GAS WILL GO

Sizzling June finally eliminated the differences between Azerbaijan and Turkey over natural gas supplies to Turkey and transit to Europe. As expected, during Azerbaijani President Ilham Aliyev's visit on 7 June, the countries signed a basic agreement on the transportation of Azerbaijani gas to Turkey and Europe.

In particular, this resulted in a memorandum of understanding on the sale and transportation of natural gas between SOCAR and the Turkish company Botas, a declaration on the sale and transportation of natural gas from Azerbaijan to Turkey and through Turkey and a memorandum of understanding on the sale and transportation of natural gas between the Ministry of Industry and Energy of Azerbaijan and the Ministry of Energy and Natural Resources of Turkey.

President Ilham Aliyev believes that the agreement with Turkey on gas supplies opens new prospects for Azerbaijan. "The gas agreements signed between Azerbaijan and Turkey create new opportunities for us. As you know, we have been negotiating this for about two years and there were some problems during those negotiations. But, our plans are becoming a reality today, on the basis of fraternal, friendly and mutual interests." Aliyev said in an interview with the Azerbaijani media.

These documents allow Azerbaijan to attract large-scale investments to its gas sector, he said.

"This investment will facilitate investment in other sectors. Further, the issue of the transit of Azerbaijani gas through Turkey has been fully resolved, which opens up new opportunities for Azerbaijan," he said.

The Azerbaijani president added that, currently, gas production in the country is limited by export possibilities. "We can increase production quickly. But for gas, production is directly related to potential markets. This project will allow us to increase the production and export of gas from Sah Daniz to 16 billion cubic metres a year in five years' time. Given that there is an infrastructure for the export of gas, we will be able to export gas in any direction and in any volume. This, in turn, will ensure an inflow of currency to the country and strengthen Azerbaijan's position in the region," the president underlined.

Despite expected competition from Russia on the Turkish gas market, Russian Prime Minister Vladimir Putin reacted calmly to the possibility of increased supplies of gas from Azerbaijan.

"Turkey's demand for gas is growing and will grow due to economic growth in the country. We know that every year, we make up the shortfall of gas supplies to Turkey from Iran. Therefore, if we talk about a substitution here, it is not a substitute for Russian gas. Rather, it is about the deficit that develops on the Turkish market during the winter period because of the shortage of supplies of Iranian gas," the Russian prime minister said at a press conference following a meeting with Turkish Prime Minister Recep Tayyip Erdogan.

In turn, Erdogan said that it did not make sense to compare the quantities to be purchased under the contract from Sah Daniz with Russian volumes of gas, since Russia meets the bulk of demand from the Turkish market. The Turkish prime minister said that his country is very interested in Russia as a partner in the gas industry.

And indeed, under the existing gas contract, Turkey buys about 6.5 billion cubic metres of gas a year from Azerbaijan. As part of Phase 2 of the development of the Sah Daniz deposit, double that amount will be delivered. Turkey buys about 20 billion cubic metres of gas a year from Gazprom.

Turkey's demand for gas is about 40 billion cubic metres a year, but the country's geographical position makes it a primary transit player on the European market; something Ankara can use to increase its political influence. Turkey has already started to apply this form of pressure in its relations with Israel, rejecting a project to supply gas to that country following the deterioration of relations after the attack on a Turkish ship in the "Peace Flotilla". Russia, which planned to supply gas to Israel, also agreed with this decision. It had been planned to lay oil and gas pipelines between Turkish Ceyhan and Israeli Ashkelon: a length of 480 km under the Mediterranean Sea. Raw materials to fill the pipeline would arrive at Ceyhan from the Caspian region and within the framework of the "Blue Stream-2" gas pipeline through the Black Sea, which is being discussed with Russia at the moment.

Blue Stream-2 is seen as an additional opportunity to supply Russian gas to the growing Turkish market and also for transit to third countries," Prime Minister Vladimir Putin said.

He recalled that Israel has discovered a deposit with significant reserves of gas in its offshore fields. "And Blue Stream-2 probably cannot be extended to Israel, just for purely economic reasons," said the Russian prime minister.

Given that Stage 2 will ensure a growth in gas production from Sah Daniz to at least 16 billion cubic metres from the current 8 billion, the remaining gas may be sent to Europe.

"This means that the gas from the second stage could be a source for projects such as Nabucco, ITGI (Turkey - Greece - Italy) and TAP (Trans-Adriatic pipeline). As you know, we are participants in Nabucco and are interested in this process," said Turkish Energy Minister Taner Yildiz.

Depending on the market, the price of Azerbaijani gas will change, said Yildiz, without specifying the cost of Azerbaijani gas, because, according to him, that might affect the sale of gas to other buyers.

The cost of Azerbaijani gas will be more acceptable than the price of Russian gas, the minister said.

At the same time, Putin once again expressed scepticism about prospects for the Nabucco project. "The problem with Nabucco is that there is no economic feasibility for the project. If they do the figures and find ways to put the project into effect, then, God willing," he said.

However, the signing of the Azerbaijani-Turkish agreements opens up great prospects for Nabucco. Moreover, Turkey recently ratified intergovernmental agreements on the project, completing almost all formal procedures.

Before the signing of the documents, SOCAR President Rovnaq Abdullayev stated that the settlement of the issue with Turkey will allow the company to determine the route of gas exports. "We are considering all possible options for exporting our own gas - Nabucco, the Trans-Adriatic pipeline and the Turkey - Greece - Italy gas pipeline. The most important point for us is to determine the cost of gas transit, first of all with Turkey. Once we decide on the cost of gas transit through Turkish territory, we can determine which export route is the most profitable for us," said Abdullayev.

After the signing of a basic agreement, it is planned to work on detailed documents on gas supplies to Turkey and exports to Europe. In parallel, work will be intensified with specific gas buyers in Europe and pipeline projects.

"Every pipeline project on which we were negotiating requires a guaranteed volume of gas supplies. We understand this because investors are putting money into the construction of pipelines," said the SOCAR representative.

As noted above, the agreement with Turkey makes it possible to finally start the second phase of development of the Sah Daniz deposit. Gas production from the project is expected to start in 2016.

Although Nabucco sceptics are right in saying that gas from Sah Daniz alone is not enough for the efficient operation of the pipeline, Azerbaijan's resources are not limited to these fields.

Not only Sah Daniz

Sah Daniz, which holds 1.2 trillion cubic metres of gas, is the biggest, but certainly not the only gas field in Azerbaijan.

Thus, according to Abdullayev, in the short term it is planned to begin exploratory drilling at the Naxcivan and Abseron gas deposits and drilling is already underway at Umid. The total volume of gas in these deposits is projected at 500 billion cubic metres.

In addition, the possibility of extracting deep gas from the ACG deposit, the total amount of which is estimated at 300-400 billion cubic metres, is being examined.

Overall, proven gas reserves in Azerbaijan amount to about 2 trillion cubic metres, while, taking into account promising deposits, total stock may reach 5 trillion cubic metres.

At the same time, Azerbaijan plans to achieve gas production of 35-40 billion cubic metres in 2015.

In addition, European institutions have not lost hope for Turkmen gas. Thus, the Italian Eni company has proposed that SOCAR take part in a project to transport Turkmen gas to Europe. This would involve the supply of 6.8 billion cubic metres of liquefied natural gas from Turkmenistan to Baku, and its decompression and further transportation through pipelines to Europe. Eni is also a partner of Gazprom in the construction of the offshore part of the South Stream gas pipeline, which is a competitor of the Nabucco project, and the EU sees Turkmenistan as a source of gas for this.

Recently, ENI chief Paolo Scaroni proposed merging two pipeline projects; Gazprom did not comment.

SOCAR itself is also exploring opportunities to export its liquefied natural gas. A memorandum of understanding to supply liquefied gas from the Black Sea coast of Georgia to Romania and a protocol on the establishment of a company to prepare a feasibility study for this have already been signed.

Work is also underway to explore the potential export of liquefied gas to Bulgaria. Various options involving the supply of 2.5 to 10 billion cubic metres are being examined.

In general, Azerbaijan has great prospects for exporting liquefied natural gas. This option allows us to avoid potential problems with a large number of transit countries, which might arise with pipeline deliveries. In addition, Ukraine is also considering building a terminal for liquefied natural gas. According to Ukrainian Energy Minister Yuriy Boyko, after the decision of Azerbaijan and Georgia to build a terminal for liquefied natural gas on the Black Sea coast, the government of Ukraine also decided to build its own terminal. Supplies of Azerbaijani liquefied natural gas to Ukraine look more realistic than the White Stream project, which involves the construction of an underwater gas pipeline across the Black Sea. And here, the issue is not just one of financial investment, but also about neutralizing environmental risks and the opposition of Black Sea countries.

Independent projections show that, by 2020, European imports will increase to 415 billion cubic metres of gas per year and to 500 billion cubic metres by 2030.

Thus, Azerbaijan, which became an exporter of gas only five years ago, might become a very strong player on the European gas market by 2015-2020, relying purely on its own resources. And the country's transit capacity is of great importance as well, since Azerbaijan is the only alternative to Russia for gas supplies from the eastern coast of the Caspian Sea to Europe.