Publication: Monitor Volume: 7 Issue: 181

On September 29 in Baku, Georgia and Azerbaijan signed a package of agreements on the sale and transport of natural gas from Azerbaijan’s offshore Shah-Deniz field to Turkey via Georgia. Presidents Eduard Shevardnadze and Haidar Aliev, along with Georgia’s International Oil Corporation chief Giorgi Chanturia and Azerbaijan’s Fuel and Energy Minister Mejid Kerimov, signed the interstate and intergovernmental agreements. These clear the way for the start of construction work on the first major westbound pipeline out of the Caspian basin.

The signing had been held up for several months by World Bank objections to Georgia’s acceptance of low transit fees on its territory. The bank, a major donor to Georgia, pressured it to demand substantially higher transit fees in the interest of balancing the state budget. The World Bank’s intervention had surprised its own main donor, the U.S. government, and prompted unprecedented public criticism by the U.S. State Department. The United States, in common with Georgia, Azerbaijan and the Shah-Deniz consortium, sought to avoid any further delays to construction work on this strategic pipeline project.

Under the agreements just signed, Georgia will receive a transit fee of US$2.5 per 1,000 cubic meters of gas during the first five years of the pipeline’s operation, and US$5 per thousand cubic meters during the following fifteen years. Georgia will have the option of receiving the payment in cash or in the form of gas. The ratio of the cash portion to the gas portion in the overall compensation is to be determined annually, depending on Georgia’s internal requirements and the Shah-Deniz consortium’s export commitments. Over and above the compensation, Georgia will have the option of buying gas from the pipeline bound for Turkey. These purchases will be limited to 5 percent of the pipeline’s annual throughput, and will be priced at an average of US$55 per 1,000 cubic meters in the initial period.

Construction work on the Shah Deniz-Baku-Tbilisi-Erzurum (Turkey) pipeline is now scheduled to begin in mid-2002. The pipeline, just under 1,000 kilometers in length, is expected to become operational in the winter 2004-2005, at a projected cost of US$1 billion. The initial throughput will be 2 billion cubic meters annually until 2007, rising to 7.5 billion cubic meters annually from 2007 on.

The Shah-Deniz consortium includes British Petroleum as operator with a 25.5-percent stake, Norway’s Statoil with 25.5 percent, Azerbaijan’s State Oil Company, France’s TotalFinaElf, and Iran’s OIEC with 10 percent each, LukAgip–an alliance of Russia’s Lukoil and Italy’s Agip–with 10 percent, and Turkish Petroleum with 9 percent. The offshore field’s recoverable gas reserves are minimally estimated at 400 billion cubic meters.

At the signing ceremony in Baku, Shevardnadze and Aliev underscored the strategic as well as the economic significance of the project. The presidents described this gas pipeline and the planned Baku-Tbilisi-Ceyhan (Turkey) oil pipeline as vital links between their countries and the developed West, as guarantees of Azerbaijan’s and Georgia’s economic progress, and as a major contribution to building security and stability in the South Caucasus (Dow-Jones Newswires, Prime News, Turan, Neftecompass, September 28-30).

The Monitor is a publication of the Jamestown Foundation. It is researched and written under the direction of senior analysts Jonas Bernstein, Vladimir Socor, Stephen Foye, and analysts Ilya Malyakin, Oleg Varfolomeyev and Ilias Bogatyrev. If you have any questions regarding the content of the Monitor, please contact the foundation. If you would like information on subscribing to the Monitor, or have any comments, suggestions or questions, please contact us by e-mail at, by fax at 301-562-8021, or by postal mail at The Jamestown Foundation, 4516 43rd Street NW, Washington DC 20016. Unauthorized reproduction or redistribution of the Monitor is strictly prohibited by law. Copyright (c) 1983-2002 The Jamestown Foundation Site Maintenance by Johnny Flash Productions