Could the ‘Deal of the Century’ Still Live Up to its Name?

On September 20–Baku staged major celebrations–with Turkish President Ahmet Necdet Sezer and Prime Minister Recep Tayyip Erdogan and Georgian president Mikhail Saakashvily present among the guests of honor. The cause for the festivities was the tenth anniversary of the first contract on delivering the Azerbaijani oil to the world market–dubbed ‘the deal of the century’ by the late president Heydar Aliyev. Many expectations were frustrated during this decade but the fast-approaching inauguration of the Baku-Tbilisi-Ceyhan (BTC) pipeline could make good on many of the old promises.


Ten years ago–on September 20 1994–the newly-forged consortium of several international oil companies–called the Azerbaijan International Operating Company (AIOC)–signed the agreement with the government of Azerbaijan on the development of three oilfields: Azeri–Chirag–and Guneshli. It was BP that had worked hardest and lobbied the smartest in preparation for this agreement–but it had to cut in Amoco–Pennzoil–and Unocal from the US–Statoil from Norway–and several minor operators (Exxon joined the next year). What was more–seeking to secure a neutral or positive attitude from Russia–Azerbaijan’s State Oil Company (SOCAR) invited Lukoil to join with a decent 10% of the total package–explaining the presence of a representative of Russia’s Ministry for Fuel and Energy at the signing ceremony.

In those days–however–powerful bureaucrats in the Yeltsin government were not accustomed to inform one another about their policies–so Foreign Minister Evgeni Primakov was furious at being kept in the dark. Three months later–the first Chechen War was unleashed and this unfolding disaster made Moscow even more nervous and disagreeable about Western plans for the Caspian. That started a chain of setbacks for the AIOC: a sharp drop in oil prices–downwards re-evaluations of the oil reserves in the Southern Caspian–disagreemen’s about export routes–and endless quarrels about maritime borders and even an incident (fortunately–a single one) involving Iranian patrol crafts.

In retrospect–three key sources of troubles for the project–as well as several other contracts signed in its wake–can be identified. The first was the (sometimes unnecessarily rude) rejections of Iran’s proposals to channel some of the prospective oil flows towards the Gulf through its territory. The second was the failure to give Russia a meaningful stake in the project–thus making a partner with a clear interest in the success. The third and most complex Pandora box of troubles was full of local conflicts–and the oil contracts–excitingly promising as they were–failed to make any contribution towards their resolution. All these shortcomings are still present but at the start of the second decade of implementation–the situation looks significantly more promising for AIOC and its local partners. It is not only the unstoppable rise of oil prices that improves the overall prospects–but also the completion in the coming months–after many delays and complications–of the strategic Baku-Tbilisi-Ceyhan pipeline that could deliver as much as one million barrels of Caspian oil a day to meet steadily growing world demand.


The intensity of geopolitical competition for Caspian oil has visibly subsided since the late 1990s when Russia and the US appeared to be at loggerheads over the control of prospective Caspian pipelines. The present-day relative calm–however–might be misleading and the absence of any Russian guests at the celebrations in Baku (as well as the total silence about them in the Russian media) is a warning signal. While the technicalities of the ten-year-old deal are mostly resolved–its implementation is still threatened by three regional risks and three external challenges. The former are the uncertainties about President Ilham Aliyev’s ability to control infighting among interest groups in Azerbaijan’s ruling elite–the desperate efforts of President Mikhail Saakashvili to keep Georgia mobilized around his program of reforms–and the fragility of the ten years old cease-fire in Mountainous Karabagh with a perfectly deadlocked peace process.

The external challenges are the disgruntlement of Iran–which seeks for means to reduce the international pressure focused on its nuclear program; the overstretched US–which is stuck in the quagmire of Iraq and seems to have few political resources left for the Caucasus; and the confused Russia–which seeks to expand its regional influence but remains unable to contain the war in Chechnya. Recent Russian efforts at re-orienting its foreign and security policies towards the ‘war on terrorism,’ triggered by the horrible tragedy in Beslan–are particularly worrisome. The doctrine of military prevention has been made an integral part of these efforts–and there is a visible desire to show the ability to deliver on the promises made by Minister of Defense Ivanov and Chief of General Staff Baluevsky. The Pankisi Gorge in Georgia has long been identified as the most probable area for a Russian ‘counter-terrorist’ operation–but it is entirely possible that targets for ‘surprise attacks’ could be found further south in Georgia and in Azerbaijan. The military base in Akhalkalaki–Georgia–would then prove its value and the radar station in Qabala–Azerbaijan–may provide a useful pretext–and if such a penetrating ‘counter-terrorist preventive strike’ would also prevent oil from flowing to the West by damaging some of the BTC infrastructure–nobody in Moscow would be greatly upset.

Such a scenario might appear entirely hypothetical–and its repercussions could be far more serious then a post-factum exchange of stern diplomatic notes. Every balanced assessment of immediate consequences and further implications would warn against reckless use of military instrumen’s in the Caucasus–but the Russian leadership has been departing further and further away from its trademark pragmatism and increasingly shows the predisposition to inadequate responses in crisis situations.


The renewed enthusiasm around the decade-old ‘deal of the century’ is fueled by record-high oil prices and pinned on the forthcoming unveiling of the high-capacity pipeline. In unstable areas like the Caucasus–however–huge profits tend to attract big trouble. The recent cancellation of NATO Partnership for Peace exercises in Azerbaijan was certainly not an isolated diplomatic incident; the lack of real partnership is certainly an open secret but the absence of real peace needs to be addressed urgently. The list of things that might go wrong with delivering the Caspian oil to the world markets is excessively long–from implosion of regimes in the South Caucasus to Russia’s aggressive move in reasserting its dominance. The deal would have deserved the pretentious name if it was used for promoting stability in the region. It may not be too late to give this emphasis to the oil policies–but the currently prevalent benign neglect is not the way to proceed.

Dr. Pavel K. Baev is a Senior Researcher at the International Peace Research Institute–Oslo (PRIO). The Central Asia Caucasus Analyst is a publication of the Central Asia-Caucasus Institute at the Nitze School for Advanced International Studies–at Johns Hopkins University–in Washington–DC.


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