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Maersk Explorer in Baku. Photo:
Maersk Explorer in Baku. Photo:

Ever since the beginning of its most recent oil boom in 2005-06, Azerbaijan has been posting record-high economic growth rates, averaging at nearly 20 percent annually. This is not the first instance when fortunes are made from Azerbaijan's oil. At the beginning of the 20th century, Azerbaijan was, for a short time, the world's leading petroleum producer, producing more than half of the world's total output.

In the recent years Azerbaijan's economy has experienced some of the highest economic growth rates in the world. In 2000, the country's GDP was US$5.3 billion. In 2005 it was $13.2 billion, in 2008 $46.4 billion and by 2010 it was estimated to be $54.4 billion (which corresponds to $90.4 billion in purchasing power parity terms).[1]

Take a close look at Azerbaijan's economic boom though and the figures tell a more troubling story.

Table 1: Total oil production in Azerbaijan, thousand barrels per day, 2000-2010[2]























Source: U.S: Energy Information Administration

As Table 1 shows, oil production in Azerbaijan has experienced very fast growth since 2005. Today, with over 1 million barrels of oil produced daily, Azerbaijan is the world's 20th-largest oil producer. By comparison, Russia, which ranks first, produces 9.5 million barrels of oil per day, Saudi Arabia 8.3, Norway 2.1, Libya 1.7, and the UK, which ranks no. 19, 1.3 million barrels per day. [3]

Table 2: Net exports of oil in Azerbaijan, thousand barrels per day, 2000-2010[4]























Source: U.S: Energy Information Administration

Not only is Azerbaijan an important oil producer, but it also exports over 90 percent of the oil it produces. Azerbaijan's oil exports started growing from 1995 onwards, following the signing of the "Contract of the Century", which brought foreign direct investment by international oil companies into offshore oil exploration. However, as Table 2 shows, the steepest rise in the oil exports has taken place since 2005-2006. This was the time when the Baku-Tbilisi-Ceyhan pipeline became operational, supplying oil to Western markets. Nearly all Azerbaijan's exports are energy-related.

The rapid increase in Azerbaijan oil exports took place against the backdrop of a strong (although not uninterrupted) rise in oil prices over the past 10 years. Crude oil prices more than doubled from $24.54 per barrel in July 2001 to $57.58 in July 2005. After peaking at $145 in July 2008, they experienced a sharp drop in the second part of 2008, bottoming out at some $30 in December 2008. Since then, however, oil prices have recovered, passing the $100 threshold in January 2011.[5] Thus, over the past six years, Azerbaijan has been exporting more oil than ever before, and selling it at much higher prices. Taken together, these two developments explain why Azerbaijan's economy and budget have experienced such stupendous growth.

Table 3: Azerbaijan's exports, 2005-2009


Exports (total, million USD)



Energy share,  percent



























Source: International Trade Center, Index Mundi

(Note: the drop in the value of exports from 2008 to 2009 is due to the sharp drop in the oil price which took place during the global financial crisis. Since then, oil prices have recovered.)


Azerbaijan's new oil boom

The story of Azerbaijan's most recent oil boom began on 20 September 1994 when then president Heydar Aliyev signed a major deal with 11 international oil companies, The contract granted exploration and operation rights in the Azeri-Chirag-Guneshli (ACG) complex of Caspian Sea oil fields, situated some 120 km off the Azerbaijan shore.  The deal was soon dubbed "the contract of the century' and is due to run until 2024.

Dr Hoşbakt Yusufzade,[6] a senior Azerbaijani geologist who was in charge of drawing up Azerbaijan's energy strategy, recalls the process leading to the decision on what to do with undrilled fields in the early 1990's:

"When the USSR collapsed, technology and money were needed to drill the Azerbaijani oil. We could either wait 30 years until we had the money and means or we would invite foreign companies. Aliyev chose the latter. There were people who objected. They said "we can do it ourselves." But it was a risky and expensive work and having international partners was a very good idea."[7]

Several months after the contract was signed, the oil companies formed the Azerbaijan International Operating Company (AIOC), an 11-strong consortium which included SOCAR, the Azerbaijan state oil company, and which was led by BP. The composition of the shares in the consortium reflected a wide range of national interests; BP gained the largest stake at 17.12 percent and second was Amoco from the US with 17.01 percent. Other companies included Russia's Lukoil (which would later sell its stake), Norway's Statoil, and Turkiye Petrolleri, the Turkish state oil company. Subsequently, Exxon and two Japanese companies joined AIOC as well.

AHTS Om & AHTS Islay: Anchor Pre-lay of Baku, Azerbaijan. Photo: British Petroleum
AHTS Om & AHTS Islay: Anchor Pre-lay of Baku, Azerbaijan. Photo: British Petroleum

The contract signed with the Azerbaijani government was a Production Sharing Agreement (PSA) type. The agreement specified that the foreign companies would utilise their own resources, capital, technology and personnel, conducting exploration at their own risk. In case of success, the companies would use revenues from oil sales to compensate their investment costs and then share the profits with the government. It was estimated that $7.5 billion of Foreign Direct Investment would then flow into the country. According to the World Bank,

"The PSAs were the cornerstones of Azerbaijan's forthcoming development as they generated a significant amount of FDI in the country, raised demand in the economy, and generated confidence for future investments."[8]

The signing of the PSA was followed by concluding Joint Operating Agreements (JOA). These were made directly between the companies, to outline their rights, responsibilities and liabilities. The first, so-called "early" oil from Azeri-Chirag-Guneshli (ACG) fields was extracted in November 1997. It was exported via the newly refurbished pipeline to the city of Novorossiysk on the Black Sea coast of Russia. This route, however, was not sustainable for a number of reasons: Russia imposed high tariffs and mixed ACG Light crude oil with its own lower-grade oil before shipping. The admixtures negatively affected the price. According to one energy expert, the loss in price due to the mixing reached 4 to 5 USD per barrel.[9] (This was significant, given that the world crude oil prices fell precipitously in late 1997 and throughout 1998, from some 19 USD per barrel in November 1997 to approximately 10 USD per barrel in December 1998[10]). From Novorossiysk, the oil would have to be transported through the already very congested Bosphorus strait. Finally, the pipeline went through the territory of Chechnya. There was also a concern in Azerbaijan about the inherent dangers of Russia's monopoly on Azerbaijan's oil exports.[11]

In addition to the Baku-Novorossiysk pipeline, another pipeline was completed for transporting smaller amounts of "early oil" – from Baku to the Supsa terminal on Georgia's Black Sea coast. However, just like the Novorossiysk pipeline, it had the disadvantage of creating the need to transport the oil through the busy Bosphorus. The combination of two pipelines provided a solution for smaller amounts of exports. For larger flows of oil, a different option was needed.

In 1998, an agreement was signed for the construction of a pipeline from Baku, via Tbilisi, the Georgian capital, to the Turkish port of Ceyhan on the Mediterranean. The initiative received a strong backing on the part of the United States, which valued the fact that the pipeline would bypass Iran. For Georgia and Azerbaijan it was important that the pipeline, which also bypassed Russia, would link them directly to Western markets.[12] The construction of the Baku-Tbilisi-Ceyhan (BTC) pipeline, which was to be financed by oil companies and not national governments) was delayed by the companies' doubts about the economic viability of the project, given its huge projected cost in excess of $3 billion (the actual costs of the BTC pipeline in the end amounted to $3.7 billion).[13] Given the plummeting oil prices, the oil companies were hesitant to make such large investments with uncertain returns. Gradually, however, wıth the rising oil prices and the upgraded estimates of the reserves in the ACG fields, the project became more attractive. In September 2002 construction started at Baku's Sangachal oil terminal.[14] Oil began to flow through the 1,760 km Baku-Tbilisi-Ceyhan pipeline, the second longest in the world, in June 2006.

By the end of that year, when one million barrels of oil a day were flowing from Baku to Ceyhan, it was already clear that economic diversification would be a major challenge for Azerbaijan. The 2006 report by consultancy MHC International LTD, "Converting Black Gold into Human Gold: Using Oil Revenues to Achieve Sustainable Development",  analyzes the policy challenges facing single-resource economies, i.e., those that rely on the export of a single resource for the bulk of their foreign exchange earnings. The report compares and analyzes 40 such economies, taking an in-depth look at five of them. Norway (an oil producer) and Chile (a copper producer), which managed to fight the resource curse and diversify their economies, are taken as examples of success stories. Nigeria, a major oil producer, is a case study in failure, and Trinidad and Tobago, a small Caribbean oil and gas producing nation, is regarded as having "promising" potential. Finally, neighbouring Kazakhstan is examined as a case "still in the making." Both Kazakhstan and Azerbaijan, as relative newcomers to the league of energy exporters, face a largely similar set of challenges and problems. Their policy decisions and choices today would determine whether they would come to resemble the successful Norway and Chile or become a failure like Nigeria.

The report points out that, "being a major petroleum exporter does not mean that Azerbaijan is fully integrated into the global economy. At best, having oil revenues only gets Azerbaijan ‘one foot in the door' of globalization."[15] It also goes on to note:

"There are inherent dangers in too rapid a rate of investment without the supporting institutional capacity to use resources effectively and efficiently, as well as significant policy and regulatory reforms." [16]

The report recommended the importance of facilitating the entry of the non-oil sector into the global economy and underlined this by saying that "it is in the non-oil sector where the vast majority of the Azerbaijan population lives and works, and those who must have the skills and opportunities to compete in the international economy"[17]. According to the report, the emphasis should be placed on human capital development and training, as well as on developing competitive export industries. This requires, the report concludes, the creation of "economic conditions where potential investors are not deterred by, for example, lack of access to export markets, entrenched monopolies or governance problems."


Resource curse

The ‘resource curse' is a concept that describes the situation of countries with a strong dependence on extractive industries but with persistent and widespread low standards of living which are the direct result of corruption, a weak tax collection system and a lack of development in other sectors of the economy. The concept was introduced by Richard Auty in 1993. Resource curse usually occurs for three main reasons.[18]

The first reason, called "Dutch Disease" has to do with the difficulties created by the large influx of foreign exchange that the country receives for selling its natural resources. The inflow of money into the country leads to the appreciation of the exchange rate. A more expensive domestic currency means that the country's non-oil exports become more expensive (and thus less competitive) in the global markets, which dampens production in non-oil sectors. The presence of a high revenue-generating resource sector weakens incentives for entrepreneurs to develop small and medium enterprises in other sectors.  This, in turn, thwarts the development of a strong middle class and results in growing social inequality. Other common attributes of Dutch Disease are excessive government spending and a real estate and construction boom.

The second reason is the negative effects of volatility of earnings. Natural resource prices are prone to considerable fluctuations. If a country draws most of its revenues from selling natural resources, the volatility will result in difficulties in budget planning and debt management.

Finally, a third and arguably the most important reason is institutional. The ready access to a large amount of funds reduces the willingness of the government to implement much-needed, yet politically unpopular reforms. Because a resource-rich state does not have to rely primarily on tax revenues to fill its budget, power holders lack incentives to set up effective institutions that guarantee property rights, provide good service, or foster accountability. Those in decision-making positions control the process of revenue distribution and will choose less oversight over more. As it has been the case in Azerbaijan, instead of building strong effective institutions, political elites will use "favours" to secure loyalty and obtain legitimation.

The institutional component in the resource curse has been strongly stressed by Terry Karl, who studied the concept of "the paradox of plenty." He describes the rentier state created by natural resource windfalls as an obstacle to political change:

"Dependence on petroleum revenues produces a distinctive type of institutional setting, the petro-state, which encourages the political distribution of rents. Such as state is characterized by fiscal reliance on petrodollars, which expands state jurisdiction and weakens authority as other extractive capabilities wither. As a result, when faced with competing pressures, state officials become habituated to relying on the progressive substitution of public spending for statecraft, thereby further weakening state capacity."[19]

There are some successful cases of resource-rich countries, both developed (such as the UK and Norway) and developing (Botswana, Chile and Malaysia), that managed to avoid or at least minimize the negative consequences of the "resource curse". However, these have been the exception rather than the rule.


Azerbaijan and the resource curse

Azerbaijan's oil boom, which began in 2006, is still a relatively recent development. Growth rates have been high but for the first several years there were no significant improvements in poverty alleviation. This has improved in the past several years, although the precise decrease in the poverty rate is difficult to measure and serious questions have been asked about the quality and reliability of official statistics. In any case, this has been achieved primarily through government social transfers. Despite generating high revenues, the oil and gas sector employs less than 1 percent of the population and thus is not a major factor behind improving job growth.

There have been signs of Dutch Disease in Azerbaijan: real estate prices have been rising, the non-oil sector remains small, and inflation has remained substantial. The annual average growth of the Consumer Price Index was 9.6 percent in 2005, 8.3 percent in 2006, 16.7 percent in 2007, reaching 20.8 percent in 2008.[20] The situation improved in 2009, but the following years again showed price rises.

The negative effects of the oil boom are most strongly felt in the institutional sphere Here Azerbaijan exhibits a typical range of behaviors and problems common for countries afflicted with a resource curse. These include persistent corruption, non-transparent government spending, and use of resource rents to keep unaccountable political elites in power. In addition to engaging in massive social transfers, the Azerbaijani leadership has gone on a military spending spree. Azerbaijan has been involved in a territorial dispute with Armenia over the Nagorno-Karabakh region and adjacent territories. According to the Swedish think tank Stockholm International Peace Research Institute, Azerbaijan's military expenditure more than doubled from $554 million in 2005 to $1,138 million in 2006 and has reached $1,421 million in 2010 (figures are given in constant 2009 dollars).[21] As a percentage of the GDP, this represents an increase from 2.4 percent to 3.4 percent. The Azerbaijani authorities provide even higher figures. In October 2010, the Azerbaijani parliament approved a military budget of $3.12 billion.[22]

Azerbaijan State Oil Fund (SOFAZ)

The logo of the Azerbaijan State Oil Fund (SOFAZ)

Azerbaijan has been commended for taking two steps towards fighting the resource curse. The first one, taken in December 1999, was to set up a sovereign wealth fund called the State Oil Fund of Azerbaijan (SOFAZ), into which the revenues from oil exports have been channeled. The main aim of SOFAZ is to accumulate, save and efficiently manage oil revenues, investing them in bonds and stocks to generate interest for the benefit of future generations. By taking massive oil income out of the economy, SOFAZ is also supposed to help prevent the overheating of the economy and avoid high inflation rates. In reality, however, significant amounts of money from SOFAZ have been transferred to the state budget annually, in particular from 2008 onwards (see Table 4).

Table 4: State Oil Fund's transfers to the state budget in 2006-2011 (in million AZN[23] and in million USD)[24]








2012 (approved budget)

Amount in million AZN








Amount in million USD (converted)








In addition to direct budgetary transfers, SOFAZ funds a number of national projects including obtaining an equity share in the BTC oil pipeline, construction of housing for refugees, large scale irrigation projects, construction of the Baku-Tbilisi-Kars railway, and a study abroad programme for young Azerbaijanis.[28]

To give an example of the level of expenditures: in 2010 the Oil Fund received oil and gas revenues on the order of ca. 12.3 billion EUR. Out of this amount some 5.6 billion EUR was transferred to the state budget and an additional 448 million EUR was spent on national projects, according to SOFAZ data.[29] From 2001 until 2007, the assets of the Oil Fund increased from 491.5 million USD to 2475 million USD. Then, within the following year, the assets more than quadrupled to 11 billion USD.[30] As of July 2011 Azerbaijan SOFAZ's total assets were estimated at 30.2 billion USD.[31]

The second measure for which Azerbaijan has been commended was to join the Extractive Industries Transparency Initiative (EITI) in June 2003. The main aim of the initiative, which had been announced by then-UK Prime Minister Tony Blair in 2002 and which is currently in place in a number of resource-rich states, is to provide support for "improved governance in resource-rich countries through the verification and full publication of company payments and government revenues from oil, gas and mining."[32]

In November 2004, Azerbaijan signed the Memorandum of Understanding on EITI Implementation in Azerbaijan. In February 2009, Azerbaijan was judged to be EITI-compliant. The country's compliance has to be revalidated within a 5-year-period (i.e. by February 2014).[33] The first Validation Report for Azerbaijan in February 2009, contained the following overall assessment:

"The most notable, yet simple achievement of the initiative is that the public reporting of revenues from the oil and gas industry, which did not occur in Azerbaijan before the EITI, has now become routine."[34]

Semi-annual and annual reports on EITI produced by the government and by independent accountants are published on the SOFAZ website.

However, EITI does not demand transparency on how the revenues from the oil and gas industry are spent. It only requires companies to publish the payments they make, and governments to publish the payments they receive.[35]

Without transparency mechanisms in place, the funding of national projects creates a fertile ground for corruption. A leading Azerbaijani economic think tank, the Center for Economic and Social Development (CESD), conducted a monitoring study on the use of SOFAZ funds to build houses for refugees from the Nagorno-Karabakh conflict. The results pointed to "severe" problems with the use of public funds, to the extent of 50 million USD misappropriated within a single year. As the study found,

"Once the price of houses constructed within the project was compared with the market price, it was evident that the houses had been artificially overpriced. And another problem is substandard work during the construction process thus aiming to consume few funds, but overprice the project."[36]

By not addressing government spending, which is where the real problem lies, EITI fails to increase the accountability of the government.[37]

The SOFAZ also suffers from a lack of strategic vision. According to a CESD report,

"Money from the Fund is currently being spent with no strategy or criteria to measure the effectiveness of the spending decisions against alternative ways of using the Fund."[38]

All in all, EITI and SOFAZ taken together have had limited impact on the fundamental problems associated with the resource curseToday over 90 percent of FDI goes to the oil sector. Agriculture, which employs some 40 percent of the population, remains neglected. The growth in the non-oil sector has been sluggish, with the exception of the construction sector. There is no parliamentary oversight over the spending of the country's enormous hydrocarbon wealth. The rapidly increasing government expenditures fuel inflation and, due to the lack of transparency, breed corruption.


Natural Gas and Azerbaijan's potential contribution to European energy security

With the discovery of the offshore Shah Deniz gas field, the largest one in the country, in 1999, Azerbaijan was placed on track to also becoming an important gas producer. Shah Deniz began producing in 2006. Before that, there had been only small gas fields in Azerbaijan, previously a natural gas importer. Shah Deniz is operated jointly by BP, Statoil and a number of other partners, including Azerbaijan's SOCAR, Russia's Lukoil, Iran's NIGC and France's Total.

Since July 2007 natural gas from Shah Deniz has been processed at the Sangachal terminal and transported to Georgia and to Erzurum, in eastern Turkey, along the South Caucasus Pipeline. This gas pipeline was built along the Baku-Tbilisi-Ceyhan oil pipeline, which allowed to lower its cost due to economies of scale. Complicated negotiations about the amount and the price of the gas Azerbaijan sells to Turkey have been continuing ever since. Azerbaijan produced approximately 27 billion cubic meters (bcm) of natural gas in 2010 and exported it to four countries: Turkey, Georgia, Russia and Iran. Turkey continues to purchase six billion cubic metres of gas a year. For 2011, Russia's Gazprom signed a contract with Azerbaijan allowing it to buy two billion cubic metres of gas – double the amount contracted in 2010 (although Russia ended up importing less gas that year, as the contracts allow for changing the actual supply volume). In December 2011 Gazprom announced its agreement with SOCAR to boost gas imports to 3 bcm in 2012.[39] Georgia buys one billion cubic metres of gas from Azerbaijan annually. In January 2011, Azerbaijan signed a five-year gas supply contract with Iran, envisioning at least 1 bcm of natural gas exports annually.[40]

Stage 2 of the Shah Deniz field development is yet to be implemented. It envisages the construction of new offshore platforms, subsea wells, an expansion of the Sangachal Terminal and of the South Caucasus Pipeline. [41] BP and Statoil are the leading companies in charge of operating this field, in partnership with five other companies. Shah Deniz II is expected to start producing in 2017. Azerbaijan's natural gas potential conitnues to grow: in September 2011 Socar and France's Total announced a major gas natural discovery in the so-called "Absheron X-2" well in the Caspian some 100 km southeast of Baku, with estimated reserves of 350 bcm of natural gas.[42] 

From projects currently in operation, Azerbaijan is expected to produce 30 billion cubic meters per year between 2011 and 2014. When fully up and running Shah Deniz Stage 2 is expected to add another 16 billion cubic metres per year (including 10 bcm earmarked for European markets). According to SOCAR's estimate, Azerbaijan will have 25 to 30 bcm of gas available for export by 2020-2025. From 2025, Azerbaijan's gas production is expected to reach 50 bcm annually. Natural gas sales will thus play an increasingly important role in Azerbaijan's economy. According to CESD Chairman Vugar Bayramov, revenues from sales of gas are expected to exceed oil revenues in the government budget already from 2015 onwards.[43]


Bringing Caspian gas to the EU: pipeline rivalry

In November 2008, the European Commission, wary of the EU's dependence on Russian energy imports, proposed the "Southern Gas Corridor" strategy aimed at bringing Caspian and Middle Eastern gas to Europe. It was announced that the creation of the Corridor was "one of the EU's highest energy security priorities."[44] As an important gas supplier, Azerbaijan plays a decisive role in the success of the Southern Corridor. So far, four projects have been included in the Southern Gas Corridor – and none of them would be viable without Azerbaijan's participation.[45]

The first and the most ambitious one is Nabucco, which envisions the construction of a large pipeline with a capacity of 31 billion cubic meters (bcm) per year, with a possibility of doubling. The pipeline would bring gas from the Turkish-Georgian and Turkish-Iraqi borders, crossing the territory of Turkey, Bulgaria, Hungary and Romania and arriving at Baumgarten, Austria. The Nabucco consortium includes Germany's RWE, Austria's OMV, Hungary's MOL, Romania's Transgaz, Bulgaria's Bulgargaz and Turkey's Botas. The costs are estimated at 7.9 billion EUR. However, in February 2011 The Guardian  disclosed information according to which BP's own estimate of the costs was nearly double the amount put forward by Nabucco's Austrian management – some 14 billion EUR vs 7.9 billion.[46] Aside from cost considerations, the key problem with Nabucco is the lack of a secure second supplier. Azerbaijan alone would be unable to fill the entire 31 bcm capacity of the envisioned pipeline, given its existing sales commitments to other countries. Therefore, being able to include gas from other sources such as Turkmenistan, Iran or North Iraq may be crucial – but difficult to implement for political and security reasons.

The Shah Deniz Alpha gas platform in the Caspian supplies gas to Europe via a pipeline through Azerbaijan, Georgia and Turkey. Photo: British Petroleum
The Shah Deniz Alpha gas platform in the Caspian supplies gas to Europe via a pipeline through
Azerbaijan, Georgia and Turkey. Photo: British Petroleum

The second project is the Interconnector Turkey-Greece-Italy (ITGI) involving Italy's Edison, Greece's DEPA and Turkey's Botas, The project relies on expanding the existing pipeline between Turkey and Greece by adding a section connecting it to Italy. The planned capacity is 8 bcm, and the estimated cost is 1.5 billion USD.

Third is the Trans-Adriatic Pipeline (TAP) which involves Norway's Statoil, EGL from Switzerland and Germany's E.ON Ruhrgas. The TAP project proposes the construction of a pipeline from Greece to Albania and Italy, with a capacity of approximately 10 bcm, at the cost of some 2 billion USD. Fourthly, there is also the less popular White Stream project which was proposed by Ukraine. White Stream envisages building a pipeline branching off the South Caucasus Pipeline and crossing the Black Sea from Supsa, passing through the Crimea to Constanta in Romania.

In addition to these projects, there is another smaller, Romanian-backed project called AGRI – Azerbaijan-Greece-Romania Interconnector. The AGRI project envisages transporting natural gas from Azerbaijan to Georgia's Black Sea coast via pipeline, liquefying it at a special terminal and delivering the liquefied natural gas (LNG) by tankers to Romania's port of Constanta on the Black Sea. AGRI has recently requested to be included in the Southern Gas Corridor. The talks in Brussels on this issue are scheduled for early 2012.

Much of the current debate revolves around the Shah Deniz Consortium's long-anticipated choice of pipeline for the 10 bcm of natural gas that is supposed to come from Shah Deniz II from 2017. By the deadline of 1 October 2011, three of the Southern Corridor pipelines – Nabucco, TAP and ITGI - have submitted bids for the transport of Shah Deniz II gas to Europe. Almost at the last moment in September 2011 British Petroleum proposed yet another option – the South East European Pipeline (SEEP). The details of the proposal have not been hammered out yet, but it would strongly rely on using the existing regional networks enhanced with interconnectors, thus significantly lowering the costs as compared to Nabucco. The SEEP was also included in the bid.[47]

So far, Azerbaijan has been trying to steer an independent course between the pipeline rivalries and has been wary of committing too early to any of the proposed projects. It has not been fully satisfied with the three pipeline proposals, which did not sufficiently provide for Azerbaijan's interests. In addition, it has also been Azerbaijan's strategy to keep several different buyers for its gas.[48]

Things gained speed on 25 October 2011 when Azerbaijan and Turkey signed agreements on Azerbaijani gas exports to Turkey and on gas transit to Europe via Turkey. The agreements established legal and commercial terms for direct transactions between Azerbaijan and European buyers, paving the way for Shah Deniz II gas to Europe.[49] Building on this agreement, in a strategic move in November 2011 Azerbaijan's and Turkey's energy ministers announced plans to construct the Trans-Anatolian Gas Pipeline (also known as Trans-Anadolu, or TANAP) that would cross Turkey from east to west and transport some 16 bcm gas annually. Out of this amount, an estimated 6 bcm will be reserved for Turkey's domestic consumption (or re-export), and the rest would be exported to Europe.[50] The two countries signed a memorandum of understanding on the construction of the TANAP on 26 December 2011 in Ankara.

The agreement to construct the TANAP still leaves open the question of how to bring Caspian gas from the Turkish coast to Europe. Analysts are debating the full implications of the announced pipeline, but it is already clear that it would make the construction of the full-length Nabucco pipeline redundant. However, as Jamestown Foundation Senior Analyst Vladimir Socor argues, a shortened (and cheaper) Nabucco running from the Turkish border to Europe would nevertheless be a feasible option.[51] In any case, by signing the agreement on TANAP, Azerbaijan and Turkey not only cemented their strategic relationship, but also strengthened their respective positions in negotiating the terms of Caspian gas exports to the EU in the future.

The deadline for announcing the decision on the definitive choice of the pipeline for Shah Deniz II gas has been postponed several times. The consortium has already identified TAP (rather than ITGI) as the preferred way of gas transportation to Italy. By June 2012, the consortium is expected to decide on the "semifinalist" pipeline to transport gas to central and southern Europe. Finally, by October 2013 the final decision on which route to choose for Shah Deniz II gas – whether the route through the Southern Balkans to Italy or a route to southern and central Europe – shall be made. [52]


Further Reading

On the resource curse:

[1] Based on IMF data for Azerbaijan, percent2CPPPGDP&grp=0&a=&pr1.x=63&pr1.y=5

[2] U.S. Energy Information Administration (

[3] Huffington Post, "Top 20 Oil-Producing Countries", 22 February 2011,

[4] U.S. Energy Information Administration,

[5] Index Mundi, Crude Oil (petroleum); Dated Brent Monthly Price - US Dollars per Barrel.

[6] Born in 1930, Prof Dr Yusufzade graduated in Geology, was a member of the Communist Party, and was the leading name in exploration and production of oil and gas in Soviet Azerbaijan. When Heydar Aliyev became president, he recruited Yusufzade to prepare the country's energy strategy

[7] Yusufzade, presentation at the Azerbaijan Diplomatic Academy's Summer Energy School, Baku, 5 July 2010.

[8]World Bank, Azerbaijan Country Brief 2009, "Economy", November 2009.,,contentMDK:20174399~menuPK:301921~pagePK:141137~piPK:141127~theSitePK:301914,00.html

[9] Jonathan Elkind, "Economic Implications of the Baku-Tbilisi-Ceyhan Pipeline", in The Baku-Tbilisi-Ceyhan Pipeline: Oil Window to the West, eds. S. Frederick Starr and Svante Cornell (Washington DC, 2005), p. 46.


[11] Svante Cornell, Azerbaijan since Independence (M.E. Sharpe, 2011), pp. 226-227.

[12] Thomas de Waal, The Caucasus: An Introduction (Oxford University Press, 2010), p. 180.


[14] Thomas de Waal, The Caucasus: An Introduction, p. 178.

[15] P. 33.                                                                                                                                     

[16] P. 68.

[17] P. 68.

[18] See Brookings, "Central Asia's Energy Challenge: Overcoming the Natural Resource Curse", 11 August 2008.

[19] Terry Lynn Karl, The Paradox of Plenty: Oil Boom and Petro-States (University of California Press, 1997): p. 16.

[20] Data taken from the Central Bank of Azerbaijan, "Statistics",

[21] SIPRI, "Military Expenditure Data – Azerbaijan",

[22] Shahin Abbasov, "Azerbaijan: Baku Embarks on Military Spending Surge, Seeking Karabakh Peace", Eurasia Insight, 22 October 2010.

[23] Data for 2003-2009 taken from SOFAZ, "Annual Report 2009", p. 26.

[24] The amounts in USD are calculated on the basis of the historical exchange rates available from the website of the Central Bank of Azerbaijan,

[25] SOFAZ, "SOFAZ Revenue and Expenditure Statement for 2010,"

[26] SOFAZ, " SOFAZ 2011 budget amended",

[27] SOFAZ, "SOFAZ 2012 budget approved", 30 December 2011,

[28] SOFAZ, "FAQ", The annual funding for the study abroad programme usually ranges between roughly 10 and 15 million EUR (see data on the SOFAZ website).

[29] SOFAZ, "SOFAZ Revenue and Expenditure Statement for 2010,"

[30] SOFAZ, "Annual Report 2009", p. 8.

[31] Sovereign Wealth Fund Institute, "Sovereign Wealth Fund Rankings", July 2011, .

[32] EITI Factsheet,

[33] EITI, Azerbaijan.

[34] Coffey International Development in association with IPAN and PKF, "Validation of the Extractive Industries Transparency Initiative (EITI) in the Republic of Azerbaijan" report (Feb. 2009), p. 24. percent20EITI percent20Validation percent20Report.pdf

[35] EITI; "EITI Factsheet", 3 May 2011. 

[36] Center for Economic and Social Development, Ending Dependency: How Is Oil Revenue Effectively Used in Azerbaijan?(2008), p. 60.

[37] See, for example, Julia Gouseva, "EITI: a new global standard for lying", Open Democracy, 11 September 2008.

[38] CESD, "Management of Oil Revenues in Azerbaijan: Transparency and Effectiveness", 2011, p. 1.

[39] Interfax, "Gazprom to boost gas purchases in Azerbaijan to 3 bcm in 2012 (Part 2)", 15 December 2011.

[40] Bloomberg, "Azerbaijan Signs Gas Supply Contract With Iran Before EU Visit", 12 Jan 2011.

[41] BP Caspian, "Shah Deniz",

[42] Total, "Azerbaijan: Total makes a major gas discovery in the Caspian Sea", 9 September 2011.

[43] CESD, "Should Azerbaijan say "no" to the Nabucco pipeline project?", 28 May 2011.

[44] European Commission, "Second Strategic Energy Review. An EU Energy Security and Solidarity Action Plan" (COM/2008/781), Brussels, 13 November 2008.

[45] For a good overview of the Southern Corridor projects and Azerbaijan's position, see "Azerbaijan will decide the shape of the Southern Gas Corridor", Eastweek, 19 Jan 2011,

[46] The Guardian, " European gas pipeline costs double", 20 February 2011.

[47] Vladimir Socor, "South-East Europe Pipeline: A Downsized Nabucco Proposed By BP", Eurasia Daily Monitor, Volume: 8 Issue: 202, 2 November 2011.[tt_news]=38609&tx_ttnews[backPid]=512

March 2011

 Back Oil boom and resource curse - Next 
Introduction – A Caspian Democracy   Losing its soul – How the Council of Europe is failing in Azerbaijan
A judicial Farce
Generation Facebook on trial
The country Heydar Aliyev built
Oil and Democracy under Ilham Aliyev
Oil and Democracy under Ilham Aliyev
  Baku's dissidents
Baku dissidents
Recommended reading   Azerbaijan online resources

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15 March 2011, 00:00