Azerbaijan Boosts Implementation Prospects of Nabucco Inter-Governmental Agreement

The inter-governmental agreement (IGA) on the Nabucco project, signed on July 13, depends existentially on Azerbaijan for start-up and first-phase gas supplies. Azerbaijan remains a staunch supporter of Nabucco and other components of the E.U.’s Southern Corridor project, but not an unconditional supporter to be taken for granted. As the Industry and Energy Minister Natig Aliyev, and State Oil Company president Rovnag Abdullayev noted in connection with the IGA’s signing, Azerbaijan looks at a range of possible importers of its gas, and several possible directions for its gas exports (Trend Capital, July 13).
Azerbaijan seeks direct access to European gas markets via Turkey as an overriding national interest. Turkey’s AKP government, however, continues obstructing the transit and purchase agreements for Azerbaijani gas. This situation, as well as uncertainty about European financing of Nabucco, have fed skepticism about the project in Baku, only partially alleviated by the IGA’s signing. The IGA cannot fully operate until Turkey signs a European-standard agreement for the transit of Azerbaijani gas through the Nabucco pipeline. Thus, Azerbaijan’s policy remains that expressed as: "Show us the pipeline to markets and we will sell you the gas."
In line with this maxim, Azerbaijan’s State Oil Company signed with Gazprom on June 29 the framework agreement on the principles of Azerbaijani gas exports to Russia (EDM, July 2). Western media speculated that this agreement would jeopardize the Nabucco project, or at least delay the IGA’s signing. Such interpretations have already been proven wrong on the second point, and will almost certainly prove wrong on the first. If anything, the immediate effect of Azerbaijan’s June 29 agreement with Gazprom was to concentrate minds in Ankara and Brussels, helping to bring forward the Nabucco IGA’s signing. In the short-to-medium term, the June 29 agreement should stimulate the IGA’s implementation, and European financing of Nabucco by creating some competition from the Russian side for Azerbaijani gas.
Baku’s June 29 move is smart on a number of counts: first, the meager volume -500 million cubic meters envisaged for Russia in 2010- is only symbolic. The agreement creates no obligation for Azerbaijan beyond 2010, although it does open the possibility of continuing and expanding Azerbaijani gas deliveries to Russia from 2011 onward. With the Nabucco pipeline due to become operational by 2014, it makes sense for Azerbaijan to use the existing pipeline to Russia during the interim period.
Second, within the limits of this agreement, Azerbaijan’s gas exports to Russia will not be sourced from fields dedicated to the Nabucco project. Thus, Gazprom will be unable to compete with Nabucco for Azerbaijani gas. That could only happen if Turkey’s AKP government blocks Azerbaijan’s westward outlet through extortionate business terms, or if the European financing of Nabucco falters. Thus, Baku’s agreement with Gazprom will usefully remind Ankara that Azerbaijan is not totally dependent on the Turkish market or the Turkish gas transmission route. By the same token, it should remind the new European commission, soon to take office in Brussels, about the necessity of timely European funding for Nabucco.
Third, from Azerbaijan’s standpoint, adding a Russian export outlet to the Turkish outlet is a diversification move, away from Turkey’s total monopoly. Diversification is as necessary to Azerbaijan as to any gas exporter (Azerbaijan might also benefit from diversification through swap arrangements with neighboring Iran). Turkey’s AKP government has delayed the Nabucco project by abusing its monopoly position vis-á-vis Azerbaijan in ways emulating Gazprom’s behavior toward Turkmenistan.
Fourth, and in addition to those tactical gains, Baku has achieved a strategic gain for itself, for Turkmenistan, and for Western objectives, by committing Gazprom to a purchase price of $350 per thousand cubic meters of Azerbaijani gas. This price benchmark should strengthen Turkmenistan’s hand in negotiations with Russia for a similar pricing of Turkmen gas. If a cash-strapped Russia declines to meet that price level for the accustomed annual volumes of Turkmen gas, then part of those volumes would become available for export in other directions, including Nabucco. This prospect should in turn stimulate Turkmenistan to supply the Nabucco pipeline through an E.U.-proposed trans-Caspian link via Azerbaijan.
In summary, Azerbaijan is retaining tactical flexibility through the non-binding agreement with Gazprom, while improving the strategic prospects for itself, the Nabucco project, and Turkmenistan within the framework of the E.U.’s Southern Corridor project. It is also thereby gently nudging Turkey to sign the transit and purchase agreements for Azerbaijani gas, so as to implement the Nabucco IGA just signed.