Azerbaijan, Turkey sign gas delivery deal...

Azerbaijan, Turkey sign gas delivery deal...
By Robert M Cutler

MONTREAL - Long negotiations between Azerbaijan and Turkey over natural gas deliveries have been successfully concluded, the Turkish government announced on October 26, a day after Azerbaijani President Ilham Aliev and Turkish Prime Minister Recep Tayyip Erdogan convened the first meeting of the Azerbaijan-Turkey High-Level Strategic Cooperation Council in Izmir. The negotiations had lasted almost two years.

The question of gas quantities was not settled and will be discussed later, the Turkish newspaper Sabah reported, quoting Erdogan. That is to be expected, given the intricate staging of the

process for implementing the project. Tamam Bayatli, head of BP-Azerbaijan's foreign relations department, told the Trend news agency in Baku that signing the agreement documents was necessary now to allow the process of pipeline selection to go further forward.

Erdogan significantly said that one of the positive results of the agreement will be decrease Turkish energy dependence on Russia. The announcement came as Aliev was in Turkey with Erdogan for the groundbreaking ceremony for construction of a major oil refinery in Izmir. Erdogan also announced at the ceremony that a project to construct a railway line between Baku and Kars had reached the final stages of the planning process.

While details on likely gas deliveries remain sketchy, it is expected that Turkey, which already receives 6.6 billion cubic meters per year (bcm/y) of natural gas from Azerbaijan's offshore Shah Deniz One field, will add 6 bcm/y to that volume from Shah Deniz Two. This long-anticipated development was presaged also at the end of last month, when the Turkish energy firm BOTAS informed Russia's Gazprom that it would not exercise an option to extend a contract for 6 bcm from Russia through the Blue Stream natural gas pipeline underneath the Black Sea between the two countries.

Further discussion of quantities must now await the decision by the Shah Deniz consortium concerning that choice. British energy firm BP holds a 25.5% share of the Shah Deniz consortium and is its operator. Norway's Statoil also holds 25.5%. Other participants include Azerbaijan's SOCAR (10%), France's Total (10%), Iran's NICO (10%), and Turkey's TPAO (9%), and Russia's Lukoil (10%).

The negotiations on gas deliveries had been given new impetus following a summit meeting between Aliev and Erdogan in late July. Afterwards, diplomatic and industrial figures from both countries went on the public record to say, and to say repeatedly, that the agreement would soon be ready. Talks resumed in early August, three weeks before the date formally set for them to start again, following the instructions from the two leaders.

The refinery is being built by the State Oil Company of the Azerbaijani Republic (SOCAR) and the Turkish energy company Turcas Petrol, at a cost of almost US$5 billion.

It is Turkey's largest private sector investment and will create 10,000 construction jobs, according to the Turkish newspaper Hurriyet. It is planned that by 2015 the complex will include a refinery, an oil processing facility for almost 70 million barrels of oil, and a container terminal with integrated port and logistic area. Associated with it will be a technical and vocational school named after Heydar Aliev, leader of post-Soviet Azerbaijan from 1993 until his death in 2003 and father of the current president, where students will also receive training in the Azeri language, which is highly mutually intelligible with Turkish.

Economists project that the complex will decrease Turkey's current account deficit by $2 billion, decreasing the country's imports of such products as jet fuel and naphtha. The Turkish newspaper Zaman, which is close to government circles, noted that the facility, to be called the Star Refinery, will not depend upon a single source. Rather a "flexible production process" would be able to handle the various grades of crude from Azerbaijan, Iran, Iraq (Kirkuk), and Russia (Urals blend).

If correct in the details, this is especially interesting for the following reason. In mid-March 2010 Turkey renewed its contract with Iraq for oil imports. At the time, it was planned for the oil to arrive in Ceyhan, on the coast of the Mediterranean Sea, via the 1,000-kilometer Kirkuk-Ceyhan pipeline, built in the 1970s with a total design capacity of 1.6 million barrels per day. The German firm Siemens and Turkey's BOTAS cooperated on modernizing the line after the fall of president Saddam Hussein from power in Baghdad.

As of last year, it was operating at up to one-third of design capacity. So it has been said that the possibility is now not excluded that Kirkuk oil finds its way to Izmir on the coast of the Aegean Sea. However, it is at least as likely that this is a press leak designed to tell potential suppliers that they have competition and have to jockey for position to offer Turkey the best deal....