Kazakhstan and Azerbaijan: Great Potentials for energy diversification in the Caspian Sea

Essay, 2017
11 Pages, Grade: 8



The energy rich Caspian Sea region is becoming increasingly important strategically, as energy consumption worldwide is rising and issues of energy security are gaining importance. Known as the Caspian Sea countries are the five countries that border the Caspian’s shores, which are Azerbaijan, the Islamic Republic of Iran, Kazakhstan, Turkmenistan and the Russian Federation (Bayramov, 2015). Azerbaijan and Kazakhstan possess the largest share of both oil and gas in the Caspian Sea Region (U.S. Administration Energy Information [EIA], 2013).

Azerbaijan is involved in the Southern Gas Corridor, which aims to bring gas from the Caspian Sea coast in Azerbaijan to the EU by 2019 (Commission, 2017). While Kazakhstan has been more concentrated to provide energy for China, a Trans-Caspian pipeline is proposed, which would run from Kazakhstan to Baku, connecting it to the Baku-Tbilisi-Ceyhan pipeline, and thus linking Kazakhstan with Europe (Trickett, 2017). This paper aims to generate an energy policy review of Azerbaijan and Kazakhstan, as they are in possession of the largest share of oil and gas in the Caspian Sea region to be able to evaluate their future potential. The basis of the analysis is the framework of the International Energy Agency (IEA), which focuses on the five factors of 1 ) General Energy Policy, 2) Energy Security, 3) Market Convergence, 4) Sustainable Development and 5) Investment Attraction (2015).

This paper argues that Azerbaijan strength is its key geostrategic position, while Kazakhstan’s strength is its abundance of energy resources. However the heavy dependence on the energy sector makes both countries victims to fluctuating oil and gas prices. While Azerbaijan is reluctant to reform, Kazakhstan is more concrete in increasing the amount of renewables in its energy industry and more ambitious in adapting its tariffs to the decreasing oil prices on the world market. Thus, it is possible that Kazakhstan will attract more investment and growth in the long-run.

This paper is structured as follows: firstly, a background outlines the historical development of the Caspian Sea region. Secondly, a theoretical part discusses the approach used to analyse Azerbaijan and Kazakhstan, outlining the factors identified by IEA. Thirdly, in an analytical part, the theoretical framework by the IEA is applied to both countries.


The Caspian Sea region is one of the oldest-oil producing areas in the world (EIA, 2013). After the dissolution of the Soviet Union (SU), the three border countries of the Caspian Sea – Azerbaijan, Turkmenistan and Kazakhstan- became independent. Due to the heavily interlinked regional system during the Soviet era, these newly independent states faced grave problems to function autonomously (IEA, 2015, p. 19). Thus, the regional powers Russia and Iran attempted to monopolise the energy resources to increase their influence in and beyond the region (Bayramov, 2015). At the same time, international oil companies got engaged in a scramble for the rich energy resources of the region (Ibid, 2015). The Caspian Sea Region forms part of what Brzezinski identified as the “Grand Chessboard” (1997, xiv). EIA estimates that the Caspian Sea region produced an average of 2.6 million barrels per day (mbd) of oil in 2012, accounting for around 3,4% of the total world supply (2013). Since 2000, the oil production in the Caspian Sea region is growing, Azerbaijan and Kazakhstan drill the largest share of oil. While in 2000 roughly 1 mbd of oil were produced, the production was more than doubled to 2.5 mbd in 2012.

Figure 1: Caspian Sea region oil production (2000-12) million barrels per day

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Source: U.S. Energy Information Administration (2013)

The gross natural gas production experienced significant growth from 2000 to 2012 as well. Here, Russia’ share is larger than in the oil production, however Azerbaijan and Kazakhstan also dominate in this area. While production was around 1.2 trillion cubic feet (tcf) per year in 2002, it was set around 2.8 tcf in 2012, illustrating the rapid growth of the industry (EIA, 2013).

Figure 2: Caspian Sea region gross natural gas production (2000-12) trillion cubic feet per year

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Source: U.S. Energy Information Administration (2013)

The U.S. Geological Survey estimates that another 20 billion barrels of oil and 243 tcf of natural gas are located in the South Caspian Basin (Ibid, 2013).

While the Caspian Sea region is rich in energy resources, it also faces several challenges. Firstly, the territorial status of the Caspian Sea is not determined yet. During the Cold War, the Caspian Sea was split between the SU and Iran. The dissolution of the SU led to the rise of territorial disputes among the neighbouring countries, preventing the full exploitation of the energy potential of the Caspian Sea (Bayramov, 2015). Secondly, as the Caspian Sea Region is landlocked, it depends upon pipelines and shipping arrangements with transit states to transport the energy to global consumers (Kubicek, 2016, p. 172). Thirdly, the security of the region is vulnerable, as the borders were drawn arbitrarily by the SU. Thus, the newly independent states are ethnically heterogeneous and fractious (Misiagiewicz, 2016, p. 187). Particularly in the Caucasus, nationalistic movements have been on the rise, which led Brzezinski to use the term “Eurasian Balkans” to describe the risk of military clashes in the region (Brzezinski, 1997, p. 128). Thus, one needs to keep in mind that the question of security is as important as energy (Misiagiewicz, 2016, p. 187).


This paper uses the approach by the International Energy Agency (IEA) to compare Azerbaijan and Kazakhstan, as it was specifically designed for the Black Sea and Caspian Sea Region. IEA has taken the framework of INOGATE as a basis (Interstate Oil and Gas Transportation to Europe) which consists of four pillars to provide an overview of the state of reforms (2015). While the IEA advises its 29 member states, it also works with China, India and Russia (IEA, 2017). INOGATE is a regional energy cooperation programme between the EU and 11 partner countries in Eastern Europe, the Caucasus and Central Asia, founded in 1996. The four pillars were created by the BAKU initiative of 2004 (Petersen, 2017, pp. 61-62).

The four pillars are formed by the key policies related to energy security, market design, sustainable development and investment climate (INOGATE, 2017). Additionally, IEA has added General Energy Policy and renamed some of the pillars (IEA, 2015). While the energy policies of 11 countries are reviewed in the report by IEA 2015, a direct comparison between countries is missing. In this paper, the theoretical framework as shown below is thus applied to Kazakhstan and Azerbaijan.

A tentative limitation to this paper is that the approach might colour this paper by an EU perspective. However, quantitative sources such as economic data are employed, as are qualitative sources, such as the opinion of academics, in order to limit bias.

Figure 3: Theoretical Framework

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Based on International Energy Agency (2013, pp. 448-450)


4.1 General Energy Policy

Azerbaijani’s Baku Region accounted for half of the world’s oil production in 1900 and had been of strategic interest in both World Wars. The discovery of oil reserves in the Caspian Sea made it attractive for foreign investment. After the collapse of the SU, Azerbaijan developed an independent energy policy. In 1994, Azerbaijan struck an agreement, also called ‘contract of the century’, with British Petroleum. Since this deal, Azerbaijan has become a partner of Western countries as an energy supplier. As a result of the deal with BP, the Baku-Tbilisi-Ceyhan pipeline was build (Misiagiewicz, 2016, p. 191).

Due to the energy boom, Azerbaijan’s economy has grown exceptionally in the past decade, its GDP has quadrupled since 2000 (IEA, 2015, p. 65). However, Azerbaijan’s GDP has decreased since 2014 to 2016, from 75.2 billion to 37.8 billion (World Bank, 2017a). The well-being of Azerbaijan and energy are very closely interlinked (IEA, 2015, p. 65).

The main energy policy can be found in the 2004 State Programme on the Development the Fuel-Energy Complex in Azerbaijan for 2005-2015, as a new program could not be found. The program foresees the investment in “capacity building, rehabilitation and natural gas extraction, reducing electricity shortages and improving energy supply security” (Ibid, p. 71). Azerbaijan maintains good relations with the EU, bilateral cooperation occurs in the context of the EU Neighbourhood Policy. In 2017, negotiations for a new agreement started, political dialogue takes place in the framework of the Baku Initiative (IEA, 2015, p. 83). The EU is the biggest export and import market of Azerbaijan. In 2011, the Joint Declaration on the Southern Gas Corridor was signed (EEAS, 2017a).

Due to its proximity to Russia, Kazakhstan is in a unique position in Central Asia, being frequently seen as a buffer state. The current President Nazarbayev, in power since 1990, is reluctant to change the relations of Kazakhstan with Russia (Misiagiewicz, 2016, p. 194). Kazakhstan is a bigger player than Azerbaijan in the energy field. It is an oil producer since 1911 and has the both the 2nd largest oil reserves and 2nd largest oil production among the former Soviet republics after Russia. The oil reserves in Kazakhstan are ranked as 12th largest in the world. The Kashagan field has special importance due to its rich oil reserves. Kazakhstan produced 1,698 million barrels per day in 2016, almost the double of the amount Azerbaijan produced (EIA, 2017, p. 1).

According to the International Monetary Fund (IMF), Kazakhstan is under the top 10 of the fastest-growing economies in the world (IEA, 2015, p. 163). Like Azerbaijan, the GDP of Kazakhstan decreased from 2014 (236.6 billion USD), to 2016 (133.7 billion USD) (World Bank, 2017b). Like Azerbaijan, Kazakhstan’s economy is vulnerable to commodity price fluctuations. Most products outside of the energy sector suffer from low productivity and competitiveness (IEA, 2015, p. 163).

In 2012, the Kazakhstan 2050 Strategy was announced, which called for widespread economic, social and political reform in order to reach the top 30 global economies by 2050. In particular, the strategy foresees the economic diversification through the creation of a favourable investment climate, the development of an effective private sector and public-private partnerships (IEA, 2015, p. 164). Furthermore, the government reduced export duties in 2014, when oil prices decreased (EIA, 2017, p. 5).

The EU is Kazakhstan’s first trade partner and largest foreign investor (EEAS, 2017b). In 2015, the EU and Kazakhstan signed an Enhanced Partnership and Cooperation Agreement (EEAS, 2017b). Kazakhstan also maintains good relations with Russia, signing a Customs Union Agreement with Belarus and Russia in 2010 and becoming a member of Eurasian Economic Union in 2015 (IEA, 2015, p. 165).


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Kazakhstan and Azerbaijan: Great Potentials for energy diversification in the Caspian Sea
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Kazakhstan, Azerbaijan, Caspian Sea, energy diversification, Kapsisches Meer, Kasachstan, Kaukasus, Aserbaidschan
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Inga von der Stein (Author), 2017, Kazakhstan and Azerbaijan: Great Potentials for energy diversification in the Caspian Sea, Munich, GRIN Verlag, https://www.grin.com/document/435461


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