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Turkey, Azerbaijan gas deal could be a potential boost for EU’s Nabucco

A long-awaited gas deal between Turkey and Azerbaijan, expected to be signed within days, could unlock Azeri gas reserves for the West and eventually trim Europe’s energy dependence on Russia.



Turkish Prime Minister Tayyip Erdogan is expected to travel to Azerbaijan on Monday to sign a deal that has been two years in the making and at times hostage to diplomatic relations in the volatile South Caucasus region.

Tensions between the traditionally close Muslim allies, had unnerved planners seeking fuel for the 7.9 billion euro EU-backed Nabucco project, a key rival to Russian pipelines.

Azerbaijan had been angered by Turkey seeking to normalise ties with Christian Armenia, Azerbaijan’s enemy in the conflict over rebel the Nagorno-Karabakh region.

To Azerbaijan’s relief, the Turkish-Armenian rapprochement collapsed last month, as a result of Turkey pressing Armenia to make some gesture to defuse tensions in Nagorno-Karabakh.

The earlier chill in relations had led to pricing disagreements over Azeri gas currently supplied to Turkey.

More importantly for Europe, it had undermined negotiations that would form the basis for the export of Azeri gas through Turkey to countries like Austria.

Precise details of the deal expected to be signed next week are unknown but it is expected to at least resolve pricing differences over 6 billion cubic metres of gas Azerbaijan currently sells to Turkey.

“The package agreement with Turkey will provide the necessary… conditions to start commercial talks with potential European buyers,” said Ana Jelenkovic of Eurasia Group.

Buyers will be looking for volumes from the second phase production at Azerbaijan’s Shah Deniz deposit in the Caspian Sea, operated by BP and Statoil and due to come online between 2014 and 2017.

Azeri Energy Minister Natik Aliyev told Reuters last week the two sides had also agreed in principle on volumes Turkey would receive from Shah Deniz II, which will produce an additional 16 billion cubic metres per year on top of the current 9-10 bcm from Shah Deniz I.

Turkey had requested 6-7 bcm of gas from the second phase and Azerbaijan would look to accelerate the start of production to 2014, he said.

That would free up volumes of gas to flow to Nabucco, albeit at a fraction of Russian current gas exports of 150 bcm. The Nabucco project would nevertheless mark an important step toward cutting dependence on Moscow, which supplies a quarter of the EU’s gas imports.

Nabucco aims to transport up to 31 bcm of gas annually from the Caspian region to an Austrian hub via Bulgaria, Romania, Turkey and Hungary.

But it faces competition from Russia’s South Stream project, which is due to start construction in 2012. Nabucco has been hit by delays and problems in pinning down supplies.

Ilham Shaban of the Independent Centre for Oil Research in Baku said Turkey had secured around 5-6 bcm annually from Shah Deniz II, but that the price was not decided.

“It’s not reflected in the documents that are expected to be signed now since Shah Deniz II has not been officially sanctioned,” he told Reuters.

“But after Erdogan’s visit, (Azeri state energy company) SOCAR will start active commercial negotiations with all potential buyers of gas from Shah Deniz II.”

Jelenkovic said there were indications that under the agreement, Azerbaijan — not Turkey — would control the sale of transit gas from Turkey’s border with Europe.

As Azeri relations with the West deteriorated over its backing for the Armenian-Turkish thaw, Azerbaijan struck deals to sell small amounts of gas to Russia and Iran, tapping supplies courted by Nabucco.

The gas deal with Turkey, Jelenkovic said, “reaffirms overall what Azerbaijan’s energy strategy and what their goal is – to remain a largely pro-Western energy supplier, but with a priority on controlling their gas supplies to Europe.”



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