How Much Longer Can Azerbaijan Wait For Nabucco to Materialize?

"It’s a good question, how long we are going to wait," Azerbaijan’s President Ilham Aliyev warned with regard to the Nabucco gas transport project during the World Economic Forum just held in Davos. As a potential large-scale producer with proven reserves of 2 trillion cubic meters of natural gas, Azerbaijan "does not have a very big margin of time to figure out what to do." The country needed to know what export outlets were available and make its plans accordingly, Aliyev told the press (Interfax, January 30; The Wall Street Journal, February 2).

Azerbaijan has all along favored the Nabucco project for transporting Caspian gas to Europe. Indeed, gas from Azerbaijan’s Shah Deniz offshore field is the only guaranteed source of supply for the planned Nabucco pipeline’s first stage. Aliyev reaffirmed that commitment during the high-level Nabucco conference in Budapest on January 26 and 27, but he also gave notice there that Azerbaijan’s decisions would ultimately depend on a number of factors, four of which will be crucial. These are: the timetable for pipeline construction, its financing, the purchase price for Azerbaijan’s gas, and the transit regime through Turkey and other countries (Bloomberg, January 27; see EDM, January 29, 30).

From Azerbaijan’s perspective, questions persist on all those four counts and, therefore, on how much longer it can wait for that westbound pipeline to materialize. Unsurprisingly, after five years of waiting, Azerbaijan is beginning to consider other options as well.

The timetable for pipeline construction will be crucial to Azerbaijan’s choice of export options for its gas. Delays to the Nabucco pipeline are in turn delaying the second phase of extraction at the Shah Deniz field. Further development of that giant field requires some clarity soon with regard to export outlets for the second-phase production. As if to complete the vicious circle, delays to the second phase at Shah Deniz are being cited as a factor behind investors’ and lenders’ skepticism about the Nabucco pipeline.

In principle, the timetables for Nabucco’s first-phase construction and the Shah Deniz field’s second-phase development are correlated with each other. Ultimately, however, Shah Deniz stakeholders might well be tempted to make a deal with Gazprom for exporting the field’s output if the Nabucco project remains deadlocked. Azerbaijan produced 22 to 23 billion cubic meters of gas in 2008, expects to produce some 27 billion cubic meters in 2009, and forecasts an output of 50 to 60 billion cubic meters annually after 2015 (APA, January 7; Bloomberg, January 27).

With regard to financing, Azerbaijan does not need EU support to be able to participate in the project–it can do so with its own means–but it does call on the European Union to invest seriously in the Nabucco pipeline, both financially and politically, without further delay. Aliyev and Prime Minister Mirek Topolanek of the Czech Republic, the current holder of the EU Presidency, underscored this requirement at the Budapest meeting, and Aliyev reemphasized it at the Davos forum.

The Budapest meeting opened for the first time the prospect of EU financial support for Nabucco, but, almost the next day, the German government took exception. Chancellor Angela Merkel wrote confidentially to Topolanek and to EU Commission President Jose Manuel Barroso, insisting that all EU countries must support the Gazprom-led Nord Stream and South Stream projects as well as Nabucco (Financial Times Deutschland, January 29). Given the limited funding available from the EU and the private sector for energy projects generally, Merkel’s demand practically implies starving Nabucco in favor of Gazprom’s projects, which would delay Nabucco’s construction even further.

On the pricing of its gas exports, Azerbaijan takes the position that market prices can only result from the diversification of export options and competition among buyers of its gas. Although it favors the Nabucco project, Azerbaijan would not make a "premature commitment" that would lead to "dependence on a single route," Aliyev pointed out in Davos. Citing Gazprom’s offer to buy all of Azerbaijan’s available export volumes of gas at European netback prices, Aliyev described it as attractive and worth considering.

At present, Azerbaijan exports small volumes of its gas at preferential prices to Georgia and Turkey. It has begun exports to Greece and is set to export to Italy through the Turkey-Greece-Italy Interconnector for Azerbaijani gas (due to expand from 4 to 8 billion cubic meters per year). It has also recently agreed to export one billion cubic meters to Bulgaria (pending a solution on transport or swapping). Iran is also seeking to import small volumes of Azerbaijani gas to supply Iran’s northern provinces. The small-capacity pipeline connecting Azerbaijan with Iran at Astara is worn out but usable for up to 3 billion cubic meters per year. Iran is a stakeholder with 10 percent in the first-phase development of Shah Deniz and is also interested in participating in the second phase (www.day.az, January 29; Turan, February 2).

The transit route through Turkey poses serious problems. Azerbaijan depends heavily on that "single route" for its existing gas exports and the planned deliveries through Nabucco to Europe. At present, Azerbaijan’s export volumes and pricing arrangements remain far below the country’s potential for production and export of gas (quite apart from its transit potential for gas from Turkmenistan).

Turkey, however, is holding up the Nabucco intergovernmental agreement by demanding a right to retain 15 percent of Azerbaijani gas at a discounted price from the transit pipeline for Turkey’s own use (Barcin Yinanc, Turkey in the Unfolding New Chapter of the Big Energy Game, January 2009), as well as onerous terms on the transit regime. Such demands could only be satisfied at the expense of Azerbaijan and other countries in the Nabucco consortium. Not content with the role of a transit corridor, Turkey would like to become a "hub" country, that is, purchasing and reselling gas and building strategic storage capacity.

The EU is tackling all these issues, aiming to sign the intergovernmental and project support agreements by June of this year. In the event of failure, however, and after its long neglect of the Nabucco project, the EU must not take Azerbaijan for granted indefinitely.