Energy and Security in the Caucasus

Emmanuel Karagiannis

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134547425
• Edition: 1
• Topic: Sciences sociales
• Subtopic: Études ethniques

Any understanding of the complex politics of the post-Soviet Caucasus presupposes an understanding of the relationship between the transportation of Azerbaijan's oil, inter-state relations and ethnic conflicts. Energy and Security in the Caucasus isa contribution to the debate revolving around the geo-politics of the Caucasus.

CHAPTER ONE

Azerbaijan’s oil and the pipeline question

Geographically, the Republic of Azerbaijan is conveniently located directly on the border of Europe and Asia, having common overland borders with Russia, Georgia, Armenia and Iran. The whole eastern part of the republic is washed by the Caspian Sea and is an outlet to Russia, Kazakhstan, Turkmenistan and Iran. The Nakhichevan Autonomous Republic, although it is part of Azerbaijan, is separated from the latter by the territory of Armenia and borders Turkey and Iran. As a result of its geographical location, Azerbaijan has a fascinating history and complex ethnic heritage.

Azerbaijan, as part of the Caucasus region, has over many centuries been a kind of arena for confrontation and was the object of disputes and wars between many powers, especially the three regional powers: Iran, Turkey, and Russia. Iran dominated Azerbaijan culturally, if not politically, from the sixth century BC until the Turkic invasions of the ninth century AD. The Turkic culture dominated Azerbaijan from the ninth to the eleventh century AD except in the area of religion, where Azerbaijanis adopted Shi’ism rather than the Sunni form of Islam. Iran continued to influence the area politically and culturally through invasions and re-conquest until it subsided as a great power. It regained control in the eleventh century and did not relinquish control until the accession of Russian imperialism in the eighteenth century. Peter the Great annexed the northern portion of Azerbaijan in 1724, but Iran regained it in 1736. Finally, Russia and Iran divided Azerbaijan by the treaties of Gulestan and Turkmanchai, in 1813 and 1828, respectively.¹

According to Professor Tadeusz Swietochowski of Monmouth College in New York, after the Czarist conquest Azerbaijan oscillated between two systems of Russian rule: rule by dependency and colonial rule. The first system was practised until the mid-nineteenth century, using Azerbaijan as the corridor for penetration into Iran and a position outflanking Turkey. In practical terms, it amounted to the bare minimum of expenditure of funds and manpower, which meant that the government, administrative, and judicial powers were all left in the native hands, and the khanate (principality) system remained essentially unchanged.² The second stage, from the mid-nineteenth century till the collapse of the Czarist rule at the beginning of the twentieth century, was colonial rule, a term used by Czarist officials, who wished to make Transcaucasia what East India was for Britain. Colonial rule entailed the removal of native rulers, who were replaced by khanates selected by the Russian administration. Yet, the middle echelon personnel remained solidly native, and the region was given a special status – the Viceroyalty of the Caucasus. There were hardly any attempts at cultural assimilation; in fact, the Viceroyalty encouraged the growth of native literature and the press.³

The situation changed dramatically after the end of World War I. While the Russians were embroiled in the civil war following the 1917 October Revolution, the Azerbaijanis attempted to establish their independence. By 1920, however, the Bolsheviks had consolidated their power sufficiently to invade Azerbaijan, and, without international support, Azerbaijan became a part of the USSR. During World War II, Soviet expansionist aims sought to utilise the purported affluence of Soviet Azerbaijan to stoke Azerbaijani nationalism in northern Iran which it occupied for a time. These efforts failed as the Allied Powers forced a Soviet withdrawal from northern Iran and Teheran quickly re-established control despite Soviet attempts to the contrary.

After the end of the World War II, Azerbaijani nationalism was controlled by lessening the influence of Islam, through a literacy program and the co-operation of moderate Islamic leaders. In addition to limiting Islam’s influence, Soviet authorities pressed to assimilate Azerbaijanis to Russian culture. This policy was aimed at obliterating distinctions between Russia and Azerbaijan. Soviet laws promulgated the influx of settlers from Russia, mainly to the city of Baku. As a result, Azerbaijani nationalism was held in check for decades. In September 1989, however, Azerbaijan became one of the first Soviet republics to declare its sovereignty. Soviet troops intervened in January 1990 after Azerbaijani militants attacked Armenians in Baku. The fighting was an escalation of the long-standing conflict between Armenia and Azerbaijan over the sovereignty of the Nagorno-Karabakh enclave. Nevertheless, the resulting mood of shock and alienation did not translate into a mass campaign for independence, and Ayaz Mutalibov, installed in late January 1990 as Moscow’s ‘satrap’, managed to maintain his grip on power for two years.

Having occupied that post, Mutalibov also inherited the problems bequeathed by the former Soviet Union. Karabakh’s war against Azerbaijan, a deep economic crisis, and the consolidation of newly-won sovereignty, were just some issues that required prompt examination. Moreover, the mistakes made in tackling them, coupled with military setbacks on the Karabakh front, aggravated the situation in the republic. As a result, mass demonstrations started in Baku and Mutalibov was forced to resign in March 1992, following the massacre of Azerbaijani villagers by Armenian military units in Nagorno-Karabakh. In early May 1992, the Azerbaijani Supreme Soviet reinstated Mutalibov as president, but within 24 hours street demonstrations again forced him to flee.

New presidential elections were held and the chairman of the Azerbaijan’s Popular Front (APF), Abulfaz Elchibey was elected president. In his presidential election campaign, Elchibey pledged to liberate Karabakh in six months. He promised democracy, human rights and fresh parliamentary and local elections.⁴ Favouring defence alliances with Turkey and the United States, Elchibey pledged to pull Azerbaijan out of the Commonwealth of Independent States (CIS). He attacked Iran by supporting the unification of north and south Azerbaijan and vowed to keep the state and religion apart.⁵ Elchibey only lasted a year. He was forced to yield office by an armed uprising in June 1993 and was replaced by former Communist Party leader and current President, Heydar Aliyev. A constitutional referendum in November 1995 granted Aliyev sweeping powers and a simultaneous legislative election provided his ruling New Azerbaijan Party with a majority of seats. In October 1998, Aliyev was re-elected president for five more years.

The strategic importance of Azerbaijan’s oil industry

Azerbaijan, the oldest known oil-producing country in the world, experienced an oil boom at the beginning of the twentieth century and later served as a major refining centre in the former Soviet Union. Initially, the eternal pillar of fire by the Zoroastrians from the mud volcanoes in Baku impressed just a few travelling foreigners other than the locals. Marco Polo was one of them. In early to mid-nineteenth century, a few hundred hand-dug pits were producing a little amount of oil under the Czarist rule.⁶ It was only in the 1870s that private investments were allowed to this part of the Russian Empire.

Indeed, in the history of Baku oil, it is impossible not to note the investment of foreign companies, especially the Nobel family. Robert Nobel was the first of the Nobels to understand the importance of the oil industry in Baku. He convinced his brother Ludwig to invest in oil extraction.⁷ In 1873, they established the Nobel Brothers Oil Extracting Partnership. Thanks to his skilful leadership, Ludwig, a talented engineer, developed many inventions that helped modernise the technology related to oil production. The Nobel Brothers Company, for example, bought the first tanker in the Caspian Sea, in order to reduce transport expenses. Due to the success of that first tanker, the Nobel Brothers built an entire fleet of tankers, giving names to the ships such as Moses, Spinoza, and Darwin. The tankers increased the turnover of goods to such an extent that, by 1890, Baku had become the busiest port in the world.⁸

In addition, the Nobel Brothers were first to introduce railway tanks for oil transportation. In 1883, a railway was laid from Baku to Tbilisi, enabling the oil to be transported by trains. In 1897, they built a pipeline which reduced the expenses of transportation by five times and paid for itself within a single year. The pipeline, the largest in the world at that time, was built from Baku to Batumi on the Black Sea Coast, a distance of 883 kilometres.⁹ All this modernisation allowed the Nobel Brothers to take the lead in the oil business by 1900, and to gain tremendous profit during the 47 years of their partnership in Azerbaijan. The Rothschild Company and Shell, lead by Samuel Markus, were also involved in oil production in Baku. More than 50 per cent of the oil extraction, and 75 per cent of the oil production commerce, were held by these three foreign companies.¹⁰ Oil turned Baku into a centre of world oil commerce and enabled it to exert an incredible influence on the entire economic development of the Caucasus.

During World War I, Azerbaijan was producing a major part of oil world oil supply and the usage had already expanded into motor vehicles and diesel engines of the naval vessels. It was an important commodity to the industrial countries of the world. In 1917, the fall of the Russian Empire created a serious vacuum on the Caucasian front. The desire to control Baku’s oil fields caused fierce competition among German, Turkish, and British forces. At the end of the war, the victory of the Entente states was in many respects connected with their control over the important oil regions. In fact, Azerbaijan’s oil became a major factor in the victory of 1918. According to British Prime Minister Lloyd George, though Entente states had an advantage over their rivals towards the end of the war, military operations could have been prolonged and it would have been difficult to predict the final result had the German bloc managed to gain control over the Baku oil fields.¹¹

Meanwhile, the situation in Azerbaijan became more complicated due to international circumstances, especially after the defeat of Germany and Turkey in World War I. On 28 May 1918, Azerbaijan declared independence. On 30 October 1918, Turkey signed an armistice with the Entente in Mudros. In accordance with the conditions of that agreement, British troops were deployed in Azerbaijan, keeping the Azerbaijani oil industry under British control. In the summer of 1919, however, the Allied regime was dismissed and British troops withdrew from Baku. Encouraged by the British withdrawal, the threat from Soviet Russia significantly increased. On the night of 27–28 April 1920, the Russian eleventh army crossed the Azerbaijani border and reoccupied Azerbaijan’s oil fields.¹² The Bolshevik regime benefited significantly from the wealth of Azerbaijan’s oil. Later on, Lenin wrote: ‘We all know that our industries stood idle because of lack of fuel ... now we control the basis for an economy capable of supporting our industries’.¹³

During World War II, Azerbaijan’s oil fields were a strategic objective in Nazi Germany’s campaign against the Soviet Union. On the eve of what came to be known as ‘The Great Patriotic War’, Baku was the cradle of the Soviet oil industry, and as such, the major supplier of oil and oil products for the Red Army. In 1940, for example, 22.2 million tons of oil were extracted from Baku which comprised nearly 72 per cent of all the oil extracted in the entire USSR.¹⁴ Hitler was determined to conquer Azerbaijan from the beginning of the war because the interruption of Azerbaijani oil supplies on any large scale could possibly result in the collapse of Soviet war effort. Moreover, if the German army would have captured the oil fields of Azerbaijan, Hitler was convinced that the Third Reich would be self-sufficient within its own borders, and thus invulnerable.

By late July 1942, Hitler’s quest for Baku seemed well on its way to achieving his goal. The Germans had already captured the city of Rostov in North Caucasus and severed the main oil pipeline from Azerbaijan.¹⁵ The determination to capture Baku was so intense that the date for the final attack and seizure had been fixed – September 25, 1942. A few days prior, Hitler’s generals presented him with a large decorated cake which depicted the Caspian Sea and Baku. Documentary films show how amused Hitler was at the gesture and how he chose the most desirable piece – Baku – for himself.¹⁶ Fortunately, the attack never occurred, and German forces were defeated before they ever reached Azerbaijan.

The importance of Baku diminished when much of the easy, shallow onshore and offshore oil had been extracted and when the large reserves of Siberia were discovered. After this time, much of the Soviet oil capital was redirected towards that region. Nevertheless, the discovery of Siberian oil enhanced the significance of Baku as a centre for oil processing and the manufacture of oil-production equipment. Although the Azerbaijani oil fields were exhausted, owing to Soviet methods of over-exploitation, the country still had huge untapped offshore oil deposits. The problem was that, even though the Soviet oil industry had successfully developed its offshore oil fields and was even among the pioneers in this field, it had done so through virtually primitive means. Indeed, the Soviet oil industry was never technologically able to develop offshore oil fields at great depth.

Thus, Azerbaijan’s offshore oil fields remained, to a large extent, undeveloped. According to the Azerbaijani State Oil Company (SOCAR), Azerbaijan’s proven oil reserves total some 17.5 billion barrels, while most outside estimates place recoverable oil reserves at 3–12 billion barrels.¹⁷ Over 90 per cent of Azerbaijan’s total oil reserves are thought to be offshore, especially near the Apsheron Peninsula. Towards the end of the Soviet rule, foreign oil companies were invited to negotiate joint ventures with the Republic of Azerbaijan. The policies of glasnost and perestroika proclaimed by Gorbachev allowed the world oil giants to turn their attention to Azerbaijan, which some of them had already visited at the beginning of the twentieth century and had enjoyed the fruits of the oil boom.

The co-operation of Azerbaijan with the Western oil companies started in 1990 during Mutalibov’s rule. The government’s immediate preoccupation was to find foreign partners for developing the three offshore fields of Chirag, Guneshli and Azeri. In the first tender, the right for working on the Azerbaijani part of the Caspian shelf was given a 40 per cent to the American-owned Amoco. The share of the USSR also consisted of 40 per cent, while that of Azerbaijan was 20 per cent.¹⁸ All sides saw that there was chance to earn large profit from the deal. For Amoco, this was a chance to enter into a vastly underdeveloped market, while Azerbaijan recognised the political and economic benefits to come from an agreement, namely independence and hard currency, which mattered greatly in the early post-Cold War.

The Elchibey government continued talks with Western companies on the question of exploiting the natural resources of the Azerbaijani section of the Caspian Sea. From the first days, the new government actively applied itself to the realisation of economic reform and the oil question was put in the forefront. After protracted and difficult talks, foreign oil compan...