Azerbaijan and Turkey clash over energy

Azerbaijan’s frustration with Turkey’s inability or unwillingness to address present and future bilateral contract terms has now broken out into the open at the highest level. Azerbaijan’s President Ilham Aliev was this week widely quoted in the press as saying publicly, “What state [meaning Azerbaijan] would agree to sell its natural resources for 30% of world market

prices, especially under current conditions? This is illogical.”
According to the bilateral contract signed in the late 1990s, Azerbaijan’s contractual price for selling gas to Turkey from the Shah Deniz deposit is $120 per thousand cubic meters (tcm). This is indeed now roughly one-third of the world market price; and although the contract includes provision for re-negotiation, this has not been successful. Under these terms, Turkey may take up to 6.6 billion cubic meters per year (bcm/y) through the contract’s expiration in 2012, when it is scheduled to ramp up from Phase 2 of the Shah Deniz development to 22 bcm/y, under terms still to be negotiated.

However, it is not only a question of price; two other related issues are volumes for export and tariff rates. Aliev continued, “What part of gas to be extracted within Phase 2 of [the] Shah Deniz project and gas being produced or to be produced by the State Oil Company of Azerbaijan will be supplied to the Turkish market? We must define that as well.” Thus, as insiders have known for some time, there is still no agreement on volumes of Azeri gas to be sold to Turkey.

Indeed, failure to agree on a new price structure is in some significant degree responsible for repeated postponements in the development of Shah Deniz 2. The development of Shah Deniz Phase 2 has been delayed also partly by Turkey’s lack of infrastructure and as well by its declining domestic demand and increased domestic gas price.

There is speculation that a failure to agree between Azerbaijan and Turkey would be the fatal blow for the Nabucco pipeline. That is not necessary so; but even if it were the case, this would not leave the Russian-sponsored South Stream pipeline as the only alternative. A relatively new pipeline project dubbed White Stream has recently made progress on the feasibility and funding levels.

White Stream would take gas across Azerbaijan and Georgia to the latter’s Black Sea ports and then across the Black Sea either to Ukraine, from where it would enter gas networks of the European U-nion states, or directly to Romania, itself an EU member. Its proponents even argue that concurrent development of White Stream with Nabucco would reinforce one another by offering “security of demand” to gas producers and exporters.

Asia Times