Where Next for SOCAR?
The victory of the Trans-Adriatic Pipeline over Nabucco West demonstrated the truth of the old military adage that amateurs talk about strategy; professionals talk about logistics. The contest was decided not by grand pipeline strategy but on the pragmatic business of getting gas to customers as cost-effectively as possible. And key to doing so is control of key distribution networks along the route – something which Azerbaijan’s SOCAR is now firmly focused on.
The late-game victory of SOCAR over Gazprom-linked companies for control of Greece’s gas pipeline operator DESFA was, in this light, absolutely essential to TAP’s subsequent win. It will ensure Azerbaijani control of a critical node in the Southern Corridor, where ownership by Gazprom would have raised serious concerns about security of supply. If Gazprom had won (which seemed likely until it was pushed back by EU warnings of anti-trust investigations), TAP’s position would have been significantly weaker.
SOCAR’s purchase means that it now has a commanding stake in most of the infrastructure from the wellhead to the market: in the Shah Deniz field which will supply gas through TAP; the Trans-Anatolian Pipeline through Turkey; the TAP consortium itself (in which SOCAR will enter with BP and Total); and now DEFSA. Acquiring equity in the Greek gas grid appears to be a prelude to much bigger SOCAR investments in the Balkans and further afield.
Significantly, it is also set to participate in the construction of gas infrastructure in Albania, a country which to date has no domestic gas grids to speak of. Although talks are at an early stage, they are fairly serious and were under discussion when outgoing Albanian Prime Minister Sali Berisha met with SOCAR President Rovnag Abdullayev in Baku on 4 July.
Reportedly SOCAR is also looking at building gas infrastructure in similarly under-supplied Montenegro (where, bizarrely, it signed an agreement last year to provide organisational and legal advice for a holiday resort). Again, things are at a very preliminary stage but Montenegro would be the first stage of the Ionian Adriatic Pipeline, the critical Balkan supply link which TAP devised to compete with Nabucco West in this strategic region.
The extent of SOCAR’s interest in the region is a clear demonstration of its ambition to become much more than just a domestic oil and gas company (in fact, the O in its name is becoming less relevant with the rise of Azerbaijani gas). The original conception of the Southern Corridor, with European companies building and operating the downstream infrastructure while Azerbaijan just supplied the gas, was clearly inadequate for SOCAR’s ambition which has risen on the back of huge profits from oil pipelines.
This ambition is predominantly driven by commercial imperatives as SOCAR seeks to become a world-class energy company, but there is also a political dimension to its desire for control. Back in 2009, Turkey – despite its fraternal bond with Azerbaijan – threatened a significant disruption to the Southern Corridor, firstly by insisting on low prices and possible re-export rights for Azerbaijani gas, and secondly by unilaterally attempting to restore relations with Azerbaijan’s arch-enemy Armenia.
The result was a severe crisis between the allies in which Azerbaijan threatened to send gas elsewhere, with President Ilham Aliyev warning that "unresolved transit fees and unacceptable demands in reality can result in the disruption of a project of world importance."
Azerbaijan has also expressed frustration at times with lacklustre EU support for Nabucco and the European Commission’s inability to provide the adequate financial and political resources (which could have swung the competition in Nabucco’s favour years ago). Meanwhile the recent Russian decision to suspend the Baku-Novorossisyk oil pipeline until Transneft gets a better deal has hammered home the need for reliable export routes.
The TANAP pipeline, unexpectedly announced by Azerbaijan and Turkey at the end of 2011, was a response to Baku’s sense of vulnerability. Built and operated by the Azerbaijani and Turkish state energy companies, it is not reliant on the commercial fluctuations of private European companies; and SOCAR will retain a majority stake, although some of its 80% holding will be sold – but only to companies with gas contracts in Azerbaijan to ensure their reliability.
Control of DESFA and SOCAR’s expected role in Albanian gas infrastructure should be seen in the same light: moves to ensure reliability of transit and reduce the ability of other actors – private or public – to interfere with the flow of Azerbaijani gas to Europe, whilst also building SOCAR’s investment portfolio in Europe.
That impetus will continue as the Southern Corridor moves ahead. SOCAR’s interest in sending gas to Central Europe will probably presage purchases of infrastructure assets at Baumgarten or elsewhere in the region. It’s also likely increase its investments in Balkan gas grids, in both domestic distribution networks and in regional interconnections like the Ionian-Adriatic Pipeline.
Relying on the state oil fund and international borrowing to fund its European expansion (despite the concerns this has raised), SOCAR is evidently just getting started. The selection of TAP, although important in its own right, is only the vanguard for SOCAR as it becomes a major player in Europe’s downstream gas market.
Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.