The fragmentation of the Soviet Union and the unfreezing of frozen ethnic conflicts in the South Caucasus disrupted once-integrated energy channels. The subsequent decay of infrastructure over the 1990s decimated the energy potential of Armenia, Azerbaijan and Georgia. The Nagorno-Karabakh War prevented Azerbaijan from utilizing its oil resources and Armenia came to be virtually cut off from Russian energy resources as a result of the civil wars in Georgia.
In the mid-1990s, the South Caucasus states began rebuilding their impaired energy infrastructure while at the same time deciding which energy spaces they saw themselves as inhabiting. In the absence of the Soviet energy system, the European market began increasing its reach into the region. Energy cooperation between Turkey, Azerbaijan and Georgia began opening up opportunities for greater integration within the European market. This arrangement, however, marginalized Armenia’s position due to its tense relations with Turkey and Azerbaijan, forcing it into greater reliance on Russia for energy resources. Azerbaijan became more self-sufficient due to its oil reserves, beginning to export its energy with Georgia as an important transit country. Armenia, on the other hand, has been largely excluded from such regional integration due to its lack of natural resources. Moreover, Armenia’s lack of diplomatic relations with Turkey, as well as the conflict with Azerbaijan over Nagorno-Karabakh has prevented it from becoming involved in the transit of Caspian energy sources.
This imbalance between the states of the South Caucasus in terms of energy dependence makes it difficult to ensure the stability of energy transit between these polities with different degrees of European and Russian influence. Oil-producing and oil-consuming states have different interests and ensuring energy security in the region requires multifaceted cooperation on the main principles of activity between energy producing, consuming and transit countries.
All share an inherited energy supply infrastructure based on large-scale generation facilities and inefficient energy consumption and are behind in terms of infrastructure modernization;
All have relatively low levels of energy consumption per capita because of low GDP per capita;
All lack appropriate legal, institutional and political frameworks for developing existing energy efficiency and renewable energy potential;
All have low levels of economic cooperation among each other.
Armenia has two main hydro-electric cascades: on the Vorotan and Hrazdan rivers. Together, these two systems consist of nine power plants. Armenia also has the Metsamor nuclear power plant – the only one in the South Caucasus. Metsamor originally had two generator units, both of which were shut down after the 1988 Spitak earthquake because of safety concerns. In 1994, one of the two units was restarted. While the plant met the end of its design life in 2016, its license to operate has been extended, as is the case for many nuclear plants globally.
Armenia’s economic recovery during the late 1990s was characterized by low levels of technological advancement. More development requires substantial investment into the diversification of Armenia’s energy system and into the improvement of its infrastructure. Armenia has been distanced from regional infrastructure projects, particularly those that strengthen ties to Europe.
According to official government documents, among them Armenia’s 2025 Energy Sector Strategy and the energy security concept of October 23, 2013, the key elements needed to strengthen Armenia’s energy security are the diversification of primary energy resources and supply routes, regional integration of the energy system, development of nuclear energy, and greater use of geothermal, biogas, solar and other renewable energy sources for heating. Some projects have already been implemented within this framework, including new generating capacities of the Yerevan Combined Cycle Gas Power Plant, construction of the 440 MW Hrazdan-5 Combined Cycle Gas Turbine, agreements between Armenia and Georgia on synchronous operation, and emergency electricity imports. While key aspects of the security concept will not change, a new energy strategy is currently in development.
Armenia does not possess any of its own fossil fuel resources and is not a transit country for oil and gas. Thus, it is heavily dependent on energy imports. Natural gas, nuclear fuel, oil products and limited amounts of coal are mostly imported from Russia. In an effort to diversify its energy supplies, the Armenian government signed an agreement with Iran in the fall of 2016 to import natural gas and export electricity.
After Armenia’s 1992 fuel crisis, residents were rationed 2-4 hours of electricity per day and most households depended on firewood or electricity for heating (World Bank, 2011). Armenia’s Soviet-era nuclear power plant is still in operation and provided 40% of the country’s total energy production in 2015 (Lavelle and Garthwaite, 2015). At the same time, many of Armenia’s electricity generating plants are older than 40 years and are at the end of their design life cycle. They, as well as the electricity grid, require replacement or major refurbishment.
Growing electricity demand in Armenia requires that new power-generating capacity be constructed. It would be prohibitively expensive to increase the capacity of the nuclear plant and hydroelectric energy depends on weather and seasonal conditions.
While Armenia imports most of its consumed energy, it is also a net electricity exporter, providing electricity to Georgia, Iran, and Nagorno-Karabakh. A challenge of electricity trading, however, is the fact that exports depend on the weather – electricity is usually exported in the summer, when surplus hydropower is available, and imported during the winter. A new transmission line between Armenia and Georgia is already under construction and expected to improve bilateral electricity trading and the security of supply.
After the economic crisis of the 1990s transition, energy consumption in Azerbaijan hit rock bottom. Azerbaijan’s increasing oil and gas extraction rates and exports, which contribute nearly 50% of the country’s GDP, have provided for dynamic economic performance.
With Turkish, American and European aid, Azerbaijan was able to offer 10 western multinational companies, including BP and ExxonMobil, the opportunity to explore and exploit Caspian energy resources, making Azerbaijan and Georgia key transit states for these resources. Oil from the Chirag oilfield in Azerbaijan gets to the international market through the Baku-Supsa pipeline, which passes through Georgia. In 2006, the Baku-Tbilisi-Ceyhan pipeline became operational, transporting oil to the Mediterranean and on to European and international markets. A new gas pipeline that will provide gas to Greece and Italy via Turkey is expected to become operational in 2020 and will, upon completion, establish an energy corridor of Trans-European energy networks.
Azerbaijan is one of the key energy producing and transportation countries of the wider Caspian region and has communicated its readiness to be part of the EU’s energy security framework. In 2006, the European Union signed a memorandum of understanding with Azerbaijan in the energy sector.
Beginning in 2006, as oil exports ramped up amid record high prices, Azerbaijan’s economy began to grow rapidly. Soon after, however, because of the lack of progress in democratic norms and basic liberties in Azerbaijan, the leadership of the Extractive Industries Transparency Initiative (EITI), a non-profit international body which seeks to address governance in extractive industries and which Azerbaijan joined in 2009, began criticizing the country for its repression of journalists and civil society actors, and said that Azerbaijan would be reassessed for compliance in 2015. In 2017, the organization suspended Azerbaijan and the country withdrew from the organization.
Azerbaijan’s crude oil reserves are estimated to be around 7 billion barrels (U.S. Energy Information Administration, 2019). While crude oil exports peaked in 2010 and have been declining since, its gas fields are being developed with the goal of supplying European and Turkish markets.
Azerbaijan’s electricity consumption has increased steadily since 2000, as have electricity tariffs. Before 2000, Azerbaijan was a net importer of electricity but has become a net exporter since then. Energy trade with Turkey and Iran is based mostly on trade for balancing the electricity supply to the Nakhchivan Autonomous Republic. Electricity generation in the country will eventually rely primarily on natural gas, while slowly increasing the share of hydropower and other renewables.
Energy independence has been a political goal for Azerbaijan since gaining independence. It developed a long-term oil strategy financially and technically supported by foreign donors to help develop its economy. Since 1998, Azerbaijan has independently met its domestic oil demand and, since 2007, has met its own gas demands, making oil and gas exports an issue for expanding economic development. European oil and gas importing countries highly value the stability of oil and gas imports and, as a result, the Strategic Energy Partnership between the EU and Azerbaijan was set up in 2005.
Because of the energy crisis in the 1990s, Georgia’s energy consumption declined and reached its lowest point in 2001, recovering slowly and at a slower rate than economic growth afterwards. Renewed access to the Russian market after July 2013 increased Georgia’s exports and its geographic location, which connects East-West transport routes, also drive its economic growth. Georgia is now a net electricity exporter through the use of clean, renewable hydropower.
In addition to the East-West pipelines, Georgia also hosts North-South transit routes. One gas pipeline has been transporting gas from Russia to Armenia, through Georgia, since the Soviet era, strengthening Russia’s position in regional energy projects.
Georgia has little fossil fuel resources, and relies largely on its imports, but hydropower constitutes 17% of its primary energy supply. Georgia’s oil imports are diversified as there are no trade restrictions; Azerbaijan and Russia supply its natural gas, and fuel wood constitutes around 8% of its total primary energy supply. The reliance on firewood for cooking and heating are due to the lack of gas infrastructure and its unaffordability for low income segments of the population. The supply and consumption of natural gas is growing, however.
Georgia reaps the benefits of being a transit country for natural gas as it receives an in-kind fee of 10% of the gas originating from Russia, and it benefits from foreign direct investment to the country provided by projects like the South Caucasus pipeline expansion.
Georgian electricity is produced mostly from hydropower, with the remainder coming from natural gas-fired thermal power plants or imports. Increased hydropower generation currently results in an electricity surplus, which is exported to Russia and Turkey in the spring and summer; however, it is still insufficient to meet the winter demand for electricity.
A comprehensive policy plan on reducing Georgia’s external energy dependence, which would increase its energy security, does not exist. International cooperation would attract investment, which could help develop its national energy resources and potential while further regional integration of electricity grids could help mitigate supply constraints.
Understanding the Region: The Caucasus and Beyond is a ten-part series of special reports that will provide credible, fact-based information and awareness about a wide range of regional topics and issues impacting the South Caucasus. The purpose of this series is to provide clarity and understanding of regional dynamics and interrelations.