The Strategic Implications of Rosneft’s Azeri Bid

The absence of Russian companies from Azerbaijan’s high-profile offshore fields – aside from Lukoil’s 10% in the Shah Deniz consortium – and the sector’s domination by Western companies has been a clear sign of Baku’s geopolitical preferences over the past two decades. Orienting itself towards the West and limiting Moscow’s ability to influence its vital gas and oil export routes has been a central pillar of the country’s policy. 

But that could change with the news that rising giant Rosneft is looking to take a stake in the Absheron gasfield in the Caspian Sea. The news could have significant implications – for Azerbaijan, but particularly for the gas balance of power within Russia.

Rosneft president and Vladimir Putin ally Igor Sechin was in Baku in mid-July to discuss possible cooperation, including SOCAR prospecting in Russia’s sector of the Caspian Sea (which would be significant in itself). Nothing was said about Absheron at the meeting between Sechin and SOCAR president Rovnag Abdullayev, but on 25 July Reuters reported that Rosneft was looking at buying a stake. At the time of writing the news had not been confirmed by either party, which illustrates the sensitivity of the issue. 

Absheron is one of Azerbaijan’s biggest undeveloped gasfields, with 150-300bcm of gas in place, according to the operator Total, which along with SOCAR holds 40%; GDF Suez holds 20%. Along with other fields like Umid and Babek it will be critical to maintaining and boosting Azerbaijan’s role as a gas exporter in the decades ahead. SOCAR has said that rising production (to 54bcm by 2020) and exports will mean that Azerbaijan will need alternative export routes to Europe, beyond the Trans-Adriatic Pipeline recently selected by the Shah Deniz consortium. That is an optimistic goal, and Absheron will be key to fulfilling it.

Sechin’s visit to Baku, coming so soon after the TAP decision, raised eyebrows. Was this Russia seeking to reward Azerbaijan for not picking an export route which would have competed with South Stream? Or was it at Azerbaijan’s request, as a signal that it was not neglecting its relationship with Russia? It may have been a bit of both.

Although Baku has thrown its lot in firmly with Western companies – for both upstream activities and export routes - it is also adept at maintaining good ties with all its neighbours. Its gas and oil may now flow almost entirely outside of Russian control, but it is still keen (for a range of broader political reasons) to keep on Moscow’s good side. And what better way to do so than by offering Russia a stake in a critical gasfield?

Although no details have been released it is fair to believe that Rosneft won’t become Absheron’s operator, so it needs to be put in perspective: this is not a major shift for Azerbaijan, but it’s a symbolic deal which will allow Russia to maintain a toehold in the Azerbaijani market as it becomes more and more of a European player. And Rosneft is likely to offer generous terms (including exploration within Russia’s Caspian waters) as acknowledgement of the decision to avoid competing with South Stream.

The deal may be more significant on the Russian side, for two reasons. Firstly it enables Russia to retain at least some influence in Caspian gas export routes. This policy was clearly demonstrated in Gazprom’s attempt to acquire the Greek gas distributor DESFA, which would have given it a controlling influence in the Southern Corridor if TAP was chosen; and more dramatically in South Stream, which was designed to, inter alia, outflank the original Nabucco plan. With SOCAR winning the DESFA contest and Nabucco dead, switching to upstream stakes in future projects is a logical strategy.

But more than this, Rosneft’s interest in Absheron highlights its growing gas rivalry with Gazprom. With the latter’s finances hit by rebellions among EU customers over spot pricing, production issues and the rising cost of mammoth projects like South Stream, Rosneft has become increasingly assertive. Vladimir Putin has so far refused to allow Rosneft to challenge Gazprom’s export monopoly but that is looking increasingly flimsy, with Rosneft and Novatek simply working it around it.

The Absheron deal fits the same pattern. With the commonality of interests between Russian companies wiped out by recent developments in the Southern Corridor, Azerbaijan is now likely to be fair game for rivalry between them. Investing there is another tactic to chip away at Gazprom’s monopoly, this time from outside Russian territory. Although the Southern Corridor pipeline contest may be over, competition over regional gas exports is not – it’s just taking another form.

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.