PERSIAN MOTIVES IN THE NATURAL GAS MARKET

The competition in the Caspian gas sector becomes increasingly more intriguing by the day, with more and more new players trying their best to gain the upper hand in control of the gas pipeline which is filled with Azerbaijani natural gas.  For example, yet another serious contender, Iran, has entered the market and wants to be a principal participant in the much-discussed NABUCCO project - the main realistic hope for Europeans at present of satisfying their growing need for natural gas.  Certainly, should it succeed, Iran will also derive considerable political plus points for its reputation, which has been much tarnished in the West, and thus it is very earnest about its plans.  But is Europe ready to accept this new participant in the gas project?  And what is Azerbaijan's role in all this?

Azerbaijan against re-export

No one questions the reliability of Azerbaijan as a supplier of gas any longer.  The country produces about 27 billion cubic metres of gas at present and, by 2020, this number might increase to 40-45 billion cubic metres.  In addition, Azerbaijan has other promising deposits.  "We hope that when the Umid deposit is prospected, its reserves of natural gas will be massive.  Geologists estimate that the Azerbaijani sector of the Caspian has up to 5 trillion tons of fuel oil equivalent" says SOCAR President Rovnaq Abdullayev.  SOCAR is preparing to develop the Abseron field in cooperation with the French company Total, and large gas deposits are expected to be found.  "We are also conducting talks to develop deep gas deposits in the Azeri-Chirag-Guneshli field, with proven deposits of 400 billion cubic metres.  In short, there is gas in Azerbaijan, but it has to be prospected," said Abdullayev.

At the same time, all the fuss over exports from ShahDeniz did affect the time table for  the implementation of the project, the SOCAR representative admitted in private conversation with journalists - the sanctioning of Phase 2 had been postponed until all the sales issues are resolved.  But Azerbaijan, which is trying not to offend any of the potential buyers, is finding it difficult to reach a specific decision.

SOCAR president Mr. Abdullayev said that "we want to further diversify the delivery of our energy resources to international markets and intend to take part in gas transportation projects like Nabucco, TGI (Turkey-Greece-Italy), the TransAdriatic pipeline and others."  Azerbaijan is also working with Russia on the transportation of energy resources and intends to deliver 500 million cubic metres of gas.  "At present, repair work is under way on the pipeline and we plan to launch the project by the end of this year," Mr. Abdullayev added.  He stressed that Azerbaijan does not want to politicize the issue of transporting energy resources and will take part in all projects which are good for the country.

In the mean time, it turns out that besides Russia, there is an agreement with yet another neighbouring country, Iran, which, as Iranian Ambassador to Azerbaijan Muhammad Bagir Bahrami said, will be buying 5 billion cubic metres of natural gas annually.  To all appearances, Iran needs our gas precisely to realize the idea of joining the NABUCCO project.

At the same time, Azerbaijan is categorically against the re-export of its gas and has even proposed that manufacturers, transit countries and consumers reach agreement preventing transit countries from selling (re-exporting) the gas they receive.  Mr. Abdullayev discussed this during the recent VI Eurasian Energy Forum in Kazakhstan.  "It is our (producer countries') desire to receive clear-cut tariffs from transit countries and to persuade the transit countries not to re-export or sell gas," he said, adding that observing these terms will result in the establishment of transparent relations between business organizations.

Gas friendship or political discord?

If agreement cannot be reached here, the following scenario is most likely to develop:  countries will use Azerbaijani gas for their own purposes, and they will sell their own gas.  What are the benefits of this for, say, Iran?  They are both political and economic!

Iran not only wants to join NABUCCO, but also wants to become, over the next decade, the main producer and exporter of natural gas to EU countries - no more, no less.  National Iranian Gas Company (NIGC) representative Hasan Torbati said that, at present, they are considering the possibility of exporting 10 billion cubic metres a year to Europe.

"We believe that the NABUCCO pipeline is an acceptable option for transporting Iranian gas to Europe, but we are not restricting ourselves to this pipeline.  We have many other possibilities, including signing DAF (delivered at frontier) contracts with European companies to supply natural gas to the border between Iran and Turkey.  So, the European companies themselves will handle most of the problems in transiting Iranian gas.  We will only deliver gas to the border with Turkey," he told the Trend news agency.

Paradoxically, these plans are being developed despite a steady upward dynamic in the domestic consumption of natural gas in that country.  For example, in 2008 gas consumption in Iran exceeded 117 billion cubic metres, which is 4 billion cubic metres more than in 2007, almost 9 billion more than in 2006, and 66 billion cubic metres more than in 1998.  However, it is thought that the situation can be improved by increasing domestic tariffs.  "Indeed, gas consumption in Iran has increased in recent years.  But we should bear two factors in mind:  first, the natural gas consumer infrastructure has been developed intensively in Iran in recent years.  Now 98% of Iran's cities use natural gas; second, gas has been cheap in Iran so far, resulting in the wasteful use of gas.  The government is now implementing a number of programmes, including one to stabilize gas consumption," Hasan Torbati said.

In Europe, these Iranian plans receive a warm welcome, and NABUCCO is ready to open its arms to accept Iran into the support group.  Gerhard Schroeder, chairman of the shareholders' committee and member of the board of directors of the North Stream company, which is building the North Stream gas pipeline, said that "to have a good position, Nabucco must transport Iranian gas too.  And this will be good, because it will give us one more source of gas deliveries to Europe," he said.

However, Schroeder, a famous politician in the past, admitted that the "EU will need to work for political support."  "It (the EU) will need strength to sort out political differences about sanctions against Iran and against energy resources from that country," Schroeder said.  But, rephrasing the old saying, let us note that "gas has no smell," so if Europe is really "cornered," political doubts will also become less important.

Iranian trumps

So where does this leave Azerbaijan?  Why should we sell our gas to Iran, whose position on political issues which are important to our country, is quite ambiguous?

First, Iran helps Azerbaijan with gas supplies to the blockaded province of Naxcivan - thanks to our southern neighbour's help, the issue was resolved in the most comfortable way for us, by swapping deliveries.  And, as the saying goes, Iran counts on a tit for tat from Azerbaijan.  On the other hand, the NIGC owns 10% of shares in the ShahDeniz project and, accordingly, can play some role in choosing methods of transport for the gas produced there.  And finally, Iran is one of those members of the "Caspian five" which has its own views on the problem of the division of the Caspian into national sectors.  The words of StatoilHydro's chief in Azerbaijan, Christian Hausken, indicate how important Iran's position is, not only for the development of "disputed" shelf deposits, but also for the export of gas from the deposits in development:  "Building a TransCaspian pipeline to export gas from Central Asia to the European market via the South Caucasus, will require the approval of all the Caspian nations."

In short, this too is an important trump held by Iran in its gas game with Europe, which also hopes to acquire Turkmen gas.  European Commissioner for Energy Andris Piebalgs said that the South Corridor project will supply 10% of Europe's gas requirements by 2020.  "The South Corridor is very important from the point of view of the diversification of energy supply routes to European countries.  We hope that the diversification policies of Azerbaijan, Kazakhstan and Turkmenistan will continue," the commissioner said.

Piebalgs said that Russia will continue to play an important role as a gas supplier to the EU, and Russian fuel's share in European fuel consumption will reach 30-35% by 2020.  In Piebalgs's opinion, Europe is increasingly dependent on foreign energy sources.  And, by 2013, this dependence might increase from 50% to 70%, and by 2020 - to 90%.

"We are very much interested in Azerbaijani gas but, most important, in minimizing commercial risks," Mr. Piebalgs said.  He continued that the EU is not considering alternative routes for gas transit to Europe, with the exception of Turkey.  "After the signing of the intergovernmental agreement on the Nabucco project, we effectively resolved the political problems of transiting gas via Turkey.  So we have made our choice.  However, if the talks on the transit of Azerbaijani gas via Turkey reach a deadlock, we will of course consider other options too.  But today transit via Turkey is a priority, and we are not considering other routes," he noted.

But whatever the outcome, Iran will probably be among the top three leaders in the European gas market.  And Azerbaijan will certainly not part with its image as reliable supplier because of two or three contracts "for old time's sake."