IHS Global Insight Perspective | |
Significance | Gazprom CEO Alexei Miller yesterday confirmed that the Russian firm would import 1 bcm of gas from Azerbaijan this year, up from the 500 mmcm envisioned in an October 2009 supply deal, as well as agreeing with SOCAR to double its gas purchases again in 2011. |
Implications | The expansion of the SOCAR-Gazprom gas supply deal is further evidence that both sides expect to reap benefits from increased co-operation, albeit for differing reasons. |
Outlook | While Azerbaijan is looking to monetise its current gas production, looking to diversify its export partners in the long term, Gazprom is pursuing a long-term strategy, aiming to buy up Azerbaijan's surplus gas and perhaps undercut the Nabucco gas pipeline project, which is counting on gas supplies from Azerbaijan. |
A Winning Strategy, So More of It?
When SOCAR, the state-run Azerbaijani oil and gas company, last year signed a preliminary gas supply deal with Russia's Gazprom, the initial headlines were doom and gloom for the Nabucco gas pipeline project. The consortium behind Nabucco, which is planned to run 3,300 km from Turkey to Austria, had been counting on gas from the second-phase development of Azerbaijan's Shah Deniz gas field for the initial throughput of the 31-bcm/y-capacity pipeline. Assumptions that the SOCAR deal with Gazprom would commit that phase-two Shah Deniz gas to Russia generated a number of reports sounding the death knell for Nabucco. However, the relatively small volumes—just 500 mmcm per year—that SOCAR agreed to sell Gazprom in that deal allowed Nabucco proponents to breathe a sigh of relief.
Even if the preliminary supply agreement—which the two state companies finalised in October 2009 and began implementing at the start of this year—did not kill Nabucco, it nevertheless sent a strong message, both to the pipeline consortium and the key transit states involved that gas from Azerbaijan should not be taken for granted (see "Related Articles"). The consortium heeded the warning, pushing ahead to sign an inter-governmental agreement on the project in Turkey in July. However, just as Azerbaijan declared its intention to pursue all of its export options—not just to Turkey and Europe via Nabucco, but also to Iran and to Russia—the Nabucco partners responded, signalling to Azerbaijan that the pipeline could make a go of it by relying on other suppliers as well. Hence, the Nabucco consortium made a concerted effort to pursue Iraqi gas supplies, downplaying the necessity of gas from Azerbaijan in the first phase of the pipeline's planned operation.
The cat-and-mouse game between Azerbaijan and the Nabucco consortium—playing out in parallel to (and partly a function of) the ongoing Azerbaijan-Turkey stalemate over gas prices and transit tariffs—has prompted SOCAR to push ahead with its other export options in the meantime. Indeed, the back-and-forth between Azerbaijan and Nabucco is effectively a background argument, given that the pipeline will not be operational until perhaps 2015–16 while the extra 16 bcm/y in gas production expected from Shah Deniz's second phase will not be available until 2016 either. The question over the direction of future gas exports from Azerbaijan remains a salient issue (and will be decided well before 2016 as events play out this year and next), but SOCAR is increasingly focusing on the here and now.
This helps to explain the Azerbaijani firm's supply deal with Gazprom, allowing SOCAR to monetise its surplus gas. Much of Azerbaijan's rising gas production is being absorbed by the domestic market, but with growing associated gas output from the offshore Azeri-Chirag-Guneshli (ACG) oil project, SOCAR—which receives ACG gas for free as a condition of the production-sharing agreement—is seeking to market this gas. ACG gas production rose in 2009 to 10.1 bcm, up from 9.3 bcm in 2008, while Azerbaijan's overall gas production increased 0.8% in 2009 to 23.6 bcm, according to the State Statistics Committee. In the absence of a new deal with Turkey and no Nabucco pipeline through which to export this gas to Europe at the moment, SOCAR is looking to both Russia and Iran to take more gas.
Outlook and Implications
Azerbaijan is making progress on both of these fronts, having signed an increased gas supply deal with the National Iranian Gas Company (NIGC), while SOCAR president Rovnaq Abdullayev said in late 2009 that Azerbaijan would increase gas exports to Russia this year to 1 bcm, double the amount from the October agreement. Yesterday, Gazprom's Miller confirmed that the Russian gas firm was ready and willing to buy the additional gas from Azerbaijan, noting that the deal with SOCAR was unique for Gazprom in that it had no upper limit on the amount that it was willing to buy.
A meeting between Abdullayev and Miller yesterday reiterated the point that Gazprom is prepared to buy "as much gas as SOCAR can supply", with the two sides announcing that the Russian firm would double its purchase of gas to 2 bcm from Azerbaijan again in 2011. Although this volume remains miniscule in Gazprom's overall portfolio—particularly at a time of weaker European demand and in the context of the Russian company's sharp reduction in its purchases of gas supplies from Turkmenistan—the doubling of gas exports is significant for SOCAR, ensuring that the firm has a committed buyer for its incremental gas output both this year and next.
Considering the ongoing row between Turkey and Azerbaijan, the value of Russia being a stable market for SOCAR's gas exports should not be overlooked. Gazprom has expressed its desire to buy gas exports from Shah Deniz phase two, vowing to offer the best price terms for Azerbaijan and beat whatever price potential European buyers offer. Azerbaijan is unlikely to commit all of its Shah Deniz phase-two gas to Russia, just as it was never going to supply this entire volume for Nabucco, much as the pipeline consortium might have wanted. Azerbaijan is determined to develop a balanced gas export portfolio, with the deals to supply additional volumes to both Iran and Russia part of this strategy.
A future deal to supply more gas to Turkey (or via Turkey to European buyers via Nabucco) would be part and parcel of Azerbaijan's strategy as well. Gazprom surely knows this, but the Russian gas giant is also well aware that it currently has leverage vis-à-vis the Nabucco consortium in being able to purchase SOCAR's gas now, as well as in the future. Agreeing to buy more gas from Azerbaijan now will build up goodwill with SOCAR and further cement Azerbaijani-Russian relations, perhaps prompting the Azerbaijani firm from refraining from aggressively competing with Gazprom for gas markets in Europe when Shah Deniz phase two is launched. Moreover, if by buying more gas from Azerbaijan denies gas supplies to the Nabucco pipeline, undermining that project's commerciality and perhaps even killing off the project, Gazprom would be unlikely to shed any tears.
Related Articles
- Bulgaria: 18 January 2010: South Stream vs. Nabucco—the Battle for the "Southern Corridor"
- Azerbaijan - Iran: 14 January 2010: Azerbaijan, Iran Sign Additional Short-Term Gas Supply Deal
- Azerbaijan - Russia: 13 January 2010: Gazprom CEO Acknowledges Start of Azerbaijani Gas Imports; Bomb Hits Dagestan
- Azerbaijan - Iran: 16 December 2009: Azerbaijan's SOCAR, Iran's NIGC Sign Formal Gas Supply Deal
- Azerbaijan - Turkey: 24 November 2009: SOCAR Eases Stance in Gas Dispute with Turkey, Offers Potential Price Discount
- Azerbaijan - Bulgaria: 16 November 2009: Azerbaijan, Bulgaria Sign Gas Deal to Bypass Turkish Transit "Bridge"
- Turkey - Azerbaijan: 29 October 2009: Turkey Willing to Compensate Azerbaijan in Gas Price Dispute
- Russia - Azerbaijan: 19 October 2009: Azerbaijani President Steps Up Rhetoric in Dispute with Turkey over Gas Prices and Transit
- Azerbaijan - Russia: 15 October 2009: SOCAR, Gazprom Formally Ink Gas Supply Agreement
- Russia - Azerbaijan: 30 June 2009: SOCAR and Gazprom Sign Small But Strategic Gas Supply Deal