Halfway between corruption and prosperity

Letter From Azerbaijan: Friday night and the crowd is piling into Finnegan's, the Irish theme pub in downtown Baku, Azerbaijan…

Letter From Azerbaijan: Friday night and the crowd is piling into Finnegan's, the Irish theme pub in downtown Baku, Azerbaijan. The clientele is overwhelming male - and large. Stout arms are studded with tattoos. Scottish accents dominate, interspersed here and there with long drawn-out drawls of Texas.

Azerbaijan, a country of eight million people on the western shore of the Caspian Sea, is on the edge of an oil boom; these are the "oilies", the expatriate workers flown in from Aberdeen and Houston to exploit resources in what the energy industry considers to be the new El Dorado.

Most western oil companies are rushing in, licking their lips in the hope of controlling what are considered to be some of the world's largest remaining untapped sources of oil and gas.

Oil giant British Petroleum is leading the charge: like everything else in the oil industry, the statistics are big. BP estimates it will be investing more than €12 billion in the region over the next few years - building platforms far out in the Caspian Sea, terminals and pipelines.

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All this has come as a bit of a shock to a country where most people eke out a living on incomes of less than €600 a year. Baku is full of designer shops and expensive hotels. The nouveau riche scream round the city in flashy sports cars. New apartment blocks sprout on every corner. Yet you don't have to go far to find abject poverty.

On a city hillside crowds of people live in shelters literally dug out of the earth. These are some of the 750,000 refugees who were forced to leave their lands when war broke out in the early 1990s with neighbouring Armenia over a disputed territory, Nagorny Karabakh.

A ceasefire has been in force between the two sides since 1994 but new hostilities could break out at any moment. Azerbaijan, which lost about 15 per cent of its territory in the fighting, insists it will regain its lands. An old man with a face furrowed like a newly ploughed field grabs my arm, pleading with me to tell his government, the United Nations - anyone - to do something.

"We have waited long enough," he says. "It's time to go and fight to get back our lands."

The big oil companies - backed by the US and other western governments - are clearly involved in a high risk game. This is a volatile, politically insecure area where there are not only local wars to contend with. It's also a region where bigger interests clash.

Russia to the north is unhappy at losing influence and power in territory it has long considered its own back yard or, in old Soviet speak, the "near abroad".

The US is equally determined to exert its military and financial power and isolate Iran - part of the "axis of evil" according to President Bush - to the south. Then there's neighbouring Georgia, with its bitter territorial disputes and, not far away, Chechnya.

Azerbaijan is by no means a model of stability. For most of the period since independence from the old Soviet Union in 1991, it has been ruled by the Aliyev family. Heydar Aliyev, a former colonel in the KGB, retired as president in 2003. Soon afterwards he died but such was the nervousness of the government at his departure, the death was not announced for four months.

Heydar's son, Ilham - who had a reputation as a playboy and gambler - stepped into his father's shoes. However the ghost of Heydar Aliyev still dominates: his picture stares out from every office wall. Giant posters of the man considered to have founded modern Azerbaijan line the roadsides.

International observers have criticised successive elections as deeply flawed. There are widespread allegations of human rights abuses. A series of recent kidnappings and murders has been blamed on senior figures in the internal order ministry.

A survey by Transparency International, a body which monitors levels of corruption around the globe, placed Azerbaijan 140th out of 146 of the world's most corrupt countries.

The oil industry, eager to satisfy the world's ever-growing thirst for oil and gas, seems undeterred by the problems of operating in such a difficult region. As part of what it describes as the world's biggest energy project, BP is investing €6 billion in a highly controversial 1,762km pipeline which runs from Azerbaijan's Caspian coast through the Republic of Georgia and across eastern Turkey to the port of Ceyhan on Turkey's Mediterranean coast.

Not only does the pipeline run through what is a highly active seismic zone: in Georgia it goes near separatist areas, while in Turkey it skirts the heartlands of the Kurds. Concerns have been expressed that the oil supply line could be vulnerable to attack by anti government groups.

This is not the first oil boom Azerbaijan has experienced. In the mid 19th century, the world's first commercial oil well was drilled on the outskirts of Baku. By 1900, the Caspian was supplying more than half the world's oil.

The early oil barons - the Rothschilds and members of Sweden's Nobel family - built majestic houses in Baku in an area still referred to as "Boom Town". But then, when communism arrived, the oil companies moved on, leaving behind poverty and some horrendous pollution, only added to during Soviet times.

This time around things might be different. Will Azerbaijan become like Norway, carefully shepherding its oil wealth, or will it be like Nigeria, riddled with corruption, ethnic conflicts and civil strife? No one is taking bets.