Analysis: British-Azeri energy ties

United Press International
Dec 15 2007

Analysis: British-Azeri energy ties

Published: Dec. 14, 2007 at 6:12 PM
By JOHN C.K. DALY
UPI International Correspondent

WASHINGTON, Dec. 14 (UPI) — Following the 1991 collapse of
communism, the United States was Azerbaijan’s largest single foreign
investor, but Britain is rapidly expanding its role there and in 2006
overtook the United States as Baku’s leading investor.

According to the Azerbaijani National Statistical Committee, in 2006
of $3.7 billion total foreign investment in Azerbaijan, Britain
placed first with more than $1.7 billion in investment, 46.9 percent
of the total, distantly followed by the United States with $662
million, or 17.4 percent of foreign investment. Due to record-high
energy prices the Azeri economy is surging, with an estimated gross
domestic product growth rate of 36 percent for January-August 2007, 5
percentage points ahead of the 2006 figure. The last few years have
seen massive investment in the country, which during 2004-2007
attracted more than $14 billion.

The single greatest factor responsible for this dramatic surge was
the opening in the summer of 2006 of the $3.6 billion, 1,092-mile
Baku-Tbilisi-Ceyhan pipeline, with a carrying capacity of 1 million
barrels per day. BTC, along with rising oil production from the
Azeri-Chirag-Guneshli project, are expected to contribute to a
doubling of Azerbaijan’s GDP by 2008.

BP is the operator not only of BTC and ACG but Azerbaijan’s offshore
Caspian Shah Deniz natural gas project and the South Caucasus
Pipeline, currently under construction.

The rising British presence in Azerbaijan’s energy sector represents
a dramatic change over the last decade. As reported by EC-TACIS, for
the period 1994-1999 the main sources of foreign direct investment in
Azerbaijan were the United States with 28 percent, followed by
Britain with 15 percent. FDI in Azerbaijan exploded from only $30
million in 1994 to more than $1 billion in 2002, about 17 percent of
Azerbaijan’s GDP, with approximately 90 percent of FDI concentrated
in the country’s hydrocarbons sector.

David Meechan, head of British Energy Ministry’s Press Service,
underlined the increasing importance of Azerbaijan in British foreign
policy during a Dec. 14 interview with Azerbaijan’s Trend news
agency.

"We appreciate strong bilateral relations between Great Britain and
Azerbaijan and the key role that Azerbaijan may play in the region,"
he said. "We are continuing establishing strong relations between the
two countries."

British Energy Minister Malcolm Wicks, who visited Baku in September,
is scheduled to meet with the delegation of Azerbaijani
parliamentarians, led by Vice Speaker Valeh Aleskerov, who are
currently visiting London. As a mark of the importance that the
British government places on the meetings, the Azeri delegation will
meet with Prince Andrew, the duke of York, in Buckingham Palace.
Eddie Perkins, head of the Press Service of Buckingham Palace, said
the key topic of the meeting will be trade and investments, adding,
"The duke of York attaches great importance to the development of
commercial relations between the two countries." Prince Andrew is the
special representative of the United Kingdom for International Trade
and Investments.

The British dominance of the Azeri oil industry is history repeating
itself. Caspian oil fields began producing oil near Baku in 1871.
Initially a Russian monopoly, in 1898 Azeri concessions were offered
to foreign investors, with the result that between 1898 and 1903
British oil firms invested millions in Baku’s oil fields, which by
1900 accounted for half the world’s production.

How did American energy firms let such a jewel slip from their
fingers? The answer is simple — politics.

In February 1988, a shooting war developed between Azerbaijan and
Armenia over the disputed Nagorno-Karabakh enclave, which lasted
until May 1994, leaving Armenian armed forces in control of 20
percent of Azerbaijan including the Nagorno-Karabakh region and seven
surrounding districts. Urging by the Armenian-American lobby resulted
in the inclusion in 1992 of the U.S. Freedom Support Act of Section
907, which banned any direct U.S. aid to the Azerbaijani government
as punishment for its blockade of Armenia and severely restricted
U.S. investment there. Section 907 was only waived a decade later by
President George W. Bush in January 2002 as a reward for Azeri
support of the United States following the Sept. 11, 2001, terrorist
attacks.

By then the British were well entrenched in Azerbaijan, much to the
distress of U.S. energy firms, which had lobbied since 1992 to get
Section 907 rescinded. London, in contrast, came into Azerbaijan with
no ideological baggage. On the issue of the still unresolved
Nagorno-Karabakh dispute, the British Foreign Office states on its
Web site, "The U.K. (and our European partners) has argued that any
solution should be based on the sovereignty of Azerbaijan with real
autonomy for the people of N-K. The international community does not
recognize N-K independence. Our policy on the N-K dispute is that we
will support any mechanism for its resolution, which both parties can
accept and which has a realistic chance of delivering a lasting
political settlement."

As Washington is slowly learning to its sorrow, the mixture of oil
and ideology results in a potentially explosive combination.

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