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Azerbaijan and Turkmenistan Untie the Caspian Gas Knot

In mid-February, Turkmenistan's President Saparmurat Niyazov rejected a proposal to split equally with Azerbaijan exports of natural gas through the proposed Trans-Caspian Gas Pipeline (TCGP) with a projected volume of 30 billion cubic meters (bcm) per year. The contract to construct the TGCP was awarded last year to PSG, a joint venture of Royal Dutch Shell, Bechtel and the GE Capital unit of General Electric. Turkmen President Niyazov accused US President Clinton's Caspian advisor John Wolf of pressing Ashgabat to accept unfavorable conditions from Baku. Later on March 9, Niyazov announced an agreement with Azerbaijan President Aliev to scale down Azerbaijan’s demands from nearly one-half of the pipeline's capacity to one-sixth, thus defusing the latest clash between the Caspian’s hydrocarbon titans.


Gas sales represent about two-fifths of the Turkmenistan's total exports. These exports increased by two-thirds in the first half of 1999, from 13.3 in the first half of 1998 to 22.4 billion cubic meters (bcm), primarily because of exports to Ukraine. These cash-flow problems led to the cancellation of the export deal, but a December 1999 contract with Russia for 20 bcm in 2000 took up the slack. Last year, Azerbaijan discovered enormous natural gas deposits in the offshore Shah-Deniz field, a field originally thought to produce only petroleum. Two exploratory wells at Shah-Deniz indicate reserves of over 1,000 bcm (1 trillion cubic meters) though a third well will be drilled in late summer and is likely to produce even more.

The conflict between Azerbaijan and Turkmenistan developed when Azerbaijan sought to put the previously unknown gas from its Shah-Deniz field into the TCGP and asked for 14 bcm per year, nearly half of the TCGP's projected volume of 30 bcm per year. According to the original projections, Turkey contracted for 16 bcm per year of TCGP's total 30 bcm volume for its domestic market. Turkmenistan was planning on using the remaining 14 bcm volume for gas re-exports from Turkey to Europe, to obtain mush needed hard-currency earnings. After the TCGP talks in Ashgabat faltered in mid-February, Azerbaijan and Turkmenistan clashed. Azerbaijan threatened to construct its own pipeline with the BP-Amoco led Shah-Deniz consortium. Turkmenistan President Niyazov announced his intention to sign a long-term contract with the Russian firm Gazprom but offered a window in the negotiations by extending the mandate for PSG Corporation and the TCGP consortium until March 20.

At the end of February, Turkmenistan's Oil and Gas Minster Orazov stated that Azerbaijan's demand to use 50% of the TCGP pipeline constituted a violation of the Declaration of Intent signed last November by the governments of Turkmenistan, Azerbaijan, Georgia and Turkey. Meanwhile, in a stinging rebuke to U.S. President Clinton, Turkmen President Niyazov blamed Clinton's Caspian advisor and U.S. negotiator John Wolf for "deliberately delaying the US $2.5 billion project and pressing Ashgabat to accept unfavorable conditions from Baku." The conflict was resolved a few weeks later on March 9, when Niyazov was shown on Ashgabat television announcing an agreement with Azerbaijan President Heydar Aliev to scale down Azerbaijan's demands for 14 bcm to only 5 bcm, one-sixth of the pipeline's capacity. This figure is in fact the export volume earlier foreseen by Azerbaijan in the initial stages of developing the Shah-Deniz deposit and it is the figure that Niyazov claims Aliev agreed to as an overall quota.


The Chairman of the Board of Gazprom Rem Vyakhirev was actually in Ashgabat waiting for TCGP talks to fail in mid-February. But a long-term Turkmenistan-Russia agreement to fill the gap was always in doubt because of economic friction between the two countries. Russia habitually sees Turkmenistan as a competitor in international energy markets, and limited the Turkmenistan's access to its own pipeline system throughout the 1990s. In fact, Turkmenistan cancelled an agreement with Gazprom in 1997 because the price it demanded was unacceptably low. Price is a constant source of friction. Russia contracted from Turkmenistan 20 bcm of gas in 1999 for delivery in 2000 with a compromise price of US $36 per 1000 cubic meters. However, Itera, the Russian company that was to transport the gas, soon stated that this price was be too high for any new long-term agreement especially given that Niyazov's opening asking price was US $46 per 1000 cubic meters.

A December 1999 agreement with Russia already foresees new large-scale exports from Turkmenistan to Russia. This resolves the dispute between the two countries from 1997 when Russia closed its pipeline system to gas from Turkmenistan. Projected exports to Russia are on the order of 20 bcm for the year 2000. By the time Vyakhirev met with Niyazov in Ashgabat on 19 February, the only points to be resolved were whether Turkmenistan can deliver the amount of gas foreseen in the agreement and what the price should be. As Vyakhirev said to journalists, any agreement with Turkmenistan will be signed in April at the earliest, pending resolution of the price structure. But Gazprom has a definite interest in coming to an accord, since its shortfall in supplying the Russian domestic market in 2001 is currently estimated at 40 bcm.


The Azerbaijani side counters, on the basis of the Shah-Deniz find, that it is perfectly content to proceed on its own, with construction of a gas pipeline through Georgia to Turkey. With Shah-Deniz, it does not need Turkmenistani participation or the TCGP. Since Azerbaijan would be able to limit the volume of gas from Turkmenistan to be allowed into the TCGP across its territory, it could kill the project by making the financial parameters uninteresting to investors.

Azerbaijan's insistence on selling its own gas to Turkey was not a ploy aimed at getting Turkmenistan to drop its claim on the offshore Kyapaz/Serdar oilfield, that was part of the "contract of the century" under development by the Azerbaijan International Operating Company (AIOC). That issue was settled at the mid-November 1999 OSCE summit in Istanbul. Azerbaijan simply wanted to negotiate throughput quotas for its maximum TCGP production ahead of time, even if it would take several years to reach a higher figure.

Presidents Niyazov and Aliev reportedly agreed, in their telephone conversation, that Turkmenistan would take the lead in drawing up the facilitating inter-governmental agreements. The inter-governmental agreements for the Baku-Ceyhan Main Export Pipeline (MEP) will undoubtedly be used as a template. Should further tensions and disagreements slow the development of the TCGP or should Azerbaijan's Shah-Deniz gas production ramp up above initial volumes, then a separate gas pipeline to Turkey originating in Azerbaijan is still possible.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2000/03/azerbaijan_and_turkmenistan_un.html
First published in Central Asia – Caucasus Analyst 2, no. 6 (15 March 2000): 7–8.

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This page contains a single entry from the blog posted on March 15, 2000 11:29 AM.

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