Azerbaijan threatens Turkey with a change in gas policy

The crisis in Azeri-Turkish relations, which has been growing for more than a year now, has led to an uprecedented toughening of Baku's policy, which has manifested itself in threats by Azerbaijan to withdraw from new energy projects (including the Nabucco gas pipeline) crossing Turkish territory. Baku's position has become so radicalised because of the prolonged impasse in regulating the terms of energy co-operation with Ankara, as well as Turkey's policy of rapprochement with Armenia, which undermines the basis of Azerbaijan's security.
While Azerbaijan's threats to limit co-operation with Turkey do not necessarily undo the prospects of the EU-endorsed Southern Gas Corridor project, they do seriously endanger it. The only winner in this situation is Russia, as Baku exploits its co-operation with Moscow to strengthen its position towards Turkey.

Azerbaijan accuses Turkey...

On 16 October, Azerbaijan's president Ilham Aliyev accused Turkey of having blocked an agreement for the last two years which concerns an increase in the price of gas imported from Azerbaijan (Turkey currently pays US$120 per 1000 m3) and the rules for the transit of Azeri gas to Europe. He also said that Turkey's persistence in this policy was forcing Azerbaijan to seek alternative gas export routes, and might result in the projects to transport Azeri gas westwards via Turkish territory (such as the Nabucco gas pipeline) being scrapped.
In addition to the currently existing technical options to transport gas to Russia and Iran, Aliyev mentioned for the first time the possibility of exporting gas to Europe via the Georgian Black Sea terminals (most probably in the form of LNG). This solution is new, and has not been mentioned before as a possible variant of transporting gas from Azerbaijan. It has the advantage of being attractive to the EU, as supplies of LNG from Azerbaijan could be a way of diversifying the sources and routes of gas supplies and reducing the European Union's dependence on supplies from Russia. Moreover, Azerbaijan has already taken steps to test the feasibility of this solution; exporting gas in LNG form was one of the subjects discussed during the Azeri leader's most recent visit to Romania in September.
Aliyev's statement means that Azerbaijan still considers Europe to be the most attractive market for its gas, and intends to continue its efforts to launch gas exports to Europe. On the other hand, the project to export LNG undermines the EU- and US-endorsed Southern Gas Corridor project in its current, most advanced form, which envisages gas transit via Turkey.

... and finalises the gas deal with Gazprom

Azerbaijan's growing disappointment with Turkey's actions in recent months has found an expression in the gas deal concluded on 14 October between Azerbaijan's state-run oil and gas company SOCAR and Gazprom, which had been announced in a memorandum signed this April and in an energy co-operation agreement concluded in June. The deal provides for the supply of 500 million m3 of Azeri gas a year, starting from 1 January 2010, and states that this quantity may be increased. The parties have not revealed the price of gas to be paid under the contract, and have limited themselves to stating that it is based on a specific formula (there has been press speculation that the price may be around US$300 per 1000 m3, which sounds probable).
Despite the very small quantity of supplies, the deal is a success for SOCAR because it strengthens the company's position in negotiations concerning the price of gas with other potential customers, including Turkey, and generates economic benefits in the form of revenue from the exports to Russia. The commercial conditions of the deal with Gazprom will be a point of reference in negotiations with other companies interested in buying Azeri gas. Azerbaijan has also used its co-operation with Gazprom to demonstrate that it has other options for gas export alternative to routes via Turkey, and is capable of pursuing an effective policy to implement them. Gazprom, in turn, has demonstrated that its energy policy is effective and that it has the potential to take control over gas exports from the Caspian region, which would run counter to the interests of the European Union as it seeks to obtain direct gas supplies from that area through the Southern Gas Corridor.

What are the stakes for Azerbaijan?

The reason why Azerbaijan has toughened its policy is the crisis in its relations with Turkey, which has been building for more than a year as Ankara has obstructed the development of Azerbaijan's energy sector. The absence of any deal on gas transit and price has been stopping Azerbaijan from increasing gas production. As a result, for the last two years Azerbaijan has been unable to launch the second phase of production in the Shah Deniz, its largest gas field.
Moreover, Turkey's new policy on Armenia and Nagorno-Karabakh, which was initiated more than a year ago and has been stepped up in recent weeks, is undermining the pillars of Azerbaijan's security. Ankara has given new momentum to the process of normalising relations with Yerevan, the objective of which is to establish diplomatic relations and open the border (which Turkey closed in 1993 as a token of support for Azerbaijan in its war with Armenia over Nagorno-Karabakh).
Armenia's political and economic isolation has until now been one of the pillars of the alliance between Baku and Ankara, further reinforced by the implementation of key projects concerning energy exports from Azerbaijan via Georgia and Turkey (the Baku-Tbilisi-Ceyhan oil pipeline and the Baku-Tbilisi-Erzurum gas pipeline). This policy has left Azerbaijan heavily dependent on energy export routes via Turkey.
Nevertheless, the Azeri leadership has decided to threaten Ankara: if Turkey continues to seek rapprochement with Armenia, it risks having the new energy projects crossing its territory blocked (although existing infrastructure would still be used). Turkey presumably has not given this possibility serious consideration in its political calculations so far, acting on the conviction that Azerbaijan has to rely on export routes via Turkish territory.
Finally, by outlining an option for exporting Azeri gas to the West that would bypass Turkey, in a way which seemingly would be acceptable to the EU, Baku is clearly showing that Europe remains its preferred direction for gas exports, as long as it can offer terms and conditions comparable to those of Gazprom.

Forecast

Azerbaijan has probably not yet taken a decision to reorientate its energy policy, and has only outlined the potentially attractive options for its European partners. Nevertheless, the actions taken suggest that Baku has started for the first time to seriously consider its need to diversify its westbound gas export routes.
If Azerbaijan puts the threats to limit co-operation with Turkey and diversify its gas export routes into practice, this will signify the failure of the EU- and US-endorsed Southern Gas Corridor project (in the variant via Turkey) and undermine these two actors' current regional strategy. Such a scenario would be a strategic success for Russia, as it would undo the Corridor concept, which took years to develop, and raise tension in the region.
However, this would not mean that Azerbaijan is giving up its plans to export gas to Europe, and the possible creation of gas transport routes to the Black Sea basin would boost the importance of the Black Sea states in Azerbaijan's energy policy (Romania, which is planning to build an LNG terminal in Constanta, seems to be a natural partner).
The reorientation of Azerbaijan's energy policy will depend on a number of factors. Firstly, it will depend on future developments in Turkish-Azeri relations, and Ankara's willingness to maintain its alliance with Baku. Secondly, the position of the foreign investors interested in the second phase of development works on the Shah Deniz field, and the commercial attractiveness of the gas export options alternative to the Turkish route, will be of key importance. Finally, the positions of the other players engaged in the region will play a role; this concerns both Russia and even more importantly to the USA and the EU, and how attached they are to the original concept of the Southern Gas Corridor. It is possible that the USA and the European Union will take measures to restore good relations between Azerbaijan and Turkey, or decide to modify the Southern Gas Corridor concept by including the option of LNG exports.

Aleksandra Jarosiewicz

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