SOCAR and Gazprom Sign Small But Strategic Gas Supply Deal

Co-Operation for Mutual (or Mutually Exclusive?) Benefits

Coming off a four-nation tour of Africa last week, Russia's President Dmitry Medvedev found time in his busy travel schedule to spend a day in one more country in which Russia is keen to rekindle its Soviet-era economic and political influence: Azerbaijan. On a one-day visit to Baku, the Azerbaijani capital, Medvedev met with his Azeri counterpart, Ilham Aliyev, to help foster renewed economic co-operation between the two former Soviet republics, and as Aliyev put it, "help further rapprochement between our two countries". A key deal to actualise that rapprochement was reached with the signing of a 500 mmcm/y gas supply deal that will see SOCAR, the Azerbaijani state oil and gas firm, begin to export gas to Russia from 1 January 2010.

The supply agreement, which has been in talks for several months following the signing of a memorandum of understanding (MoU) between SOCAR and Gazprom back in March (see "Related Articles"), is quite modest at just half of one bcm, but the deal is not merely symbolic. While the fact that Azerbaijan has gone from importing Russian gas as recently as 2006 to exporting its own gas to its former Soviet master from next year is indicative of Azerbaijan's growing importance as a regional gas producer (not to mention its changed relationship with Gazprom), the agreement signed yesterday is strategically important for both countries. Indeed, the fact that the deal was signed in the presence of the presidents of both countries is no accident, as both sides see the agreement in a wider sense as having the potential to benefit their geopolitical interests.

Gazprom CEO Alexei Miller said that the Russian gas firm intends to increase its gas imports from Azerbaijan in the future, signalling that Gazprom, which will initially receive gas from Azerbaijan's phase-one development of the offshore Shah Deniz field, is keen to buy gas volumes from phase two as well. While many see politics in the supply deal, suggesting that Gazprom is merely trying to undercut the competition by buying Azeri gas and thus removing this potential source of supplies as throughput for the European Union (EU)-backed Nabucco gas pipeline through Turkey, Medvedev said that the deal was the product of "mutual benefit and not political motives". Nevertheless, Medvedev added that Russia takes a long-term view of the gas market, saying, "It's true that Russia has a lot of its own gas...but this agreement allows us to look into the future. Other deals in this sphere will have to match it."

Putting the Squeeze on Turkey

Although no price details from the deal were disclosed, Gazprom's Miller said that the import price will be based on a formula, while noting that Gazprom is ready to buy gas at market prices in maximum possible volumes. Gazprom, which has stated its intention to use gas from Central Asia and the Caspian region to pump to Europe via its proposed South Stream pipeline, also reportedly agreed with Azerbaijan to become a preferred buyer of gas from Shah Deniz-2 in case other buyer offer equal terms, according to Russia's RIA Novosti. Azerbaijan plans to produce about 27 bcm of gas this year and then 30 bcm in 2010, while the launch of phase-two gas supplies from Shah Deniz—now expected in 2014—is expected to provide another 15–20 bcm/y of gas to Azerbaijan's total production and exports.

Although "commercial" interests may be behind Gazprom's decision to sign the deal with SOCAR, it is clearly Russia's geopolitical interests that motivated it, rather than vice versa. For Azerbaijan, the gas supply deal with Russia may well be the other way around—geopolitical interests motivated by the country's commercial interests. President Aliyev suggested this as well, according to Azerbaijani AzTV state television, saying that, "Today we laid a good basis for effective cooperation in gas sphere. The Agreement signed between Gazprom and SOCAR opens a new page in our relations…I think that this cooperation will be successful and mutually beneficial, which will fully ensure interests of Azerbaijan and Russia."

Given the small volumes involved, it is Azerbaijan's geopolitical interests—namely, that of keeping Russia at bay, diversifying Azerbaijan's gas export partners, and pressuring Turkey to relent on its demands for gas transit, price, and supply terms—that appear to have dictated its decision to sign a supply deal with Gazprom. Prime-TASS quoted Aliyev as saying, "The deal is commercial, which is very important given the fact that the issue of gas relations has been artificially politicised", but it is perhaps telling that a spokesperson for SOCAR quoted by Platts said that the deal was signed on the presidential level, and neither Gazprom nor SOCAR had any immediate comment on the agreement. The deal may give Azerbaijan the opportunity to monetise a small volume of gas output and achieve (in a nominal sense) the goal of diversifying the country's gas export partners, but the real goal of the agreement with Gazprom appears to be to pressure Turkey—which is holding out in talks with its Nabucco pipeline partners for better transit terms, as well as in bilateral talks with Azerbaijan on a transit agreement, gas prices, and supply volumes—to relent at last.

Outlook and Implications

Indeed, by signing the deal with Gazprom, Azerbaijan is keen to demonstrate to Turkey—and, by extension, Turkey's partners in the Nabucco consortium—that the Caspian state has alternative export options and is not afraid to utilise them. Few people expect that Azerbaijan will actually agree to supply all (or even significantly more) gas volumes from Shah Deniz-2 to Gazprom, lest the country undermine its own economic and political independence from Russia, but neither are the EU and the European member firms of the Nabucco consortium willing to call Azerbaijan's bluff. Turkey has not yet played its hand, but there is nonetheless a growing fear that Turkey is very much in danger of overplaying it and watching the window of opportunity for the development of a southern corridor for gas supplies to Europe slam shut.

Nabucco supporters have said that gas from Shah Deniz-2 is crucial for the start-up of the pipeline, as it will help ensure the 3,300-km pipeline's initial viability, but once construction is under way and the idea moves from drawing board to reality, the actual existence of the physical infrastructure itself will provide enough incentives to convince regional gas producers to use it as an export route. Azerbaijani officials have taken a different tack, saying that their country has sufficient gas resources to make Nabucco economical on its own, so the signing of a gas deal with Russia puts the issue squarely in Turkey's court, under intense pressure on both sides and with the clock ticking. The signing of an inter-governmental agreement (IGA) to underpin Nabucco has already been pushed back from June, and while there is talk of progress in bilateral negotiations between Azerbaijan and Turkey, there is little indication that an overarching deal covering transit, prices, and gas volumes is imminent. Unless Turkey relents soon, the Gazprom-SOCAR deal from yesterday could represent a slippery slope for the future of the Nabucco project.

Related Articles

• Russia: 29 June 2009: Gazprom Hopes for Deal to Import Gas from Azerbaijan from 2010 
• Turkey: 25 June 2009: Hungarian, Turkish Energy Officials Say Intergovernmental Nabucco Agreement to Be Ready in July
• Azerbaijan: 19 June 2009: Azerbaijan Claims to Have Sufficient Gas for Nabucco; Project's IGA May Be Delayed
• Europe: 11 June 2009: EU Energy Commissioner Says Agreement on Nabucco to Be Signed by July; South Stream Not a Competitor
• Russia: 18 May 2009: Gazprom Clinches Deals with Transit Countries to Push Forward South Stream Gas Pipeline
• European Union: 11 May 2009: EU Signs Agreement to Underpin Development of "Southern Corridor" for Gas
• Azerbaijan: 30 March 2009: Gazprom, SOCAR Sign MoU on Potential Azerbaijani Gas Exports to Russia from 2010
• Azerbaijan: 13 March 2009: Ongoing Turkish-Azerbaijani Gas Transit Dispute Could Delay Shah Deniz Phase Two, Nabucco
• Russia: 11 March 2009: South Stream Gas Pipeline Project Secures Boost with Russia-Hungary Co-Operation Agreement
• Azerbaijan: 3 June 2008: In Tactical Move, Gazprom Offers to Buy Azeri Gas at Market Prices