Turkish-Azeri Gas Deal Delay Darkens Nabucco Prospects; Washington Urges Quick Agreement

BAKU (Reuters)–The lack of a deal between Azerbaijan and Turkey in protracted talks over the transit of Caspian gas threatens an energy supply route for European markets, U.S. envoy Richard Morningstar said on Wednesday, urging Azerbaijan and Turkey to sign the long-awaited deal crucial for retaining confidence in Western plans to reduce Europe’s dependence on Russian gas.
The European Union-backed Nabucco pipeline, with a price tag of 7.9 billion euros, needs Azeri gas and is central to Europe’s efforts to diversify its energy supplies and reduce dependence on Russia.
Turkey and Azerbaijan have yet to agree on a deal that would lay the foundation for Nabucco exports to Europe and important details of the agreement are now expected to be worked out even later than previously thought.
The lack of an agreement puts more pressure on Nabucco which is facing difficulties already, and which some analysts doubt will be built at all.
He said the signing of a deal, which has been two years in the making, would be essential to boost confidence in the European Union’s ambitious Southern Corridor plan to bypass Russia in bringing Caspian Sea gas through Turkey to Europe.
“We are encouraged by the recent progress in negotiations between Turkey and Azerbaijan,” Morningstar, US Special Envoy for Eurasian Energy Issues, said at a conference on Caspian Sea energy development in the Azerbaijani capital Baku.
“We are hopeful the two sides will reach an agreement sooner rather than later, so that confidence in the Southern Corridor is not undermined.”
“The concept of a Southern Corridor is simply not viable if countries that stand most to benefit from it cannot reach commercially sensible, mutually advantageous agreements on the terms under which gas for the corridor will be transported,” said Washington’s Eurasian energy envoy, Richard Morningstar.
The next round of negotiations between Azerbaijan and Turkey begin on Thursday and will lead up to the arrival of Azeri President Ilham Aliyev to Turkey on June 7, when a general agreement is expected to be signed.
But concrete details, concerning commercial aspects and exports, will not be signed for another 6-8 months, said Murad Heydarov, adviser to Azeri President Ilham Alyiev.
The June 7 agreement may be seen as an attempt to buy more time while more important details are set straight.
The two sides have been negotiating since 2008, when the price Turkey pays for its contracted 6.6 bcm of Azeri gas was up for renegotiation.
Negotiations had been complicated by political tensions over a bid by Turkey and Christian Armenia, Azerbaijan’s enemy in the conflict over rebel Nagorno-Karabakh, to end a century of hostilities and mend ties. The rapprochement collapsed in April.
Nabucco has yet to secure any supplies for the 31 billion cubic meter capacity pipeline, seen coming on line at the end of 2014, leaving it vulnerable to Russia’s rival South Stream pipeline that also aims to feed European consumers.
Next year Azerbaijan is expected to produce an additional 1.4 billion cubic meters of gas that it can export from its Shah Deniz, said state oil company Socar’s general manager of gas export.
Russia is already keen to buy Azeri gas and Moscow has said it would be interested in buying all the gas from the second phase of production of Azerbaijan’s off-shore Shah Deniz field seen coming on line in 2016.
Azerbaijan’s additional gas output next year, a result of increased efficiency at field wells, will boost output above a peak level of 8.6 bcm this year.
“Production should reach 10 bcm next year, which should free up additional gas exports to Europe,” export manager Kamal Abbasov said on the sidelines of the 17th caspian Oil and Gas Conference.
After a gas glut in European markets, demand on the continent is seen rising from around 2015 as economic activity picks up and more gas-fired power plants come on line.
“We are in a very oversupplied gas market in 2010 but … we will be facing a supply gap sometime between 2015 and 2020 and this points to additional necessary gas supplies to the EU,” said Wolfgang Sporrer, OMV Gas and Power’s regional manager.
OMV is a shareholder in the Nabucco consortium, as well as MOL, Romania’s Transgaz, Bulgaria’s Bulgargaz, Turkey’s Botas and Germany’s RWE.
Azerbaijan’s off-shore Shah Deniz field holds its largest gas reserves, expected to be at least 1.2 trillion cubic meters, though some analysts have put the reserves as high as 2 trillion cubic meters.