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Azerbaijani Gas Again on the Front Burner

Azerbaijan’s president Ilham Aliev has announced a doubling of the reserves of both oil and gas in his country’s Caspian offshore. New finds in as many of five fields to be developed contain perhaps 50 trillion cubic feet of gas, such as to require a new gas export pipeline. An executive of the national oil company SOCAR has hinted that gas from Turkmenistan could be included, starting even in the near term with small quantities. The French company And although Gazprom has lately offered to buy Azerbaijani gas at near-market prices, probably for re-export to Europe via its planned South Stream pipeline, Azerbaijan has not shown much interest, instead declaring that it will feed the first contracted gas into the rival Nabucco pipeline destined for Bulgaria and beyond.


When the Western oil majors began to explore the Azerbaijani offshore in the early 1990s, they did not have natural gas on their minds, but only oil. Questions about natural gas entered the picture only later in the decade, when PSG International, a joint venture between Bechtel and the GE Capital unit of General Electric, contracted with Turkmenistan to develop the Trans-Caspian Gas Pipeline (TCGP). This project would have taken that country’s gas to Turkey via Azerbaijan and Georgia, alongside the route of the Baku-Tbilisi-Ceyhan (BTC) pipeline for export of Azerbaijan’s offshore oil. (The Baku-Tbilisi-Ceyhan pipeline is also known as the MEP, for Main Export Pipeline.) Whilst the TCGP was still being negotiated and planned, unexpectedly large volumes of associated natural gas were separately discovered in the Shah-Deniz deposit, where Azerbaijan had given BP-Amoco the rights to explore for oil. Azerbaijan’s president Heydar Aliyev, unable to find agreement with Turkmenistan’s president Saparmurat Niyazov concerning expansion of the TCGP or allocation of its volume between the two countries, then decided to go ahead with an export pipeline exclusively for his country’s own natural gas from Shah-Deniz. This pipeline, now up and running, indeed traces a route parallel to the BTC, and Turkmenistan still has no TCGP.

Both Azerbaijan and Turkmenistan now have new presidents, Ilham Aliev and Gurbanguly Berdymukhamedov, respectively. A month ago, on 19-20 May, they held their countries’ first bilateral summit in over a decade. Symbolically, the day the summit began, a ship from the Azerbaijani state oil company SOCAR delivered equipment to a Turkmenistani oil rig located in Turkmenistan’s Caspian offshore. In a concluding joint press conference, the two presidents declared “all issues resolved” between their countries. Turkmenistan reopened its embassy in Baku, and Azerbaijan paid off its $45 million gas debt to Ashgabat. Moreover, at another energy summit just a few days later in Kyiv, Aliyev underlined Azerbaijan’s role as both a producer and a transit country, leading many observers to believe that a bilateral Caspian delimitation agreement with Turkmenistan was in the works. Such an agreement would likely adopt the “modified median line” rule already in force under bilateral agreements between Azerbaijan and Russia, between Russia and Kazakhstan, and between Azerbaijan and Kazakhstan. Even if formalized only on an ad hoc basis in the beginning, such a procedure would allow Azerbaijan and Turkmenistan to settle their dispute over ownership of the Kyapaz/Serdar field in the Caspian Sea (probably providing for its development under a joint venture), not to mention resurrection of the TCGP project.


Earlier this month, at an international oil and gas conference Baku, Aliyev reported new estimates of natural gas reserves at Shah-Deniz, which essentially doubled from 600 billion cubic meters to 1.2 trillion cubic meters, which is equivalent to over a century of Azerbaijan’s current domestic consumption. Moreover, the first vice-president of SOCAR has subsequently said that potential new finds in as many of five fields to be developed might require a new gas export pipeline, and he hinted that gas from Turkmenistan could be included even in the near term in small quantities. In a related development, Total and SOCAR agreed to work out the terms of a Production-Sharing Agreement for the Apsheron Block, one of the five fields. (The others are Babek, Nakhichevan, Umit and Zafar-Mashal.)

On a visit to Baku earlier this month, Gazprom’s chief Alexei Miller created a great stir by unexpectedly offering to buy natural gas from Azerbaijan at European market prices, minus transport costs. Although he did not say why he should wish to do so, speculation centers on the idea that this would be to fill the Russian-Italian sponsored “South Stream” pipeline, on which Gazprom is partnering with Eni: the same team that built the “Blue Stream” pipeline under the Black Sea from Russia to Turkey. However, the South Stream’s route is still quite vague: first it would cross, under the Black Sea, the continental shelves of Ukraine and Romania, whose agreement would also be necessary, reaching Bulgaria; whence it would either continue through Greece and under the Ionian Sea to Italy or instead join another Turkey-Greece-Italy (“trans-Adriatic”) pipeline already planned by the Swiss energy-trading company Elektrizitäts-Gesellschaft Laufenburg (EGL) with Norway’s StatoilHydro; or it could take a northern route through Serbia, Hungary and Slovenia to Austria’s Baumgarten hub, unless from Slovenia it passed instead into northern Italy, or else via Bosnia-Herzegovina and/or Croatia to Trieste.

A potential problem from Baku’s standpoint is that Gazprom insists on long-term contracts at fixed prices, whereas the price of natural gas in Europe is projected to rise over time, beginning even later this year. Indeed, Azerbaijan has not shown much interest in Gazprom’s offer. Baku announced instead its determination to participate in the rival Nabucco pipeline project, which takes a route through Turkey, Bulgaria, Romania and Hungary, also terminating at Baumgarten in Austria; and only a few days later, Azerbaijan agreed to supply the first real order for physical gas through Nabucco: Bulgaria will buy more than 1 billion cubic meters per year of Azerbaijan’s natural gas as from 2013, when the Nabucco pipeline is projected to open. This amount represents over one-sixth of Bulgaria’s annual consumption and about one-eighth of the pipeline’s first-phase capacity.


Azerbaijani officials have already said for the record that gas rigs in the Turkmenistani sector of the Caspian will be interconnected to Azerbaijani offshore rigs, which are themselves already hooked into the gas pipeline going to Turkey. Perhaps it was this very equipment that the SOCAR ship was delivering on the day that the Aliyev- Berdymukhamedov summit was beginning. It has been known for over a decade that there is no technical obstacle to the construction of the TCGP on an ecologically sound basis. Confirmation of recent discoveries in Turkmenistan reveals that the country’s natural gas reserves total at least 8 trillion cubic meters, this in addition to the newly confirmed Azerbaijani reserves.

Not only natural gas is back on the front burner in the geopolitical agenda of the region. When Ilham Aliyev announced the doubling of natural gas reserves at Shah-Deniz, he also mentioned that new surveys also show a doubling of oil reserves at the "Contract of the Century" Azerbaijani-Chirag-Gunashli oil fields, from 3.7 to 7.4 billion barrels. In this connection, he discussed plans for a new oil terminal in Georgia at Kulevi, whence a new pipeline segment would take Azerbaijani oil to the Odessa-Brody pipeline, which would then flow from east to west, with yet another new segment also to be constructed to Gdansk, as has long been proposed.

Skeptics who maintained in the 1990s that the Caspian Sea region had only as much energy as the North Sea were refuted by Kazakhstan’s offshore Kashagan oil strike in 2000. The present world situation has shown those who emphasized its significance even if it were only a “swing” producer were right. And as the market price of oil and gas increases, more of it can be taken out of the ground, because a commercial profit becomes economically possible even if the raw material costs more to extract, refine, transport and market. With the changes of leadership in Azerbaijan and Turkmenistan, higher world prices for petrochemical products, and the confirmation of increased reserves, Azerbaijani gas is back on the front burner.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2008/06/azerbaijani_gas_again_on_the_f.html
First published in Central Asia – Caucasus Analyst, vol. 10, no. 12 (25 June 2008): 3–5.

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