Interstate relations between Azerbaijan and Ukraine are traditionally viewed through the prism of the «pipeline factor». After all, Ukraine is one of the main trade partners of Azerbaijan, and the absolute majority of Azerbaijan’s energy exports to Ukraine are oil and oil products. In January-June 2020, Ukraine increased oil imports 2,4 times compared to the same period in 2019 — up to 773,515 thousand. tons. According to the State Customs Service, raw materials were imported in the amount of $ 264,688 million (an increase of 1,6 times).
This aspect is often played out in such a way that Kiev is particularly interested in it, as it is interested in meeting the needs of Ukraine’s fuel resources.
However, today there is a long-term trend in Azerbaijani-Ukrainian interstate relations. The visits of President of Ukraine Volodymyr Zelensky to Baku and high-ranking Azerbaijani officials to Kyiv, meetings of the Ukrainian President with representatives of large Azerbaijani business create conditions for strengthening both bilateral and multilateral cooperation. After all, the Azerbaijani-Ukrainian rapprochement also leads to the development of the Organization for Democracy and Economic Development of GUAM. It should be noted that the GUAM countries (Azerbaijan, Ukraine, Georgia, Moldova) have been solving similar geopolitical problems for many years. And the geopolitical and geoeconomic prospects of GUAM depend on the Azerbaijani-Ukrainian tandem.
Baku, relying on Turkey, the United States and the European Union, seeks to address four key issues: first, the settlement of the Karabakh conflict; secondly, strengthening the geostrategic positions of Azerbaijan, both in the South Caucasus and outside the region; third, the withdrawal of the national economy on the trajectory of sustainable development; fourth, strengthening Baku’s position in the European energy market.
Baku takes into account that certain sections of the main pipeline systems are exposed to military-political risks associated with the instability of the political situation in the Nagorno-Karabakh region, etc. South Ossetia. For example, the Baku-Tbilisi-Ceyhan oil pipeline (BTC), the European Southern Gas Corridor (YUG) project, the Baku-Supsa pipeline, the Baku-Tbilisi-Kars (BTC) railway, and the Baku-Tbilisi highway run at a distance visibility and close to the place where the last events of July took place on the Azerbaijani-Armenian state border in the Tovuz (Azerbaijan) or Tavush (Armenia) direction. Armenia’s border positions allow it to control the north-western regions of Azerbaijan, along which the above-mentioned energy transport and infrastructure routes leading to Europe pass.
Increased competition in the European energy market against the background of falling oil and natural gas prices encourage the Azerbaijani authorities to intensify in the Ukrainian direction. Especially since EU4Energy has launched a project of technical assistance to Ukraine for the implementation of Directive 2009/119 / EU on the formation and maintenance of minimum reserves of oil and petroleum products (INP).
During this year Representatives of the Verkhovna Rada, the Ministry of Energy, the State Reserve Agency of Ukraine together with the specialists of the Secretariat of the Energy Community (EC) will develop bylaws necessary to create reserves of oil and oil products. This circumstance meets the energy interests of Azerbaijan and Ukraine.
At present, Azerbaijan is establishing mutually beneficial cooperation with Turkey, Georgia, Romania, Ukraine, and Belarus as part of strengthening its position in the European energy market, which can support the functioning of the European South Caucasus Project. Therefore, SOCAR is working on plans to develop processing abroad — in Turkey, Georgia, Romania and Ukraine. Today, SOCAR has already completed the construction of the complex in Turkey. For example, the design capacity of the STAR plant is 10 million tons per year, with raw materials to be delivered via the Baku-Tbilisi-Ceyhan GTS (BTC), and oil products to be sold on the Turkish market and exported to the EU.
At the moment, the state oil company SOCAR is already investing in Ukraine. Thus, there are 60 gas stations and 4 oil depots in Ukraine. The Presidents of Azerbaijan and Ukraine, Ilham Aliyev and Vladimir Zelensky, hope to restore the dynamics of bilateral political dialogue and trade and economic cooperation after the end of quarantine in the two countries. Aliyev and Zelensky note the prospects for deepening cooperation between Ukraine, Azerbaijan, Georgia and Moldova within GUAM.
One of the most important areas of cooperation within GUAM is to ensure security and stability in the region, as all four participating countries have faced a loss of territorial integrity. The last summit of GUAM heads of government took place in December 2019. It was a question of creating instruments of cooperation within the framework of the Free Trade Area (FTA), in particular, mutual liberalization of the services market, and practical implementation of the GUAM transport corridor concept, which will significantly reduce the supply of energy from the Caspian region to Europe.
In other words, Azerbaijan and Ukraine have taken on the role of GUAM’s «locomotive.» Strengthening cooperation between Azerbaijan and Ukraine will accelerate the implementation of the Caspian-Black Sea-Baltic energy corridor project.
The consequence of Russia’s annexation of Crimea and the escalation of military tensions (Russia’s occupation of part of the Ukrainian territories) in Donbass was the loss of most of Ukraine’s transit opportunities, as the left-bank part of Ukraine became «nowhere to be found.» In these circumstances, Ankara and Baku are strategic partners of Kyiv. The three-sided format of Azerbaijan-Ukraine-Turkey cooperation will further strengthen relations between the countries and may become a platform for developing mutually beneficial projects similar to those successfully implemented by Azerbaijan and Turkey in other three-sided formats of cooperation. For example, the Trans-Caspian project is expected to be implemented in Kyiv, which will allow deliveries of Turkmen natural gas to Ukraine. By doing so, Kyiv wants to significantly weaken Gazprom’s position in the European natural gas market, as Turkmenistan and Uzbekistan will supply their natural gas to Ukraine and transit to the EU. It should be noted that in the near future Azerbaijan, Georgia, Romania and Turkmenistan will hold 3-party talks on the creation of a transport and transit corridor «Caspian-Black Sea», which will connect two ports — Constanta, Romania and Turkmenbashi, Turkmenistan.
Factor «Odessa — Brody» and GUAM
The most important area of cooperation between Baku and Kiev is the creation of a new route for the transportation of Azerbaijani oil to European consumers in the direction of «Baku — Supsa — Odessa — Brody — Plock.» GUAM states have previously expressed political support for the Odessa-Brody-Gdansk project. As soon as Odessa-Brody operates in the reverse mode, oil exporters from the Caspian region and its consumers in northern and central Europe will have an incentive to extend this pipeline project to Plock and Gdansk. Especially since JV Sarmatia with the participation of oil companies from Azerbaijan, Georgia, Ukraine, Poland and Lithuania has already been established to develop a feasibility study for this project.
For Azerbaijan, the Odessa-Brody route is access to sustainable oil sales. If Baku and Kiev reach an agreement, the parties need to sign a contract on firm sales guarantees. Baku considers it necessary for Kyiv to take concrete steps in the issue of Azerbaijani oil supplies to Ukrainian refineries and its transit to Europe.
Azerbaijan has the opportunity to load the Odessa-Brody pipeline in «obverse» mode and provide supplies of up to 5 million tons of oil for its processing at the two largest enterprises in Ukraine. Although, the profitability of the Odessa-Brody oil pipeline will be achieved by pumping at least 8 million tons of oil per year.
Against the background of bargaining with Russia on the price of oil, Belarus since March this year. began importing oil from Ukraine via the Odessa-Brody pipeline. Concern Belneftekhim has concluded a deal with SOCAR for the supply of two oil tankers with a total volume of 160. tons from the territory of Ukraine via the Odessa-Brody oil pipeline.
Ukrtransnafta has started receiving Azerbaijani Azeri Light oil at the Yuzhny offshore oil terminal (MNT), which was delivered there by a tanker for the needs of Belarus. Ensuring the transit of oil to the Mozyr refinery will allow Kiev to increase the level of loading of the oil transportation system of Ukraine, as the production of its oil in Ukraine is insignificant and one refinery is enough for its processing.
Azerbaijani investments in Ukraine in 2020 may amount to up to $ 2 billion in oil transportation and refining infrastructure facilities, as well as the participation of Azerbaijani companies in auctions for balancing capacities. Azerbaijan and Ukraine intend to do so through two trading houses.
Officials of Azerbaijan and Ukraine are discussing SOCAR’s participation in the modernization of Ukraine’s energy sector. Although, no significant progress has been made. SOCAR subsidiary SOCAR Energy Ukraine has been operating in Ukraine since 2008. Another SOCAR subsidiary, Caspian Drilling Company, in July 2019 participated in a tender for the development of the Dolphin oil and gas field in the Black Sea. In September, the Cabinet of Ministers of Ukraine declared the results of the competition invalid. On December 6, 2019, the chairman of the State Service for Geology and Subsoil Roman Opimakh announced that a new tender for the development of hydrocarbons at the Dolphin section will most likely take place in September 2020.
In addition, SOCAR is interested in storing oil in Ukraine within a year with the possibility of deciding where to send it: either refined in Ukraine, or exported by pipeline to Belarus, or again on water loaded on tankers and sold on the free market. However, the current legislation of Ukraine does not allow to provide such a service. SOCAR applied to the Ministry of Finance of Ukraine for permission to establish a licensed customs warehouse on the basis of its capacity to provide oil storage services.
Initially, Azerbaijani oil can be stored in the linear part of the Kremenchug-Lisichansk oil pipeline section, where it is technically possible to place about 400. tons of oil. Ukrtransnafta has already submitted relevant initiatives to the Ministry of Finance of Ukraine, where it proposes, among other things, to recognize an inactive section of the pipeline with a capacity with certain nuances. If this is accepted, Ukrtransnafta will be able to enter the market with such a capacity as this linear part of the pipeline.
It should be noted that the tank farm owned by MNT «Pivdenny» can currently accommodate 200 thousand. cube. m, or 170 thousand. tons, but this is not enough even to accommodate oil from two tankers of 90 thousand. t.
Even if Ukrtransnafta accepts one tanker and puts it into storage, the Ukrainian side will no longer be able to accept the second tanker for transportation, for example, in the interests of Belarus or Kremenchug.
Therefore, Ukrtransnafta has plans to expand the MNT Yuzhny tank farm with the installation of four tanks with a capacity of 120 rubles each. t each.
In the context of the implementation of the South Kazakhstan project by Baku, Ukraine also hopes to deepen energy cooperation with Azerbaijan in this area. Ukraine and Azerbaijan have already discussed the issue of involving Ukraine in the implementation of the YUG project within the framework of the meeting of the bilateral working group on energy on June 14, 2019 in Baku.
Kiev needs to enter new markets and include Ukraine in the system of global trade routes. When connected to YUGK, Ukraine will be able to purchase natural gas from Azerbaijan in the 2nd and 3rd phases of the project through swap deliveries.
In the context of the expected commissioning of the Trans-Adriatic Pipeline (TAP), as well as the Greece-Bulgaria interconnector (IGB), conditions will be created for the transportation of Azerbaijani gas to the countries of Southeast Europe. Kiev expects to become a transit country for Azerbaijani oil to the Czech Republic, Hungary and Slovakia. Kiev is also interested in expanding cooperation on crude oil supplies and is ready to consider the supply of liquefied natural gas (LNG) from Azerbaijan to Ukraine.
With the accession of Romania to the South-South Kazakhstan project, in the future Ukraine will be able to receive Azerbaijani energy on the route Bulgaria-Romania-Ukraine.
It can be stated that the Azerbaijani-Ukrainian interstate relations are not limited to the bilateral agenda. Baku and Kiev are building partnerships built on the coincidence of long-term strategic interests and challenges not only of Azerbaijan and Ukraine, but also of the GUAM Organization for Democracy and Economic Development.
Rauf Rajabov, Orientalist, Head of Analytical Center 3RD VIEW, Baku, Azerbaijan