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Azerbaijan looks past Turkey

Azerbaijan's efforts to diversify gas export routes and reduce its reliance on Turkey as a transit country for moving the fuel on to Europe are increasing as its negotiations with Ankara over supplies continue to face difficulties. As talks with drag on with Turkey, Azerbaijan has recently added Iran and Bulgaria to its customer base.

Also, whether coincidentally or not, the international consortium exploiting the Shah-Deniz deposit, Azerbaijan's largest gas resource, has decided to shut one of its five wells "for technical reasons", a move that will lower Azerbaijan's gas production during this year to between 7.2 and 7.5 billion cubic meters (bcm) from 9 bcm.

BP and Norway's Statoil each hold 25.5% of the Shah Deniz consortium; they are responsible, respectively, for the commercial and technical operations. Other members are France's Total, Azerbaijan's SOCAR, Russia's Gazprom, and Iran's Naftiran, each with 10%, and Turkey's TPAO with 9%. The deposit as a whole is estimated to contain 1.2 trillion cubic meters of natural gas plus 1.75 billion barrels (bbl) of condensate.

Press reports suggest that Turkey proposes a transit fee of US$2.36 per 100 kilometers of transit for Azerbaijani gas, which has the effect of determining a price of $200/tcm for Baku's gas at its border with Turkey, which would then sell the gas on to Europe at its western border for $250/tcm. So it emerges that Turkey still wishes effectively to impose a netback of 25% on the new agreement.

The renegotiation of the terms of this 25-year contract are legally separate from the ongoing negotiations between the same two parties for subsequent volumes from Shah Deniz, as well as from negotiations yet to begin over volumes destined for the Nabucco pipeline that will carry gas from Azerbaijan through Turkey to Europe. So the present impasse may also be a bargaining tool through which Turkey seeks to maintain its proposed 15% netback on later Nabucco gas, an arrangement that the European Union found unacceptable earlier this year, before the Nabucco intergovernmental agreement was signed (see Nabucco ink starts to flow, 16 July 2009.)

Under the terms of the contract presently in force, Azerbaijan sells gas to Turkey at the latter's eastern border for about half the world market price, and Turkey exports it at its western border at international prices. The result is that Turkey can keep half of the gas while effectively paying nothing for it. In contrast, the State Oil Company of the Azerbaijan Republic (SOCAR) agreed earlier this year to sell 500 million cubic meters (mcm) of gas to Russia's Gazprom during 2010 at

competitive international prices. Now Azerbaijan has also signed a memorandum of understanding (MoU) with Bulgaria for the export of 1 bcm each year starting in two years, with the gas crossing the Black Sea in tankers as compressed natural gas (CNG), a technology that has not been tried previously for such large-scale transportation. CNG tankers are more expensive than tankers for liquefied natural gas (LNG) but do not require the expensive gasification and de-gasification infrastructure that LNG does.

Studies of the possible application of CNG technology to trans-Caspian transport of Turkmenistan's gas to Azerbaijan, for example, evaluate it as being 1.6 times as expensive as an undersea pipeline but only two-thirds as expensive as LNG. It may be noted that a minimum volume of 30 bcm per year seems necessary to make the trans-Caspian CNG project feasible.

Three weeks ago, another MoU was signed whereby the Azerbaijani "national champion" SOCAR would begin to sell 500 mcm/y of natural gas to the National Iranian Gas Co at prices close to the world market. This volume would increase subsequently as repairs to an Azerbaijan-Iran gas pipeline are executed, including upgrade of a compressor unit near the border with Iranian town of Astara. The deal includes provisions for modernizing a 200-kilometer pipeline running along the Caspian coast between the two countries that dates from the Soviet era.

The Iranian ambassador in Baku oddly mentioned a figure 10 times the announced number when he stated to a press conference that Iran would import 5 bcm/y. This probably refers to Tehran's aspirations for a future expansion of the volume. According to Azerbaijan's president Ilham Aliev, speaking to an international conference five months ago, Iran has even proposed to buy all gas produced from Shah-Deniz.

The deal with Iran builds upon bilateral cooperation begun in 2006, when a swap deal was began whereby Azerbaijan sends gas through the Baku-Astara pipeline to Iran, which then sends it on to Nakhchivan, which as an exclave is geographically separated from the main body of Azerbaijan's exclave and borders Iran, Armenia and, for 16km, Turkey.

Nakhchivan is an autonomous republic within Azerbaijan and elects its own parliament to govern internal affairs. Its principal families have played an important part in Azerbaijani affairs since the discovery of oil off the Caspian coast in the 19th century. Former Azerbaijan president Heydar Aliev is only one of a number of Soviet and post-Soviet leaders of Azerbaijan born in the region. Gas deliveries via Iran in 2006 started at the low level of 70 mcm in 2006 and are projected to increase to 350 mcm in the current year.

Shah Deniz Phase 1 has been scheduled to peak next year at a production level of 8.6 bcm plus 45,000 bbl of condensate. Phase 2's peak capacity is planned at 22 bcm/y, but the completion date for Phase 2 has already been postponed from 2013-14 to 2016 due to the failure of Turkey and Azerbaijan to reach agreement over the transit issues. There are further offshore gas deposits, for example the Guneshli and Apsheron fields among others, that have yet to be fully developed and which Azerbaijan's president has credibly announced to contain the impressive total of 5 trillion cubic meters.

Azerbaijan cannot immediately cease selling its gas production to Turkey, as its near-term prospective sales to Russia, Iran, and Bulgaria cannot take up the slack; nevertheless, Azerbaijan is exploring these as alternatives in the medium term. A long-term result of an absolute failure to agree with Turkey would be to put a question mark over the whole Nabucco project designed to take Turkmenistan's gas through Azerbaijan (and Georgia) into Turkey and eventually European markets.

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URL:  http://www.robertcutler.org/blog/2009/12/azerbaijan_looks_past_turkey.html
First published in Asia Times Online, 4 December 2009.

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