Azerbaijan: Gazprom Deal Means No Change for Baku's Energy Policy

Executives for the State Oil Company of the Azerbaijani Republic and Azerbaijani energy experts are insisting that a recent memorandum of understanding signed with Gazprom in no way means that Baku will abandon the Nabucco pipeline project, or other Western-backed natural gas ventures.

The memorandum, signed by the two companies on March 27, establishes that talks will begin at an unspecified date on the shipment of an unspecified quantity of gas to Russia from Azerbaijan, starting in January 2010. In connection with the potential export commitment, technical inspections of the 228-kilometer gas pipeline from Baku to Dagestan (Novo Filya) are expected to begin shortly. The pipeline, which has been idle since 2007, can handle up to 8 billion cubic meters (bcm) of gas per year.

Local and international media have interpreted the agreement as meaning that Baku has changed its energy policy to favor Russia, after earlier this year, in February, expressing support for the rival Nabucco project. [For details, see the Eurasia Insight archive].

In a March 30 interview with ANS television, however, SOCAR President Rovnag Abdullayev stressed that the deal with Gazprom will not touch gas from Stage 2 of the Shah Deniz project, a mega gas source (10-12 bcm per year), scheduled to come online in 2014-2015. It is Stage 2 gas that has been the focus of competition between Russia and European Union countries. "This gas [from "Shah Deniz] is a matter for separate negotiations," Abdullayev said. "The memorandum with Gazprom is about gas from SOCAR's own fields."

Selling gas for a good price "is one of the main interests of Azerbaijan and we are considering any route and conducting talks with companies and countries," said Abdullayev, repeating a long-standing company position. The price SOCAR will receive for gas delivered to Dagestan will be a topic for future talks, he added.

Abdullayev presented the prospective deal as a means to an end -- access to additional markets beyond the North Caucasus via Gazprom's Russian pipeline network. Gazprom, in turn, has interest in supplying gas to Iran via Azerbaijan, he said. "We [SOCAR] are also interested in gas supplies to other countries with use of Gazprom's infrastructure as transit lines. There are many issues of mutual interest and they all are represented in the memorandum," he said

Ilham Shaban, an independent Baku-based energy expert, observes that SOCAR has more than enough gas of its own to sell without touching the Shah Deniz field. "SOCAR has sharply increased gas production from its own fields during the last two years," Shaban said. The company has sufficient gas to supply "about 1.5 bcm" to Gazprom for Dagestan as of 2010, he estimated.

After refusing imports of Russian gas in early 2007, SOCAR has spent about $1 billion increasing its own gas production, according to company data. In 2008, company production stood at 8 bcm of gas, double the level of 2006. SOCAR's production target for 2010, the year gas deliveries to Dagestan would begin, is set at 9.5 bcm.

While gas supplies "are always linked with politics," noted Shaban, SOCAR has merely hit on "a very good deal" for its extra gas. Aside from improving Azerbaijani-Russian relations, "[i]t could catalyze the efforts of Western countries and governments which plan to import large volumes of Azerbaijani gas in the future," he continued. "Finally, it will restart the pipeline and will diversify Azerbaijani gas supplies even more and bring in additional revenue, which is important in the current [global financial] crisis."

With oil now selling at a mere $48 per barrel, capitalizing on Azerbaijan's other energy resources has gained greater importance. As the Nabucco project promoters fumble over financing, Gazprom has made several ambitious offers to Azerbaijan since 2007. [For background see the Eurasia Insight archive]. It has offered to modernize the country's underground gas storage system, buy all gas from Stage 2 of Shah Deniz, and provide swap supplies of Azerbaijani gas to European customers via Russia.

Like a trader keeping his options open, SOCAR chief Abdullayev, however, stresses that the Gazprom memorandum in no way means that Baku is backing out of the Nabucco and TGI (Turkey-Greece-Italy) projects. "Talks are going on with all participants," he told ANS television. "We are even interested in a trans-Adriatic pipeline. The major issue for us is to try to sell gas for the best commercial terms."

Italy has expressed interest in buying up to 9 billion cubic meters of Azerbaijani gas beginning in 2015; Greece has its sights on 2 billion cubic meters, or 45 percent of its annual needs.

Vafa Guluzade, a former presidential advisor and longtime Russia skeptic, concurs that Azerbaijan will not cut off Europe with such deals in the works. "Azerbaijan is not going to sell all its gas to Russia and Baku will not refuse Nabucco," Guluzade said.

Pro-opposition political analyst Hikmet Hajizade calls the Gazprom deal "normal energy policy."

"European integration is a priority for Azerbaijan and it is not going to change," Hajizade told the 1news.az news portal on March 30.