SHAH-DENIZ CHANGES CASPIAN GAS EXPORT PICTURE.

The British Petroleum-Amoco company, operator of the Shah-Deniz project in Azerbaijan, announced on February 16 a plan to export natural gas from that project to Turkey, starting as early as 2002. The plan is a consequence of last year’s surprise discovery of a huge deposit of gas at Shah-Deniz, far larger than the proven oil deposit there. That bonanza turned Azerbaijan potentially into a major exporter of gas, besides oil, to Mediterranean and Black Sea countries (see the Monitor, July 15, 1999; Fortnight in Review, July 30, 1999).

As detailed by BP Amoco’s chief executive in Azerbaijan, Andrew Hopwood, the plan envisions supplying Turkey with 5 billion cubic meters of gas annually, from the winter 2002-2003 on, for a first-stage period of five years. The investment is projected at US$1.3 billion for that first stage. Deliveries can increase to as much as 16 billion cubic meters annually in the second stage, with Turkey apparently in the dual role of buyer and transit country. The Shah-Deniz consortium intends to offer Turkey a multiyear supply contract. The engineering work, due to begin in the second half of 2000, includes installation of platforms at the offshore field, laying an underwater pipeline to shore, renovating–and adding compressor capacity to–an existing 490-kilometer pipeline from the vicinity of Baku to the Georgian border, and laying a new, 280-kilometer line across Georgia to Turkey.

Gas reserves at Shah-Deniz are estimated at 700 billion cubic meters after the completion of two test wells. The third, due for completion in the second half of this year, may well increase that estimate. The field is located approximately 70 kilometers southeast of Baku in water depths ranging from 50 to 600 meters. The project owners are operator BP Amoco and Norway’s Statoil with stakes of 25.5 percent each; Elf Aquitaine of France, the LukAgip tandem (Russia’s Lukoil and Italy’s Agip), Iran’s Oil Industries Engineering, and Azerbaijan’s State Oil Company, with stakes of 10 percent each; and Turkish Petroleum with 9 percent. Formed in 1996, the Shah-Deniz consortium had planned to invest US$4 billion in the twenty-five-year oil project. The gas find probably changes not just that investment picture, but the broader picture of gas exports from the Caspian basin, with repercussions on Turkmenistan and the planned Trans-Caspian Pipeline (TCP).

For Turkmenistan, with its huge and unused gas export potential, the Turkish market represents the sole viable export option at least in the short term. The TCP, to be laid on the Caspian seabed and via Azerbaijan and Georgia, is intended to deliver 16 billion cubic meters of Turkmen gas to Turkey annually starting in 2002, plus another 16 billion for transit to other markets in a follow-up stage. Turkmenistan, Azerbaijan, Georgia and Turkey, with strong support from the United States, have recently signed a set of agreements on the TCP and are currently negotiating over details of the final documents. The Shell company is responsible for the upstream part and the Bechtel and General Electric companies for the downstream part of the project. However, Azerbaijan and the Shah-Deniz consortium are now competing for the same Turkish market. That market, while continually expanding, is being targeted by Russia and Iran as well; the aggregate offer far exceeds Turkey’s projected absorption capacity for the decade ahead.

Even assuming that Turkey, for political reasons, ultimately chooses Turkic countries as suppliers–an assumption which remains far from certain–Azerbaijani gas can easily outcompete Turkmen gas for the Turkish market by dint of geography: The Azerbaijani source of supply lies much closer to Turkey, enabling Baku to charge substantially lower prices than Ashgabat could. And Azerbaijani officials sound determined to exploit that competitive advantage over Turkmenistan.

Shah-Deniz means that a trans-Caspian gas pipeline is no longer an economic priority to Azerbaijan, even if it retains political importance. Anticipating the opening of an overland gas export route to Turkey, Azerbaijan has played hardball in the recent negotiations with Turkmenistan over the TCP. Baku has demanded that 50 percent of the TCP’s throughput capacity on the Azerbaijani and Georgian stretches be dedicated to Azerbaijani gas–a clear departure from the TCP’s original dedication to Turkmen gas. Turkmenistan, loath to see its projected export income dwindle, has offered to yield a fixed quota of 5 billion cubic meters annually for Azerbaijani gas. Washington’s good offices have not resolved the dispute. The Shah-Deniz consortium’s planned export route abandons the TCP route. Ashgabat now seems to doubt Baku’s willingness to permit the transit of Turkmen gas to Turkey, except on Baku’s own terms. As a result, Turkmen President Saparmurat Niazov announced yesterday his intention to mend fences with Russia’s Gazprom, in the hope of obtaining transit rights through Russia for Turkmen gas (Turan, Caspian News, Ashgabat Radio, February 14-17).

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