Azerbaijan upstream activities in oil and gas are moving into Central Asia, with two deals recently signed, the last just a few days ago, to build oil refineries in Tajikistan and Kyrgyzstan.

New Azerbaijan upstream activities in Central Asia

An agreement was signed between the companies Azeraluminum and Tajik Aluminum Co (TALCO) during a state visit to Baku by Tajikistan’s President Emomalii Rahmon last week for Azeraluminum to construct an oil refinery in his country. TALCO already manages a plant in Tursunzade, 60 kilometers west of the Tajikistan’s capital, Dushanbe, that is reported to have a production capacity of 517,000 tonnes/year, of which 99% is exported. In the course of his visit to Azerbaijan, Rahmon was invited to an industrial plant not far from Baku that uses 50 tonnes of aluminum per year in the production of electric cables and other power-sector equipment.

It is expected that the oil refinery will be built in southern Tajikistan. Its construction will follow upon a feasibility study probably to be executed by the US firm Foster Wheeler, with which the State Oil Company of the Azerbaijan Republic (SOCAR) has already established a Baku-based joint venture.

Earlier this year, in line with increased Azerbaijan upstream activities in Central Asia, SOCAR agreed to construct a US$250 million oil refinery in Kyrgyzstan with a capacity of 2 million tonnes per year, equivalent to about 40,000 barrels per day. This would reduce and possibly even eliminate Kyrgyzstan’s dependence on Russia, on which it relies for imports of about 1.4 million tonnes per year, representing three-quarters of its oil and oil products consumption.

When the deal was announced a little over three months ago, Azerbaijan’s Industry and Energy Minister Natik Aliev explained that construction would finish by the end of 2013 or in early 2014. However, this still depends on Kazakhstan agreeing a swap deal with Azerbaijan.

Possible developments for new Azerbaijan upstream activities

The best arrangement would be that Azerbaijan sends the given quantity of oil across the Caspian Sea for import into northwestern Kazakhstan, while Kazakhstan exports the equivalent amount to Kyrgyzstan on its southeastern border.

However, since Kazakhstan can also finance the construction of such a refinery in Kyrgyzstan independently, the fate of this project depends upon the result of negotiations between Kazakhstan and Kyrgyzstan. Sources in Bishkek speak even of a volume of 3 million tonnes per year, which would be enough to create potential exports to China and Uzbekistan after satisfying domestic demand.

Azerbaijan has already extended its activities and thus its geo-economic influence westwards into Turkey and southeast Europe, where it intends to sell gas from the offshore Shah Deniz Two development now under way. In addition to operating two refineries in Azerbaijan with a capacity of 400,000 barrels per day, SOCAR has expanded its downstream activities by acquiring the Kulevi oil product terminal in Georgia and the Petkim petrochemical plant in Turkey.

The company also owns gas distribution systems in Azerbaijan and Georgia as well as 200 retail gasoline service stations in Azerbaijan, Georgia, Ukraine and Romania. Just three weeks ago, after an announcement late last year, the company formally took over the Swiss-based operations of Esso Schweiz in the retail service station sector. Esso was a previous name for Exxon, now ExxonMobil that survived among some of its overseas affiliates. SOCAR will also provide products to the aviation sector and tank trucks. It has plans to expand to a total of 500 service stations, in all countries combined, by 2015.

Overall geo-economics of Azerbaijan upstream activities

Having thus reached already westwards, now Azerbaijan and SOCAR are extending their activities and influence eastwards beyond the Caspian Sea basin proper, to Kyrgyzstan and Tajikistan in southern and southeastern Central Asia. The projects themselves are quantitatively minor, as such things go, but the countries involved are also relatively small; and since they are near the collision points not only of geological tectonic plates (producing the Himalaya mountains) but also geopolitical tectonic plates, the moves by Azerbaijan have a much larger potential geo-economic significance.

That is especially so because, combined with initiatives from China, the given countries may be in the process of extricating themselves from a Russian sphere of influence inherited from the Soviet, indeed pre-Soviet, era. Over the past decade and half, China has become an extremely important player in the economy of Kyrgyzstan, through which it also penetrates the market for (re-exported) consumer goods in Uzbekistan.

Last September, Dmitry Medvedev, then president of Russia, promised to support construction of Tajikistan’s Rogun dam and hydro-power project, four years after Russia withdrew its technicians and cut off assistance. However, sources at the Duma (the Russian parliament) explained at the time that this offer was conditioned upon Tajikistan remaining a loyal member within a Russian sphere of influence. It does not seem to have been followed up, particularly since Vladimir Putin has now replaced Medvedev in the office of president.

Consequently it is still more significant, in conjunction with Azerbaijan’s modest moves into the region, that China is now promoting construction of a gas pipeline from Turkmenistan through northern Afghanistan and Tajikistan into western China.

Tajikistan, for its part, continues to promote the CASA-1000 project to build a transmission line to sell electricity produced in Tajikistan to Pakistan via Afghanistan.

[First published in Asia Times Online.]