Eurasia Daily Monitor

January 5, 2007 — Volume 4, Issue 4

AZERBAIJAN’S PRESIDENT TURNS DOWN GAZPROM’S `BLACKMAIL’ PRICE

by Vladimir Socor

Azerbaijan has ceased importing gas from Russia as of January 1.
Despite the anticipated shortage of gas in the country — compounded by an
unanticipated production delay at the international Shah Deniz gas
project — Azerbaijan has refused to pay $235 per 1,000 cubic meters of
Gazprom-delivered gas in 2007. President Ilham Aliyev turned down such
`commercial blackmail,’ telling the Russian media, `I cannot allow that to
happen. Azerbaijan is no longer the kind of state that can be forced into
anything’ (Ekho Moskvy, December 23).

Gazprom’s final proposal to Azerbaijan in late December increased the
volume offer from 1.5 billion cubic meters of gas to 2.5 billion cubic
meters for 2007, though still far below last year’s 4.5 billion cubic
meters. And it raised the asking price to $235 per 1,000 cubic meters for
2007, compared with the $110 price charged to Azerbaijan, Armenia, and
Georgia in 2006. Moscow left the price unchanged for Armenia in 2007 in
return for property takeovers in that country; but it more than doubled the
price to Azerbaijan and also to Georgia, which ruled out property transfers
to Russia.

President Aliyev, Industry and Energy Minister Natig Aliyev, and State
Oil Company president Rovnag Abdullayev all declared publicly in the closing
days of the year that Azerbaijan would not accept arbitrary overpricing or a
politically motivated price. Indeed, geopolitics largely motivates Moscow’s
decisions to raise the price and slash the volume of gas deliveries to
Azerbaijan. The goal is to prevent the latter from helping Georgia to resist
Moscow’s twin threats of supply cuts and extortionate pricing.

Azerbaijan currently extracts some 5 billion cubic meters of gas
annually and the international oil-producing consortium extracts some 2
billion cubic meters of associated gas. The country’s annual requirement is
10 to 11 billion cubic meters. Azerbaijan will use some internally produced
gas, as well as fuel oil, instead of Russian-delivered gas, to generate
electricity. Almost all of Azerbaijan’s electricity-generating capacities
operate on gas, but a large part can also operate on the more expensive fuel
oil.

To obtain that fuel oil, Azerbaijan must redirect some volume of crude
oil from export to refining in the country. It will definitely not redirect
any volume from the Baku-Tbilisi-Ceyhan pipeline, but rather from the line
that runs to Russia’s Novorossiysk Black Sea port. That pipeline handled
some 4 to 4.5 million tons of oil from Azerbaijan per year in 2005 and 2006,
some of it from the international consortium and some from Azerbaijan’s
state company. The international consortium’s share in using that pipeline
has grown in late 2006 due to technical problems on the BP-operated
Baku-Supsa (Georgia) pipeline — a situation that seems to persist.
Azerbaijan can shift some of that volume into the pipeline to Ceyhan and
another portion for in-country refining, producing fuel oil to generate
electricity.

Technical problems are also causing a further delay of the start of
commercial production at the BP-operated Shah Deniz giant gas field, the
source of the Baku-Tbilisi-Erzurum (Turkey) pipeline. Planned for mid-2006
and postponed into December, that production start has again been postponed
for `some weeks’ due to a leak at the first well, deep under water. Three
other wells are due on stream shortly. The delay has complicated the gas
supply situation for 2007 in Azerbaijan and especially in Georgia. The first
gas deliveries from Shah Deniz had been scheduled to reach Georgia in
September 2006, then rescheduled for December 20. The postponement has been
a factor in forcing Georgia at the end of December to sign a contract with
Gazprom, buying gas at the extortionate price of $235 per 1,000 cubic
meters, as a stop-gap solution to survive the winter.

Both Azerbaijan and Georgia have considered the possibility of
emergency imports of Iranian gas in small volume to tide them over the
winter. In Azerbaijan’s case, Iran was willing at the end of December to
supply 1.8 billion cubic meters of gas in 2007, but the talks on the price
were inconclusive. In January-February 2006, Azerbaijan transited small but
critical volumes of Iranian gas to Georgia through the Astara-Gazi
Mahomed-Gazakh pipeline during the Russian energy blockade of Georgia.
Recalling that situation recently, U.S. Deputy Assistant Secretary of State
Matt Bryza declared in Tbilisi that no one can `tell Georgia to refuse
buying Iranian gas and freeze in winter.’

The winter of 2006-2007 is almost certainly the final opportunity for
Russia to exert leverage on Azerbaijan and Georgia through manipulation of
energy supplies. Clearly, this form of leverage has lost its effectiveness
thanks to the direct availability of Caspian supplies to Azerbaijan and
Georgia. By next winter, both countries should have become completely immune
to Moscow’s use of the energy trade as a pressure tool.

(ANS, APA, Turan, Interfax, December 23-30, January 3; see EDM,
December 8)

–Vladimir Socor