Azerbaijan's pipe dream for Europe

The Shah Deniz gas terminal could see a huge increase in activity

By Tom Esslemont
BBC News, Baku

On the outskirts of Azerbaijan's BP Shah Deniz gas terminal, security guards are on duty around the clock.

They patrol the 15km (9 mile) fence as a damp drizzle falls across the warren of gas pipes and oil platforms behind it. Green and yellow flags flap violently in the wind.

You can see why every effort is made to protect the terminal - this is where most of Azerbaijan's energy wealth is secured.

Huge volumes of gas are pumped out from underneath the Caspian Sea, refined and fed through pipelines to Europe.

Azerbaijan is keen for the pipeline to happen. It could take a long time Vukar Bayramov Baku-based analyst Pipeline scheme gains momentum EU seeks to expand energy grids

In the coming years, Azerbaijan and the Shah Deniz gas plant could be at the heart of Europe's energy needs.

The dispute between Ukraine and Russia earlier this year, which left thousands of homes in Eastern Europe in the cold, has turned gas into a burning issue here.

Energy providers in countries like Bulgaria, Hungary and Austria have pledged financial support to a new gas pipeline called Nabucco which, if built, would rely on Azerbaijan to provide the infrastructure for transporting more gas westwards.

And it would most likely begin here at Shah Deniz.

If Nabucco gets the go-ahead, the pipeline would rival the proposed Russian South Stream pipeline and would transport 31 billion cubic metres of gas annually by 2020.

Diversification

The Shah Deniz terminal already provides more than 8bn cubic metres of gas per annum, most of which is transported through a pipeline via Georgia and on to Turkey.

See planned Nabucco gas pipeline route

But it is mostly oil that accounts for Azerbaijan's wealth.

In the capital, Baku, which is some 30km (19 miles) from Shah Deniz, you only have to look at the ornate gold-stoned facades of the 19th Century buildings to get a sense of what the oil boom did for the economy more than 100 years ago.

Europe should be much more interested in diversifying its gas supplies Shahmar Movsumov Azeri Oil Fund Europe still faces gas quandary

Some leading Azeri economists believe that oil production has now peaked, heightening the need for diversification.

"Azerbaijan is keen for the pipeline to happen. It could take a long time. It could take six or seven years, but I think that in terms of money, there are enough funds," says Vukar Bayramov, chairman of the Baku-based Centre for Economic and Social Development.

However, the government denies that waning oil production is the reason for wanting the pipeline to go ahead.

"My personal view is that Europe should be much more interested in diversifying its gas supplies and... protecting themselves from the type of events that happened earlier this year," says Shahmar Movsumov, executive director of the Azeri Oil Fund, a government department set up to control the revenue from oil and gas.

Most people in the government are optimistic about prospects for Nabucco. But there is still a major stumbling block to its eventual construction.

Russian pressure?

If Nabucco is to happen it will rely not just on Azeri gas, but also on gas from Central Asia where countries currently sell gas to Russia - the country Ukraine blamed for turning off the taps earlier this year.

No-one wants to push this point more than Russia's ambassador to Azerbaijan, Vasili Istratov.

"As far as I'm aware, there is no decision taken anywhere in Central Asia to use Nabucco as a pipeline to transport gas to Europe. If that decision is being taken that's their decision, it's their right," he says.

Some economists believe oil production in Azerbaijan has peaked

I ask him whether he thinks Russia is putting pressure on Turkmenistan and other countries in Central Asia to try to deter them from selling gas to the Nabucco pipeline consortium.

Mr Istratov's reply was short: "Russia is purchasing that gas. Is it pressure? Or is it not pressure, just competition in the market?"

Turkmenistan is situated hundreds of miles across the choppy Caspian Sea.

Even if its government does agree to sell gas to the Nabucco consortium, it will take a feat of engineering brilliance to transport the gas across the water in order to avoid building the pipeline through Russia.

Mr Bayramov is adamant Nabucco will happen, though he is not sure if it can help prevent future energy disputes between Europe and Russia.

"I'm not sure if Azerbaijan can balance good relations with Russia and Europe," he said.

"If Nabucco is not approved, then the ruling party will have less opportunity to keep good relations with both Europe and Russia. [Russia] is not a stable partner - just look at the latest crisis."

Poverty

But Mr Bayramov does not think the problems will end there for Azerbaijan.

If Nabucco goes ahead, he thinks it will inevitably lead to a widening gap between rich and poor in the country.

He told me much of the wealth from oil and gas revenues is being absorbed into the state coffers, with little spin off for the country's poor.

The government estimates that 15% of people live below the poverty line although some economists, including Mr Bayramov, put it much higher at 25%.

Some villages not far from Baku have even been without a gas supply for the last 17 years.

The Nabucco pipeline may give Azerbaijan a strong chance of further prosperity; and Europe may also be at an advantage.

But it is unclear if people at the bottom end of Azeri society will benefit at all.

Click to return