Russia-Ukraine Gas Conflict Helps Azerbaijan, Nabucco

The gas conflict between Russia and Ukraine may be over, but the row has strengthened Azerbaijan's image as a potential alternative source for large-scale gas supplies to Europe, local experts believe.

In this geo-strategic chess game, international attention is zeroing in on the planned Nabucco pipeline -- a 3,300-kilometer-long gas line that would run from the Caspian Sea region via Turkey into Eastern and Central Europe. A high-level summit will be held in Budapest on January 26-27 about ways to move forward with the pipeline, already identified as a policy priority for both the United States and the European Union.

Unlike last year, Azerbaijani President Ilham Aliyev is now indicating clearly his government's interest in the project. [For details, see the Eurasia Insight archive].

"Azerbaijan, which enjoys giant oil and gas reserves and a modern transport infrastructure, will play a much more important role in the diversification of the supply of energy resources [to Europe] in the future," Aliyev said, after talks with Estonian President Thomas Hendrick Ilves in Baku on January 14, Azertag state news agency reported.

At a January 16 cabinet meeting, the government agreed to start exporting gas to Greece and Bulgaria in 2009 via the Baku-Tbilisi-Erzurum pipeline if transit agreements are signed.

Whereas earlier Aliyev had tread cautiously to avoid spoiling potential gas sales to Russia, this time he drew a sharp comparison between Azerbaijan and Russia as reliable energy providers.

"We export oil and gas to many places, but there were no single case during all these export operations when the supply would stop or consumers would face any problem," he said. "The latest events which we hear in the news every day convince us that the importance of diversification [of oil and gas exports] is only increasing."

One Azerbaijani analyst believes that Aliyev may go so far as to commit publicly to Nabucco during the Budapest summit, which the Azerbaijani leader will attend. "[T]he EU and US will do their best for Nabucco implementation and provide more political support and guarantees to the countries like Azerbaijan and Turkmenistan," commented Elhan Shahinoglu, director of Baku's Atlas think tank. "Therefore, it is likely that Aliyev will openly support Nabucco in Budapest."

The catch is timing. Large-volume gas supplies for Nabucco are only possible after 2014, when the second, more intensive stage of development of Shah Deniz will begin. As of yet, the Azerbaijani government and the consortium of companies developing Shah Deniz have not agreed on a general plan of work for this second stage, a delay which means that feasibility studies and engineering planning, originally slotted for early 2009, have to be pushed back as well.

Cost presents a second hurdle. Guaranteed purchases are critical for justifying the high production costs associated with Shah Deniz's Stage 2, when some 10-12 billion cubic meters of gas per year are expected. Total project investments could reach $20 billion, BP-Azerbaijan President Bill Shredder told a September press conference.

While ten countries have expressed interest in buying Shah Deniz gas, no iron-clad agreements have been signed. Among the potential clients are Greece (1-1.5 bcm), Bulgaria (1-1.5 bcm), Israel (1.5-3 bcm), Iran (3-5 bcm), Turkey (5-6 bcm), Italy (7-8 bcm) and Russia (all gas produced during Stage-2). If Nabucco is completed, Austria, Hungary and Romania could also be added to the list.

Russia remains the wild card. As recently as December 2008, Azerbaijani State Oil Company President Rovnag Abdullayev stated that the possibility of selling Shah Deniz gas to Russia's Gazprom remained under consideration. "Our goal is to sell gas at the most advantageous and best price," Abdullayev told journalists.

The shutoff of Russian gas to Ukraine and Europe, however, has most likely changed that position, one Baku-based energy expert contends.

"In some ways, the Azerbaijani government has intentionally delayed the process of concluding long-term contracts and tried to make the right choice between Europe and Russia," said Ilham Shaban. "But now when it has stronger Western support, the government will speed up talks with the Europeans and will try to sign contracts for gas supplies bypassing Russia," Shaban predicted.

A final hitch -- the long-term disagreement with Turkey over Ankara's desire to resell Azerbaijani gas from Nabucco at a higher price -- may soon be drawing to a close as well, both Shaban and Shahinoglu believe.

The chance to capitalize on European interest in Nabucco while memories of the Ukraine-Russia gas dispute are still running strong will prompt Turkey and Azerbaijan to put their differences aside, commented Shahinoglu. At January 5 parliamentary hearings, Turkish Energy Minister Khilmi Guler affirmed that Nabucco is now a priority for Ankara.

"I think that Baku and Ankara will come to an agreement soon that Azerbaijan will be the gas seller, while Turkey will play the role of a transit country," the expert said.