Talks between Azerbaijan and Turkey over the purchase and transport of Azerbaijani gas continue despite recent criticism of the latter’s stance in the negotiations by Azerbaijani President Ilham Aliyev. The president’s sharp comments followed shortly after a renewal of diplomatic relations on 14 October between Turkey and Armenia, Azerbaijan’s regional foe – a step that Baku disagreed with – followed by angry exchanges  between  Baku  and  Ankara  over the reciprocal display/removal of each country’s national flags. Armenian separatists have occupied Azerbaijan’s Nagorno-Karabakh region since the early 1990s and Baku insists that the region be returned to its control. It fears that Turkey’s rapprochement with Armenia will harm its efforts to have the region returned and weaken its position in the Caucasus in general.

The political fracas between Baku and Ankara has since settled, but during its course, President Aliyev expressed his country’s displeasure with Turkey’s position on prices for natural gas supplies from the Shah Deniz Stage 2 project and the future transit of gas across Turkish territory to Europe. The president stated that Turkey’s position was forcing Azerbaijan to consider alternative routes for its gas to Europe, suggesting that Azerbaijan could easily accept Russia’s offer to purchase all Shah Deniz 2 gas. Such a development would hold grave consequences for the proposed Nabucco Gas Pipeline project.

Speaking during a televised address to the government on 16 October, President Aliyev criticized Turkey for failing to reach a price agreement and set transit fees more to its liking. “We have tried not to highlight this and resolve everything through negotiations over the past two years,” Mr Aliyev said according to Interfax , “but our resources have been exhausted and we will never accept the proposals given to us. We need to explore alternatives. There are countries in need of energy resources all around us,” he added, saying that Azerbaijan was prepared to export gas to the EU “today.”

Baku has stated on numerous occasions that it is prepared to supply natural gas to Europe through the Nabucco pipeline and the Interconnector-Turkey-Greece-Italy (ITGI) project, but as supply negotiations for these projects muddle along, Russia’s Gazprom has stepped in with an offer to purchase as much gas as Azerbaijan can provide, and on 14 October, two days prior to Mr Aliyev’s angry remarks, the State Oil Company of the Azerbaijan Republic (Socar) signed with Gazprom a purchase and sale agreement to supply an initial 500mn cu ms of gas beginning January 2010.

Europe Waiting For Gas

Azerbaijan has the resources and infrastructure to supply Europe, Mr Aliyev said. “European countries are waiting for our gas. Our potential partners include Greece, Romania, Italy, Bulgaria, Hungary, Germany and Switzerland. All these countries want to buy our gas for world prices and we want to sell our gas. This is a mutually beneficial project,” he added.

“However, unfortunately, we have been unable to do this for two years. The reason is, we have still not resolved the problem of gas transit with Turkey. We are guarding our national interests, and these interests are based on international practice both in terms of prices and rates. It is no secret to anyone that Azerbaijan has been selling gas to Turkey at only one-third of the world prices for years. What country would be glad to sell its resources at 30% of the world prices? This goes against logic,” Mr Aliyev said, adding that negotiations with Ankara have been going on since April 2008. Although the gas sales agreement with Turkey expired then, Azerbaijan continues to sell gas to Turkey at $120 per 1,000 cu ms.

Turkey’s position on transporting Azerbaijani gas has complicated the €7.9bn Nabucco project in which Ankara is a partner with Austria, Germany, Hungary, Romania and Bulgaria. Turkey’s insistence on the right to keep 15% of the pipeline’s throughput at preferential prices delayed the signing of an Intergovernmental Agreement (IGA) on the project until last July (MEES, 20 July). The IGA was seen as a means to move the beleaguered project forward, but clearly, as Mr Aliyev’s remarks indicate, a great deal of wrangling continues.

President Aliyev also complained that Turkey’s position had resulted in the delay of Shah Deniz Stage 2 development, which will double the offshore gasfield’s production capacity to more than 16 bcm/year. “We would have been producing and selling gas and earning a lot more if we started the second stage two years ago. But we are losing time,” the president said, according to The Wall Street Journal . “There are the unnecessary hurdles. We don’t like the price. We will never sell our gas for that price. We don’t like the tariff rates – 70% higher than the region’s average. Why should we pay so much?” He added that the partners in the BP-led Shah Deniz consortium were also worried about the development contract, which expires in 2026. Shah Deniz 2 is now tentatively scheduled to come on-stream in 2015-16.

Ankara Will Pay The Difference

Since President Aliyev’s terse revelation of his country’s negotiations with Turkey, Ankara’s Minister of Energy Taner Yildiz said progress had been made with Baku on a gas agreement. According to Azerbaijan’s Today news agency, reporting on 28 October, Turkey will pay the difference between the old price for gas that it has paid since April 2008 when its gas agreement expired and a new price yet to be agreed with Azerbaijan. “Today we no longer buy low-priced gas from Azerbaijan,” the agency quoted Mr Yildiz as saying. “In accordance with the new price to be agreed upon, we will pay the difference.” Turkey is expected to pay at least $1.1bn in compensation if the new price agreed upon is around $250 per 1,000 cu ms. Other Azerbaijani media sources have reported that Turkey has offered to pay a transit fee of $2.36 per 100km, which is $0.24 less than the fee charged by Russia.

Azerbaijan’s Alternatives

Despite the fact that Azerbaijan has been an advocate for the 31 bcm/y Nabucco project for a number of years, President Aliyev’s deliberate public statement that his country will seek alternative routes to deliver its gas to Europe reveals just how frustrated Azerbaijan has become with the whole Nabucco ordeal. While he mentioned alternatives, there is really only one viable export route, and that is through Russia, most likely through the proposed South Stream gas pipeline across the Black Sea to Europe. South Stream, a 900km under water pipeline with a cost estimated by some to be nearing €20bn, is Moscow’s answer not only to Nabucco and the ITGI, but also to a Trans-Caspian Gas Pipeline from Turkmenistan that would, if ever built, make Nabucco worth all that it has gone through and has yet to experience. South Stream, itself still a questionable undertaking, aims also to remove Ukraine from the Russia-gas-supply-to-Europe equation. 

Whether Russia genuinely needs Azerbaijan’s gas to make South Stream viable remains a question. More likely, Russia’s interest in signing an agreement with Socar like that signed on 14 October has more to do with pre-empting gas supplies for Nabucco. However, according to a report in the Eurasia Daily Monitor on 15 October, the agreement covers the years 2010-14, giving Azerbaijan the option to give full attention to Nabucco if the pipeline exists at that time. The report said Azerbaijan’s agreement with Gazprom “can actually concentrate minds all-around on the Nabucco project,” bearing the following considerations in mind: First, the volumes committed to Gazprom are meager and the time-frame does not impinge on the Nabucco project…Second, this agreement does not allow Gazprom to compete against Nabucco for Azerbaijan gas, but the situation could change in Russia’s favor if Turkey’s AKP government insists on its “extortionate” terms…Third, Baku’s agreement with Gazprom is a reminder to Ankara that Azerbaijan does not totally depend on the Turkish gas market or the Turkish transmission route…Fourth, Baku is successfully ruling out Gazprom’s wish to re-export Caspian gas to European countries, at a profit to Russia and at the expense of Caspian producers. Baku has stipulated [in the agreement] that its gas shall be used in Russia’s north Caucasus.

Meanwhile, Russia has moved to draw Turkey into the South Stream project by securing Ankara’s permission to conduct a survey of Turkey’s section of the Black Sea seabed to determine the best route for the pipeline, which will be designed to transport 62 bcm/y. In exchange, Russia has agreed to supply crude oil to the Samsun-Ceyhan (Trans Anatolian) crude oil pipeline (MEES, 26 October) and go so far as to join Turkey in the construction of a refinery at Ceyhan. Samsun-Ceyhan is intended to bypass the Bosphorus and Dardanelles straits, and, before this agreement, was viewed as a competitor against the Burgas-Alexandroupolis pipeline, which is 51% owned by Russia’s Transneft, for crude being shipped out of the Black Sea.

© Copyright MEES 2009.