Tuesday, July 6, 2010

An Azeri-Turkish deal on gas - a partnership renewed ?

Edito Energie, juin 2010


The package of the Azeri-Turkish gas agreements signed in Istanbul on 7 June in the presence of President Ilham Aliyev and Prime Minister Recep Erdogan certainly makes cooperation easier in a sector which both parties consider to be strategic. It does not, however, specify all details of the sale and transit of gas (see e.g. EurasiaNet, 7 June). The documents above all have important political significance. The resumption of gas negotiations and the ability to reach a compromise on gas cooperation to the satisfaction of both Azerbaijan and Turkey serve as proof of a warming of relations between the two countries. Good, bilateral relations will make it easier for both Azerbaijan and Turkey to implement their regional political interests (in the south Caucasus and also, as an example, in dealings with Russia) and bring them tangible economic benefits. The further specification of the commercial details for gas cooperation and the relatively rapid signing of final documents is, however, very much in the interests of Azerbaijan and the implementation of its energy policy goals (putting into operation routes for the profitable gas exports to the west). For Turkey, however, the current outline format of the gas deal seems to be sufficient at the moment – it will smooth the way for them to inter alia negotiate with other producers while still leaving room for manoeuvre with Azerbaijan. In consequence, it is presently difficult to say much about the ultimate shape and way of implementating the deal and about its actual significance for the Southern Corridor concept supported by the EU.

Signing the deal

The documents signed by the energy ministers of Azerbaijan and Turkey and the heads of energy corporations SOCAR and Botas (being 2 Memoranda of Understanding and one Declaration) determined, according to media reports, the following:

- the conditions for settling outstanding payments and for the present supplies of Azeri gas from the current 1st phase of exploitation of the largest Azeri deposit, Shah Deniz (according to information revealed in the Turkish press, the price is set to rise from US$120 to US$300 per 1000m³);

- the volumes of Azeri gas exports to Turkey in the coming years: from the 2nd phase of Shah Deniz (which is set to commence c. 2016), 6 bcm of gas will be delivered to the Turkish market. Additionally 1.2 bcm/y will be supplied to the Petkim petrochemical holding (owned by a joint venture made up of SOCAR and Turcas Rafineri); and

- an outline of regulations for transit to Europe through Turkish territory (according to the Turkish press the transit fee for Azeri gas is to be around US$45 /1000 cubic meters).

There remain, however, a few issues which in the long-term will require further clarification (for example, those concerning precise rules of transit and a finalized formulation enabling changes in the price for Azeri gas over the coming years, especially when Shah Deniz II starts) and talks on this subject should, according to what is being said by the Azeris, last approximately 6-8 months.

A background to the current deal

A major source of the Azeri-Turkish problems was (aside from Turkish attempts to improve relations with Armenia) the inability to reach a consensus regarding the price of Azeri gas sold to Turkey (in 2009 this led to no agreed price being set) and no agreement being reached for the terms for the transit of gas to Europe. The intensification of gas talks and the reaching of a compromise acceptable for both sides following two years of ineffective negotiations and worsening Azeri-Turkish relations has come directly after the breakdown (in April 2010) of the process to normalise Turkish-Armenian relations. However, the concessions made by Turkey were undoubtedly partly caused by activities taken by Azerbaijan aimed at limiting its strong, unilateral dependence on the sale and transit of Azeri fuel (gas and especially oil) through Turkish territory. Baku, in an attempt to reduce the asymmetry in energy relations with Ankara, initiated an active search for alternative routes for gas export. One effect of this was the appearance of a project strongly supported by Azerbaijan in recent months for LNG exports from Georgian coast, via the Black Sea to Romania (AGRI project).

The significance of the gas compromise for Azerbaijan …

A long-term improvement in relations with Turkey (possible in part due to working out binding rules for gas cooperation which are satisfactory for both parties) would bring many benefits to Azerbaijan. It is key in the political sphere (as a counterbalance to relations with Russia and Iran and to strengthen its relations with the West), for security (the Nagorno-Karabakh issue), and for the economy (initiating profitable gas export routes to the EU). Against this background the deal that has been signed will above all bring a short term results. It facilitates bilateral cooperation not only in the gas sphere, including specific Azeri investments in Turkey. One of the issues solved is that of gas supplies to the co-owned by SOCAR Petkim petrochemical holding which used to be a problematic issue for Azeri company. There is an increased likelihood that the Turkish administration will consent to the same j.v. constructing a refinery worth 5 billion euros.

The longer term effects of documents signed are not certain, although the agreement in principle that has been reached paves the way for firm commitments and stable future cooperation. The outline transit deal makes it possible to begin concrete talks on the subject of Azerbaijan selling gas to European buyers. Nevertheless, in order to be able to finalise these talks and to choose the optimal gas export route(s) for Azerbaijan (choosing from Southern Corridor projects running through Turkish territory - Nabucco, the Turkish-Greek-Italian ITGI interconnector, the transadriatic pipeline TAP - and AGRI) it will be necessary to bring a relatively quick conclusion to the gas talks with Turkey, including specifying all the details currently missing which are connected to the trade and transport of gas.

... and for Turkey

Reaching a compromise in gas cooperation issues with Azerbaijan undoubtedly also serves Turkish interests. Nevertheless it is worth remembering that from Ankara’s perspective, with its visibly growing regional ambitions, Azerbaijan is only one of its important partners when it comes to the gas sphere. This is why the fact of signing these documents is being used in the large part as a means to realise its aims/goals only indirectly (if at all) linked to Azeri-Turkish relations. By making partial concessions (e.g. in connection with the current price for Azeri gas) Ankara is trying:

- to gain the trust of its main partner in the south Caucasus, which – especially after the fiasco of the talks with Armenia – would increase the efficacy of its regional policy.
- to confirm its will and the actual possibility of realization a transit corridor on Turkish territory carrying Caspian gas to the EU. This seems to be a major element in the implementation of Turkey’s ambitions to create a strategic (for Europe and the Eurasian and Middle East gas producers) gas hub.
- to gain a bargaining chip in the ongoing talks on energy cooperation with Russia; above all in the difficult gas negotiations (concerning a change in the terms for gas supplies to Turkey and the South Stream and Blue Stream II gas pipeline projects).

Consequences for regional gas export projects

The warming of Azeri-Turkish relations and the perspective of an intensified gas cooperation is ringing alarm bells in Russia. On the one hand it hampers the ongoing negotiations to extend the gas contract for the supply of 6 bcm of Russian gas. The contract expires at the beginning of next year and is one of three currently in force. On the other hand Russia is worried by the perspective of an acceleration of the implementation of projects for exporting Caspian gas through Turkey (e.g. Nabucco) which are in competition with Gazprom’s plans (the South Stream pipeline).

The current deal clearly simplifies negotiations concerning the sale of Azeri gas to EU markets and makes plans for the transit of Caspian gas through Turkey more realistic. However, it does not constitute a breakthrough which will make possible a fundamental speeding up of work on the process of making final investment decisions concerning the specific projects of the Southern Corridor (Nabucco, ITGI and TAP).

It seems that the finalisation of Azeri-Turkish talks and the determining of clear, unambiguous rules for gas transit to the EU could speed up work especially on the implementation of the ITGI and TAP projects. The Nabucco partners signed already in July 2009 an intergovernmental agreement that regulates the issue of gas transit through Turkey, but the project would certainly benefit from ameliorating relations between Azerbaijan and Turkey and the increased prospects of their productiv cooperation in the gas sector. At the same time it appears that in parallell with solving the transit issue for all the projects of the Southern Corridor concept it is necessary to make sure the contracts for the delivery of gas are signed.

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