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Same-Day Analysis

Azerbaijan, Turkey Agree on Gas Price, Supply, and Transit Terms

Published: 08 June 2010
Turkish president Abdullah Gul and Azerbaijani president Ilham Aliyev yesterday signed an agreement covering terms for the supply of gas from Azerbaijan to Turkey and the transit of Azeri gas via Turkey to Europe, potentially paving the way for the first gas purchase and supply agreements for Shah Deniz phase-2 gas production.

IHS Global Insight Perspective



The formal agreement between Turkey and Azerbaijan, following a deal in principle reached between the two countries in April, is a much-needed shot in the arm for a variety of "southern corridor" gas infrastructure projects, which have been hampered over the impasse between Turkey and Azerbaijan.


The Turkey-Azerbaijan agreement should pave the way for the launch of the phase-2 development of Azerbaijan's Shah Deniz gas field, which is expected to provide gas supplies for export via Turkey to Europe, as well as underpin construction on a variety of new infrastructure projects designed to deliver this gas.


The Turkey-Azerbaijan deal had been in doubt in recent weeks over lingering disagreements; the signing yesterday of a memorandum of understanding (MoU) between the two countries, while providing clarity for the development of Shah Deniz phase 2 and potential investors in new infrastructure projects, will require some details to be hammered out between Turkish and Azerbaijani negotiators in order to be finalised.

Agreement at Last (Mostly)

Yesterday in the Turkish city of Istanbul, President Abdullah Gul and his Azerbaijani counterpart Ilham Aliyev signed a formal agreement between their two countries covering the terms of gas prices, supply volumes, and transit tariffs. The memorandum of understanding (MoU), following an earlier deal in principle reached in April, brings to an end a more-than-two-year dispute between the two erstwhile allies and should—in theory—remove a major obstacle to progress in realising the vision of the "southern corridor" for gas supplies from the Caspian region to Europe (see "Related Articles").

The gas stalemate between Turkey and Azerbaijan, exacerbated by Turkey's half-hearted attempt to normalise relations with Armenia, Azerbaijan's arch-rival, has served as a major impediment in planning the phase-2 development of Azerbaijan's Shah Deniz field, output from which is expected to play an important role in Europe's energy diversification efforts. Shah Deniz phase-2 is expected to produce up to 20 bcm of additional gas supplies, and a variety of infrastructure projects—from the Nabucco gas pipeline, the Interconnector-Turkey-Greece-Italy (ITGI), and Trans-Adriatic Pipeline (TAP), among others—have been counting on gas from this project to provide throughput supplies. The success of each of these projects has effectively hinged on the outcome of the ongoing Turkey-Azerbaijan negotiations.

With so much riding on Turkey and Azerbaijan resolving their differences, yesterday Gul and Aliyev signed the MoU, although few details were disclosed, and reports suggest that a final, formal deal will still need to be agreed. In the weeks since Turkish energy and natural resources minister Taner Yildiz said that the two sides had reached a deal in principle, an earlier plan to have Turkish prime minister Recep Tayyip Erdogan sign an agreement with Aliyev in the Azerbaijani capital, Baku was aborted over lingering disagreements on the details, and last week Azerbaijani officials suggested that more work would need to be done over the next six to eight months to agree on all the details. Reports yesterday suggested that one of the areas in which the two sides have yet to reach agreement is in whether Turkey will be allowed to re-export gas from Azerbaijan to Europe.

Nevertheless, those areas in which Turkey and Azerbaijan have now reached agreement are significant. Yildiz said that the MoU covers three main areas: a new pricing mechanism covering gas supplies under the existing 15-year, 6.6-bcm/y supply deal between Azerbaijan and Turkey, an agreement on the volume of gas Turkey will receive under Shah Deniz phase 2, and an agreement on transit tariffs for Azeri gas via Turkey to Europe. Turkey previously agreed to pay compensation to Azerbaijan for the difference in the new gas price (once finally agreed) and the previous price of US$120 per 1,000 cm, which was to have expired on 15 April 2008 but has remained in effect since that time. Yildiz said that the new price—which will apply to both current and future gas supplies to Turkey from Azerbaijan—will fluctuate according to market conditions, although press reports suggest that Turkey will retain a discount in its import price for gas from Azerbaijan relative to its imported gas from Russia.

Outlook and Implications

The decision to withhold details on the MoU has left much room for speculation and potential further problems in striking a formal deal between the two countries. Reports suggested that Turkey would receive a total of 11 bcm of gas from Azerbaijan (including the existing 6.6 bcm in the earlier deal) from 2016, although how much of this gas would be consumed in Turkey and how much might be re-exported to Europe remains an open question. Azerbaijani industry and energy minister Natik Aliyev said that Azerbaijan would supply 10 bcm of gas per year to Europe from Shah Deniz phase 2, but with Turkey already re-exporting a small amount of Azeri gas to Greece and aiming to send more once Shah Deniz phase 2 comes onstream, this volume could go up.

Part of the uncertainty is a result of the difference of opinions on Turkey's ability to re-export gas from Azerbaijan, although this may be resolved in time as SOCAR, the Azerbaijani state oil and gas firm, works out the details on its own direct gas supplies to the Turkish domestic market. Yidiz said that Petkim, the former Turkish state petrochemical firm that is now owned by a joint venture between SOCAR and Turkey's Turcas group, would receive the right to import gas directly from Azerbaijan for its own use. Still, a formal agreement clarifying Turkey's right to re-export Azeri gas or its prohibition on doing so would certainly help to illuminate the situation and ameliorate any future disputes between the two countries.

In the meantime, yesterday's MoU, imperfect as it may be, is at least a "step ahead in the right direction", as the Nabucco pipeline consortium's managing director, Reinhard Mitschek, put it. By ending their long-running stalemate (or at least agreeing to look beyond their remaining differences), Turkey and Azerbaijan have smoothed the path towards realising southern corridor projects like Nabucco, TAP, and ITGI. The Turkey-Azerbaijan deal should clear the way for the launch of Shah Deniz phase-2 development, as well as provide much-needed confidence going forward in upcoming investment decisions for the multitude of aforementioned gas pipeline projects. With open season for capacity allocation on these projects upcoming, the resolution of the Turkey-Azerbaijan dispute should allow for the first signing of gas purchase and supply deals between SOCAR and European buyers. As those deals begin to be signed, hammering out the final details on a formal Turkey-Azerbaijan agreement should be quite straightforward—hopefully.

Related Articles

  • Azerbaijan-Turkey: 4 June 2010: Uncertainty Persists on Turkey-Azerbaijan Gas Deal As Pipeline Competition Enters Final Phase
  • Azerbaijan-Turkey: 3 June 2010: Delay to Final Turkey-Azerbaijan Gas Deal Could Hamper Southern Corridor Projects
  • Azerbaijan: 2 June 2010Energy Minister Hikes Azerbaijan Gas Production Forecast for Shah Deniz Phase Two
  • Europe: 25 May 2010: Southern European Gas Corridor Development Launches War of Words
  • Turkey-Azerbaijan: 19 May 2010: Turkish, Azeri Gas Deal Set to Be Formalised on 7-8 June
  • Azerbaijan-Georgia-Romania: 13 May 2010: Azerbaijan, Georgia, Romania Sign Agreement to Form JV to Transport Gas to Europe
  • Europe: 5 May 2010: RWE Expects Delay on Nabucco Supply Agreements
  • Turkey-Azerbaijan: 28 April 2010: Turkey, Azerbaijan Reach Deal in Principle on Gas Price and Transit Terms
  • Azerbaijan - Turkey: 9 February 2010: Turkey Reportedly Set to Pay US$1.7 bil. to Azerbaijan in Gas Arrears
  • CIS - Europe: 13 July 2009: Nabucco Gas Pipeline Project Crosses Key Threshold with Signing of Intergovernmental Agreement
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