Azerbaijan: Baku Likely to Reject Russian Offer to Buy Natural Gas

If you cannot beat them, try to co-opt them: that apparently is Gazprom's operational philosophy. The Russian state-controlled energy giant on June 2 sounded out officials in Azerbaijan about large-scale purchases of Azerbaijani natural gas. But Baku seems unenthused about doing a deal.

Azerbaijan is the only Caspian Basin state currently able to export a significant volume of energy via pipelines that are not controlled by Russia. Indeed, the United States, European Union and Azerbaijan have pursued the construction of a trans-Caspian pipeline, which, if connected to the existing routes traversing Azerbaijan, could break Russia's near-monopoly over oil and gas exports out of Central Asia. Given this possibility, Gazprom's offer to buy Azerbaijani gas is likely a round-about attempt by the Kremlin to throw a monkey wrench into trans-Caspian pipeline plans.

Gazprom's chief executive officer Alexei Miller made the purchase offer during talks with Azerbaijani President Ilham Aliyev on June 2 in Baku. Miller reportedly told Aliyev that Gazprom was prepared to pay a "market price" for the gas, a likely hint that geopolitics and not economics was driving the company's offers. After meeting with Aliyev, Miller departed for Iran, where he was to hold energy discussions with Iranian officials. News of the Russian offer caused a buzz at the first day of a regional energy conference in Baku on June 3.

"We are interested in the development of mutually beneficial energy cooperation between Gazprom and Azerbaijan," a Gazprom statement quoted Miller as saying. Miller described Azerbaijan as a "natural partner" for Gazprom, noting that "we already connected with developed gas-transportation infrastructure."

Azerbaijani government officials did not immediately comment on Miller's offer, and representatives of the state oil company, SOCAR, were circumspect about the possibility of gas sales to Russia. SOCAR President Rovnag Abdullayev characterized the Russian offer as a "positive" development, but he gave no indication that Baku would go for it. "We have received many proposals from different counties – Iran, Turkey, Israel, Russia and European Union countries," the Turan news agency quoted Abdullayev as saying. "Azerbaijan will consider all the offers and will eventually choose the most beneficial ones."

Up until 2007, Azerbaijan was an importer of Gazprom gas. However, those imports came to an abrupt stop when Gazprom declared that it was sharply raising its gas price. [For background see the Eurasia Insight archive]. Rather than meet Gazprom's exorbitant demand, Azerbaijan simply stopped buying from the Russian company, and Baku also stopped shipping oil via the Baku-Novorossiysk pipeline.

Since then, Baku has ignored all of Gazprom's cooperation offers. Experts in Baku doubt that Azerbaijan will take Gazprom up on Miller's latest proposal. They note that if Baku agreed to supply the volumes that Russia seeks, then Azerbaijan would not have enough left over to make viable an envisioned European export route via the planned Nabucco pipeline. [For background see the Eurasia Insight archive]. "Selling gas to Russia would mean the rejection of these very important projects for Azerbaijan -- projects that have not only economic, but also political significance [to Baku]," Ilham Shaban, Baku-based energy expert, told EurasiaNet on June 3.

"The Azerbaijani government is trying to turn into important player in the European gas market – both as exporter and transit country," Shaban continued. "Gazprom's idea totally contradicts these plans."

Sabit Bagirov, a former president of SOCAR who is now an energy consultant, agreed that Baku would likely rebuff Gazprom. "Azerbaijan is already exporting its gas to Europe at market prices. So, I do not see reasons why Baku should sell its gas to Russia instead of the Europe," Bagirov told EurasiaNet.

Some observers suggest that Gazprom's offer may be a sign of desperation in the company's efforts to retain its competitive edge in the Caspian Basin. Russia has been increasingly hard-pressed over the past year as it strives to maintain its grip over Central Asian export routes. For example, Gazprom has been forced to pay sharply higher prices to Central Asian gas suppliers, something that is sure to put a sizable dent in company profits. [For background see the Eurasia Insight archive]. A sign that Gazprom's heyday may be nearing dusk is the fact that three Gazprom managers have recently sold over $25 million of their company stock, according to a report in the Russian business daily Vedomosti.

The Caspian Oil & Gas Conference, which opened June 3 in Baku, is likely to be the scene of lots of wheeling and dealing involving Azerbaijan.

Bulgaria will be among the countries making a play for Azerbaijani gas. On June 2, Bulgarian Economics and Energy Minister Petar Dimitrov arrived in Baku, where he is expected to meet with SOCAR representatives and government officials. Bulgaria is reportedly seeking to buy about 1 billion cubic meters (bcm) of gas annually.

Israeli Minister of National Infrastructure Binyamin Ben-Eliezer also arrived to Baku with the same intent. Ben-Eliezer told journalists in Baku on June 2 that he is going to discuss the issue of Azerbaijani gas supplies to Israel.

In the meantime, Ukraine is lobbying for its own White Stream project, unveiled recently by Ukrainian Prime Minister Yulia Timoshenko. White Stream envisions the transport of gas from the Caspian Basin to Georgia and then, via underwater pipeline, to Crimea, where it would link in to Ukraine's existing export network to Western Europe.

Boris Klimchuk, Ukraine's envoy to Baku, said at a May 30 news briefing that White Stream "has a good future," noting that the project would require only "modest investment" to get up and running.