Delays in Turkish-Azeri Gas Deal Raises Uncertainty Over Nabucco

Turkey and Azerbaijan have proven unable to conclude their negotiations on natural gas cooperation, which have been in progress for over one year. Turkish-Azeri gas talks include several issues involving the revision of the price Turkey pays for its imports from Shah Deniz-I, the determination of the volume and price for its imports from Shah Deniz-II, and agreement on the volume and conditions for the transit of Azeri exports to Europe through Turkish territory.

Since the delay of the negotiations is holding hostage the planned EU-backed Nabucco pipeline project, international pressure on the two countries has been growing for some time. During his visits to the region and also using other platforms, US Special Envoy on Eurasian Energy, Richard Morningstar, repeatedly urged the parties to bridge their differences, and utilize the window of opportunity for realizing a key component of the EU-backed Southern Corridor (Anadolu Ajansi, November 18, 2009; January 29).

Turkish officials continue to maintain that they will do their utmost to help realize the Nabucco project. However, the protracted negotiations on the transit of Azeri gas to Europe through Turkish territory, accompanied by the lack of purchase commitments from European consumers, raise questions about the viability of the Nabucco pipeline. Therefore, despite the highly publicized signing of the Nabucco inter-governmental agreement in Ankara in July 2009, the partners have not matched their declarations with action that will set the project on an irrevocable path.

Statements by an executive from Austria’s OMV, one of the shareholders of the Nabucco consortium, that the pipeline would not be built if demand was too low, has only added to uncertainty about the project (Dow Jones, January 27). Commenting on this development, Turkish Energy Minister, Taner Yildiz, ruled out any uncertainty over Nabucco, maintaining that the projected demand exceeded the pipeline’s capacity. He also added that Turkey was doing its part to implement the project and had achieved progress in talks with supplier countries, especially Azerbaijan and Turkmenistan (Anadolu Ajansi, February 2). Similarly, Nabucco consortium CEO Reinhard Mitschek sought to dispel speculation about the fate of the pipeline, by maintaining that there was enough consumer demand (Hurriyet, February 17).

Both Ankara’s position and the lack of clear leadership on the part of the Europeans to move Nabucco forward has caused frustration among officials in Baku. Azerbaijan’s President Ilham Aliyev again expressed these concerns at the highest levels during the Economic Forum in Davos (EDM, February 2). Azerbaijan, therefore, accelerated its work toward the diversification of its export options. In late 2009, as the delays became apparent in negotiations with Turkey over prices and transit of Azeri gas to Europe, the state oil company (SOCAR) concluded several agreements with Russia and Iran. Recently, it was announced that Iran might be interested in importing even larger volumes of Azeri gas, reaching as much as 10 billion cubic meters (bcm), annually (www.en.trend.az, February 25). Moscow’s offer to purchase the entire volume of Azeri gas has been on the table for some time. SOCAR’s President, Rovnag Abdullayev, also mooted the possibility of Azerbaijan providing throughput to the South Stream project (ITAR-TASS, February 25). Meanwhile, Azerbaijan is contemplating investing in alternative ways to export its gas, bypassing Turkey. Baku is considering liquefied natural gas (LNG) terminals on the Georgian and Romanian Black Sea coasts. The investment is estimated to be worth around 6 billion Euros, and would turn Romania into a major hub for marketing Azeri gas in Europe (www.azernews.az, February 19).

These developments should have renewed the urgency in Ankara to resolve the remaining disagreements with Baku. Perhaps, one reason why Turkey does not seem to be alarmed by the weakening prospects of the Azeri option is emerging cooperation between Turkey and Iran. In the fall of 2009, Turkey signed a controversial deal with Iran for the joint exploration of Iranian reserves and export of Iranian gas to European markets through Turkey (EDM, October 29, 2009). During his visit to Turkey in early February, the Iranian Foreign Minister, Manouchehr Mottaki, said that several European countries had approached Iran to sign import agreements. Tehran, therefore, wants the completion of the Nabucco pipeline, so that it may use this route to access European markets (Cihan, February 3).

In early February, Yildiz expressed his hope that Turkey and Azerbaijan could conclude their talks soon. However, reportedly, the parties were only able to reach an agreement on the price for Turkey’s imports from Shah Deniz-I. Abdullayev stressed that despite progress on many issues, both parties still had some way to go before they could finalize the entire package. “We are negotiating in the form of a package in which about ten issues have been raised. Several of them have been resolved, but there is no overall agreement so far,” said Abdullayev (www.azernews.az, February 2). Turkey will also compensate Azerbaijan for the price difference retrospectively for the period, since the previous agreement ended in April 2008.

Although both Azeri and Turkish officials declined to mention any price, the Turkish press, attributing comments to Yildiz, later speculated that Turkey would pay $300 per 1,000 cubic meters, which is a significant increase on the current $120. Turkish energy officials, however, declined to specify any price publicly. Yildiz argued, that as long as the commercial negotiations were in progress, it would be inappropriate to reveal the price, yet he added that Turkey would pay Azerbaijan a price that was reasonable and will protect the interests of both sides (Anadolu Ajansi, February 2).

Subsequent press reports estimated the price as between $260 to $300. They also maintained that although Ankara wants to sign an agreement on the revised price, Baku prefers a broader package. Therefore, Baku might wait until the price for Turkish exports from Shah Deniz-II can be agreed (Hurriyet Daily News, February 12). Yildiz insists that Turkish proposals for the transit fees and import prices for Shah Deniz-II are reasonable, and Aliyev’s criticism of Turkey was caused by miscommunication (Cihan, February 14). Whatever the reason for the delays, the final deal still remains uncertain, and simply reflects the deepening division emerging between the two nations.