Are the Caucasus energy assets in danger from a war in Nagorno-Karabakh?

Fighting between Armenia and Azerbaijan over the disputed territory of Nagorno-Karabakh has continued to escalate since first shots were fired on September 27. With the two sides now accusing each other of cross-border shelling, there is a looming threat of an all-out war in a region that serves as a major transit corridor for oil and gas supplies.

However, this risk is yet to reflect itself in oil prices, with Brent and other benchmarks remaining relatively flat this week. This said, the resurgence in coronavirus (COVID-19) cases is weighing down on demand, leaving many producers with spare capacity. World oil demand will be 7.1% lower year on year this quarter, according to the International Energy Agency (IEA).

Azerbaijan’s state energy company SOCAR said the country’s oil and gas infrastructure was safe on September 30 thanks to measures taken by the army amid military conflict in the region of Nagorno-Karabakh.

The worst spate of fighting between Armenia and Azerbaijan since the 1990s has raged in the Armenian-occupied region of Nagorno-Karabakh since the weekend. The clashes have not taken place near the major energy assets so far, according to reports.

Ibrahim Akhmedov, a spokesman for SOCAR, told Reuters that the country’s oil and gas infrastructure was operating normally and that its exports were being carried out as usual.

Major oil giant BP said the business operations at its projects in Azerbaijan were continuing as usual.

Analysts said on September 29 that military clashes over the Armenian-occupied territory have not affected energy supplies from the region, but could disrupt oil and gas exports should the conflict escalate.

The conflict centres around the long-disputed Nagorno-Karabakh region, which is internationally recognised as part of Azerbaijan but broke away in 1991 and is controlled by ethnic Armenians, who have declared it as the Republic of Artsakh. The two countries fought a war over disputed territory in 1988 to 1994 and tensions have simmered ever since, occasionally breaking out into border clashes.

Risks to oil and gas transit

Azerbaijan pumps the bulk of its crude oil through the BP-operated Baku-Tbilisi-Ceyhan (BTC) pipeline that connects offshore Azeri oilfields with an export terminal on Turkey’s Mediterranean Coast. At one point the pipeline runs just 16 km from Azerbaijan’s border with Armenia. BTC carried almost 640,000 barrels per day (bpd) of crude last year, mostly consisting of Azeri supplies, but also some volumes from Kazakhstan and Turkmenistan.

Azerbaijan also supplied 9.2bn cubic metres of gas to Turkey last year via the South Caucasus Pipeline (SCP). SCP forms part of the longer Southern Gas Corridor (SGC) network which cost BP and its partners around $40bn to build.

The renewal of fighting with Armenia comes as Azerbaijan prepares to launch gas flows through SGC to Italy and Greece from the Shah Deniz gas project in the Caspian Sea, also managed by BP. Supplies were expected to begin in October, but construction was held up due to coronavirus restrictions. The Trans-Adriatic Pipeline (TAP) consortium, which operates SGC’s European leg, told NewsBase earlier this month that it was “committed” to sending the first gas to Europe by the end of the year, without disclosing an exact start date.

Armenia could in theory target BTC with shells, but it would face condemnation for the resulting environmental disaster, and for jeopardising European energy security. Furthermore, the parts of the pipeline nearest to its border are buried up to two metres below the ground, meaning they would not make easy targets.

There is also no precedent. Armenia has not attacked Azeri pipelines during previous escalations in the conflict. In 2008, though, Georgia accused Russia of launching a missile strike against the pipeline, which Moscow denies. Earlier that year the Kurdistan Workers’ Party (PKK) claimed responsibility for an attack in Turkey that left the pipeline out of action for several weeks.

By disrupting gas supplies, Armenia would also incur the wrath of Turkey, which has already vowed to stand by its “brother nation” Azerbaijan “with all its resources and heart.” Turkish President Recep Tayyip Erdogan has called on Armenia to withdraw immediately from Nagorno-Karabakh. Armenia reported on the afternoon of September 29 that one of its fighter jets had been shot down by Turkey, indicating that Ankara is scaling up its involvement in the conflict.

Azerbaijan’s national oil company (NOC) SOCAR said on September 29 that the country’s oil and gas infrastructure was being guarded by the army. So far none of the fighting has taken place near energy assets. BP has also reported that operations in Azerbaijan are continuing as usual.

In comments to Argus, however, a SOCAR spokesman said it “can hardly be a coincidence that attacks by Armenian occupying forces” intensified ahead of SGC’s start-up. Infrastructure could end up in Armenian hands and Azerbaijan’s own military actions are “the major security factor for the Southern Gas Corridor and other assets of strategic importance for Europe and Azerbaijan,” the representative said.

Armenian gas supply

Another risk is that Azerbaijan could target some of the gas pipelines distributing Russian gas across Armenia.

Armenia is a captive gas market, relying on Russia’s Gazprom for practically all its supplies. Gas is also used as a major source of electricity supply. These pipelines are physically more exposed to shelling than those in Azerbaijan. Were Azeri forces to target key pipelines, though, Armenia’s capital Yerevan would likely be spared from disruptions thanks to nearby gas storage facilities operated by Gazprom.

Gazprom Armenia reported in July that gas pipelines near the Azeri border had been damaged, leading to a disruption in local supplies. It did not specify a reason, although the outage coincided with shelling by the Azeri army.

While Turkey stands behind Azerbaijan, Russia has traditionally supported Armenia in the conflict, although it is also on friendly terms with Azerbaijan. The pair have a security pact and Armenia hosts Russian military bases. Russia and Turkey are already tangled up in two proxy wars in Libya and Syria, and there is a danger they could end up locked in a third in the South Caucasus.