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Eurasia Daily Monitor
October 15, 2009-Volume 6, Issue 189
AZERBAIJAN-RUSSIA GAS AGREEMENT AND ITS IMPLICATIONS
by Vladimir Socor
On October 14 in Baku, Azerbaijan's State Oil Company
president Rovnag Abdullayev and Gazprom CEO Aleksei Miller signed an
agreement on Azerbaijani gas exports to Russia. The move is a logical
follow-up to the June 29 agreement, signed by the same company
chiefs--in the presence of Presidents Ilham Alyiev and Dmitry Medvedev
in Baku on that occasion--about the main principles of the gas
trade between the two countries (see EDM, July 2, 17).
This agreement turns Azerbaijan for the first time in history from
an importer of Russian gas into an exporter of gas to Russia--albeit
with small initial volumes--thanks to growing internal production in
Azerbaijan. If understood and handled appropriately by the European
Union and Turkey, this event can lend impetus to the E.U.- and
U.S.-backed Nabucco pipeline project, notwithstanding European media
speculation about Russia pre-empting Nabucco's Azerbaijani gas
supplies.
The documents just signed involve a framework agreement for the
years 2010 to 2014 and a sale-and-purchase contract for 2010. During
this first year Azerbaijan shall export at least 500 million cubic
meters (mcm) of gas to Russia through the Baku-Novo Filya pipeline, for
use in Russia's North Caucasus territories. Azerbaijan may
increase that export volume during 2010, at its discretion. The gas may
originate in any of Azerbaijan's fields (Trend Capital, Day.Az,
October 14).
The Russian purchase price is not publicly specified. According to
Abdullayev at the signing ceremony, the price-setting formula
`suits the Azerbaijani side' - apparently a hint
that the price is in line with the anticipated European netback prices
for 2010. This had been Baku's objective all along in the
negotiations on its gas price. Under this agreement, the price is said
to be adjustable every quarter, pegged to the price of the basket of oil
products (APA, Turan, October 14). Miller had proposed to buy
Azerbaijani gas at $350 per one thousand cubic meters in the lead-up to
the June 29 preliminary agreement.
Azerbaijan used to import Russian gas until as recently as 2006
through the old Baku-Novo Filya pipeline, which runs for approximately
200 kilometers along the Caspian Sea coast from the Russian border to
Baku. This line will now be used in the reverse mode to carry
Azerbaijani gas to Russia. The volume envisaged for 2010 will use only a
fraction of this pipeline's Soviet-era capacity. In addition,
Azerbaijan is preparing its own section of the old Mozdok
(Russia)-Gazimahomed pipeline, for possible reverse-use as a gas export
outlet to Russia (Trend Capital, October 1).
Gas extraction in Azerbaijan is set to reach 27 bcm for 2009
(Day.Az, October 8). The rate of increase could have been faster, but
has been affected by slowed-down development at the giant Shah Deniz
offshore field. That slowdown in turn reflects delays on the Nabucco
pipeline project and Turkish government obstructions to a gas agreement
with Azerbaijan. These two factors have postponed the opening of
Azerbaijan's gas export route to the West. In this situation,
Azerbaijan can only open an export route to Russia while awaiting
progress on Nabucco and with Turkey.
Meanwhile, Azerbaijan remains committed to the Nabucco project.
The government and the State Oil Company are consistently reaffirming
Baku's readiness to supply 7 bcm per year for that
pipeline's first phase. Construction work on Nabucco is now
expected to start in 2011, for the first gas to flow by 2015 from
Azerbaijan to Europe.
Consequently, Baku has set the time-frame of the agreement just
signed with Gazprom to expire in 2014, so as to release Azerbaijan from
obligations to Gazprom after that year. Miller, however, declared at the
signing ceremony explicitly that Russia wants to prolong this agreement
after 2015, and for larger volumes of Azerbaijani gas (Interfax, October
14). That would pose risks for Nabucco. The October 14 agreement does
not.
This agreement, however, reiterates and amplifies certain lessons
for the E.U., Turkey, and U.S. that were already implicit in the June 29
preliminary agreement. Azerbaijan's move can actually help
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, assuming that
Azerbaijan retains the necessary Western support to pursue
Azerbaijan's own Western choice. Awaiting Nabucco's
commissioning, it makes sense for Azerbaijan to use the existing
pipeline(s) to Russia for exporting Azerbaijan's growing surplus
of gas during the interim period until 2014.
Second, this agreement does not allow Gazprom to compete against
Nabucco for Azerbaijani gas. But the situation could change in
Russia's favor, if Turkey's AKP government insists on
its extortionate terms for the purchase of Azerbaijani gas and its
transportation through Nabucco. By the same token, Washington and the
reshuffled European Commission, now entering a new term of office in
Brussels, are being reminded that they need to lift that logjam in
Ankara.
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 gas transmission route. From Azerbaijan's
standpoint, adding a Russian export outlet--albeit a small one--is an
export diversification move, away from Turkey's perceived
monopoly on transportation, which the AKP government seeks to abuse.
Azerbaijan can also use the Baku-Astara pipeline to Iran, or swap
arrangements with that neighbor country, during the interim period until
2014.
Fourth, Baku is successfully resisting Gazprom's wish to
re-export Caspian gas to third countries, at a profit to Russia and at
the expense of Caspian producers. Baku has stipulated that its gas shall
be used in Russia's North Caucasus. And if the Russian purchase
price is consistent with European netback prices--as envisaged at the
time of the June 29 preliminary agreement and, apparently, in the
October 14 agreement--Baku will have achieved a strategic gain.
Turkey's AKP government would place itself in an embarrassing
position by insisting on worse terms than Russia has now consented to
Azerbaijan. Across the Caspian Sea, Azerbaijan will have set a useful
precedent for Turkmenistan to also demand European netback prices from
Gazprom. If the cash-strapped Gazprom fails to meet that benchmark, then
a part of Turkmen export volumes would become available for the proposed
trans-Caspian link to the Nabucco project.
--Vladimir Socor
October 15, 2009-Volume 6, Issue 189
AZERBAIJAN-RUSSIA GAS AGREEMENT AND ITS IMPLICATIONS
by Vladimir Socor
On October 14 in Baku, Azerbaijan's State Oil Company
president Rovnag Abdullayev and Gazprom CEO Aleksei Miller signed an
agreement on Azerbaijani gas exports to Russia. The move is a logical
follow-up to the June 29 agreement, signed by the same company
chiefs--in the presence of Presidents Ilham Alyiev and Dmitry Medvedev
in Baku on that occasion--about the main principles of the gas
trade between the two countries (see EDM, July 2, 17).
This agreement turns Azerbaijan for the first time in history from
an importer of Russian gas into an exporter of gas to Russia--albeit
with small initial volumes--thanks to growing internal production in
Azerbaijan. If understood and handled appropriately by the European
Union and Turkey, this event can lend impetus to the E.U.- and
U.S.-backed Nabucco pipeline project, notwithstanding European media
speculation about Russia pre-empting Nabucco's Azerbaijani gas
supplies.
The documents just signed involve a framework agreement for the
years 2010 to 2014 and a sale-and-purchase contract for 2010. During
this first year Azerbaijan shall export at least 500 million cubic
meters (mcm) of gas to Russia through the Baku-Novo Filya pipeline, for
use in Russia's North Caucasus territories. Azerbaijan may
increase that export volume during 2010, at its discretion. The gas may
originate in any of Azerbaijan's fields (Trend Capital, Day.Az,
October 14).
The Russian purchase price is not publicly specified. According to
Abdullayev at the signing ceremony, the price-setting formula
`suits the Azerbaijani side' - apparently a hint
that the price is in line with the anticipated European netback prices
for 2010. This had been Baku's objective all along in the
negotiations on its gas price. Under this agreement, the price is said
to be adjustable every quarter, pegged to the price of the basket of oil
products (APA, Turan, October 14). Miller had proposed to buy
Azerbaijani gas at $350 per one thousand cubic meters in the lead-up to
the June 29 preliminary agreement.
Azerbaijan used to import Russian gas until as recently as 2006
through the old Baku-Novo Filya pipeline, which runs for approximately
200 kilometers along the Caspian Sea coast from the Russian border to
Baku. This line will now be used in the reverse mode to carry
Azerbaijani gas to Russia. The volume envisaged for 2010 will use only a
fraction of this pipeline's Soviet-era capacity. In addition,
Azerbaijan is preparing its own section of the old Mozdok
(Russia)-Gazimahomed pipeline, for possible reverse-use as a gas export
outlet to Russia (Trend Capital, October 1).
Gas extraction in Azerbaijan is set to reach 27 bcm for 2009
(Day.Az, October 8). The rate of increase could have been faster, but
has been affected by slowed-down development at the giant Shah Deniz
offshore field. That slowdown in turn reflects delays on the Nabucco
pipeline project and Turkish government obstructions to a gas agreement
with Azerbaijan. These two factors have postponed the opening of
Azerbaijan's gas export route to the West. In this situation,
Azerbaijan can only open an export route to Russia while awaiting
progress on Nabucco and with Turkey.
Meanwhile, Azerbaijan remains committed to the Nabucco project.
The government and the State Oil Company are consistently reaffirming
Baku's readiness to supply 7 bcm per year for that
pipeline's first phase. Construction work on Nabucco is now
expected to start in 2011, for the first gas to flow by 2015 from
Azerbaijan to Europe.
Consequently, Baku has set the time-frame of the agreement just
signed with Gazprom to expire in 2014, so as to release Azerbaijan from
obligations to Gazprom after that year. Miller, however, declared at the
signing ceremony explicitly that Russia wants to prolong this agreement
after 2015, and for larger volumes of Azerbaijani gas (Interfax, October
14). That would pose risks for Nabucco. The October 14 agreement does
not.
This agreement, however, reiterates and amplifies certain lessons
for the E.U., Turkey, and U.S. that were already implicit in the June 29
preliminary agreement. Azerbaijan's move can actually help
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, assuming that
Azerbaijan retains the necessary Western support to pursue
Azerbaijan's own Western choice. Awaiting Nabucco's
commissioning, it makes sense for Azerbaijan to use the existing
pipeline(s) to Russia for exporting Azerbaijan's growing surplus
of gas during the interim period until 2014.
Second, this agreement does not allow Gazprom to compete against
Nabucco for Azerbaijani gas. But the situation could change in
Russia's favor, if Turkey's AKP government insists on
its extortionate terms for the purchase of Azerbaijani gas and its
transportation through Nabucco. By the same token, Washington and the
reshuffled European Commission, now entering a new term of office in
Brussels, are being reminded that they need to lift that logjam in
Ankara.
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 gas transmission route. From Azerbaijan's
standpoint, adding a Russian export outlet--albeit a small one--is an
export diversification move, away from Turkey's perceived
monopoly on transportation, which the AKP government seeks to abuse.
Azerbaijan can also use the Baku-Astara pipeline to Iran, or swap
arrangements with that neighbor country, during the interim period until
2014.
Fourth, Baku is successfully resisting Gazprom's wish to
re-export Caspian gas to third countries, at a profit to Russia and at
the expense of Caspian producers. Baku has stipulated that its gas shall
be used in Russia's North Caucasus. And if the Russian purchase
price is consistent with European netback prices--as envisaged at the
time of the June 29 preliminary agreement and, apparently, in the
October 14 agreement--Baku will have achieved a strategic gain.
Turkey's AKP government would place itself in an embarrassing
position by insisting on worse terms than Russia has now consented to
Azerbaijan. Across the Caspian Sea, Azerbaijan will have set a useful
precedent for Turkmenistan to also demand European netback prices from
Gazprom. If the cash-strapped Gazprom fails to meet that benchmark, then
a part of Turkmen export volumes would become available for the proposed
trans-Caspian link to the Nabucco project.
--Vladimir Socor