Turkish-Azerbaijani energy relations: significant leverage in the implementation of the foreign policy interests of both countries.

• Author: Ibrahimov, Rovshan
• Position: Report

Introduction

After the announcement of the restoration of its independence, Azerbaijan immediately faced many challenges inherited from the Soviet Union. First and foremost was the unstable political situation in the country, problematized by economic collapse and war with Armenia. In order to solve its economic problems, Azerbaijan had only one advantage: energy resources. Once known worldwide as one of the preeminent places for the production of oil, Azerbaijan needed to restore its reputation. However, it was necessary to start the development of new fields and bring these resources to the world markets. Independently, Azerbaijan couldn't do it. It lacked the necessary financial sources and technologies. To acquire them, it was necessary to attract Western companies.

Turkey played an important role in Azerbaijan's energy production and transport. It is worth noting that the restoration of Azerbaijan's independence was also a landmark event for Turkey; less than a month after Azerbaijan declared its independence, on November 9, 1991, Turkey became the first country to recognize it. (1) Both states have a common culture, ethnic and religious roots. That's why relations between Turkey and Azerbaijan have always been closer than what is typical between two nation states, and may be better described by what is now a well established expression, "one nation, two states," a term coined by President Heydar Aliyev during his official visit in Turkey in February 1994. The close relations between the two countries formed the basis for the development of economic ties.

Immediately after achieving its independence, Azerbaijan tried to restore its reputation as an oil country and initiate the large-scale production of its energy resources. An important component in this operation was the exploitation of Azerbaijan's large, offshore fields. These offshore energy fields had been explored while Azerbaijan was still a part of the Soviet Union. However, at that time, the Soviet Union lacked both the capital and the necessary technology for extracting oil from these deep and complex structures. Given the USSR's huge oil reserves in Siberia, which were more attractive for exploitation, the Azerbaijani fields remained undeveloped.

Despite the many difficulties, however, Azerbaijan managed to sign an agreement with Western companies which became known as the "Contract of the Century" forming a consortium which aimed at developing the offshore Azeri, Chirag and Deep Water Guneshli oil fields. The beginning of work on this project gave rise to a sustainable and productive cooperation between Azerbaijan and Turkey.

TPAO's Role in Turkish-Azerbaijan Energy Relations

Along with eleven companies from eight countries, the Turkish state energy company TPAO (Turkiye Petrolleri Anonim Ortakligi) became a member of the consortium. Turkey understood the opportunities that had opened up after the change in the geopolitical situation in Eurasia. With the collapse of the Soviet Union, new Turkic states which are rich in natural resources have appeared. The first such state among them with which Turkey was to develop economic relations was Azerbaijan. This cooperation was aided by the geographical proximity of the two countries, as well as Azerbaijan's wish to balance the presence of Russia in the South Caucasus region. In turn, Turkey sought ways to ensure supply for its own domestic energy demand from alternative sources. TPAO was elected as the main tool for the implementation of these purposes.

TPAO submitted a report to the former Turkish president, Turgut Ozal, stating its willingness to operate hydrocarbon exploration and production activities in Azerbaijan. Following negotiations between the political authorities in 1992, two national oil companies TPAO and SOCAR (State Oil Company of Azerbaijan Republic), signed a protocol to boost exploration and production activities by developing a direct cooperation in offshore and onshore fields, or by getting into a partnership(s) with foreign corporations which met with the Azerbaijani government's approval. (2) In the initial stage, TPAO's share in the Azeri Chirag and Deep Water Guneshli oil fields was small, consisting of only 1.75 percent. However, the significance of Turkey's participation in this project was that TPAO, for the first time in its history, participated in the development of a field outside of Turkey.

Subsequently, TPAO's share in the project has increased, as SOCAR delivered percent of its share to TPAO. President Heydar Aliyev and Turkish Prime Minister Tansu Ciller signed an agreement on transferring the 5 percent of shares to TPAO in Baku on April 12, 1995. (3) This project was not the only one in which TPAO participated. The table below describes the Azerbaijani projects in which TPAO is involved.

It is worth noting that TPAO is involved in all of the significant energy projects currently being implemented in Azerbaijan. Despite the fact that Azer baijan has signed over thirty agreements with foreign companies to develop their fields (Azeri, Chirag, Deep Water Guneshli and Shah Deniz), to date only two of them have been fully realized. In the period from 1994 to 2012, TPAO invested a total of $2.3 billion in the Azeri, Chirag and Guneshli project, and paid $650 million to the Azerbaijan budget. Overall, TPAO has invested $3.4 billion in all the projects in which it participates in Azerbaijan. The income of this company for the same period amounted to $5.4 billion. TPAO is the largest Turkish public investor in Azerbaijan. (14)

SOCAR's Energy Investment in Turkey

Azerbaijan's SOCAR has also made a great contribution to the energy cooperation between the two countries. It is worth noting that the activities of SOCAR in Turkey started in the second half of the first decade of the 2000s. This is due primarily to the fact that SOCAR, in the interval following the restoration of Azerbaijan's independence, managed to become a large international company with sufficient financial capacity and experience in implementing large projects. The company quickly became a key actor in the implementation of Azerbaijan's geo-economic interests in the Black Sea region and the Balkans. As a consequence, to strengthen of Azerbaijan's political and economic potential and turn the country into a leader in the South Caucasus, SOCAR's geo-economic interests began to expand and include new regions.

The first step in the company's vigorous activity in Turkey began in 2007, when SOCAR and the Turkish oil company Turcas signed a protocol on the establishment of a joint company. One of the milestone events in this regard was the SOCAR Turcas and Injaz alliance which acquired 51 percent of Petkim Petrokimya Holding. After some time, SOCAR acquired an additional 10.32 percent of the shares, bringing its stake in the company to 61.32 percent. Annually, Petkim Petrokimya Holding's production covers about 25 percent of Turkey's domestic market needs. (15) Thanks to SOCAR's investments in the joint company, its market share in Turkey stands to increase from 25 percent to 40 percent. (16)

In general, it is worth noting that SOCAR is the largest foreign investor in Turkey, with a future investment expected to reach $20 billion. In turn, SOCAR Energy Turkey, which is a subsidiary of SOCAR in Turkey, claims to be the largest industrial company in Turkey, whose total turnover in 2018 reached $15 billion, and in 2023 will be $30 billion. (24)

Energy cooperation between the two countries is developing successfully, and this success is the impetus for the further deepening of relations not only in the energy sector, but in all others. Energy cooperation is also a key factor in achieving the foreign policy goals of both countries. Mutually beneficial tandem enterprises only allow for a more successful implementation of foreign policy.

Turkish Foreign Policy Implementation in Regard to Azerbaijan

It should be noted that Turkey's foreign policy priorities in regard to cooperation with Azerbaijan in the energy sector have changed over time. In the 1990s, Turkey's main priorities were to ensure the market for alternative energy sources at the expense of supplies from Azerbaijan and the Central Asian countries, and turning the country into a transit country.

Already by 2000, Turkey's priorities regarding the energy factor in foreign policy had begun to change. Turkey's new priorities were to establish the country as a regional leader and a regional energy hub. In principle, the desire to become an energy transit hub is a part of Turkey's strategy of becoming a regional leader. At the same time as it works to achieve these goals, Turkey, as a country which imports energy resources, will ensure secure and sustainable access to alternative sources to meet its own domestic needs.

In general, the task of providing energy from alternative sources is a priority, and it is no accident. To date, Turkey's economy is one of the fastest growing in the world. Along with the growth of the economy, Turkey's energy consumption is also growing. It is expected that Turkey's total energy demand will more than double, reaching 222.4 Mtoe by 2020. Electricity, natural gas and oil demand will reach 398-434 billion kWh, 59 BCM, and 59 million tons respectively. In short, in terms of the growth of electricity consumption, Turkey is second, after China, in the world. In the face of this growing need, Turkey's own energy resources are scarce: from domestic production Turkey covers only 26 percent of the country's needs, while the rest of the volume must be imported. (25) Turkey currently imports about 93 percent of its oil and 97 percent of its natural gas. At the same time, Turkey is geographically located between countries where more than 72 percent of the world's oil and gas reserves are located...