Georgia, Azerbaijan: A New Oil Terminal, and More Money for Baku

November 21, 2007
Stratfor

There is a mistake in the article below. Russia does not have peacekeepers deployed in Nagorno-Karabakh.

Summary

Georgia and Azerbaijan inaugurated a new oil terminal in the Georgian Black Sea port of Kulevi. Not only does this translate into more oil and petroleum products for the West, it also means Baku's coffers will be full like never before.

Analysis

Georgian President Mikhail Saakashvili and Azerbaijani President Ilham Aliyev opened a new oil terminal Nov. 21 in Georgia's Black Sea port of Kulevi. The Kulevi terminal, which Azerbaijan's state-owned oil company SOCAR will run, will start with a capacity of 100,000 barrels per day (bpd), but that is expected to double.

The Kulevi oil terminal will supply the West with crude oil and refined products from Azerbaijan, which has received increasing attention as Europe looks to decrease its energy dependence on politically hot countries such as Russia, and as Azerbaijan seeks export options outside its typical use of Russian energy infrastructure. Over the past two years, Azerbaijan and Europe have built an energy relationship, with the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and Turkey-Greece Interconnector (TGI) natural gas pipeline coming on line. What is different about Kulevi is that a third of the exports will be refined petroleum products -- something Azerbaijan has not exported to the West before.

The Kulevi terminal will make Azerbaijan the big winner -- especially financially. The BTC alone has brought $3 billion to Azerbaijan in the first year of operations. The money flow is expected to increase vastly with the TGI and now Kulevi coming on line.

Energy wealth has doubled Azerbaijan's gross domestic product, but the sudden wealth is very worrying to certain of Azerbaijan's neighbors because the majority of the money is going toward defense. Azerbaijan's defense budget has jumped from just a few hundred million a year to a billion this past year. The country is arming itself, and neighboring Armenia is closely watching. The two countries have been deadlocked over the Azerbaijani secessionist region of Nagorno-Karabakh -- a conflict that has flared into a war in the past. Azerbaijan's armament now has many wondering if Baku is planning another conflict against a neighbor that has been cut out of the region's recent energy wealth.

But there is another player in this game: Russia. Moscow has continually been part of the negotiation over Nagorno-Karabakh and currently has peacekeepers deployed there. Should the conflict spin up again, Russia would definitely sweep into action as the "great mediator." Currently it is playing both sides by supplying both Armenia and Azerbaijan with weapons, though Baku obviously has its own money to buy them. However, as Azerbaijan becomes more of an energy rival to Russia, Moscow has an increased interest not only in arming both sides, but also in seeing Azerbaijan fully destabilized by embroiling itself in a messy conflict.

Note: Above are excerpts from the article. The full article appears here. Clarifications and comments by me are contained in {}. Deletions are marked by [...]. The bold emphasis is mine.