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Azerbaijan and Russia: Fight for gas market of Europe - analysis

Over the period of past 15 years, Azerbaijan managed not only to magnetize great investments but also to establish enough extraction and transportation infrastructure to export oil and gas resources to the world market - special analysis by APA-Economics.

Besides Baku-Supsa and Baku-Novorossiysk Pipelines, Azerbaijan achieved construction of Baku-Tbilisi-Ceyhan and South Caucasus Export Pipeline for pumping its resources through. The current infrastructure Azerbaijan has enables to export not only its oil and gas but also re-export hydrocarbons of the other Caspian nations. In fact, Europe shows deep interest in importation of Turkmen and Kazakh natural gas through a route that bypasses Russia. Of course, Azerbaijan can re-export Kazakh and Turkmen gas to Europe as a transit state which can bring further political and financial dividends. Export of its gas will allow Azerbaijan to occupy the niche in the European market. Shah Deniz gas is not the only target.
There are still left lots of unexplored and untapped fields in the Azerbaijani sector of the Caspian. Energy-rich Russia has cornered European market with natural gas. Its share beats 25% now. But, Russia is not satisfied with this market share and wants to take advantage of the increasing demand in Europe while Europe had felt its increasing needs earlier and is seeking to diversify its energy sources and routes. Russian state monopolist Gazprom made former soviet countries live special surprise on the eve of New Year. Georgia, the victim of this policy, has nothing to do but to pay a quadruple price for Russia gas ($235 per 1,000 cubic meters now, compared to $64 per 1,000 cubic meters in 2005). Minsk protested against this policy, but in vain.

To break good news, on June 26 in Vienna, the Energy Ministers of Austria, Bulgaria, Hungary, Romania, and Turkey as well as the European Union’s Energy Commissioner Andris Piebalgs signed a Ministerial Statement of commitment to the Nabucco gas pipeline project to deliver Caspian gas. If implemented as planned, the project will open for the first time a transit corridor for Caspian and Mid-eastern gas into EU territory; contribute to diversification of the EU’s supplies, reducing dependence on Russia overall; end Gazprom’s outright monopoly in Hungary, Romania, and Bulgaria and cut its 65% dominance in Austria; turn Turkey and Austria into international hubs for gas transport; and provide some non-Russian options for German and Italian markets. The project envisions commissioning of the pipeline in 2011. Construction costs of the 4,000km pipeline are estimated at €5 billion ($6.74 billion). Austria’s OMV, Hungary’s MOL, Turkey’s BOTASH, Bulgaria’s Bulgargas and Romania’s Transgas companies have been involved in construction of the project. The pipeline will allow delivering Middle Asian and Caspian natural gas to Europe through Azerbaijan, Georgia, Turkey, Bulgaria, Romania, Hungary and Austria.

Azerbaijan’s Industry and Energy Minister Natig Aliyev says Nabucco project is very important for Azerbaijan because it will enable to take step towards Europe. “Moreover, this project shouldn’t depend on a single source, the Caspian Sea. This pipeline envisions delivering 30 billion cu m of gas annually. Azerbaijan doesn’t have so much. We can only speak of 16-20 billion cubic meters, which Azerbaijan will achieve after Phase 2 of Shah Deniz Project in 2014-15. This project will be filled with natural gas of Asian and Gulf countries,” says Aliyev.
In 1991, Turkish and Turkmen leaders suggested an idea of extending a subsea pipeline through Azerbaijan and Georgia to Turkey. This idea aroused the concept of Trans-Caspian Pipeline Project. The 2,000km pipeline was projected to cost $3 billion. If implemented as planned, the project would carry 16 billion cubic meters of gas to Turkey and 14 billion cubic meters to Europe annually. Unfortunately, the parties failed to reach common agreement- Turkmenistan demanded millions of dollars in advance, the littoral states failed to distribute the Caspian, Turkmenistan and Azerbaijan couldn’t agree on pumping Azeri gas into this pipeline and so on. The project had been planned to come online in 2002 but negotiations went up to 2001 but in vain. Natig Aliyev says Azerbaijan sought 1 50% share in the project for exportation of its natural gas from Shah Deniz and Turkmenistan disagreed. In February this year, Turkish Energy Minister Hilmi Guler broke good news, saying “We are negotiating with Ashgabat on the Trans-Caspian Project”. Presidential administration of Turkmenistan also said that they wanted to expand cooperation with the European Union after president Niyazov’s meeting with EU envoy.

South Caucasus Pipeline played vital part in reanimation of this project as this project had been planned to be laid through the depth of the Caspian and via Georgia to Turkey. Now there is no need to construct the overland part of this pipeline. South Caucasus Pipeline envisions carrying 20 billion cubic meters of natural gas while Azerbaijan doesn’t intend to pump so much now. If everything is best, this pipeline will work at 50% capacity. If the parties can agree now, Turkmenistan should lay only underwater part of the pipeline and Azerbaijan will become a transit country. Natig Aliyev avoids saying Kazakh and Turkmen gas will absolutely e-exported via Azerbaijan. “Let these countries reveal their plans and we are ready to support them. If they say they are ready to export the natural gas through a particular route, we can pass a concrete decision on expansion of the pipelines, construction of new ports and other work what e can do,” he notes.

A joint declaration signed by Russian, Turkmen and Kazakh Presidents at Turkmenbashi Summit suggested construction of a new pipeline near the Caspian. The three countries will submit the economic and technical assessment of the project to the authorized companies in the H2 of 2008. The pipeline will run through Kazakhstan and Turkmenistan and along the Caspian Sea to Russia. Russian Industry and Energy Minister Viktor Khristenko said this agreement will ensure gas supply to former soviet countries and Europe.

Aleksey Miller, chair of Gazprom board, added that reconstruction of the pipeline network and construction of a new pipeline along the Caspian Sea will enable to increase the amount of gas imports from Turkmenistan to 80 billion cubic meters annually. The situation says that Russia will gain control over Turkmen and Kazakh supplies to Europe. That is, Russia will turn off the faucet when it wants and this is a good tool to control the price.

What makes Turkmenistan and Kazakhstan to choose Russian routes?
Turkmenistan has nothing to do but export its gas via Russia through lack of alternative routes.
What factor plays the main role in making this decision? –
Unsolved issue on distribution of the Caspian Sea?
Russian experts insist that implementation of the Trans-Caspian Pipeline is far from real as this will damage the ecology of the Caspian. It is not clear what damage they mean because this pipeline will carry natural gas – gas is not so dangerous like oil. If not so, why wasn’t the ecological issue raised in the decision to lay a subsea pipeline (Blue Stream) through the Black Sea?
If the project is to Russia’s advantage, is it environment-friendly? (