GAZPROM AND SOCAR CLOSE NEW DEAL ON AZERBAIJANI GAS EXPORTS

In early September, Gazprom reached a deal to double supplies from Azerbaijan next year, making good on the Russian gas monopoly’s promise to buy “as much gas as SOCAR can supply”. Experts believe that Russia’s purpose is not related to a lack of own resources, but aimed to undermine the European Union's plans for alternative gas pipelines, in particular the Nabucco pipeline.On September 3, the Chairman of the Gazprom Management Committee, Alexey Miller, attended an extended meeting in Baku with Azerbaijan’s President Ilham Aliyev during Russian President Dmitri Medvedev’s official visit to Baku.The meeting resulted in the signature of an addendum to the effective gas purchase and sale contract for Azerbaijani natural gas between Gazprom and the State Oil Company of Azerbaijan Republic (SOCAR). According to the addendum, the annual volumes of gas purchases will grow to two billion cubic meters (bcm) starting from 2011 and to over two bcm from 2012. This year, it is buying one bcm.Miller stated that the signed document is fully in line with the basic contract, which does not limit the maximum volume of gas supply from Azerbaijan. “Owing to territorial proximity, the absence of transit zones and existing gas transmission infrastructure availability, the cooperation deepening in the gas sector between Azerbaijan and Russia is considered the most economically beneficial option for both partners. It is absolutely clear, therefore, that Azerbaijan gives priority to increasing its export volumes particularly for Russia”, Gazprom said in a statement issued following the meeting.The deal raises doubts about the future of alternative gas supply routes from Azerbaijan to Europe, especially the Nabucco pipeline. Azerbaijan is seen as the primary supplier of the Nabucco route which is planned to run 3,300 kilometers from Turkey to Austria, and will reduce Europe’s dependence on Russia for gas supplies.The latest gas supply deal is the third agreement signed in a year between the two countries, since Baku and Moscow agreed in October last year to ensure Russian purchases of Azerbaijani gas. During the news conference in Baku, Medvedev characterized the energy cooperation between the two countries as the most important sphere of bilateral cooperation and said “we agreed to organize a particular summit of the heads of states dedicated to this topic”.Having been a dominant gas exporter to Europe for a long time, Russia has opposed Nabucco, the completion of which would create an alternative export route bypassing Russian territory and endanger Moscow’s interest in controlling energy exports from former Soviet republics. In consequence, many experts believe that Moscow’s current purpose is to maintain its dominance on Europe's gas market.Strengthening energy cooperation between Azerbaijan and Russia also raises a question about Azerbaijan’s capability of supplying sufficient volumes of gas for the Nabucco pipeline. During a joint news conference on September 3, President Aliyev praised the deals with Moscow as “strategic and evidence of dynamic and effective development of bilateral relations”. He said that this project has a “big future”, with the advantage that gas can be transited directly between the two countries. At the same time, Aliyev reassured that Azerbaijan’s reserves are “large enough” and sufficient for ensuring diversified gas exports. According to the Azerbaijani leader, the country’s proven gas reserves are estimated at two trillion cubic meters (tcm), while “we see realistic reserves of up to five tcm”. The Nabucco pipeline consortium also expressed its confidence in reliable gas supplies from Azerbaijan. Gas reserves in Iraq and Azerbaijan are sufficient for bringing the Nabucco pipeline online by late 2015 with or without phase two production at Azerbaijan's giant Shah Deniz deposit. Azerbaijan claims phase two production at the field, co-led by BP and Statoil and estimated to 1.2 tcm of gas, could begin in late 2016.During a news conference in Baku, Nabucco’s Managing Director Reinhard Mitschek said gas would be available from reserves held by Azerbaijan’s state energy company, SOCAR.Azerbaijan says it plans to send 10 bcm of gas from Shah Deniz II to Europe, but also underlines it has alternatives to the Nabucco pipeline including the Italy-Turkey-Greece Interconnector (ITGI) and the Trans-Adriatic Pipeline (TAP).The Nabucco consortium announced last week that the European Investment Bank, the European Bank for Reconstruction and Development and the World Bank signed a mandate letter to back the project, whereby the three banks will start due diligence for loans that could reach 4 billion Euros.Medvedev brushed off the accusation that Russia is trying to corner regional energy supply and deprive Nabucco of an important source of gas. "We cannot and must not hamper other projects”, Medvedev said.In his turn, Aliyev reassured Western energy partners that strengthening energy cooperation with Russia would not come at their expense. “We don't see our work in the gas sector as an opportunity for unfounded competition. We are working not on the basis of political reasons, but economic practice”, Aliyev said.