PRAGMATIC COOPERATION

The latest visit of Russian Federation President Vladimir Putin to Baku not only paved the ground for renewed relations in the political sphere, but also provided an impetus for cooperation in the energy sector that seemed to be waning. Among the numerous documents various agencies signed during the meeting, special attention is attracted to the agreement on cooperation in the oil and gas sector between the largest oil company of the world, Rosneft, and the state oil company of Azerbaijan (SOCAR). The talks between potential cooperation between the two state energy companies began back during the visit of the Rosneft leader, Igor Sechin, in July this year. Although the media did not cover the range of discussed issues in detail, it was clear that real foundations for mutually beneficial practical cooperation between the two sides have emerged, ones that go beyond the limits of purely geopolitical perceptions. 

Such a course of events is also significant because many experts believed, largely mistakenly, that Azerbaijan and Russia are rivals in the energy sphere in Europe. Both countries are oil and gas exporters that have various routes for transport. However, for some reason experts do not take into consideration the volumes of exported energy resources and markets where they are supplied. This agreement between the largest companies of the two companies became yet another counter-argument to disprove these experts.

Cooperation between the two countries in the energy sector has not always been so broad. LUKoil alone takes part in a number of projects in the Azerbaijani energy segment. In addition, Azerbaijan has for several years supplied natural gas to the Russian market and part of the Azerbaijani oil was supplied to the world markets through the Baku-Novorossiysk pipeline. Furthermore, the energy systems of the two countries operate in a parallel mode. 

Yet, even this extremely limited areas of cooperation in the energy sector showed some decline in the past year: the volume of natural gas exported to Russia is quite small and in May Russian Prime Minister Dmitriy Medvedev signed a resolution to revoke the agreement between the Russian Federation and Azerbaijan on the transit of the Azerbaijani oil via the Baku-Novorossiysk pipeline. 

Considering these circumstances, it is interesting to analyse in what areas Rosneft and SOCAR may cooperate and how stable such cooperation can be. It is a paradox, but one of the vectors for cooperation between the two companies is directly linked with using the Baku-Novorossiysk pipeline. Both companies are in negotiations on potential transport of Russian oil Urals in the volume of 5m tonnes per year via the Baku-Novorossiysk pipeline in reverse mode. Thus, Rosneft may begin its supplies to Azerbaijan. The question that arises is what is the benefit of Russian oil supplies to Azerbaijan, which does not actually need them? Moreover, using the pipeline in the reverse mode can have a negative impact on LUKoil's transport of oil: the company fills the Baku-Novorossiysk pipeline in Makhachkala with oil produced from the Caspian sea fields. LUKoil will lose this route if the pipeline is reversed towards Baku. The expenses are plain to see. Where are the benefits?

For the Russian company the beginning of selling oil to Baku is first of all the diversification of its supplies. Certainly, for such a large company the export of 5m tonnes may seem insignificant, but the objective here is to pump the oil into the Baku-Tbilisi-Ceyhan pipeline (BTC), which provides access to the Mediterranean sea and further to any point of the world. True, such a scenario may not suit the Azerbaijani company, since Russian brand Urals has lower quality and will be mixed with Azeri Light, significantly decreasing its price on the world market, and consequently profits. There is an acceptable option here as well. Russian oil can be refined on refineries in Baku for internal consumption to free up the higher quality Azerbaijani oil for export. Back under the USSR the Baku-Novorossiysk pipeline was built for the transport of Siberian oil and its refinement in plants in Baku. This system collapsed following the demise of the Soviet Union, but 20 years later the Siberian oil may yet again be pumped for refinement to Baku.

For its part, Rosneft too benefits from this cooperation. The company may receive Azerbaijani oil for its refinement at the refineries in Italy and Germany, where Rosneft is a stakeholder. These plants specialize in the refinement of high-quality oil and in this case the supplies of Azeri Light would be very welcome. Otherwise, these plants will have to be retooled for processing the Urals brand of oil, requiring extra investments. It is clear that using the transport infrastructure can form the basis for mutually beneficial cooperation and the level of its implementation is quite high.

Another promising area for cooperation could be the joint production of energy resources on the territory of the two countries and in third countries. Rosneft already expressed its wish to take part in the development of Azerbaijani fields, including Abseron. On the other hand, SOCAR wishes a stake in the production from Russian fields, especially those in the Caspian sea. This can be seen from SOCAR's recent bid for prospecting and producing oil from the Kalmykiya offshore field.

Rosneft produces up to 37% of oil in Russia and plans to steadily increase the output. In this case cooperation with SOCAR may facilitate this goal since the Azerbaijani company already has well-developed oil-producing infrastructure on the Caspian and extensive experience. In addition, the Russian sector of the sea is as yet insufficiently developed.

What is more, both companies may take part in the implementation of projects that concern trading operations. It is known that Rosneft is interested in SOCAR's infrastructure, such as the oil storage and terminals in the UAE, Singapore and a number of other countries. 

On the whole, the development of the positive scenario points out that cooperation between the two companies can turn into an example of successful synergy, with both companies multiplying their potential and the possibility of implementation of their mid- and long-term plans. There is only one formula for success for this cooperation: pragmatism of partners and mutually beneficial cooperation.