The Oil and Gas Resources of Azerbaijan

Fazil Zeynalov

Connaissances & Savoirs

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The Oil and Gas Resources of Azerbaijan

“Oil is the greatest national wealth of the Republic of Azerbaijan and the Azerbaijani people. Azerbaijan has been the land of oil since ancient times and has natural wealth such as oil and gas at its disposal. It is for this reason that Azerbaijan is known as the land of fires.”

Heydar Aliyev 1

Abbreviations

ACGAzeri-Chirag-Guneshli [deposits]

AGRIAzerbaijan-Georgia-Romania Interconnector

AIOCAzerbaijan International Operating Company

BNITO        Naphtha trading and industrial company of Batum

BPBritish Petroleum

BTCBaku-Tbilissi-Ceyhan [oil pipeline]

BTEBaku-Tbilisi-Erzurum [gas pipeline]

BTKBaku-Tbilisi-Kars [railway]

CIS        Commonwealth of Independent States

DRADemocratic Republic of Azerbaijan

ECOEconomic Cooperation Organization

EITIExtractive Industries Transparency Initiative

EUEuropean Union

INOGATEInterstate Oil and Gas Transport to Europe

ITGIInterconnector Turkey-Greece-Italy

NISNewly Independent States

PSAProduction Sharing Agreement

SOCAR        State Oil Company of Azerbaijan Republic

SOFAZ        State Oil Fund of the Republic of Azerbaijan

SSRSoviet Socialist Republic

TANAPTrans-Anatolian Pipeline

TAPTrans-Adriatic Pipeline

UNUnited Nations

USSRUnion of Soviet Socialist Republics

Introduction

Located on the historic Silk Route, at the crossroads of Eurasia, Azerbaijan has been of particular interest since Antiquity for its geographic position and natural wealth. It has long been known as the Land of Fire, a name that is intrinsically linked to the abundant underground energy resources of the Absheron Peninsula. At various periods in the history of humanity, travellers and geographers who visited the country reported the presence of black oil and how it was used by the country’s inhabitants, not only for daily uses but also in international trade.

Azerbaijan’s oil was fully discovered as an essential economic resource in the mid-19th century, at a time when the world was becoming aware of the importance of this precious resource, following the introduction and widespread use of increasingly perfected technologies, the development of national and international means of transport, and progressive changes in the lifestyles of the people. This resulted in a gradual increase in global demand, which in turn led to new economic opportunities for the extraction of oil. As the producer of half of the oil consumed worldwide, Azerbaijan was seen as a miraculous land and became a “magnet” for international investors. It mobilised considerable financial resources and used new technologies and expertise in the energy sector, which in turn fuelled the growth of other economic activities. It became a particularly important player not only in the region but internationally, and also fuelled the envy of the world’s major powers. However, the nationalisation of the oilfields during the Soviet period was not successful in allowing the attraction of Azerbaijan to flourish fully in the context of the quickly developing international oil trade.

With Azerbaijan’s independence in 1991 came the opportunity to study the most effective ways to boost the energy sector, a difficult task given the complex regional climate and persistent conflicts of interest, whether explicit or unspoken, between the main players on the international stage, the unprecedented national and regional economic crisis brought about by the split between the former Soviet Republics and the bankruptcy of the planned economy, and finally the undeclared war by Armenia, which occupied 20 % of Azerbaijan’s territory causing a wave of almost one million refugees and displaced persons on national soil. The exploitation of oil and gas resources was not seen simply as a means of generating wealth for a few private companies; the government’s stated objective was to establish a way to achieve the goals of its national development strategy. 2 However, essential economic and geopolitical challenges first had to be met, such as attracting foreign investors, increasing the capacity for oil and gas extraction, and diversifying export channels towards the international markets. In this context, President Heydar Aliyev showed courage, caution and foresight by signing the “contract of the century” on 20 September 1994, a date that resonates with the people as it marked the beginning of a new phase in the history of Azerbaijani oil, paving the way for a series of new contracts relating to both offshore and onshore fields and cooperation with various partners that was beneficial and mutually advantageous. 3

Azerbaijan currently has major assets:

- it serves as a strategic “bridge” between Europe and Asia and continues to offer attractive land routes for Euro-Asian trade;

- it provides direct access to the international and European markets;

- and it constitutes a unique opportunity to transport energy resources from the countries of Central Asia.

By developing its infrastructure with the diversification of oil and gas pipelines, Azerbaijan became a major regional energy hub 4 , a key actor at the heart of most energy projects in the region and a new partner in the energy security of Europe.

This gives us a clearer understanding of the importance of geography in the destiny of Azerbaijan, which, from the time Heydar Aliyev came to power, has adopted a foreign policy that is multi-faceted and balanced. While its geographic location, the nature of its terrain and its underground resources have been important factors in determining the government’s actions, the wise and forward-thinking policies adopted since 1993 have constituted an essential asset in the economic and political success of Azerbaijan. Given its strategic and economic appeal, this is a country that has managed to avoid becoming a stage for latent confrontation between the major powers. It has committed to a policy based on partnership with all parties who will determine the future of a region that is particularly sensitive to violence and war.

The Caspian Sea is inextricably linked to the history of Azerbaijan. It was once a source of wealth thanks to its biological resources and its role in international trade. When the Arab geographer and traveller, al-Istakhri, described the Azerbaijani shores of the Caspian in the 10 th century, he wrote of fishing and the presence of many merchant ships. 5 The Caspian enabled successive Azerbaijani States to maintain their commercial links with neighbouring countries, although without being protected by the ambitions of the major conquering forces or the military incursions from the tribes in the north – who travelled by sea to pillage the coastal provinces. The Caspian Sea, shared by the five States that lie on its shores, is now a source of wealth due to its energy resources. Azerbaijan is developing its capacity to extract these resources within its territory and has put in place a new strategy to ensure a better future. It is writing a new page in history.

Chapter I. Oil exploitation in the Middle Ages

There is little available information about the energy resources of Azerbaijan in ancient times, but an abundant literature provides evidence of perpetual fire as a result of natural gas rising to the surface around Baku, and particularly in the village of Surakhani – considered the cradle of oil production in the region. 6 “In any case, it is clear that for 25 or 30 centuries, Absheron and its flames were renowned among the peoples of Antiquity.” 7 The fire was used by the inhabitants for their domestic needs, as reported by an anonymous geographer in the 13 th century. He describes the city of Baku “as a coastal city in Shirvan province. All night long the land there burns like a flame; people bring saucepans to boil water”. 8 All that was needed was to dig one metre underground to generate a powerful flame four metres high. 9

Some authors point out that Zarathustra, who founded Zoroastrianism with perpetual fire as its core symbol, spent some time here in the 6 th century BC before departing for Asia. We do not have any more information, but it is clear that Zoroastrianism was particularly well-developed in the Absheron Peninsula 10 ...