Azerbaijan and Turkey clash over energy
By R M Cutler
MONTREAL - In all the debate and speculation over the various pipelines planned
for the Caspian-South Caucasus corridor and adjacent regions (Nabucco, South
Stream, White Stream, and Trans-Caspian Gas Pipelines in addition to various
oil pipeline projects), the troubled state of energy relations between
Azerbaijan and Turkey has been lost from view, mainly due to their stellar
cooperation in the past over the Baku-Tbilisi-Ceyhan oil pipeline and South
Caucasus Pipeline for gas in particular.
However, 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.
It follows that the agreement reached to supply 500 million cubic meters to
Russia in 2010 from Shah Deniz 2 was aimed as much at Turkey as at laggard
Western interest in promoting the Nabucco pipeline, although the assertions
from the Russian side that Russian companies will receive "first refusal" on
quantities from further development of Shah Deniz 2 do not appear to be well
founded: at least, there are no legally binding documents that oblige
Azerbaijan to act in such a manner.
Aliev underlined that his government would continue to seek to reach an
agreement with Turkey so that his country's gas could be exported in larger
volumes. Adding to the difficulty of reaching agreement is the administrative
disorder within Botas, the state pipeline operator. The Turkish government this
week relieved Botas's chairman and general manager Saltuk Duzyol of his duties.
He had been deputy chairman for over three years before becoming chairman at
the end of 2007.
No reason was given, but the move was expected because Duzyol opposed the state
policy of ending Botas's monopoly on gas imports and transport by unbundling it
and selling contracts to private companies. (Botas's market share is scheduled
to decline to 20% under Turkey's energy liberalization law.) Duzyol was also
suspected of seeking to expand Botas's activities at the expense of TPAO, the
state upstream oil and gas firm.
It remains to be seen whether this will make a difference, insofar as the
government in Ankara is beginning to give the impression of trying to play off
its different suppliers against one another. This impression first was made
when Prime Minister Recep Tayyip Erdogan went to Baku following the Prague
summit with the EU on Nabucco, made a spectacular "fraternal" speech to
Azerbaijan's parliament, and then proceeded to Sochi where he agreed with
Russia's Prime Minister Vladimir Putin on tentative terms for South Stream
(formerly Blue Stream II) in return for Russian assistance in construction of
the Samsun-Ceyhan ("Trans-Anatolian") oil pipeline.
Following this, the terms of the breakthrough agreement in Prague between
Turkey and the European Union that resolved some basic legal and economic
questions were called again into question in Ankara; and this, to the great
surprise of Erdogan's erstwhile Azerbaijani interlocutors, put the Nabucco
pipeline somewhat back into question.
The prospect of gas from Turkmenistan reaching Azerbaijan for westward
re-export is not the stumbling block that some observers believe it to be.
Earlier this month, after having threatened to seek an undefined form of
international arbitration over an offshore territorial demarcation
disagreement, Turkmenistan's President Gurbanguly Berdimuhamedov stated that he
would prefer a compromise solution. And just as the absence of a comprehensive
settlement of the Caspian Sea's legal status has not prevented unilateral and
bilateral (eg, cooperative Russian-Kazakhstani) development of existing
deposits, so it does not block in principle the construction of an undersea
Turkmenistan-Azerbaijan pipeline, which technical studies have long
demonstrated to be feasible.
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 Union 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.
The EU has funded feasibility studies for White Stream in the framework of the
Trans-European Networks (TEN) program. After sub-sea transit from Georgia to
Romania, such a study projects that the pipeline would travel overland to Italy
along the route of the Pan-European Oil Pipeline. The EU-funded TEN study
demonstrated White Stream's feasibility from the standpoint of market,
economic, commercial, technical, and legal considerations.
Its first stage calls for only 8 bcm/y and can be developed using gas from
Azerbaijan alone. Construction is projected to begin in 2012 with the pipeline
entering into service in 2015. In this connection it is worth noting that the
May summit in Prague where questions blocking agreement on Nabucco between
Turkey and the EU were thought to be resolved was "not a Nabucco summit"
according to EU energy commissioner Andris Piebalgs, "but rather a summit
focused on the Southern Corridor". The Southern Corridor comprises the Nabucco
and White Stream pipelines plus the Italy-Turkey-Greece Interconnector (ITGI),
which has already entered into service.
The bilateral Azerbaijani-Turkish energy relations are embedded within a
multilateral network stretching from Turkmenistan to Austria. In the post-Cold
War world, it is an error to forget this and to focus instead on the
bilateralism. Consequently, and indeed regardless of the outcome of the talks
between Turkey and Azerbaijan, we will likely hear more about White Stream in
the future.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and the University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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