THE PIPELINE CLOSED

Russian Prime Minister Dmitriy Medvedev has signed an agreement on the termination of the inter-governmental agreement of 1996 on the transit of Azerba-ijani oil via the Baku-Novorossiysk pipeline. The Russians have linked the termination of the agreement with the losses incurred by the "Transneft" joint-stock company in the operation of the pipeline. "Transneft's" press secretary, Igor Demin, said that Azerbaijan has for several years been pumping half as much oil than provided for by the agreement.

The Russians claim that Azerbaijan agreed to pump not less than five million tonnes of oil, whereas the actual volume of transit over the past five years did not exceed 2.5m tonnes, and in some years did not even reach 2m tonnes. Although, Moscow adds, it was with a pumping of the agreed volume that the fixed tariff of $15.67 a tonne per 1,000km was linked.

According to Demin, "Transneft" was forced to reserve a volume of 5m tonnes for the Azerbaijani oil, but the actual volumes were significantly less and because of this the company received a shortfall of revenue of $50m annually. Furthermore, the Russians believe the conditions for the transit of Azerbaijani oil are preferential and do not comply with WTO regulations. For example, a year ago, in "Transneft's" corporative magazine "Pipeline transportation of oil", it states that "there are strong suspicions that this agreement contravenes WTO regulations". "The amount of crude oil supplied via the Baku-Novorossiysk pipeline is not less than 5m tonnes annually. In effect, the transportation of oil is a service in which the quantity of a commodity from other countries which is transported with the aid of this service is indirectly restricted. This is an infringement of the regime of non-discrimination," the magazine noted. "The basic principle of WTO trading is the principle of freedom of transit. Be that as it may, problems may arise on this subject. The transit of Azerbaijani oil could affect the interests of other WTO member-countries," the magazine said. The conclusion of the article was that this agreement should be rejected and an agreement on transit reached based on new conditions.

Following the termination of this inter-governmental agreement, "Trans-neft" intends to conclude a commercial agreement with the Azerbaijani State Oil Company (SOCAR) in which both the volumes and an increase in transit tariffs will be stipulated.

It should be mentioned that this is the second major inter-governmental agreement between Russia and Azerbaijan that has been invalidated in less than half a year - at the end of 2012 Russia gave up the lease of the Qabala radar station. Despite lengthy talks the sides were unable to reach a compromise to extend the agreement on the lease of the radar station. The history of the question of the oil pipeline is not at all as simple as the Russian side tries to make out.

Of course, a transit tariff of $15.67 a tonne could be seen as preferential based on current prices. But ten years ago this tariff was very disadvantageous to Azerbaijan. You can make your own judgement: at the beginning of the 2000s the tariff for the sale of oil via the Baku-Supsa pipeline was between $3 and $3.5 a tonne. In Supsa top-quality Azerbaijani oil was not mixed with any other grades of oil, and in Novorossiysk Azerbaijan received the Urals admixture, the price of which has always been $4-5 less than Azeri Light.

At the end of  the 1990s-beginning of 2000 the Azerbaijani government tried on several occasions to change the conditions of transit via Baku-Novorossiysk, i.e. to reduce the transit tariff and also provide a quality bank at the Russian Black Sea port so as not to lose out in the marketing value of the oil. But "Transneft" constantly insisted on the need to increase oil transit volumes to maintain the quality bank and the question of the tariffs was virtually sacrosanct.

The conditions of the transit of Azerbaijani oil via Baku-Novorossiysk were indeed discriminatory, but not in relation to "Transneft", which the corporative journal claimed, but in relation to Azerbaijan. In fact in 1996 Moscow took advantage of Baku's lack of an alternative to the pipeline to reach out to the world markets. But as far as Azerbaijan was concerned the Baku-Novorossiysk route was de-signed to solve the transient tasks of ensuring a growth in oil exports along with the start of extraction at the Azeri-Chirag-Guneshli (Azari-Ciraq-Gun-asli) field. 

It was in connection with the non-preferential conditions of the transit via Baku-Novorossiysk that the Baku-Supsa pipeline to the Georgian coast of the Black Sea was brought into operation for a short period. As well as tasks for the export of the increasing volume of oil, Baku-Supsa ensured diversification of energy routes. And the significance of the Georgian route was confirmed in 1999-2000 when the Baku-Novorossiysk pipeline was virtually out of action because of the fighting in the North Caucasus and a number of breaches. As a result "Transneft" even had to build a string bypassing Chechnya. Incidentally, it should be mentioned that at that time official Baku had not made any claims against "Transneft" for failure to fulfil the transit agreement.

With the launch of Azerbaijan's main oil transport corridor Baku-Tbilisi-Ceyhan (BTC) the Baku-Novorossiysk pipeline was turned into a kind of reserve option. It was not by chance that the maximum volume of transportation of 4.6m tonnes of oil via Baku-Novorossiysk occurred in 2006 - that was the start of the full-scale development of AChG, but BTC had still not been commissioned and the increasing volume of oil was sent via the northern route.

Following the launch of BTC the Azerbaijani international operations company (the operator for the development of AChG) gave up Baku-Novorossiysk, and SOCAR maintained a level of transit at 2m tonnes annually to ensure the multiple options of energy routes.

For Azerbaijan Baku-Novorossiysk is also linked with another drawback - the oil from the Russian port on intermediate bulk tankers up to 1m barrels (135,000t) goes mainly to Black Sea and mostly Mediterranean markets because of the need to cross the Bosphorus Strait. The carrying capacity of this strait does not enable heavy-tonnage tankers to be loaded at Black Sea ports. Whereas from Ceyhan Azerbaijani oil on tankers with a volume of 300-500,000t is delivered to any part of the world. And this is one more advantage when it comes to diversification of markets.

But despite all the drawbacks SOCAR has a vested interest in the functioning of the northern route.

"What is important for SOCAR is the maintenance of the Baku-Novorossiysk route and we will definitely have talks with 'Transneft'. This route is inscribed in the strategy of diversification of the transportation of energy resources. If you recall, in 2008 with all that was happening in Georgia, Baku-Novorossiysk remained Azer-baijan's only outlet for oil exports," a SOCAR spokesman told R+.

That said, SOCAR also has a number of important questions, the solution of which is important in order to continue the transit of oil to Novorossiysk. "Of course, we need to maintain a quality bank - this will be one of the conditions of the new agreement, because the Urals oil which we market from Novorossiysk is much cheaper than pure Azerbaijani oil. Furthermore, we would like to keep the minimum volume of pumping within a scale of 1.5-2m tonnes annually. And another important factor will be the opportunity to pump the oil of third countries through the pipeline. We could pump Kazakh oil through Baku-Novo-rossiysk right now, but this is not written into the existing agreement," a spokesman for the Azerbaijani company said.

Azerbaijan is also offering Russia the opportunity to use Baku-Novorossiysk in the reverse direction to supply oil to SOCAR's new oil refinery. "The option of reverse use will be discussed at talks between SOCAR and 'Transneft'. By working in reverse mode the pipeline will be able to transport Russian oil to Azerbaijan. In the future this oil can be processed at a new petrochemical complex which SOCAR will build or exported in other directions," SOCAR's president, Rovnaq Abdullayev, said.

However, this pipeline was built at the beginning of the 1980s precisely to supply oil from Russia and Kazakhstan to Baku, and it was only during the years of independence that it has been redirected in the reverse direction. Proposals about the reverse route to Baku were made by SOCAR before, especially in the light of the launching of BTC, because in this case it would have been possible to pump Russian oil straight to the Mediterranean port of Ceyhan bypassing the Bosphorus Strait. But the Russians did not take these proposals seriously because of an aversion to an export pipeline from a post-Soviet country bypassing its own territory. At the same time, an outlet to the major oil-transit port of Ceyhan on the Mediterranean interested Russian companies and in October 2009 "Rosneft", "Transneft" and "Sovkom-flot" signed an agreement with Calik Holding and the Italian Eni on the construction of the Samsun-Ceyhan pipeline. But the project remained on paper and is hardly likely to be implemented in the next few years because of the high cost of construction and operation.

So, SOCAR and "Transneft" have enough questions to discuss, although the timeframe is not so wide. Despite the renunciation of the treaty on oil transit via Baku-Novorossiysk, Azerbaijan will be able to take advantage of it until the beginning of 2014. Even if the talks end negatively Azerbaijan will not lose much. Having two export routes - Baku-Tbilisi-Ceyhan and Baku-Supsa - with an overall capacity of 60m tonnes (which, incidentally, could be increased even more), there should be no problems with transit. That is why a positive outcome of the talks is of greater benefit to "Transneft". After all, having survived, albeit for even a short time, without Baku-Novorossiysk, SOCAR may not go back to this route at all.