June 22, 2013

Ukraine - Azerbaijan: state and prospects of cooperation in the energy sector

The Independent Analytical Center for Geopolitical Studies “Borysfen Intel” affords ground to the analysts generation for expressing their point of view regarding the political, economic, security, information situation in Ukraine and in the world in general, according to their personal geopolitical studies and analyses.


Note that an authors’ point of view
can disagree with the editor’s one

Oleksiy O. Volovych

Born in Kirovograd, in 1947, Central Ukraine.

A graduate of Faculty of Oriental Languages of the Military Institute of Foreign Languages in Moscow, Historical Faculty of Ivanovo University (Russia). Candidate of Historical Sciences (PhD in History). Defended Doctoral dissertation about the American-Libyan relations in Institute of Military History in Moscow.

1966–1996 — service in Military Forces of the USSR and Ukraine.

Served as a military translator in Egypt, Iraq, Libya, military observer in UN Peacekeeping Forces in Bosnia and Herzegovina (UNPROFOR).

From 1996 — the Head of the Department of Near and Middle East Office of the Asia-Pacific region, the Middle East and Africa; Associate Professor of the Department of International Relations of the Institute of Social Sciences of the Odessa National University; the First Secretary on the political issues of the Embassy of Ukraine in Lebanon; Director of the Odessa Branch of the National Institute of Strategic Researches. At the present time Senior Research Fellow of the Odessa Branch of the National Institute of Strategic Researches.

Knows English, Arabic and some its dialects (Egyptian, Iraqi, Lebanese).

Married, has two sons and two grandsons.


State and Prospects of Cooperation in Energy Sphere

According to generally accepted international standards of energy security, energy carriers supply from one source should not exceed 25% in any country, because only in such conditions the state may develop as energy independent. To majority of European countries energy carriers come from 5-8 outside sources. The USA gets energy carriers from 60 countries, while providing itself with its own hydrocarbons by 30% and, according to forecasts, in a few years due to the "shale revolution", it will not only satisfy its own needs for gas, but will also become one of the largest gas exporters in the world. China gets energy carriers from 30 countries, also providing its own energy resources by 25%. To Turkey energy carriers come from 12 countries, but self-sufficient energy is negligible percentage.

Ukraine belongs to energy deficit countries as from its own sources of fuel-energy resources it meets its needs only by 47-50%. Domestic production covers 10-15% of the demand for oil and 20-25% — for natural gas. Ukraine receives major amounts of energy carriers (oil, gas, nuclear fuel) mainly from one source — Russia, 90% of oil, 60% of gas, 100% of nuclear fuel. The price of Russian gas for Ukraine today is one of the highest among the countries of Central and Eastern Europe — 432 dollars for 1 thousand m³ including the "discount" of $ 100 per 1 thousand m³, which Ukraine received due to the extension of the Agreement on the Black Sea Fleet basing in the Crimea till 2042.

Under these circumstances, the dependence of the energy sector and economy of Ukraine in general on imported energy carriers supplies is critical, since in recent years the energy factor has been used by Russia as an important tool not only of economic but also political influence. Thus, much of Ukraine's dependence on Russian energy carriers puts the problem of diversification among the main tasks of strengthening the energy security of our country.

There are few regions in the world, from which Ukraine can receive alternative to Russian energy carriers. They are North Africa, the Gulf region and especially Caspian countries — Azerbaijan, Kazakhstan and Turkmenistan. One of the factors that determines the priority of Ukraine's cooperation with the countries of the Caspian Basin is their relative geographical closeness.

Oil Resources of Azerbaijan.

According to the CIA-World-Factbook, in 2012 the proven reserves of oil in Azerbaijan amounted to 7 billion barrels (21st place in the world), production — 987 thousand barrels per day (22nd place in the world), export — 821 thousand barrels per day (16the place in the world), consumption — 168 thousand barrels per day (65the place in the world). Currently, Azerbaijan produces 24 thousand tons of oil per day. For comparison, here are the same data and the same source in neighboring Kazakhstan: Proven oil reserves — 30 billion barrels (12th in the world and only twice less than in Russia), production — 1.635 million barrels per day (18th in the world), export — 1.078 million barrels per day (14th in the world), consumption — 244 thousand barrels per day (53d in the world).

By some estimates, projected reserves of liquid hydrocarbons of Azerbaijan are estimated at 4 to 8 billion tons, of which about 0.9 -1.8 billion tons are classified as proven. However, by all indications, estimates of proved reserves of Azerbaijani oil were too high and now they are no more than 250 million tons. This means that at production level of 25 million tons per year, Azerbaijani oil reserves will last for 10 years. From 1995 to 2010, oil production in Azerbaijan had increased more than 5 times: in 1995 — 9 million tons, in 2000 — 14 million tons, in 2005 — 22.2 million tons, in 2010 –to 50.7 million tons. But it seems that 2010 was the peak of oil production in Azerbaijan. The volume of oil production in the country has been decreasing for the third year in a row. Thus, in 2011, oil production decreased by 10.8% to 45.4 million tons, and in 2012 — already by 5.3% to 43 million tons. Over the first two months of 2013 oil production in Azerbaijan decreased by 4 %.

Where does the Azerbaijani oil go to?

Where does the Azerbaijani oil go to?
Where does the Azerbaijani oil go to?

In April 1999, were put into operation the Baku — Supsa oil pipeline, with capacity of 6.5 million tons of oil per year, and the Supsa Export Terminal on the Black Sea coast of Georgia, which allowed Azerbaijan for the first time to start oil exports to world markets, bypassing Russia. Another pipeline bypassing Russia became the Baku — Tbilisi — Jeyhan (BTJ) 1773 km long, enacted in July 2006. Carrying capacity of the BTJ project is 50 million tons of oil a year, but so far it has not been achieved mainly due to the lack of a sufficient amount of Azerbaijani oil.

Since 1996, Azerbaijan has been exporting oil in small amounts (up to 5 million tons per year) through Baku — Novorossiysk oil pipeline, but in mid-May this year the Russian government unilaterally terminated the Agreement of 18 January 1996, as Azerbaijan did not fulfill its obligations regarding oil pumping. In recent years it has actually transported only about 2 million tons of oil, thus maintaining the oil pipeline became unprofitable for the Russian company "Transneft" serving this pipeline. According to experts, the reduction of Azerbaijan's oil transportation through Russia is basically due to a decrease of Azerbaijani oil production in recent years, which is not enough for maximum filling the above mentioned two pipelines.

How much oil is there in Ukraine?

According to the CIA-World-Factbook, in 2012, proven oil reserves in Ukraine were 395 million barrels, or about 60 million tons. However, many experts believe that the initial oil reserves in Ukraine make 560 million tons of oil with gas condensate. Besides, Ukraine has a significant potential to increase oil reserves by exploring new oil fields, especially in the offshore Black Sea.

Ukraine’s need in oil and refined products today is about 22 million tons per year. Domestic production meets the needs of the national economy by only 10%. According to "Naftogaz of Ukraine", in comparison with 2010, the volume of oil production in Ukraine in 2011 decreased by 6.3% and amounted to 2.41 million tons. In January-March 2013, oil production declined by 7 5% (by 43.5 thousand tons) as compared with the same period of 2012 — to 533.2 thousand tons. The rest of oil is being imported from Russia, Kazakhstan and Azerbaijan, at this, the share of Russian raw materials in the structure of oil imports to Ukraine is over 95% and over 70% of the total volume of the domestic oil consumption.

According to the Energy Strategy of Ukraine till 2030, before the oil workers of Ukraine is a rather modest task: in 2030 to be producing ( according to the optimistic scenario) 5.8 million tons of oil, which means that even 17 years later the main supplier of oil to Ukraine will remain Russia. The task of increasing domestic production of oil can be executed only if there will be allocated funds from the state budget for the purchase of equipment necessary for geological exploration and development of oil fields on land and offshore. The problem is, these funds have never been allocated in sufficient amounts.

“Odesa-Brody” oil pipeline

“Odesa-Brody” oil pipeline
“Odesa-Brody” oil pipeline

“Odesa-Brody" oil pipeline with the capacity of 14.5 million tons of oil per year, was built in 2001 as part of the Eurasian Oil Transporting Corridor (EAOTC), primarily to deliver Caspian oil (Kazakhstan and Azerbaijan) to Ukraine and then to transit it to countries of Central and Eastern Europe. In the same year in the port “Yuzhnyi” (Rus: "Southern") near Odessa was completed the first stage of the sea oil terminal (SOT) “Pivdennyi” (Ukr: "Southern"). Until 2004 the oil pipeline had not been working, and then it was used in the reverse mode to transport Russian oil to the SOT "Pivdennyi". Since 2009, the oil pipeline has been used in the reverse mode to transport Azerbaijani oil to the Mozyr refinery in Belarus.

It seems that the Caspian oil in significant volumes will not soon come to Ukraine and Europe through this pipeline for a number of reasons:

firstly, construction of the Brody — Plotsk part of the pipeline has not started yet;

secondly, today Azerbaijan does not have enough oil to fill the pipeline and possibly will be able to do this only after 2016;

thirdly, there are no guarantees regarding volumes of oil that Azerbaijan could deliver to Europe (needed at least 10 million tons per year);

fourthly, lack of a five-sided intergovernmental agreement between the countries participating in the EAOTC project (Azerbaijan, Georgia, Ukraine, Poland and Lithuania);

fifthly, lack of agreement between suppliers and consumers of Caspian oil.

This raises doubts of the Polish side about profitability of the future oil pipeline and the price of Azerbaijani oil. According to some Polish experts, if Russian oil turns out cheaper than the Caspian one, there will be no point in continuing the pipeline "Odessa-Brody" to Plotsk and further, to Gdansk. Therefore, it is possible that the Polish government will refuse from participation in the EAOTC project because of its economic unprofitability.

Lack of Azerbaijani oil for Ukraine

Ukraine is ready for the transit of Caspian oil to Europe, but is primarily interested in getting this oil for its domestic needs too. However, problems in this area are much larger than gains. According to the State Statistics Committee of Ukraine, in 2012 the trade turnover between Ukraine and Azerbaijan amounted to 903.8 million US dollars and decreased as compared with 2011, by 492.1 million US dollars or by 35.3%, just because Azerbaijani oil was not delivered to Ukrainian refineries in 2012. In previous years Azerbaijani oil in limited volumes (3 — 4 million tons) was delivered by tankers to the Odessa Commercial Sea Port and then was transported to refineries via Dnieper main oil pipelines. In 2009, began delivery of Azerbaijani oil to Kremenchug refinery. An agreement was signed on oil supplies in the amount of 4.8 million tons per year, but in 2009 Kremenchug received only about 560 thousand tons, in 2010 — 1 million tons of oil, but in 2011 — only 640 thousand tons. And that was actually the end of supplies of Azerbaijani oil to Kremenchug refinery.

During the visit of President Viktor Yanukovych to Azerbaijan in April 2011, there was achieved an agreement on Azerbaijani oil supplies to Ukraine. But since then, and as of May 2013, the Azerbaijani oil in a more or less considerable volumes has not come to Ukraine. In May 2011 the JSC "Ukrtransnafta" began to transport 80 thousand tons of Azerbaijani oil through the oil pipeline "Odessa-Brody" in the reverse mode to Western Ukrainian refineries (Nadvornyansky and Drohobych), but in the first half of 2011, these supplies were reduced to 21, 5% — to 704.7 thousand tons and then completely stopped.

Considering the prospects for Azerbaijani oil supplies to Ukraine, one should keep in mind the important fact that in recent years Baku relies on construction of oil refineries, as selling products of oil processing is more profitable than selling crude oil. Currently, Azerbaijan is planning to build two refineries in its own territory in Tokmok, a powerful Aliata refinery at the Turkish Aegean Sea coast, and a number of other refineries in Ukraine, Romania, Georgia, Chechnya, Kyrgyzstan, Iran, and even in Indonesia. This means that exports of crude oil to Europe, including Ukraine, will be greatly reduced.

Gas resources of Azerbaijan.

If extracting oil in Azerbaijan began in the early nineteenth century, at the world natural gas market this country arrived comparatively recently. Back in the mid 90s of last century, Azerbaijan was importing gas from Russia, and its own production in 2004 was only 4.6 billion cubic meters. However, development of new gas fields in the Caspian Sea shelf, especially of Shah Deniz-1 with resources over 1.2 trillion cubic meters, allowed to quickly ramp up gas production. Already in 2010 Azerbaijan produced 16.6 billion cubic meters of gas, of which about 6 billion cubic meters were exported.

According to the CIA-World-Factbook, in 2012 proved natural gas reserves in Azerbaijan as of 1 January 2012 were even lower than in Ukraine (respectively 849.5 billion cubic meters and 1.104 trillion cubic meters). In 2010, Azerbaijan extracted less natural gas than Ukraine (respectively 16.68 billion cubic meters and 19.36 billion cubic meters). In 2011, more than half of the extracted Azerbaijani gas (9.9 billion m³) was spent on domestic consumption and only 6.755 billion m³ exported. By gas exports in 2011, Azerbaijan ranked 47th in the world. (For comparison, data for Turkmenistan as of 2011: proven reserves of natural gas — 24.3 trillion cubic meters, the volume of production — 59.5 billion m³, exports — 34.5 billion m³ — the 11th place in the world). Based on the mentioned above, the possibilities of Azerbaijan in the field of exports of natural gas at present seem rather modest.

Taking into consideration the relative geographic closeness, significant proven reserves of natural gas and the high rate of gas production (according to forecasts, by 2025 natural gas production in Azerbaijan will have increased to 50 billion cubic meters per year), some Ukrainian experts include Azerbaijan to the most promising sources of supplies of natural gas to Ukraine. However, in our view, the prospects of Azerbaijani gas supplies to Ukraine look at the moment and for at least the next 5-7 years quite problematic. That is why Ukraine is in talks with Qatar and other countries for the supply of liquefied natural gas (LNG) for LNG-terminal which is under construction in the waters of the port "Yuzhnyi" near Odessa.

Negotiations and memoranda without significant results

Consortium AGRI (The Azerbaijan–Georgia–Romania Interconnector)
Consortium AGRI (The Azerbaijan–Georgia–Romania Interconnector)

Negotiations between Kyiv and Baku on Azerbaijani energy carriers supply to Ukraine have been on for the past 20 years, but, unfortunately, without significant results. Thus, on the 28th of January, 2011 at the International Economy Forum in Davos, was signed a memorandum on cooperation in LNG supplies to Ukraine from Azerbaijan in 2014- the volume of 2 billion cubic meters, and from 2015 on — 5 billion cubic meters. It was stated that Ukraine was ready to guarantee a long-term contract for a period of 10-15 years for the purchase of gas. Signing a memorandum with Ukraine which does not oblige, Azerbaijan back in 2009, as part of a consortium AGRI (The Azerbaijan-Georgia-Romania Interconnector) was the investor in the construction of LNG-terminal in Constanta in Romania and sees for itself the implementation of this project as a priority.

In its configuration AGRI resembles another gas pipeline project "White Stream» (GUEU — Georgia — Ukraine — European Union), which had been actively developed in 2008-2009. According to this project, a gas pipeline from Azerbaijan through Georgia to the district of Supsa at the Georgian coast of the Black Sea and further on the seabed to Ukraine or Romania. Finally, the priority got the Romanian version and the project GREU was transformed into AGRI project with the difference that instead of the pipeline, methane carriers will be used. As the advantages of the Romanian version of the project, developers and potential gas exporters point out political stability of Romania, its membership in the EU and NATO. We may say, Romania has overcome Ukraine again. And now, Bucharest expresses willingness to sell excess gas to Ukraine in the future.

For the next Economy Forum in Davos in January 2012 Ukraine had prepared for signing two agreements: one on supply of 5 billion cubic meters of Azerbaijani gas for Ukrainian LNG-terminal and the second –on creation of the joint venture for implementation of the LNG-terminal project. However, the Azerbaijani side refrained from signing the agreements, citing the unavailability of necessary infrastructure in Ukraine and on the Caucasian coast.

Actual and potential consumers of Azerbaijani gas

As you know, LNG-terminal in Yuzhnyi will start working not sooner than in 3-4 years. On the other hand, the construction of the LNG terminal in the Georgian port of Kulevi has not begun yet. Besides, the gas that Azerbaijan promised to deliver to Ukraine, will start being extracted only in 2017 after the launch of Shah Deniz-2. So, to the time when gas supplies begin (considering building LNG-terminals in Ukraine and Georgia), may pass several years. Besides, , we should not exclude the fact that in 5-7 years Ukraine will be able to produce enough gas from its shelf of the Black Sea and shale deposits, as well as get gas in the liquefied state from other countries, and the question of obtaining Azerbaijani gas will lose its relevance.

So, in our opinion, we should not count on Azerbaijani gas too much. Firstly, the signed in Davos memoranda are just a framework documents, which are not binding on the parties. Secondly, over the past 18 years, Azerbaijan has concluded over 30 agreements with different countries and major oil and gas companies of the world on supplies of energy carriers. Thirdly, today Azerbaijan, as a source of gas supplies, is included in a number of promising projects: «Nabucco» (the last modification — Nabucco-West), Trans-Adriatic gas pipeline (TRG), Trans-Arabian gas pipeline (TAG), pipeline Transanatoliyskyy (TANAP) and the aforementioned AGRI project. If you put all these projects together, it appears that demand for Azerbaijani gas from foreign customers in 2020 will reach 45-60 billion m³, while, as mentioned above, Azerbaijan plans to reach 50 billion m³ of gas production only in 2025.

Apart from these projects, over the past two years, Baku has managed to promise its gas to Ukraine and Lithuania, Poland, Greece, Syria and Jordan. Besides, in 2010 Azerbaijan signed an agreement on gas supplies to Russia and Iran. In 2012, the Russian gas monopoly OAC "Gazprom" had doubled the purchase of Azerbaijani gas — from 1.5 to 3 billion m³ a year and plans to further increase it to 7-15 billion m³. It should also be noted that Azerbaijan’s neighbors Kazakhstan and Uzbekistan, in comparison with Azerbaijan, have larger proven reserves of natural gas and are extracting and exporting gas on a much larger scale, to say nothing of Turkmenistan, which ranks fourth in the world in natural gas reserves (24.3 trillion cubic meters) and produces about 60 billion m³, which is almost four times as much as Azerbaijan does.

Ukraine also expects to receive Turkmen gas, but the necessary for this construction of the Trans-Caspian pipeline between Turkmenistan and Azerbaijan on the bottom of the Caspian Sea has not started yet and so far it is not known whether it will start at all. Not wasting any time, Turkmenistan is looking for alternative markets for its gas exports. Thus, in December 2009 Turkmenistan introduced into operation two new pipelines: one to China and the other to Iran.

Kyiv’s new attempts to achieve an agreement with Baku

The visit of the Minister of Energy and Coal Industry of Ukraine E. Stavytskyi to Azerbaijan in mid-March this year was not too effective, it was sooner ritualistic. E. Stavytskyi invited the Azerbaijani side to participate in «LNG-terminal" project in Yuzhnyi and offered Ukraine’s participation in gas transit projects TANAP and AGRI in the format of a pipe supplier, but so far no specific agreement has been achieved. At the moment, three variants of supplies of Azerbaijani gas to Europe are being studied, one of which with the capacity of 10 billion m³ suggests construction of TANAP pipeline through Bulgaria, Romania and Hungary. In case of implementation of this variant, Ukraine could hypothetically expect only 1 — 2 billion m³ of gas. Approximately the same volume of gas Ukraine can expect to receive from the AGRI project. But all this has chances to be implemented only if Azerbaijan and Turkey agree on the use of Ukrainian pipes for the construction of the TANAR gas pipeline.

According to the Ambassador of Ukraine to Azerbaijan O. Mishchenko, in late May this year Kyiv and Baku were only "going to identify areas of cooperation in the energy sector." O. Mishchenko calls "one of the achievements” of economic cooperation between the two countries the establishment of a special working group for energy cooperation. We believe that after 20 years of Ukrainian-Azerbaijani cooperation in the energy sector achievements could have been more significant.

At the end of March 2013 Prime Minister of Ukraine Mykola Azarov expressed hope that Russia would allow Ukraine to pump Turkmen and Azerbaijani gas through its GTS ( gas transportation system), arguing that the signed by Ukraine Agreement on Free Trade in the CIS includes the principle of free access to pipeline transportation for the participants of the Agreement. According to Mykola Azarov, such a variant of transporting Turkmen and Azerbaijani gas to Ukraine would be much cheaper as compared with the supply route through the Black Sea. However, in our opinion, it is very doubtful that Russia has agreed to let use its GTS to deliver Caspian gas to Ukraine, taking into consideration the fact that at the end of January this year Moscow demanded from Kyiv $ 7 billion US dollars of fine for breach of obligations by the Ukrainian side on purchases of Russian gas in specified by the Agreement amounts. In general, remembering that Russia is interested in Ukraine’s buying as much of Russian gas as possible, it would be groundless to expect that it will help Ukraine to diversify sources of getting gas.


In our opinion, the chances of Ukraine to receive Azerbaijani oil in large volumes from Azerbaijan are rather doubtful. The main reason is the decrease in recent years in oil production of Azerbaijan, which is not enough to supply consumers with even one BTJ pipeline. In this situation, the main suppliers of oil to Ukraine remain Russia and Kazakhstan.

Taking into consideration the high level of demand for Caspian gas, we should not expect its low price for Ukraine, especially since it can be delivered almost exclusively in liquefied form, rather than through the pipeline, which would require large expenditures on its liquefaction at the LNG terminal in the Georgian city of Kulevi and re-gasification at the LNG-terminal in the port "Yuzhnyi" near Odessa. However, the flow of Caspian energy carriers to Ukraine at market prices has to some extent to reduce our energy dependence on Russia, which will contribute to the energy security of Ukraine. In the situation when the prospects for supplies of Caspian oil and gas to Ukraine are very uncertain, the Government of Ukraine should pay more attention to developing its own oil and gas fields both on land and at sea shelf.

According to experts, the forecasted resources of traditional hydrocarbons (oil and gas) in Ukraine are about 25 billion tons of fuel equivalent, while in Azerbaijan — 10 billion tons. This volume of energy resources is enough, at least for 50 years and during this time can be established production of methane hydrates, which are actually inexhaustible source of energy. Besides, Ukraine has large reserves of coal, uranium, shale gas, as well as opportunities for the development of alternative energy, including solar and wind ones. With such energy resources, Ukraine could become an energy independent country. But for this, national energy resources must be developed at a much larger scale, more purposefully and aggressively than it has been done so far.


"Borysfen Intel"’s Note:

1.According to the data of the experts of the analytical center "Borysfen Intel", Ukraine’s own production of natural gas makes 25-30%.

2.As it has become known from information sources, on the 18th of June, 2013 Minister of Industry and Energy of Azerbaijan Natih Aliyev said that his country is not interested in Ukraine’s participating in the construction of Trans-Anatolian pipeline, "Trans-Anatolian pipeline is a pipeline belonging to the countries-participators and gas producers. I just cannot see any reason for Ukraine’s participation. Because that country is not a gas producer and the pipeline does not go through its territory," he explained. (Http://www.kommersant.ua/doc/2214783)