Amid a diplomatic chill, Azerbaijan and Turkey opened a new round of talks November 16 on an energy export price. Recent agreements on gas supplies to Bulgaria, Iran and Russia suggest that Baku is exploring alternative export routes as a means to pressure Ankara into paying significantly more for Azerbaijani natural gas.
Baku and Ankara have been unable to fix a mutually acceptable gas price, even though talks have been going on since April 2008. Azerbaijan claims that the $120 per 1,000 cubic meters (tcm) that Ankara now pays, a price set in 2001, is 30 percent below international rate, and does not correspond with the fresh influx of production to come from Azerbaijan's Shah Deniz Stage II gas field. Baku is seeking to more than double the amount that Ankara pays, to $250/tcm.
Azerbaijani President Ilham Aliyev in October declared that, given the stalemate with Ankara, Baku would consider alternative export options, including Russia, Iran and Bulgaria.
Export deals have since been made with all three targeted partners. On November 13, President Aliyev agreed to the export of 1 billion cubic meters (bcm) of gas to Bulgaria between 2011 and 2012. The agreement also allows for the export of liquefied gas to Bulgaria, a move away from Azerbaijan's traditional pipeline delivery routes to Europe via Georgia and Turkey.
Two days before the Bulgarian deal, the State Oil Company of the Azerbaijani Republic (SOCAR) agreed to ship "not less than 500 million cubic meters" of gas to Iran, starting in 2010. Exact volumes will depend on pipeline infrastructure, according to SOCAR President Rovnag Abdullayev, the Trend news agency reported. A contract is expected to be signed by the end of the year.
In October, SOCAR also signed a contract with Gazprom for the annual export of the same amount of gas to Russia between 2010 and 2014. No price was published, although Aliyev called it "mutually beneficial."
Rasim Musabekov, a Baku-based political expert, contends that if Turkey and Azerbaijan do not resolve their price dispute soon, more gas could be shipped to Russia and Iran. Baku might also move forward with delivery options to Europe other than via Turkey's pipelines - such as by Black Sea tankers sailing from Georgia. The end result could be that Azerbaijan goes back on its promises to export supplies from Shah Deniz Stage II to the Nabucco pipeline, Musabekov suggested.
"There are no clear conditions on Nabucco yet, and, anyway, the [Azerbaijani] government does not feel it gets any political dividends from support for Nabucco," Musabekov said.
At a November 14 news conference, Azerbaijani Energy Minister Natig Aliyev asserted that the export of Shah Deniz Stage II gas to Europe "is a priority for the government."
In an October 29 interview with CNN Turk, Turkish Energy Minister Taner Yildiz stated that the price Turkey pays for gas from Shah Deniz is being discussed as part of a package with transit rates for Azerbaijani gas traveling to Europe via Turkish pipelines. Ankara proposes that Baku pay a "fairly competitive" price of $2.36 for each 100 kilometers of Turkish territory crossed by 1,000 cubic meters of Azerbaijani gas - a price 24 cents lower than Russia's own tariff for the same distance, Yildiz claimed.
Energy expert Ilham Shaban believes that the proposed Turkish tariff is indeed competitive. Ankara would receive just $23.60 for each 1,000 cubic meters of Azerbaijani gas that travels the 1,000 kilometers across Turkey into Europe. Consequently, offering a lower price for Azerbaijani gas ($200 per 1,000 cubic meters versus the European price of $250 per 1,000 cubic meters) "should be acceptable for Baku," Shaban said.
A diplomatic chill between the two longtime allies appears to be hampering efforts to settle pricing differences. The October 10 signing of protocols for rapprochement with Azerbaijani foe Armenia set Baku's nerves on edge; a tussle over Turkey's removal of Azerbaijani flags from a World Cup qualifier soccer match attended by Armenian President Serzh Sargsyan, and Azerbaijan's removal of Turkish flags from a Baku cemetery further deepened the sour feelings. All flags have since been restored, but suspicions seem to linger. [For background see the Eurasia Insight archive].
"In a situation where Baku does not feel decisive political support from Turkey, why should Azerbaijan ... subsidize the Turkish economy with cheap gas, while living standards in Turkey are at least twice higher than in Azerbaijan?" asked Musabekov. [Editor's Note: Musabekov serves on the board of the Open Society Institute (OSI)-Azerbaijan in Baku. EurasiaNet.org operates under OSI's auspices in New York].
Expert Shaban agrees that politics is driving the gas dispute. Frustration with Turkey and the West over what is perceived as tepid support for Azerbaijan on the Nagorno-Karabakh issue is weakening pro-Western attitudes in Baku. As a result, Shaban indicated, Azerbaijani policymakers are "drifting toward greater gas cooperation with Russia, Iran and Eastern European countries."
A SOCAR source who asked not to be identified told EurasiaNet that the dispute with Ankara over gas tariffs began "much earlier" than the recent political disagreements over Armenia and flags.
One London-based energy consultant noted that the importance of gas cooperation with Turkey outweighs any "bad feeling" between the two on political topics. "[I]n the end, I am confident they will ultimately reach an agreement on gas transit and prices," said Laurent Ruseckas. "Strategically, it is simply too important for both sides."
Musabekov agrees: Russia and Iran do not have the pipeline capacity to handle the annual 6.5 bcm of gas Turkey now receives from Shah Deniz, meaning that Baku would be left with excess, unsellable gas on its hands. "At the end of the day, the agreement will be reached," he predicted. "Baku simply cannot stop gas supplies to Turkey."
Editor's Note: Shahin Abbasov is a freelance correspondent based in Baku. He is also a board member of the Open Society Institute-Azerbaijan.