Wednesday, April 1, 2009

Memorandum of Understanding between Gazprom and SOCAR: No Shah-Deniz Gas for Nabucco?

Turkey’s improper conditions for transit of Azeri gas from Shah-Deniz field vie its territory and the lack of unique stance and the commitment by EU on the proposed Nabucco project encouraged Russia to feel confident in its strives to gain control over Azeri gas export. The recent Memorandum of Understanding signed by Gazprom and SOCAR is basically seen as Azerbaijan is seeing no better alternative than going to negotiation with Russia.

On March 27, 2009, Rovnag Abdullayev, president of SOCAR (Azerbaijani State Oil Company) and Alexei Miller, chief of Gazprom came together to discuss the terms of deliveries of Azeri gas. The Memorandum of Understanding, signed by the two says the first delivery was projected for January 2010 on DAF conditions (Delivered on Frontier). According to the Memo, Gazprom and SOCAR will perform technical inspection of gas pipeline system at the Baku – Nova-Filya sections, through which Azerbaijani gas will be supplied to Russia. There was no reference to the volume of gas to be delivered. What was known was the intended supply of gas to Russia’s Dagestan, in southern border.

Russian newspapers presented the March 27 Memorandum as a victory of Gazprom as a result of recent Russian-Western confrontation over the oil-rich Caspian region. Citing Tatyana Mitrova, Director of the Centre for the Study of the Global Energy Markets at the Russian Academy of Sciences, Interfax reported that Gazprom’s grip of Azeri gas would reduce the probability of sufficient gas for Nabucco.


Azerbaijan is growingly disposed to have unfailing transport route for exporting its gas. Baku always seemed to have preferred EU-supported Nabucco. In president’s level, Azerbaijani authorities have publically endorsed the Nabucco. The Active participation of Azeri President Aliyev in Budapest summit of Nabucco and the recent visits of high level officials from European countries were seen as Azerbaijan has made Nabucco a priority. However, following ambivalent philosophy of European Union and Turkish obstruction, Azerbaijan is going to find much profitable alternative routes.

The gas to be transported through Nabucco pipeline in the EU-planned Southern Corridor for gas export to Europe is being blocked by Turkey through unilateral demands that are not acceptable both the EU and Azerbaijan. During his Brussels and Moscow visits early this year AKP leaders went further outlining their government’s position as trying to press the EU on this project, in order to speed up Turkey’s accession negations with EU (Eurasia Daily Monitor, March 16). In the meantime, Turkish government was asking Baku to pay the prices for Ankara’s idealistic dreams. Ankara insists on having a right to purchase 15 percent of the Azerbaijani gas but paying less than European netback prices for that lift-off portion. Through its inappropriate conditions, Ankara is holding back the export of natural gas from Azerbaijan to European consumers. Moreover, Turkey’s postponing maneuvers hamper Azerbaijan’s direct access to European market through Nabucco project.

Along with Turkey, EU has not displayed unique stance with regard to the proposed pipeline. While this ambivalence of EU became manifest in the Budapest summit, where EC, after difficult political bargaining, had managed to allocate €250 million as a start-up credit to help launch the project (although project’s estimated cost is €8 billion), the recent statement by German chancellor Angela Merkel deepened those beliefs about EU’s cautiousness. Merkel has taken a stance against proposals to use EU funds to finance Nabucco pipeline project, during the EU’s informal summit of heads of state and governments on March 1 in Brussels (Eurasia Daily Monitor, March 9). German Chancellor argued there has been no need for EU to finance Nabucco: “Nabucco’s problem is where gas would come from – not an insufficiency of investment funds.” Although the arguments of Merkel are rather disputable and seem inaccurate, the views on Nabucco among EU countries are pretty fragmented.

It is true that Baku understands Nabucco’s importance in increasing Azerbaijan’s role as a gas supplier playing a momentous role in Europe’s energy security. However, seeing the project is not moving forward due to above mentioned hindrances, Azeri government, who takes the position that gas export is a business project, is going to seek other alternatives. In this respect, Gasprom’s offer to buy Shah-Deniz at netback prices is seen much lucrative and commercial for Baku. As Baku-based political expert Rasim Musabeyov maintained, Azerbaijan is interested in the economic aspects of the project: “The more gas markets are available the more Azerbaijan benefits.” Besides, other sub-factors are forcing Azerbaijan to feel enthusiastic in his deal with Gazprom. Azerbaijan bought gas from Gazprom until 2007. Following Gazprom’s raising the gas prices and BP-led fields’ beginning production that year Azerbaijan became a gas exporter and refused importing gas from Russia. According Ilham Shaban, Director of Oil Researches Centre, the pipeline, through which Azerbaijan exported gas from Russia until 2007, is still useless and Azerbaijan loses much from that. Selling gas to Gazprom Azerbaijan would ensure to reuse that pipeline. Another reason why Shaban makes optimistic statement on SOCAR-Gazprom agreement is his belief in chances of Azerbaijan to expand geography of gas export in a short run.

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