Shah Deniz Phase Two Postponement Officially Confirmed

Norway’s StatoilHydro company, commercial operator of the gas export pipeline from Azerbaijan’s Shah Deniz field, has publicly identified Turkey as stalling on the transit agreement for Shah Deniz gas to Europe. StatoilHydro’s latest statements corroborate the concerns of European and Azerbaijani officials on this issue (EDM, March 4, 5, 16, April 20, 27). The Turkish AKP government’s stalling hurts Azerbaijan’s interests, those of the multinational consortium that develops the giant offshore Shah Deniz field, and European Union interests in the Nabucco pipeline project, the start of which depends on the gas from Shah Deniz.

StatoilHydro-Azerbaijan president Kristian Hausken and the company’s vice president for gas Olav Skalmeras have announced that the consortium must postpone the start of Phase Two of production at Shah Deniz until 2016, due to lack of a transit agreement with Turkey. According to the Norwegian executives, the issue of transit via Turkey remains a challenge to the Shah Deniz project. They said that Phase Two can only take place -and its timeframe clarified- after the transit problems will have been resolved with Turkey (Reuters, April 24; Trend Capital, April 28).

Phase Two of Shah Deniz gas production had been envisaged to start in 2013-14, its timetable correlated with that of the Nabucco pipeline’s construction. Turkish-imposed delays in field development and production at Shah Deniz would correspondingly delay investment in the Nabucco project and its construction.

The consortium, headed by BP and StatoilHydro, owns and operates the Shah Deniz project and the dedicated South Caucasus Pipeline (SCP) for gas export. The line, known also as the Baku-Tbilisi-Erzurum (BTE) pipeline, was conceived as the first section of a major gas export route via Turkey to Europe. The existing line should feed into the planned Nabucco pipeline on Turkish territory. The SCP (BTE) consortium’s ownership and operating rights on the pipeline, however, stop at the Georgia-Turkey border. Beyond that border, Turkey’s state company Botas owns and operates the pipeline to Erzurum and onward to Nabucco’s starting point. Thus, when Nabucco is built, the two internationally-owned pipelines -SCP and Nabucco- will have to be linked with each other through the Turkish-owned pipeline situated between them; and Nabucco itself would run through Turkish territory.

This situation and the perceived lack of alternatives to the Turkish route are tempting the AKP government to seek concessions at the expense of Azerbaijan, the Shah Deniz consortium, and the two pipeline consortiums. Ankara seeks unilateral advantages on the terms of gas transportation and pricing simply by stalling on the transit agreements. Stalling on these projects is also the AKP government’s way to seek political concessions from the EU. As the EU-Turkey accession negotiations are a long-term process, the stalling may also turn out to be a long-term process, if the EU tolerates such behavior.

Phase Two of production at Shah Deniz is planned to reach 20 billion cubic meters of gas annually in the plateau years, double the volume of Phase One which is currently in progress (Trend Capital, April 29). Investment in Phase Two is estimated at $16 billion, compared to the $5 billion invested in Phase One. Facing such investment costs, the international consortium as well as the Azerbaijani government needs long-term stable arrangements for transit via Turkey and marketing in Europe.

Meanwhile, Russia proposes to buy up all available volumes of Azerbaijani gas at attractive prices. Following repeated offers since June 2008 from the Kremlin, a memorandum of understanding was signed on March 27, 2009, by the Azerbaijan’s State Oil Company with Gazprom. Faced itself with a gas shortfall in the years ahead, Gazprom could use Azerbaijani gas either for consumption in southern regions of Russia or for re-export to Europe as "Russian" gas through the Gazprom-planned South Stream pipeline. Russian officials have alluded to both possibilities.

Underscoring Moscow’s interest, Valery Yazev -head of Russia’s Gas Society and vice-chairman of the Duma- proposes that "Russia must offer the highest possible price for Azerbaijani gas," finance modernization of the Soviet-era gas pipeline from Baku to the Russian border, and sell Azerbaijani gas in Europe as Russian gas. As Yazev makes clear, Moscow seeks to draw Azerbaijan into some bilateral price-fixing arrangement at Europe’s expense: "What is Europe’s game? It tries to crush the gas producers. Our countries need to coordinate their positions. Azerbaijan is geographically closest to Europe among gas-producing countries of this region. Therefore Moscow wants to develop close interaction with Baku" (Interfax, Trend Capital, April 22, 24).

In effect, Russia is racing against the EU in Azerbaijan. Meanwhile, Turkey’s AKP government is making it more difficult for the EU and Azerbaijan jointly to win this race.