European Energy Security: EU Energy Policy Toward Azerbaijan During the Period Between 1991 and 2009 Agha Bayramov

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European Energy Security: EU Energy Policy Toward

Azerbaijan During the Period Between 1991 and 2009

Agha Bayramov

S2650355

Moddermanlaan 61, Groningen 9721 GM

Phone: +31626573774

aga_bayramov@mail.com

Supervisor: Dr. Arjan van den Assem

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DECLARATION BY CANDIDATE

I hereby declare that this thesis, “European Energy Security: EU Energy Policy Toward Azerbaijan During the Period Between 1991 and 2009“, is my own work and my own effort and that it has not been accepted anywhere else for the award of any other degree or diploma. Where sources of information have been used, they have been acknowledged.

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Abstract

This thesis aims to investigate energy cooperation between the European Union and Azerbaijan from 1991 to 2009. In particular, the main purpose of this study is to evaluate the energy policy of the EU toward Azerbaijan, and to assess how and to what extent this policy changed after the 2006 and 2009 energy disputes between Russia and Ukraine. The thesis argues that until 2006, the EU was not active in the Caspian region as an institution regarding energy issues while its members and energy companies were able to establish bilateral energy relations with Azerbaijan. This study will seek to address internal and external obstacles to the development of the relationship between the EU and Azerbaijan, such as the national energy preferences of the EU members, their relations with Russia and energy companies. In addition, this thesis will briefly discuss the historical background of EU energy policy. To explain the mechanisms of energy cooperation and evaluate the national preferences of both supplier and consumer countries, the thesis will use Liberal Intergovernmentalism as a baseline theory. However, studies on this subject have been mostly limited to state relations. In that respect, by using transnational theory, the thesis will explain the role of both state and non-state actors in the formation of energy cooperation and national preferences. By doing so, it will explain that energy relations are not solely based on state interests. Finally, the thesis will apply the ideas of Copenhagen Security Studies in order to support the above mentioned ideas and explain that the definition of energy security depends on a political and economic interpretation of threat.

Key Words: European Union, Azerbaijan, Caspian Sea, Russia, the United Kingdom,

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Acknowledgement

I would like to express my deepest gratitude to my supervisor, Dr. Arjan van den Assem for continuous encouragement, guidance and support of my thesis throughout the

research process. His supportive guidance, critiques and invaluable comments assisted me to develop a full understanding of the subject. Also, I would like to thank all the faculty members of the Department of International Relations and International Organization (IRIO) for their guidance, instructions and help.

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List of Abbreviation

BTC – Baku-Tbilisi-Ceyhan oil pipeline

BTE – Baku-Tbilisi-Erzurum gas pipeline BP- British Petroleum

CIS- Commonwealth of Independent States EC – European Community

ECSC – The European Coal and Steel Community

ECT – Energy Charter Treaty

EEA – European Economic Area

ENP – European Neighborhood Policy

EU – The European Union

IEA – International Energy Agency

IEM – Internal Energy Market

INOGATE – Interstate Oil and Gas Transport to Europe

LNG – Liquefied Natural Gas

LI –Liberal Intergovernmentalism

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SOCAR- The State Oil Company of Azerbaijan Republic

TACIS- Technical Assistance to the Commonwealth of Independent States TRACECA- Transport Corridor Europe-Caucasus-Asia

UNCLOS – United Nations Convention on the Law of the Sea US- United States

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INTRODUCTION

Research Background

After the collapse of the Soviet Union in 1991, the energy rich countries of the Caspian region gained their independence and joined the global arena of energy politics. Due to their rich natural gas and oil reserves and geographical position, they became the new focus of geopolitical competition between the great powers, such as the U.S, China, Russia and the EU. Besides the states, the region’s energy resources attracted the attention of international energy companies such as British Petroleum (BP), Gazprom, Shell and LukOil, which competed with each other for transporting hydrocarbon reserves.

Among the Caspian states, Azerbaijan was one of the first countries that illustrated its strong willingness to cooperate with the EU and its energy companies in the 1990s (Youngs 2009). In that respect, the Azerbaijani government opened its energy doors to the investment by the EU and its energy companies. By doing so, Azerbaijan intended to enhance its economic development and gain European support for its independence. Among the European energy companies, BP was the first to support the transportation of the energy resources of Azerbaijan in 1994. In that way, Azerbaijan was able to establish bilateral economic relations with the UK during the 1990s. Nevertheless, due to low energy prices, the geopolitical instability of the region and a lack of information about the region’s potential energy reserves, there were doubts within the EU regarding the importance of regional countries like Azerbaijan for the energy diversification and supply of the EU (Youngs 2009).

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Purpose and Research questions

The aim of this study is to explore and assess the energy relations between the EU and Azerbaijan from 1991 to 2009. The specific objective of this research is to investigate the EU’s energy policy toward Azerbaijan and to evaluate how and to what extent this policy changed after the 2006 and 2009 energy disputes between Russia and Ukraine. Additionally, this thesis will discuss the contribution of Azerbaijan to the energy diversification and security of the EU. Besides state relations, the thesis seeks to understand the importance and role of some non-state actors, particularly international natural gas and oil companies such as BP and Gazprom. To date, there have been few studies that investigate the political and economic role of international energy companies. Therefore, the findings of this study will be an important contribution to the academic field of energy studies. Inspired by these problems, the research question of the thesis is whether and to what extent the EU’s energy policy toward Azerbaijan, was successful during the period between 1991 and 2009? And what was the role of non-state actors like international energy companies at that time?

The thesis has been divided into three main parts. The first chapter discusses the theoretical framework used in this thesis. To construct the foundation of the research, it explains briefly what security is and provides several definitions of energy security from the perspective of export, import and transit countries. To discuss the framework of energy cooperation and describe the political and economic preferences of both states and energy companies, the theory chapter engages with Liberal Intergovernmental and Transnational theories.

Secondly, the thesis emphasizes the internal perspective of EU energy policy and discusses the historical background to it. The study gives an overview of EU members’ national preferences particularly Germany, France and the UK in terms of import and export rates. Further, the second part discusses the energy initiatives of the EU such as the Internal Market, the third package and 2020 targets namely competitiveness, sustainability and security. By doing so, this part of the thesis answers the following question of whether the EU has a strong energy capacity to achieve its goals?

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Additionally, it discusses the political and economic powers of non-state actors like energy companies. The central hypothesis of this research is: the EU as an institution was not very active in the energy projects of Azerbaijan and instead focused on humanitarian programs until the 2006 energy crises. However, the thesis is limited to a particular time frame and it is beyond the scope of this study to cover all factors in the internal and external energy policies of the EU.

Methodology

This thesis uses a qualitative case study method to investigate the EU’s energy policy and its relations with Azerbaijan. By using the descriptive case study, the thesis aims to give a more detailed explanation of the context of the EU’s energy policy and its members and as well as the importance of the Caspian hydrocarbon resources, focusing on Azerbaijan. By using the 2006 energy dispute between Ukraine and Russia, the study intends to illustrate how and to what extent the energy policy of the EU and its members changed.

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1. Theoretical Framework

This chapter describes and discusses the theoretical frameworks used in this thesis. It will be divided into four main sections, each of which presents the particular political theory relating to each of the research questions. Firstly, it gives an overview of the concept of security. It then addresses what energy security is, how one can define it in terms of import, export and transit countries and whether and to what extent it is part of national security. From the perspective of states, the third part of the chapter applies transnational theory particularly the MNC approach, to analyze the political and economic power of multinational companies and whether and how they can have an impact on the energy policies of states. Finally, by applying the state preferences, bargaining and institutional approaches of Liberal Intergovernmental theory, the final part answers the question, to what extent can different national preferences influence regional energy cooperation and the role of institutions like the EU?

1.1 The Concept of Security

There are several significant discussions that are ongoing among security studies academics about issues of security and the relevant actors. On the one hand, traditionalist scholars advocate that security should be defined as a state-centric and military concept, which is a legacy of the Cold War. On the other hand, non-traditionalists argue that economic, social and environmental issues should be included in the definition of security. Therefore, the purpose of this part is to explain several current definitions of security from different ideological viewpoints and to discuss whether and to what extent energy should be accepted as a part of security.

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state. Societal security is about traditional patterns of language, culture, association, and religious and national identity. Economic security concerns access to the resources, finance and market. Environmental security includes the protection of the ecological biosphere” (Buzan 1991, p. 433).

Additionally, Buzan points out that ideas of military security and competition among states were significant during the Cold War. Since the end of the Cold War, economic rather than military power has been the main concern of state security (Buzan 1991). In other words, he analyzes the concept of security from different angles, meanwhile explaining how threats are constructed or perceived by different people. An important contribution of the Copenhagen Security School is to provide an explanation beyond the restrictive traditionalist framework. With respect to this, the high energy dependency of the EU on external sources can be interpreted as a significant economic security threat since some countries use their energy resources as an economic weapon to impact on other countries’ economic development and political decision making. The Arab oil embargo is an important example of this idea.

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that pose an equal threat to states, such as environmental, economic and demographic issues (Klare and Thomas 1994). Another security scholar, Muhammed Ayoob introduces a distinct explanation. According to him, to protect national security, governments should have both hard and soft powers. They should not be restricted by the concept of military threat because economic threats can also constrain political structures and the development of states (Ayoob 1997).

1.2 The Concept of Energy Security

In the academic literature, there are different definitions of energy security. Although many scholars define it from the perspective of consumer countries, energy security is perceived differently by energy exporter and importer countries. In other words, energy security is a multifaceted concept. The purpose of this part is to introduce several interpretations of energy security by surveying the existing academic literature as a basis for later chapters, which will discuss energy security from the perspectives of export, import and transit countries.

According to Barton, Redgwell, Ronne and Zillman, energy security means sustainable access to natural resources at a reasonable price without risk of interruption (Energy Security Book 2004). The key problem with this explanation is that it does not cover all aspects of energy security. Although access to energy resources is one significant aspects of energy security, it covers other important concerns such as environmental issues, sustainability and resilience, which are excluded by the writers. Therefore, it seems to be an insufficient interpretation of energy security. Palonkorpi offers a political explanation, that “energy security is an attempt by energy customers to protect themselves from interruptions that could endanger the supply of energy as a result of an accident, terrorism, insufficient investment in energy infrastructure or insufficient organization of the energy” (Palonkorpi 2008, p.1). A further definition is given by Kaveshinkov who describes it from an economic perspective. He claims that energy security should be defined as economic security because it is the backbone of economic development (Kaveshinkov 2010).

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concerns of both export and import countries as well as oil and gas companies. For consumer countries such as Germany, Italy and Poland, the most significant concerns are cheap and sustainable energy (World Economic Forum 2006). From the perspective of oil producing countries such as Azerbaijan, the most important considerations are high demand, payment and a less competitive consumer market (Doukas, Flamos and Psarras 2008). The majority of energy export countries’ budgets and economic growth depends on energy prices, which causes them to worry about the stability of the market. From the perspective of energy companies such as Gazprom and BP, energy security means access to energy reserves without economic or political restrictions, a less competitive market, and the support of its government (World Economic Forum). Although, these definitions are different from each other, the protection of economic growth is a common theme in all of them because energy is market related and has a strong impact on the economic development of both consumer and producer countries.

Another problem is that the majority of policy makers and academics define energy security only from the perspective of oil concerns. They claim that compared with natural gas and coal, there are few oil reserves in the world and it is consumed more than other energy types, which makes it the primary energy source (Bielecki 2002, p. 237). However, energy security should not be limited to oil because there are other natural resources such as natural gas, nuclear energy, coal and renewable energy which play an important role in energy security. In addition, energy security issues have short-term and long-term time dimensions. Long-term energy security concerns the sustainability of energy that encourages market competition and economic growth. On the other hand, short-term energy security deals with energy infrastructure that can respond to unexpected energy disruptions, such as technical issues, political disorder and environmental conditions (IEA.org 2015).

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benefit. Thus, a balanced price would allow economic growth (Kruyut, Vuuren, Vries and Groenenberg 2009).

Overall, these examples confirm the idea of Buzan that security should not be limited to military power. In the same vein, energy security should be explained from the perspective of consumer, producer and energy companies. As mentioned by Buzan, Wilde and Waever, security is a multidimensional term and instead of putting security in a limited traditional box, it should be expanded to other areas such as the economic, political and geographic spheres. In the same vein, explaining energy security or issues only from the political viewpoint would not be effective because it would not cover all aspects of energy security. In that respect, in the following chapters, this thesis will discuss European energy policy and relations with energy producing countries like Azerbaijan and Russia from both the political and economic perspectives.

1.3 Transnational Theory

This section moves on to describe in greater detail the multinational corporation (MNC) approach of transnational theory. By using the MNC approach, this thesis argues that states are not the only actors in world politics, especially with respect to energy relations. There are several international energy companies that play an important role in the international energy market and help to determine the structure of energy relations. With respect to this, the research will analyze whether they have the political and economic power to change or intervene in the national energy policy of countries. Also, by using transnational theory, the research will not stick to a state-centric perspective but will illustrate the different sides of energy cooperation. So far, very little attention has been paid to the role of international energy companies and non-state actors in international energy relations. Rather, most studies in the field of energy have only focused on state relations and their politics. However, before proceeding to examine the MNC approach, it is necessary to provide a brief overview of transnational theory.

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contrasts with that of Nye, Keohane and Roberts, who argue that governments can be involved in transnational relations (Nye, Keohane and Roberts 1971). In the same vein, Risse-Kappen notes that transnational relations should be between non-state actors across different boundaries, at least one side should be a non-state actor and that states can be involved in these regular interactions (Risse-Kappen 1995). Additionally, Sinclair explains that a regrettable and marginal part of transnationalism includes ‘bad forces’ such as terrorist and criminal groups. A broader definition of non-state actors has been adopted by Josselin and Wallace who indicate that non-state actors include organizations:

 “largely or entirely autonomous from central government funding and control;

 emanating from civil society, or from the market economy, or from political impulses beyond state control and direction; operating as or participating in networks which extend across the boundaries of two or more states-thus engaging in transnational relations, linking political systems, economies, societies;

 acting in ways which affect political outcomes, either within one of more states or within international institutions – either purposefully or semi-purposefully, either as their primary objective or as one aspect of their activities” (Jesselin and Wallace 2001, p. 4).

According to Sinclair, unlike realism, transnational theory concerns the interests of non-state actors and claims that global politics is not only between states, elites or political leaders. Further, he mentions that global politics should not be based on a state-centric view because there are other important actors that play an important role in world affairs and without them, it is not possible to fully understand global governance: “Although states remain relevant actors in transnationalism, but states are not the same actors they are in realist-inspired thinking” (Sinclair 2012, p. 62).

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several energy companies that can influence the decision making of states and change the course of international politics, such as the Arabian and American oil companies, and a host of others (Wolfers 1959).

Although it is true that in the current political environment, the number and role of non-state actors are increasing, one may ask where they get their power. For example, most NGOs and national energy companies receive political and economic support from their own governments. This raises the question of to what extent these non-state actors are independent. In contrast to Wolfers, realists argue that “IR should be about the really crucial aspects of international interactions and thus deliberately limit the scope of their analysis in an attempt to better understand what is vital” (Steans, Pettiford, Diez, El-Anis 2010, p. 74). Wolfer’s view is supported by Nye and Keohane who write that “although Wolfers and others have pointed out the importance of inter-societal interactions and transnational actors in international affairs, the impact of these phenomena on world politics has often been ignored both in policy oriented writings and more theatrical works” (Nye and Keohane 1971, p. 330). Sinclair points out that “the origins of this problem lie in the rise of Neorealism advocated by Kenneth Waltz. Waltz suggested that international politics was governed by a lack of overarching authority, or what he called the condition of anarchy, which made states unitary actors and meant other possible actors were only of marginal interest” (Sinclair 2012, p. 59). In his article, Waltz argues that “the structure of the international system sets the context for and limits to the development of norms, institutions, etc. The structure is defined in terms of its principal actors – states, not institutions” (Waltz 1986, p. 5).

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EU needs the sustainable energy of Russia. The forth effect is that transnational relations can create new instruments that allow some countries to dominate others. Due to an asymmetrical power distribution, transnational relations may strengthen the hand of more powerful countries (Nye and Keohane 1971). The final effect of transnational relations is “the emergence of autonomous actors with private foreign policies that may deliberately oppose or impinge on state policies” (Nye and Keohane 1971, p. 337).

However, Sinclair argues that covering too large an academic audience is a significant weakness of transnationalist theory. In other words, he explains that the wide approach of transnationalism makes “the basis for the explanation of global governance outcomes much more complex than other approaches as well as making causations harder to decipher” (Sinclair 2012, p. 69).

As described above, multinational corporations (MNCs), also called transnational corporations (TNCs), are some of the most significant actors in transnational relations in the modern political economy. According to a definition provided by the United Nations Conference on Trade and Development (UNCTAD), “transnational corporations are incorporated or unincorporated enterprises comprising parent enterprises and their foreign affiliates. A parent enterprise is defined as an enterprise that controls assets of other entities in countries other than its home country, usually by owning a certain equity capital stake” (uncatd.org. 2013). In other words, it is a corporation that is operated and registered in several countries but controlled from its home country.

There are several debates among IR scholars about the advantages and disadvantages of MNCs. On the one hand, it is claimed that MNCs are a threat to a state’s political and economic interests. On the other hand, they are regarded as significant contributors to the welfare of states. Fatemi argues that MNCs have played an important role in the development of global welfare. An example of this contribution is the reconstruction of Europe after the Second World War by supporting resource transportation and management in many countries (Fatemi, 1976). This view is supported by Nye, who argues that the “power of multinational cooperation equals to national security equation because for many states, the strongest sense of threat has shifted from the military area and territorial integrity to the economic area” (Nye 1974, p. 7). In other words, they believe that multinational corporations are the economic powers in modern world politics regarding energy relations.

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countries and make their economic growth dependent on capitalist relations (Kappen 1995). In his article, Nye identifies three main political strategies of multinational corporations. Firstly, they can request political and economic support from their home governments in case of any restrictions by the host state (Nye 1974). Some MNCs have strong relations with their home country due to their similar economic interests and others are funded by their home country. Therefore, this provides them with direct or indirect support against any restrictions of the host country. For instance, the largest energy companies of Russia, the UK, France and Italy are fully or at least 50% state owned (Kapen 1995). Secondly, transnational actors can use their economic power to change or influence internal preferences directly and indirectly. Although international energy companies state that they do not have political interests or policies, they prefer to support political and economic stability both in their host and home countries for their business interests (Nye and Keohane, 1971). According to Uhlin, “the size, flexibility, competence, centralization and control over the means of production are the main power features of MNCs” (Uhlin 1988, p. 236). Lastly, if the host country restricts the market interests of transnational actors, they can establish boycotts to limit international investment in that country (Nye 1974). In other words, they can threaten the host country with moving their economic investment to other countries or they can provide further investment to strengthen their relations.

According to Kappen, some multinational companies served the economic and political interests of the great powers. “The British Petroleum Company, for example, was originally established by the British government to secure oil reserves in the Middle East that could be used to fuel the British navy” (Kappen 1995, p. 267). With respect to this, there is strong cooperation between international energy companies and host governments, which proves that international companies are not entirely tools of the states because to some extent states also need their power and support.

Although Fatemi shares the view that MNCs have signficant economic and political power, he claims that they also have several advantages. According to him, “MNCs shift industrial production toward the poorer parts of the globe. It transfers technology and managerial resources from advanced to less developed countries. It promotes both regional and global economic integration” (Fatemi 1976 p. 197). Many scholars hold the view that MNCs have strong political and economic impacts, in that they can also use mass media to influence the social and cultural environments of their host countries.

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influence regional cooperation and the national preferences of states. Due to their economic power and advantages, states consider those actors’ interests while forming national preferences and making political changes. It is possible, therefore, to assume that they are sharing power with states whereas without government support, they could not implement their own economic policies. Considering all the above mentioned ideas, the final section will discuss regional cooperation among states.

1.4 Liberal Intergovernmentalism (LI)

Having discussed transnational actors and security theories, the final section of this chapter addresses three main approaches of liberal intergovernmentalism which are baselines for regional integration. By applying the state preferences, bargaining and institutional approaches, this study will discuss the purposes of and obstacles to cooperation between the EU and the Caspian Sea countries. LI is not a narrow theoretical framework; it provides this study with different theoretical approaches to explain European politics. Additionally, this thesis argues that national preferences of states can both strengthen and limit diplomacy, economic cooperation and foreign policy of states. They can also impact on the bargaining process. In the light of this, through LI, the research will analyze the extent to which the national interests of EU member states can influence the common energy policy of the EU and its institutional power.

In the literature, the term liberal intergovernmentalism refers to the application of ‘rationalist institutionalism’. In other words, it is one of the foundational approaches for investigating cooperation and relations between states (Moravcsik and Schimmelfennig 2009). According to Moravcsik and Schimmelfenning, there are three main characteristics of LI, which are that is a grand theory, parsimonious and empirical. They argue that LI explains the development of regional integration by synthesizing multiple theories, which makes it a grand theory. It is not possible to explain relations between states only by a single factor (Moravcsik and Schimmelfennig 2009). Its parsimonious character means simply that LI seeks to explain complex aspects of EU politics in a simple way by excluding unnecessary information (Moravcsik and Schimmelfennig 2009). The term ‘empirical’ means that it includes states, actors and leaders and their interactions.

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their different economic and political interests regarding energy by using their negotiation and bargaining powers. Further, LI argues that the members created the EU thus they are the main decision makers (Wiener and Diez 2009).

Secondly, Moravcsik and other intergovernmentalists point out that states are individualist because their first priority is to protect their national interests and to gain more profit. These preferences are different for each state and are not fixed or constant because they depend on particular issues or concerns such as economic growth, political relations and the market interests of energy companies. Additionally, national preferences are shaped by internal societal groups, the international system and states (Moravcsik and Schimmelfennig 2009). Among the EU countries this approach is quite difficult with respect to common energy security. Due to the different national energy preferences, the common energy security policy of the EU is not strong among the member states.

In addition, to resolve complex and different national interests, LI utilises bargaining and institutional powers. Liberal intergovernmentalists claim that although collective cooperation and mutual beneficiary agreements between states especially within the EU are very significant, individual and collective interests sometimes conflict with each other and make it difficult to achieve agreement. Also, there is an uneven interdependence between the EU members because of their political, economic and geographic positions, the relative power of states, information about their preferences, and interdependence between countries. In that respect, the bargaining approach explains that this asymmetrical power distribution impacts the result of negotiations and prevent the members from establishing a single policy (Moravcisk 1997).

Lastly, LI scholars stress that institutions are very important because they support long-lasting international cooperation. According to them, institutions provide states with a common ground for achieving a collective result. Further, they minimize the transaction costs of different issues and provide members with information about different national preferences. By doing so, they lessen the members’ doubts and uncertainty about each other’s future interests and behavior (Moravcsik 1997, Wiener and Diez 2009). The members identify their national preferences and by using their relative bargaining power they are able to distribute the costs and benefits. Finally, institutions secure their agreement for the purpose of preventing future disagreements and uncertainty.

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using the theories outlined above, the study explains European energy security and Europe’s relations with energy producing countries from the perspective of both states and non-state actors. From the perspective of the Copenhagen Security School, energy has a political and strategic significance to the national security issues of both consumer and producer countries. The Copenhagen Security School provides the thesis with an important framework because it does not stick to the traditional definition of security and maintains that besides military power, energy is also an important factor in economic development. By using this theory, the thesis will explain the possible economic and political security threats to the EU such as high energy dependency and less diversification.

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2. European Energy Policy: From the European Coal and Steel Community

to 2020 European Energy Policy

In this part, the study highlights and discusses the main internal factors in European energy policy. To analyze the energy framework of the EU, this chapter has been divided into two core sections and under each section, the study answers several sub-questions. The first section gives an overview of the history of EU energy policy such as the European Coal and Steel Community (ECSC) and European Atomic Energy Community (Euratom) agreements and questions whether the EU achieved a successful energy policy during the period between 1951 and 1991. The second part deals with the current energy objectives of the EU such as renewable, common mix and diversified energy and to what extent the EU changed after 1991. In the meantime, it highlights the influence of national policy on the external energy relations and agreements of the EU with the main energy exporting countries. Finally, the chapter discusses the key energy challenges/obstacles for the EU and whether the EU has a strong enough internal energy capacity to achieve sustainable, competitive and secure energy.

2.1. Historical Context of the Energy Policy

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was strengthened by the Euratom Treaty of 1957, which established the European Atomic Energy Community and the nuclear energy industry. Also, on the same day, the European states signed the treaty to establish the European Economic Community. These two treaties played an important role in the establishment of future energy-based cooperation, because by these treaties the European countries ended with war and began economic and political cooperation.

Nevertheless, during the period between 1950 and 1970 the energy focus of the Western European states changed significantly, from coal to oil and natural gas. “Coal was the main source of energy supply for Western Europe until the 1960s -covering roughly 86% of total energy consumption in 1950, 59% in 1960, but only 23% in 1982” (Hoffman and Dienes 1985, p.2). Meanwhile, after the Three Mile Island accident in the US (1979) and the Chernobyl disaster in the Soviet Union (1986), the member states of the EC became more hesitant regarding nuclear energy (Baumann 2010 p.81). “Until the early 1960s the countries of Western and Eastern Europe were rather self-sufficient in most energy supplies due to sufficient domestic coal in many countries such as the United Kingdom, West Germany, France and Poland” (Hoffman and Dienes 1985, p. 1). Nevertheless, the production of coal started to become expensive and low oil prices made oil more attractive than coal to the European states. In the light of this, coal production started to decline and crude oil imports increased significantly. Therefore, the previously self-sufficient European energy economy became crude oil dependent and vulnerable.

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2.1.1. Changing Energy Strategy

After these energy crises, traditional energy sources like coal regained importance amongst the European states and some of them even strongly supported using nuclear energy. They realized that diversification of fuel types and oil sources was important to maintain economic stability and minimize energy vulnerability. In light of this, “the IEA was founded in response to the 1973/4 oil crisis in order to help countries co-ordinate a collective response to major disruptions in oil supply through the release of emergency oil stocks to the markets” (iea.org 2015). However, the idea of a common energy approach only appeared later because after the energy crisis, the members focused on their own national energy security (Delreux and Keukeleire 2014).

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2.2. Position of Member States

What were the reactions of the members, namely Germany, France and Italy to the energy initiatives of the EU such as the IEM? And what kind of energy policies did they have? As mentioned earlier, each of the members has unique energy priorities. For instance, Germany is one of the main energy importers and transporters in Europe (Matlary 1997). Due to its high natural gas and oil dependency, Germany considers energy a national policy issue and its external energy relations are determined particularly by the Ministries of Foreign Affairs, Economy and Defense. In that respect, although the market plays an important role in gas and oil trade, the state has strong powers of intervention regarding nuclear and coal energy. During the IEM negotiations, Germany, together with the Netherlands, did not support the idea of the IEM because of third party access and competition policy (Matlary 1997). Also, there were several strong domestic interest groups in Germany that influenced the government during the decision-making process. In general, German energy companies have strong energy relations with external sources and with the German government, which provided them with indirect decision-making power.

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Britain is against any attempt by the Commission to extend its power over Britain’s domestic energy regulations (Matlary 1997).

Taken together, the members support EU energy initiatives if they do not conflict with their domestic priorities and the interests of domestic groups such as energy companies. The domestic priorities of the members vary due to their different export, transit and import positions. In this context, the IEM confirms the issue-specific idea of LI theory because it illustrated that the particular domestic issues of the members directly influenced their positions with respect to the EU’s energy initiatives. As discussed above, France intended to use the IEM to its advantage and supported the IEM only if it benefitted its national interest but Britain does not want strong control of the Commission. Besides their state-centric interests, the members consider the economic benefits to their energy companies and domestic groups. These priorities also demonstrate the bottom line of LI theory that the economic interests of powerful domestic groups determine state preferences (Moravcsik 1993). In other words, the definition of energy security for one member is the definition of energy weaknesses for other. Thus, these issues make the members less enthusiastic and limit the EU’s ability to implement a common energy framework.

2.2.1. The Role of EU actors

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instead it supported the Common Energy Policy (CEP) because it is claimed that the CEP would better protect the interests of consumers, regional energy companies and the EP (Matlary 1997). In that respect, it can be seen that even within the EU institutions, internal interests have a powerful influence. The final significant actor is the European Council, which plays an important role in observing the EU agenda, suggesting developments and accelerating implementation of policy. Also, in terms of policy-making, it provides the Commission with a general mandate. In that respect, despite the importance of the Council, in terms of policy initiatives and formulation, the Commission has greater powers. Overall, with regard to energy, the Commission plays a vital role whereas the Council is not as important or active in energy policy. Despite its wide powers, the EP prefers to comment on energy proposals instead of using its amendment power (Matlary 1997).

In general, as was mentioned in the theory section, the EU is a “network” institution, connecting different levels of states and European actors, which negotiate different policy interests and find common preferences under the EU. This view is supported by Wessels (1990), who explains that the main power of the EU is to provide different interest groups with a common policy package and to secure their agreement. In other words, as stated by LI scholars, the EU is the main motivation and reason for the long term cooperation between European states. Indeed, without the EU and its powerful institutions, it would be difficult to negotiate the different preferences of the members and to reach a superior result in a peaceful way (Moravcsik and Schimmelfennig 2009). Nevertheless, although the abovementioned institutions of the EU have monitoring, policy initiative and implementation powers, they cannot directly influence the national preferences of the members or make decisions to limit their role. In that respect, the EU should be seen as a negotiation platform where the member states try to implement or pursue their own economic and political interests.

2.3. Current Objectives of European Energy Policy: Sustainability, Security of Supply and Competitiveness

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diversification. According to European Commission statistics, the overall energy import dependency of the EU is 50%, which constitutes more than 20% of general imports. With respect to this, crude oil is in first place with 90% import dependency and it is followed by 66% for natural gas and 42% for coal. The last place is made up by 40% import dependency for uranium and other nuclear fuels. Among the main energy countries, Russia, Norway and Algeria, together supply more than 60% of the natural gas and oil of the EU (ec.europa.eu 2015).

Source: Eurostat December 2007, Directorate – General For Energy and Transport

It is claimed that the main reason for the high oil and natural gas import rates is the low energy production of the EU during the period between 1999 and 2009. During those years, production of natural gas decreased by 25% and oil by 45% (Commission 2013). However, due to the limited number of suppliers and the political situation of transit countries, the security and disruption of natural gas are very uncertain. Considering these dependency rates and a possible increase in future demand, in its 2006 Green Paper, the European Commission listed sustainability, security of supply and competitiveness as its three main energy objectives. There is a large volume of published studies describing these objectives in terms of a triangle graph and claiming that each of them has strong linkages with the others (Verde 2008, Keppler 2007 and Barosso 2008). To achieve these goals, the EU has identified several future-oriented action plans. For instance, “following the 2006 Green Paper and other calls from institutions (i.e. the European Parliament), the spring 2007 European Council reached an agreement on the action plan named “Energy Policy for Europe” (Verde 2008, p .46). These are also known as the “2020 energy targets”, which are to:

Gas Import Countries to the EU

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 “reduce greenhouse gases by at least 20%,

 increase the share of renewable energy in the EU's energy mix to at least 20% of consumption

 improve energy efficiency by at least 20%” (Commission 2011, p.2).

However, it is claimed that the EU is spending too much time discussing the greenhouse agenda, which overshadows other aspects of energy security. For example, “the UK government committed itself to investing 100 million pounds in climate change development between 2008-13 because it is the only energy security challenge facing the UK” (Youngs 2009, p. 28). According to Youngs (2009), the EU should pay as much attention to other energy issues like foreign energy policy as it does to climate change. This argument is supported by some energy importing countries, which have complained about the climate change initiatives of the EU and argued that they discriminate against oil. Nevertheless, Keukeleire and Delreux (2014) dispute this idea and believe that the climate change initiatives of the EU especially the 20% greenhouse gas reduction by 2020, are significant for energy security and import dependency because by decreasing its greenhouse emissions, the EU could reduce both demand for fossil fuels and its import dependency rate. Thus, the EU should increase its leadership position regarding climate change and environmental issues. Nevertheless, their claim is limited since some of the member countries have started to increase their coal import rates from the US. After the LNG revolution in North America, consumption of coal decreased significantly in the US. In the meantime, the EU has started to import this cheap American coal and shut down gas-powered plants. However, despite its high prices, natural gas is cleaner than cheap coal in terms of climate change and meanwhile, due to its flexibility, it is easy to supply power when there is a lack of wind and sunlight. Therefore, for these reasons the climate change policy of the EU is still questionable.

2.3.1 Competitiveness

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on energy prices such as low diversification and high dependency on a single source. The main purposes of competitiveness are to improve the internal energy market, to provide European citizens with reliable, cheap and sustainable energy, to develop strong investment opportunities for small energy companies and to make European industry more efficient (Commission 2010). In other words, the EU has attempted to create a liberalized energy market and provide internal energy companies and investors with freedom of choice regarding energy mix.

Nevertheless, although to successfully achieve these goals would strengthen the EU position’s in the international energy market, there are several obstacles preventing the EU from achieving them. According to the Commission “the internal energy market is still fragmented and has not achieved its potential for transparency, accessibility and choice” (Commission 2010, p.3). In the same vein, Jong and Linde argue that “the current environment is full of uncertainties about the degree of multilateralism, bilateralism, national and supra-national interests and about the level of government intervention in correcting market outcomes” (Jong and Linde 2008, p. 8). An absence of single gas and electricity markets prove that the internal energy market is not strong enough. In the meantime, this weakness is the crucial challenge to the 2020 targets.

The main reason for this is the significant support of national markets by the member states. The national energy approach provides some companies with significant opportunities to increase their monopoly over the energy market and pricing regulations and meanwhile creates unintended effects for neighboring countries. The absence of crisis management policies particularly in terms of gas and electricity also motivates the member states to pursue national energy policy and support national energy companies. Therefore, having a weak internal energy market restricts the EU from implementing a competitive energy policy and could create severe gaps between member states. The members should consider that establishment of a strong internal market is very important because it would establish unity among the members, increase their cooperation against external energy threats and secure their economic development.

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competitive and liberalized internal gas and electricity market, the EC implemented a third gas and electricity directive and regulations in 2009. These regulations have become known as the “Third Package”, which is designed to enhance the gas structure of the EU (Yafimava 2013). It covers five main areas:

 unbundling energy suppliers from network operators  strengthening the independence of regulators

 establishment of the Agency for the Cooperation of Energy Regulators (ACER)  cross-border cooperation between transmission system operators and the creation of

European Networks for Transmission System Operators

 increased transparency in retail markets to benefit consumers” (ec.europa.eu 2015). Although Jong (2008) considers that the third package is an important proposal in terms of its time frame and objectives in response to the EU’s energy difficulties, it has several controversial objectives, namely unbundling ownership of network infrastructure, which could lead to political and national opposition. This is a valid argument because the third package outlines general requirements instead of critical issues. In order to achieve a strong internal gas market and implement the third energy package, first it should be accepted clearly by all participants. Meanwhile, it is important to create a clear and definite vision (Yafimava 2013). In his speech, Challenges and Perspectives of the EU Energy Policy, former energy commissioner Andris Piebalgs highlighted the importance of the competitive IEM:

“the completion of competitive, fully integrated internal energy market in Europe. We need an open and competitive energy market, with competition between companies looking to become European-wide competitors rather than dominant national players. If Europe is to respond successfully to the many challenges and to invest properly for the future, consolidation of the energy sector should be market driven” (Piebalgs 2006, p.3).

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market. Finally, the EU member countries could foster their domestic industries, attract more energy investment and decrease unemployment by enhancing the internal energy market (Commission 2014).

2.3.2 Security of Supply

Due to its strong relationship with other energy matters like sustainability and competitiveness, and growing demand and high energy dependency, security of energy supply has been one of the most significant concerns of the EU. According to the European Commission, the purpose of security of supply is “to ensure the reliable provision of energy whenever and wherever needed” (ec.europa.eu 2015). As mentioned in the theory chapter, securing the energy supply is also an important dimension of energy security. In its policy overview regarding EU energy policy, the IEA argues that in order to ensure energy supply, the EU should effectively address both internal and external issues. For instance, externally, the following goals should be addressed by the EU:

 “promoting diversification of energy imports by fuel, by source and by transportation route;

 promoting the upgrade of existing energy transportation infrastructures and the development of new ones by producer and transit countries;

 improving the conditions for energy trade, including non-discriminatory transit and third-party access to the export pipeline infrastructures;

 promoting the highest levels of physical and environmental safety and security of energy infrastructures;” (IEA 2008, p. 79).

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of this is the 1973 oil crisis, which increased the member states’ nationalistic feelings over energy resources instead of speaking with a single voice.

The members should consider that their energy decisions/preferences directly impact the external and internal position of the EU, and individual contracts with energy producing countries weaken the position of the EU against those countries. But by implementing a single energy policy, they would promote energy diversification, security and market development. This argument is supported by the 2006 Green Paper, in which the Commission particularly highlighted the importance of a single voice in all aspects of energy policy such as external energy policy, the internal energy market especially gas and electricity, and infrastructure standards/measures to prevent member states from energy disruptions (Commission 2006). However, despite its efforts and future-oriented energy policy papers, the Commission has not completely achieved the idea of common action under the single EU umbrella. In general, its member states such as the UK, Germany and France prefer to implement national energy policy and establish bilateral relations with energy producing countries, which provide those producer countries with significant opportunities to increase European energy dependency and decrease the common voice approach of the EU (Matlary 1997, Youngs 2009, Bauman 2008 and Yergin 2012). Also, different energy dependency rates have a strong impact on the foreign policy priorities of the member states and the decision-making of the EU. For example, Italian opposition to the EU sanctions against the Libyan government in 2011 due to its strong oil relations with Libya (Keukeleire and Delreux 2014). In this context, the analysis of Moravscik illustrates that concrete economic and some geopolitical interests of the member states have been more important than general EU security and integration (Morasvcsik 2008). This view is supported by other scholars (Kepler 2007 and Verde 2008) who argue that without resolving security of supply, achieving other ambitious and long-term energy objectives will not be possible in the future. Therefore, to prevent this situation, the member states should include security of supply in the common EU energy policy agenda and should not always bring different state preferences to the discussion, if they want to achieve a competitive and sustainable internal energy market.

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such as transmission systems and common standard infrastructure, is also an important factor to allow it to respond immediately to short-term energy disruptions. Due to its high dependency on external energy sources, particularly for natural gas, the EU member states should create energy reserves for possible short-term energy disruptions. In this way, they would ensure both energy supply and sustainability. However, this practice is also weak among the member countries; only a few states are enhancing their energy reserves (Commission 2006).

2.3.3 Renewable Energy

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gas emissions by making big investments in renewables, the closing of nuclear and gas power plants is increasing consumption of coal.

2.3.4 Sustainability

To make energy consumption sustainable is one of the ambitious targets of the EU. To successfully achieve this goal, the EU should implement the abovementioned policies. Additionally, it is crucial to complete several key objectives in the energy policy of Europe such as the reduction of greenhouse gas emissions, pollution, fossil fuel dependence and the effective use of natural resources (Commission 2006). In addition, energy diversification is a crucial part of sustainability as it could decrease energy vulnerability by preventing the EU from depending on single energy sources. With respect to this, despite its strong resource diversification such as gas, wind, coal, nuclear and hydro, it is also important to adopt a common energy mix instead of national energy diversification to protect the energy balance because any differentiation in the energy decisions of member states impacts both their neighbors and the general position of the Commission (Commission 2006, IEA 2008).

Nevertheless, despite these ambitious energy policy initiatives and objectives, it is questionable whether the EU has the capacity to achieve them completely. It would be very complicated to implement a common energy mix due to the national energy priorities of the member states. As is noted by LI theory, both domestic and external energy preferences of the members are issue-specific and are also different from each other because of different energy dependency rates, geopolitical priorities, production, diplomatic relations and needs (Belkin 2008, Keukeleire and Delreux 2014). A well-known example of these different priorities is nuclear energy, which France strongly supports, whereas Germany is against it and has closed its nuclear power plants. Therefore, the EU’s energy policies on one level and the members’ national priorities on another level conflict with each other and prevent a single voice for the intentions of the EU.

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box. It is claimed that the regional approach of the EU has more advantages than a general integration approach. Firstly, in this way the EU can decrease national energy policy competition between regional members and meanwhile, increase solidarity between them. In addition, any domestic policy change by a member state can directly impact on both the energy market of the EU and its neighbors and in particular there is a lack of cooperation between small and larger states in terms of the energy economy. An important example of cross-border issues is Germany’s decision to decrease the number of its nuclear energy plants, which had an immediate impact on both the EU energy market and its neighbors. By taking a regional approach, the member states could limit the negative and unintended consequences of bilateral energy decisions and become more integrated and cooperative at a regional level (CIEP 2013).

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3. European Energy Policy Toward The Caspian Region: Azerbaijan

This chapter answers the main research question: whether, and to what extent, the EU’s energy policy toward Azerbaijan was successful during the period between 1991 and 2009, and what was the role of non-state actors like international energy companies at that time? The chapter has been divided into two main parts, namely external and internal influences, in order to effectively discuss the issues. In relation to internal factors, the study will examine how the national preferences of the member states impacted on the EU’s energy policy. In the light of this, this chapter highlights the history of the EU’s involvement through programs such as TACECA and INOGATE and whether they were successful. In relation to external factors, the study asks to what extent the relationship between Russia and the EU influenced implementation of energy policies and also how international energy companies like BP, Gazprom and Stat Oil responded to the EU’s energy policy. That is, to what extent they supported the involvement of the EU in the Caspian Region. The central hypothesis of this part is that the EU as an institution did not implement active energy policies in the region until 2004, and that the energy crises of 2006 and 2009 between Ukraine and Russia led to a change in the weak involvement of the EU, which then increased its energy related initiatives in the Caspian Region.

3.1. The European Union Assistance Programs: from TACIS to ENP

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USSR, Russia exerted enormous effort at the beginning of 1990s to maintain its traditional influence on these countries. Specifically, Russia attempted to restrict transportation of the energy resources of the Caspian Sea by monopolizing energy transportation pipelines. Another global power is the EU which has operated in the region since 1992 (Lussac 2010). To support the economic and political transition of the newly independent states, the European Commission launched the Technical Assistance to the Community of Independent States program (TACIS) at the end of 1991. It was designed to help 13 former Soviet Republics to launch successful reforms in nine sectors such as economic, administrative, social, energy, education, property rights, statistics, transport and legal reforms (Lusac 2010 and CIEEL 2015). The EU used this program as a key interaction tool with the South Caucasian countries and it was implemented at regional and national levels. At the regional level, the program intended to create cooperation between Azerbaijan, Georgia and Armenia. At the national level, it designed several national development actions for each of those states such as diversification of economic income in Azerbaijan, which was heavily dependent on energy resources (Lussac 2010).

In 1993, the EU launched the TRACECA program in order to develop a transport route from Europe to the Central Asian countries by including the Black Sea, Caucasus and the Caspian Sea. The main purpose of this program was to decrease Russian transport monopolization over these regions and provide Azerbaijan with an alternative transport route. Due to its political importance, both regional countries and the EU devoted themselves to implement the program effectively. In the light of this, with the strong support of the Azerbaijan government, the Restoration of the Silk Road international conference took place in Baku in 1995 (Lussac 2010, Helly 2003, TRACECA-org.org 2015). According to Lussac (2010), the program successfully weakened the strong political hold of Russia over the region’s countries and provided them with direct access to the EU. Additionally, the development of an oil transportation network between Azerbaijan and Kazakhstan and the Baku-Batumi railroad were supported by the TRACECA.

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words, it has become an important energy cooperation tool of the EU since 1996. It has three regional secretariats: the Eastern Europe office is in Kiev which is also a general office, the Tbilisi office is assigned to the Caucasus and Tashkent hosts the regional secretariat for Central Asia (Lussac 2010, INOGATE.org 2015). The program has four key objectives:

 “Converging energy markets on the basis of the principles of the EU internal energy market;

 Enhancing energy security by addressing the issues of energy exports/imports, demand, supply and diversification;

 Supporting sustainable energy development;

 Attracting investment towards energy projects of common and regional interest” (INOGATE.org 2015).

Azerbaijan has been a partner of the program since 1996. The program has provided Azerbaijan with support in different areas such as energy security, energy efficiency, regional energy market and attracting investment (INOGATE.org 2015). By implementing the program, the EU has started to enhance both its presence in the region and interaction between regional actors. For instance, Ramiz Rzayev, who is INOGATE’s country coordinator in Azerbaijan, considers that “the INOGATE Program played a big role in attracting investments to the energy sector of Azerbaijan” (INOGATE Annual Report 2011, p.15). Also, the program has provided Azerbaijan and other regional countries with advanced technological equipment and assistance.

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realized that Azerbaijan could become one of the source countries for energy diversification. By implementing the ENP, the EU intended to provide its neighbors with an alternative institutional context to Russian dominance political influence. To strengthen the idea of the ENP and regional energy cooperation with the Caspian Sea countries, the Baku Initiative was launched by the EU in 2004 (ec.europa.eu 2006 and Youngs 2009). “The Baku Initiative is aiming to facilitate the progressive integration of the energy markets of this region into the EU market as well as the transportation of the extensive Caspian oil and gas resources towards Europe” (ec.europa.eu 2006). In light of this, during the initiative, the EC and other participants aimed to improve the regional energy market, attract investment for infrastructure and implement support programs and policies of energy efficiency. In other words, the Baku Initiative secured the EU’s energy supply by providing Caspian energy and strengthened the energy market of the Caspian countries by increasing energy investment.

3.1.1. Limits and Challenges of the European Partnership Programs

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Armenia but did not include Azerbaijan despite its geographic and energy advantages (Lussac 2010, and Helly 2003).

At the beginning of the 1990s, among the EU member states, only Germany opened embassies in the South Caucasus. In 2004, Chris Patten, External Relations Commissioner, visited the region for the first time since independence. In a study conducted by Lussac (2010), it was shown that during the 1990s, the EU preferred not to compete significantly with Russia regarding the region’s energy transportation and thus the natural resources of Azerbaijan received limited attention from the EU in terms of energy diversification. Rather, the EU addressed political, humanitarian and social developments such as democracy, education, regional cooperation and political elections in Azerbaijan. In addition, during that time, the EU did not pay much attention to Azerbaijan’s demands or what the Azerbaijani government wanted.

After the collapse of the USSR, Azerbaijan had significant economic difficulties due to the Nagorno-Karabakh conflict and the one million refugees caused by the conflict. Additionally, it was restricted by a Russian monopolized energy strategy. In that respect, the Azerbaijani government sought to obtain external investment for transporting hydrocarbon resources, constructing infrastructure, and especially decreasing Russian political and economic dominance. In 1994, the Caspian Sea Exhibition was organized in Baku and during that time, president Haydar Aliyev expressed his wish that transportation of Azerbaijan natural resources by the western energy companies would improve and strengthen Azerbaijan’s energy industry and establish strong mutual relations with the western states (Mammadov 2010). However, the EU put more emphasis on democratic values and paid less attention in particular to the Nagorno-Karabakh problem, which challenged the position of the Azerbaijan government to the EU and pushed the region toward Russia and Iran because they did not criticize or demand democratic reforms but offered transportation routes, money and technical support. Nevertheless, this does not mean that the EU should not implement its traditional values but while demanding them, it should provide Azerbaijan with economic and political support to reduce Russian influence.

3.2. Reasons for Limited Involvement

European Energy Security: EU Energy Policy Toward Azerbaijan During the Period Between 1991 and 2009 Agha Bayramov