AT THE CROSSROADS

Although politicians and political scientists are in animated discussions about the dividends this or that country will receive from the world's gas, economists are more concerned about the financial side of the issue. According to the latter, gas is, first and foremost, a product which can support the economy of both fuel producer and consumer. The same position is shared by Azerbaijan, which intends to distribute its gas between its clients in thoroughly rational fashion, not only to please all our friendly neighbours, but also to maximize economic benefit. According to President Ilham Aliyev, "for us, all markets are interesting and attractive if the price corresponds to world levels and if all other conditions, including transit, are based on international practice. We are exporting our resources and, of course, we want to be paid properly for them."

The Turkish gambit

The unresolved question of transporting gas from Azerbaijan hinders the development of Stage-2 of Sah Daniz. And this, on the one hand, means a delay in investments of $20 billion into the country's economy, which is so necessary at a time of crisis and in the post-crisis period and, on the other hand, it causes dissatisfaction among project shareholders, as well as potential European buyers such as Greece, Bulgaria, Italy, Ro-mania, Hungary, Austria, Germany and Switzerland. And it is precisely these countries which are ready to buy Azerbaijani gas at world prices without any haggling over discounts. So Azerbaijan appears to have specific markets for natural gas, plus contracts which have already been signed with neighbouring countries, but no specific route of supply has been defined, following which all tariffs, rates and volumes of gas must be subject to various forms of negotiation.

The situation, as we mentioned, is compounded by the fact that the contract for Sah Daniz was signed in 2006 and expires in 2026 and, with it, all the rights of members of the consortium to this field will also expire. And if we begin the second phase of the project today, in the best case scenario, the first gas from these layers will be produced in 2015, i.e. only 11 years would remain to complete the contract. It should be noted that, by conservative estimates, the reserves of Sah Daniz are 1.2 trillion cubic metres, and it is unrealistic to extract this much gas in such a short period of time. Thus, it is clear why consortium members are so nervous about this problem; also clear is the justifiable desire of potential buyers for at least some guarantee that they will receive gas by a specific date.

As you know, this uncertainty surrounding the project has dragged on for two years, due to unresolved transit and pricing issues between Turkey and Azerbaijan. As President Ilham Aliyev noted earlier, "for many years Azerbaijan has been selling gas to Turkey at prices amounting to 30 per cent of world prices. We want our gas to be purchased, if not at world prices, at least for prices close to them. Let it not be equal to the cost of Russian gas, let it be 8 or 10 per cent lower, but not 50 per cent lower." This is quite logical, especially as Azerbaijan has already received proposals at tariff rates 70 per cent higher than prices prevailing in the region. Currently, Turkey pays $120 for one thousand cubic metres of Azerbaijani gas, compared with $250-300 for gas from Russia and Iran.

Negotiations between SOCAR and Turkey's Botas continue but, unfortunately, there is no progress, despite some seemingly promising statements on the issue. At the same time, there is information that "Turkish Energy Minister Taner Yildiz has urged Azerbaijan to ensure that it continues to sell gas at a lower price" (Bloomberg), which shows that the position of the Turkish side has not changed. Will Azerbaijan yield this time? According to the president of the State Oil Company of Azerbaijan (SOCAR), Rovnaq Abdullayev, "Azerbaijan is ready to offer discount prices to Turkey. But the price must be acceptable to us, and it should not be lower than the price that exists today on Turkey's domestic market." He also confirmed that negotiations between the parties are not going smoothly, but nevertheless, SOCAR expects to complete them by the end of this year. Only then will it be possible to start gas production from Stage 2...

Fight fire with fire...

So, this long-lasting uncertainty with Turkey has prompted Azerbaijan to seek alternative means of transporting its natural gas, and today, as we know, there are some realistic alternatives. First, there are Russia and Iran (by the way, the former invited to Azerbaijan to take part in the South Stream project and, in general, to integrate more closely in "gas" issues) and second, there is a totally new form of supply - the sale of liquefied natural gas via Black Sea ports. The second latter may seem slightly unrealistic to some (although, as is known, there are specific agreements on this route with Bulgaria) but, according to international experts, it is this form of relationship between the sellers and buyers of "blue fuel" that will be the norm in the future. For example, according to a senior economist at the Cedigaz International As-sociation for Natural Gas, Armelle Lecarpentier, in 2009 some countries have increased investment into the production of liquefied natural gas (LNG), mainly due to the fact that this method is more competitive compared with gas transit by pipeline, due to lower prices. This creates greater uncertainty for major gas pipeline projects.

At present, SOCAR is continuing to clarify this issue in negotiations with Bulgaria and Romania. "Where will a liquefied gas terminal be built - in Kulevi or Supsa? The answer to this question will come from a feasibility study (FS), or by surveys preceding the feasibility study," said SOCAR Vice-President Elsad Nasirov.

Either way, if we still fail to agree with Turkey, then this route will be one way of delivering Azerbaijani gas to Europe, which is very important for our country. As soon as a statement was released that Azerbaijan is also considering other options for gas supplies, particularly to China, some experts immediately concluded in the media that gas cooperation with the EU had been given up in favour of Asia. "This is illogical, unfair and fundamentally wrong," Nasirov said in response. "Any pipeline connecting us to a potentially new market is good and, in principle, it is pleasing that there is a Turkmenistan-China pipeline, because there will be an opportunity for us to acquire one more alternative transportation route. However, it is difficult to predict what the Chinese market will be like in 2020-2025," he said, noting that, under favourable circumstances, exports to China may become more profitable than to the EU by that time.

But, nevertheless, the EU remains a priority for Azerbai-jan, as the price of gas there is determined by the market, not by the capital of any state. And the Nabucco gas pipeline project has not yet been discarded as it is, today, the European Union's most important project. According to Azerbaijan's Minister of Fuel and Energy, Natiq Aliyev, if the project succeeds, Azerbaijani gas will be transported from Greece to Bulgaria, and by other routes - to Germany. "To do this, you can build a 90-kilometre gas pipeline from Greece to Bulgaria. All this must be analyzed and evaluated. One of the goals is to obtain a net profit after transportation costs, because Azerbaijani gas is the main source of reserves here," stressed the minister.

In summary, we would like to return once again to the question of the urgency of "transit issues". According to international analysts, the post-crisis years will see a significant decline in demand for the "blue fuel" in Europe, as illustrated by information available for the end of 2009 - world production is expected to fall by 4.8 per cent, which will be the most significant decline in the past 40 years, although experts at the Cedigaz International As-sociation for Natural Gas say that world gas production will begin to grow again in 2010. However, this growth will still be below pre-crisis levels and will amount to only 1.8-2.4 per cent. This is due to the decline in demand for fuel - about 5.0-6.5 per cent this year. Moreover, the consumption of "blue fuel", as opposed to production, will need more time to recover - Cedigaz experts predict that this figure cannot exceed the level in 2008 until 2014.

In other words, today Azerbaijani gas has many clients ready to actually pay for it, but the uncertainty around transportation could lead to economic losses in the future. Thus Baku is trying to diversify routes to take its energy resources to the world markets as quickly as possible, in order to reap in full all dividends from its gas. Azerbaijan is being more decisive and taking rather bold decisions, including plans to supply natural gas to Bulgaria in liquefied form, especially as it has the potential to do so.