Azerbaijan’s alternatives

JULIAN LEE | NOVEMBER 2009 | SOURCE: FSU - Pipeline Advisory

As it continues to face difficulties in agreeing transit terms and gas prices with Turkey, Azerbaijan is casting around for alternative ways of exporting its gas. There is no shortage of potential buyers and no shortage of schemes to deliver gas to them.

While Azerbaijan may consider deliveries to Europe via Turkey as the ‘natural’ outlet for its gas, it has not been slow to consider alternative routes to Europe, or even alternative markets altogether. The message to both Turkey and the EU is clear – you are not the only game in town.

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Azerbaijan would like to export much of its future gas production to Europe through gas pipelines running across Turkey. This much has been clearly stated by politicians and senior Socar executives time and again.

However, the Caspian state’s plans have run into something of an obstacle in Turkey’s apparent unwillingness to renegotiate the terms of its purchases of gas from Phase 1 of the Shah Deniz project, or to accept transit terms for gas from the project’s second phase that are acceptable to Azerbaijan.

The situation has been complicated further by Turkey’s rapprochement with Armenia, a development that Azerbaijan has reacted to with a mixture of anger and denial. When the move first began to hit the press back in April, Azerbaijan’s President Ilham Aliev decided to travel to Moscow to meet his Russian counterpart, rather than attend a major energy conference in Sofia at which the Nabucco pipeline was to be a major topic of discussion.

At the same time, the Baku press was full of stories pointing out that Turkey had not actually decided to open its border with Armenia and that it would not turn its back on Azerbaijan. For its part, Turkey has sought to reassure Azerbaijan that its changing relationship with Armenia will have no impact on its relationship with Azerbaijan.

While the people on the streets of Baku still regard the Turks as ‘our brothers and sisters’, relations at a government level are certainly cooler than they were a year ago and the thawing of Turkish-Armenian relations and the lack of progress on the gas transit issue are the twin causes of this cooling.

As part of the project to develop the Shah Deniz gas field and associated export infrastructure, Azerbaijan agreed in March 2001 to sell Turkey up to 6.6 bcm/yr of gas at a price of $120/1,000m3, a price that looked entirely reasonable at the time.

Now, however, the price is far below that being paid by European customers for Russian gas, even in the depths of recession, and Azerbaijan wants to renegotiate it.

The intergovernmental agreement between Azerbaijan and Turkey also stated in Article 4 that ‘the amount of natural gas in excess of the Republic of Turkey’s needs supplied from the Azerbaijan Republic to the Republic of Turkey in accordance with this Agreement may be exported to third countries by the Republic of Turkey’ and this, too, has become a stumbling block over the negotiations of future gas sales to Turkey.

Understandably, Azerbaijan does not want to sell gas to Turkey at below market prices, only to see some of that gas competing with its own supplies in Europe and wants to withdraw the resale rights. Turkey appears to be digging its heels in.

Both sides seem to be looking to the EU to put pressure on the other to acquiesce to their demands. Turkey’s geographical position between the Caspian Sea and southern Europe makes it vital to the EU’s ‘Southern Corridor’ of energy supply routes from the Caspian Sea region and the Middle East bypassing Russia.Suggestions that the proposed White Stream pipeline beneath the Black Sea would permit the Southern Corridor to bypass both Turkey and Russia seem to ignore the fact that this line would have to run through the Exclusive Economic Zones (EEZs) of one or other country.

While this might not give them the same control as they would have over an onshore route, it would still provide either with ample opportunity to delay, or even derail, the project. Turkey seems to hope that the importance of the Southern Corridor to the EU and of European gas markets to Azerbaijan will give it the upper hand. As an insurance policy, Turkey has reached a series of energy-related deals with Russia.

These include:

1. Allowing the proposed South Stream gas pipeline to be routed through its Black Sea EEZ;

2. Planning a second string of the Blue Stream pipeline, which might even be extended to Turkey’s Mediterranean coast and beyond;

3. Russia becoming a partner in the Samsun-Ceyhan oil pipeline linking Turkey’s Black Sea and Mediterranean coasts;

4. The possible joint construction of a new refinery at Ceyhan.

Azerbaijan has also sought EU help, suggesting that the entire Southern Corridor project is put in jeopardy by Turkey’s stance. Government officials, representatives of Socar and senior executives of European companies involved in the Shah Deniz project have all been at pains to point out that gas deliveries to Europe via Turkey are not the only option for Azerbaijan.

Most recently, Socar has begun to consider the possibility of exporting compressed natural gas from its Kulevi terminal on the Black Sea to Bulgaria, where this natural gas would both supply the domestic market and, potentially, be delivered elsewhere in Europe. Azerbaijan and Bulgaria signed a memorandum of understanding on gas transportation on the 13th of November.

The country is certainly not short of potential buyers for its gas. Russia and Iran, both of which share borders with Azerbaijan, have indicated that they would like to buy the entire output of Shah Deniz Phase 2, while the project partners have repeated that the decision on where the gas is sold will be based solely on economics.

Gazprom has also suggested that Azerbaijan’s gas could reach Europe through Russia, presumably seeing it as providing an important part of the throughput of its planned 63 bcm/yr South Stream pipeline.

It remains unclear, though, whether Gazprom would be prepared to offer Azerbaijan anything more attractive than buying the gas at the border between the two countries at some form of European-related price.

The gas giant has jealously guarded its monopoly over gas exports from Russia and is unlikely to be content with providing transit facilities for Azerbaijan and allowing Azeri gas to compete with its own deliveries to Europe.

Azerbaijan might also wish to consider Turkmenistan’s recent experience with Gazprom before becoming too reliant on its northern neighbour. No gas has been delivered to Russia from the Central Asian producer since an explosion in April on the Central Asia-Centre pipeline connecting the two countries.

Although the physical damage to the pipeline was quickly repaired, Gazprom has demand a revision to the contract terms that were agreed only last year, as it faces reduced demand for its own gas. Azerbaijan may not relish playing the role of ‘swing supplier’ to Gazprom.

Azerbaijan has sent the EU a coded warning that it could lose more than just its Southern Corridor project, suggesting that it might lose Azerbaijan’s gas altogether. While it might seem far-fetched to some, Azerbaijan has indicated that it might consider exporting gas to China, if it cannot gain direct access to Europe.

Both the company’s CEO Rovnag Abdullayev and the vice-president for investment and marketing Elshad Nasirov have suggested that Azerbaijan’s gas could be delivered to Eastern, rather than Western, markets.

Of course, such gas exports would encounter the same obstacle facing deliveries of Turkmenistan’s gas to Europe – transit across the Caspian Sea. However, the completion of the Turkmenistan-Uzbekistan-Kazakhstan-China gas pipeline brings the infrastructure to move its gas to China tantalisingly close to Azerbaijan.

While gas exports to China may be the third choice of three options for Azerbaijan after sales to Europe via Turkey and sales to Europe via Russia, the fact that it is even being talked about should cause a pause for thought.

The historical arguments against gas exports to China have been distance and price, with Chinese gas sales expected to yield a much lower netback for producers than gas sales to Europe. However, as Nasirov said, it may be better to get a lower gas price sooner than wait forever to be able to export to Europe.

If Azerbaijan cannot get its gas to Europe, then higher European gas prices are irrelevant to Baku. Socar seems to have decided that it might have more of an impact in Brussels if the EU faces the prospect of losing Azerbaijan’s gas to China, rather than being forced to choose between seeing delivered to Europe via Turkey or via Russia.

Europe remains the market of choice for Azerbaijan’s gas and gas pipelines through Turkey the preferred means of accessing that market, but Azerbaijan has made it quite clear that it has other options and it will not delay the second phase of Shah Deniz, or other gas projects, indefinitely.

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