Marching Across the Caspian: The Geopolitics of Oil in Kazakshtan and Azerbaijan

TAYLOR CROMPTON
Associate Blog Editor

Kazakhstan, the world’s 14th-largest oil exporter, has had a providential week. First came Xi Jinping’s, China’s President, visit on September 7th to celebrate the opening of the Kazakhstan-China oil pipeline, which is jointly owned by the China National Petroleum Corporation and Kazakhstan’s national oil company. Then came the first drops of oil from Kazakhstan’s Kashagan oil field—the main source for the Kazakhstan-China pipeline. The field contains reserves of approximately 13 billion barrels, and it is expected to reach a daily production rate of 1.5 million barrels per day, which, as Andrew Kramer noted in a New York Times article on September 11, 2013, “will amount to about 1.6 percent of the world’s total [oil production].” Although the size of the oil reserves is striking, the direction in which it will flow may prove to be the more consequential factor for the global energy sector.

For China, which relies heavily on the Middle East for its ever-growing oil imports, the pipeline signifies an opportunity for the country to both increase and diversify its fuel supply. Of course, such physical connectivity between the two countries is matched by a more strategic symbolic connection, as Xi said of Kazakhstan and its Central Asian neighbors, “‘China highly values its friendship with these countries and takes them as a foreign policy priority,’” (Perlez). China has named this movement its “marching westwards” policy, a compliment to the “new Silk Road” that former Secretary of State Hillary Clinton announced in 2011. Yet as China commences its great step westwards, Kazakhstan is marching its way eastwards.

As a former Soviet State, Kazakhstan has long-held and complex relations with its Asian neighbors. Yet the country seems contented to put its economic future in the hands of the East, as Jane Perlez reported in a New York Times article on September 7, 2013, “‘[Kazakhstan] has found that China is an easier economic partner and has more cash [than the West]. China is able to step in and provide massive loans without strings attached.’” Indeed, China has loaned $5 billion each to Kazakhstan’s national bank and national oil company. Such loans may prove a windfall for Kazakhstan, a country that has been eagerly awaiting an opportunity to capitalize on its significant oil wealth. But across the Caspian Sea, another Caucasus country has sent its oil in a rather different path across the global geopolitics of oil arena.

Positioned on the west coast of the Caspian Sea, bordered by Iran to the south, Russia to the north, and Georgia and Armenia to the West, Azerbaijan has emerged as one of the most geopolitically important developing nations in the world.  Baku, Azerbaijan’s capital and largest city, has long been a prominent player in the global oil economy—indeed, the city was the world’s largest oil producer at the turn of the 20th century. Although Azerbaijan lost its position in the oil sector in the mid-20th century, its return to oil-glory was sealed when the 6 billion barrel Azeri-Chirag-Guneshli (ACG) oil field was discovered in 1985—a veritable sable gold mine for not only Azerbaijan but also for the developed powers that were seeking fuel sources outside of OPEC. Enter what has come to be known as the “deal of the century”—a $20 billion PSA to develop the ACG, directed by the Azerbaijani International Operating Company (AIOC).  The AIOC was charged primarily with figuring out how to export Azerbaijan’s oil wealth throughout the world. The solution? The Baku-Tbilisi-Ceyhan (BTC) pipeline.

The economics of exploiting the ACG were clear. The geopolitics, less so. Seven powerful countries, from the East and West, had a stake in constructing a pipeline for the ACG’s oil, as did the surrounding Caucus states through which a pipeline could potentially run. The pipeline could stand as a physical barrier separating Russia from Iran and the rest of the Arabian Peninsula, which was attractive to the U.S. given its residual Cold War-anxiety and its growing uneasiness about the stability of the Middle East. And a pipeline through either Iran or Russia was out of the question for the West because it was unwilling to grant either country any leverage over its newfound oil buddy. Yet Azerbaijani was a bit more equivocal about its political obligations—holding the key to the entire deal, the country was keen to milk the field for all it was worth.

Reeling from two centuries of Russian domination and seeking new allies as the 21st-century approached, Azerbaijan felt that its future lay with the West. And former President Heydar Aliyev knew he stood to be the biggest winner in the deal, as his former foreign policy advisor remarked, “‘Oil is our strategy, it is our defense, and it is our independence. Iran is dreaming dreams of Azerbaijan, and if the Russians were strong, they would colonize Azerbaijan. But they can’t because Aliyev invited the whole world in to watch.’” (Ipek, 2009, p. 233). Eager to please the countries of its most generous investors, the UK and the US, and eager to physically connect with its adoptive political parent, the West, Azerbaijan agreed to build what would become the 1,099 mile, $4 billion BTC pipeline from Baku through Tbilisi, Georgia’s capital, to Ceyhan, a Turkish Mediterranean port.. Completed in the summer of 2005, the BTC pipeline continues to pump oil today with a maximum discharge of 1 million barrels per day. Azerbaijan’s GDP grew 26.4% in 2005. In 2006, it grew 34.5%.

It seems that Azerbaijan’s decision to tie its hands with the West proved to be a fortuitous decision. Of course, it remains to be seen how Kazakhstan’s eastward-march strategy will affect regional and global geopolitics. Regardless, these countries offer a complex duality, a duality worth tracking in the region in the future.