented scale of development of infrastructure for transportation and utilities, and the creation of modern enterprises of social infrastructure – including the construction of educational institutions, improved health care and athletic facilities – illustrate the dynamic and sustainable progress of the Republic of Azerbaijan.The achievement of significant successes in the field of education in recent years is also directly related to socio-economic policies aimed at modernizing the country. Important steps have been taken aimed at modernizing the education infrastructure. In the framework of the “State Program for the Education of Azerbaijani Youth in Foreign Countries in 2007-2015,” over 1,300 people were sent to study abroad during this period with funding from the State Oil Fund. Currently 10,700 Azerbaijani students are receiving education at leading universities in the world. As President Ilham Aliyev noted: “Since 2019, a new stage of reforms has begun in Azerbaijan, the purpose of which is to turn Azerbaijan into a modern, developing country, improve the welfare of citizens, eliminate existing problems and build a stronger state. Based on these goals, Azerbaijan is carrying out systemic and institutional reforms and we will carry them out in the future.”Due to the positive effects of caused by the Contract of the Century, excellent opportunities are available for developing the well-being of the Azerbaijani people and for strengthening the stability of Azerbaijan in the 21st century.This article was written in cooperation with Hope for the Future Association for Emigrant Jews of Azerbaijan and the Caucasus.
