Azerbaijan-Turkmenistan energy deal unlocks new regional politics

Last week Azerbaijan and Turkmenistan took concrete steps to end a three-decade long dispute over an offshore oil field in the Caspian Sea.

The Azerbaijanis called the disputed oilfield Kapaz — after Mount Kapaz located near the picturesque Lake Goygol outside Azerbaijan’s second largest city Ganja. The Turkmens called it Serder — the Turkic transliteration of a Persian word meaning “commander”. Now, both countries have agreed to call the oilfield “Dostluq”, meaning friendship.

They also agreed to Dostluq’s joint development. While the oil field is not massive, it is still significant.  It is estimated the field contains 60-70 million tons of oil, as well as significant reserves of natural gas. No details about how the profits will be divided have been made public but insiders close to the project tell me that Turkmenistan will get the largest share. 

In the 1990’s, when the Caspian region was starting to boom in terms of energy projects (for the second time in history) neither side could agree to the rights over the offshore oil field. 

At the time, Azerbaijan was willing to make concessions to enable joint development of the field. At first, Turkmenistan also seemed willing — but right before a deal was finally inked, Ashgabat got cold feet fearing Russian disapproval. 

But times have changed. The geopolitical stars have aligned in the region and the timing of this agreement between Azerbaijan and Turkmenistan is no coincidence. They are likely three main reasons why the agreement was made now.

The first reason is that Turkmenistan is out of money. Ashgabat has relied too heavily on natural gas exports to too few customers — mainly Russia and China. The country is also in an economic crisis. Currency depreciation, autarkic policies, and limited spending on public services have led to economic stagnation. Lines for basic goods are now commonplace, especially in the regions outside Ashgabat. Even so, billions of dollars have been wasted on frivolous projects with little or no economic value.

Those international investors that could enter the country are reluctant to do so because little has been done to improve the business climate, privatise state-owned industries, or combat rampant corruption. Like other countries with economies linked to Russia, Turkmenistan has felt the negative effects of Russia’s poor economic performance and economic sanctions.

The greatest potential for Turkmenistan to turnaround its dire economic situation is with its energy resources. President Berdymukhammedov has encouraged some foreign investment in the energy sector, but not enough to make a meaningful difference. Turkmenistan needs new revenue streams and the recent deal over Dostluq could help.

The second reason is that Russian President Vladimir Putin is distracted — and the Turkmens know this. In the 1990’s Ashgabat was loathed to make a deal with Baku for fear up upsetting Moscow. The situation is now different. President Putin faces many problems at home. The Covid-19 pandemic presents a major challenge to the country as the virus continues to run rampant through the population.

The economic situation in Russia is also bleak. The poor economic situation is a result of the pandemic, the drop in oil prices, economic sanctions, and endemic corruption. There have been more and more anti-government protests in recent months throughout the whole of Russia. But perhaps Putin’s biggest problem comes from his main political opponent Alexei Navalny.

Moreover, these are only Putin’s domestic problems. The foreign policy situation does not look much better. Russia has experienced geopolitical setbacks in Syria and Libya. The situation in Belarus looks far from being resolved in a manner that will satisfy the Kremlin. 

Moscow has picked up another military burden by providing a “peacekeeping” force in parts of Nagorno-Karabakh. The war in eastern Ukraine simmers on without an end in sight. It is very possible that Crimea, which Russia illegally annexed from Ukraine in 2014, could soon run out of fresh drinking water.

In 2021, a bilateral agreement between Turkmenistan and Azerbaijan over an offshore oil field is the least of Russia’s concerns.

Finally, everyone likes a winner. The recent completion of the Southern Gas Corridor and Azerbaijan’s stunning victory in the second Karabakh War probably injected some enthusiasm, if not a healthy dose of realpolitik, into Ashgabat’s thinking. 

The Southern Gas Corridor was a success story if ever there was one in terms of regional energy projects. The first shipment of Caspian natural gas made its way to Europe using this new route on the last day of 2020 on time and below budget — a rare, good news story in an otherwise dismal year for geopolitics.

Azerbaijan’s victory in the second Karabakh War also demonstrated that the “old way” of viewing the region no longer applies. Even though it was Russia that brokered the ceasefire agreement, there is a perception that Moscow abandoned Yerevan during the conflict. There is also a perception in the region that Azerbaijan defied Russia, with no consequences, by using military force to liberate its territory. 

In geopolitics, perception is often reality. Frankly, Moscow’s long arm in the region now looks a little shorter. It is likely that Ashgabat cared less about Moscow’s concerns because of this. 

In addition to providing more regional stability in the Caspian, this agreement between Azerbaijan and Turkmenistan could help boost the confidence between the two countries working together on bigger projects in the future. The most obvious project is a Trans-Caspian Pipeline.

A pipeline is the only economically viable way to transport Central Asia’s natural gas across the Caspian Sea and on to Europe without going through Russia or Iran. While a fully-fledged pipeline should be the long-term goal, in the short term, Azerbaijan and Turkmenistan to construct an interconnector between two existing gas fields in the Caspian. An interconnector would serve as a proof of concept and might reduce Russian objections in the same way a fully-fledged pipeline might not.

The Caspian region’s first energy boom took place during the beginning of the last century.  The second took place in the 1990s after the collapse of the Soviet Union. With the completion of the Southern Gas Corridor, and the agreement over Dostluq, it is very possible that a third energy boom will take place during this decade. Both policymakers and investors should keep an eye on this region.