Russia Scores Double Match Point with Azerbaijani Gas Deal

Russian President Dmitri Medvedev only visited Baku for a day, but walked away with a gas deal likely to bring Moscow benefits for years to come.

Under a June 29 agreement with Azerbaijan, Russia's gas monopolist Gazprom has become the first -- and only -- company listed as a potential purchaser of natural gas from Stage 2 of Azerbaijan's sprawling Shah Deniz field. In a boon for Baku, the agreement stipulates that any other potential purchaser must outbid Gazprom for Stage-2 gas, according to Gazprom Chief Executive Officer Alexei Miller.

The document does not specify volumes of gas to be purchased or prices to be paid. Gazprom had earlier offered to purchase all gas produced during Stage 2 of Shah Deniz -- estimated at some 14 billion cubic meters of gas per year by 2016.

At first glance, the deal would appear to give Russia a critical strategic advantage in the Caspian Sea energy chess game. The United States and European Union have long promoted Shah Deniz's Stage 2 as an alternative gas supply source for Gazprom-dependent customers in Europe.

But energy expert Ilham Shaban cautions against taking the agreement as a sign that Baku has thrown over the West for the deep-pocketed Gazprom. "Western media and analysts will, of course, say that Azerbaijan has turned towards Moscow and given up its commitments [to the US and EU-backed pipeline project Nabucco], but the truth is that nobody but Gazprom has made concrete proposals to Azerbaijan concerning Stage 2 so far," Shaban said.

Nor do Gazprom's proposals appear limited to gas purchases alone. Gazprom CEO Miller told Baku reporters that the company will also consider taking part in development of the Shah Deniz field. That would mean acquiring a stake from one of the project's current participants: BP (25.5 percent), StatoilHydro (25.5 percent), State Oil Company of the Azerbaijani Republic (10 percent), Naft Iran Intertrade Company (10%), Total (10 percent), LUKAgip (10 percent) or Turkey's TPAO (9 percent).

A smaller gas deal sweetened Medevdev's June 29 Baku visit still further. Aside from the Stage-2 deal, Gazprom signed an agreement with the State Oil Company of the Azerbaijani Republic (SOCAR) for the annual purchase of 500 million cubic meters of gas from SOCAR's own fields. The gas will be delivered through an existing pipeline to the Russian republic of Daghestan beginning in January 2010.

Here, too, though, Gazprom has its eye set on expansion. Miller told reporters that the volume of purchased gas could increase to 1.5 billion cubic meters per year.

The price to be paid for this gas remains open to negotiation, but energy expert Shaban estimates a payout of $290 - $300 per 1,000 cubic meters.

A pleased Azerbaijani President Ilham Aliyev praised the gas deals for "opening a new sphere" in relations between Azerbaijan and Russia. "It is a window for entering a new market for us," he said at a joint press conference with Medvedev.

Medvedev said that the gas agreements have "a promising future."

Aliyev did not comment about the Stage-2 Shah Deniz deal. Instead, emphasis was put on the "commercial character" of the less significant agreement on gas deliveries to Daghestan. "It is very important given that gas issues are often being politicized artificially and unfairly," Aliyev stated in reference to the agreement.

Medvedev echoed that stance, asserting that the deals were motivated by a desire for the "successful development of bilateral relations and energy security" rather than "political motives."

While that emphasis on "business as usual" might hold for SOCAR's Daghestan deal -- Azerbaijan gets market prices, rather than the discounted prices paid by Georgia and Turkey; Russia gets lower transportation costs -- politics will inevitably come into play over the Shah Deniz Stage-2 deal, predicts political analyst Elhan Shahinoglu.

"Shah Deniz gas touches on global energy security interests and, thus, it is more geopolitical than economic interests at play there," Shahinoglu said.

The deal potentially hurts the Western-backed Nabucco project, and plans for gas shipments via Azerbaijani ally Turkey, he noted. [For background see the Eurasia Insight archive]. "However, this is not the final decision. The final agreement on Shah Deniz's Stage 2 will depend on interaction with all the stakeholders -- including the political ones -- in Gazprom's major competitor, the Nabucco project," Shahinoglu said.

To offset damage to Azerbaijan's ties with the US and European Union, Baku will still pursue Nabucco, TGI and other Europe-focused gas pipeline projects, Shaban believes. But the onus is now on these players to underline to Baku that they are ready to follow through with Stage-2 purchases as well, he added.

"The only way that Baku would sacrifice its gas [to Russia] is if the country would receive some political compensation for that, in the form of Russian facilitation of a [Nagorno] Karabakh peace process in favour of Azerbaijan," Shaban said. The chances for such an outcome, however, appear remote, he said.

Aliyev and Medvedev limited themselves to now-standard lines about the Nagorno-Karabakh talks, touching on the alleged readiness by both sides to "move forward" amidst stronger hopes for a resolution than in the past.

Largely overlooked in the glare of the Shah Deniz agreement, four other documents were also signed during Medvedev's visit. The agreements, largely formalities, covered principles for defining the Azerbaijani-Russian border, cooperation on a treaty that would clarify the Caspian Sea's status, services for the two countries' embassies and a cooperation agreement between Azerbaijan and the government of the Russian republic of Kabardino-Balkaria.