Russia's Gazprom is in talks with Azerbaijan to purchase natural gas. Europe and Iran have also been courting Azerbaijan for its natural gas, but Gazprom has announced it is now willing to pay the same as, if not more than, the Europeans and Iranians are offering. If Azerbaijan reaches an agreement with Gazprom, it could cut off one of Europe's options for diversifying its natural gas supplies away from Russia, while enabling Moscow to keep its natural gas exports flowing westward.
Russian natural gas giant Gazprom is in talks with Azerbaijan to purchase natural gas. Russian Ambassador to the South Caucasus Vasily Istratov said June 4 that Gazprom CEO Alexei Miller met with Azerbaijani President Ilham Aliyev on June 2 in Baku. Gazprom is proposing to pay the same as — and possibly more than — Europe and Iran have offered for the natural gas. This marks one of the first times that Gazprom has actually said it will put up the cash to compete with other potential natural gas buyers. If Azerbaijan goes with the Russian suitor, it could cut off one of Europe's options for further diversifying away from Russian energy supplies and could secure Moscow's ability to continue its own westward exports. (click image to enlarge) Russia supplied Azerbaijan with natural gas until around 2006, when Azerbaijan's own natural gas fields came online, eliminating the country's dependence on Russian natural gas. But obviously the infrastructure is still in place, hooking Azerbaijan into Russia's complex spider web of pipelines running from northern Russia and Central Asia to Europe, with spurs shooting down into the Caucasus. Each of the three lines running from Russia to Azerbaijan has an annual capacity of 10-13 billion cubic meters (bcm). One of those lines was turned into a line running through Georgia to Turkey, called the South Caucasus Pipeline, which takes natural gas from Azerbaijan's Shah Deniz field to Europe. Shah Deniz contains 1.2 trillion cubic meters of natural gas reserves and, in its first phase of production, pumps 8.6 bcm annually, which goes to Europe. The second phase of the field is expected to pump another 8.6 bcm annually starting in 2011. It is this second phase that is drawing bids not only from Europe, but also from Iran and now Russia. Russia differs from other bidders in that its structural links to Azerbaijan already exist; it would require a simple reversal of the natural gas flow through the Soviet-era pipelines to get Azerbaijani natural gas flowing to Russia and then Europe. If phase two is to produce natural gas for Europe, the Europeans will have to build a parallel line to the South Caucasus pipeline through Turkey, which is not really a difficult project financially for the Europeans. The battle over Shah Deniz's second phase thus comes down to who will put up the most cash for the natural gas supplies. Iran does not have the money to compete. In the past, the Europeans have always beaten Russia in bidding contests, because Moscow refuses to spend the money. But Gazprom has offered to pay $360 per thousand cubic meters, which is on the high end of what Europe is expected to pay for natural gas by 2011. Traditionally, Gazprom has bought cheap natural gas from former Soviet states; however, recently, countries such as Turkmenistan have hiked their prices, forcing Gazprom to adjust. With the large amount of natural gas Russia sends to Europe — approximately a quarter of Europe's consumption — Russia depends on supplies from Central Asia to help fill the orders. But Central Asian countries are looking eastward to China as a potential energy customer, making Moscow a little jittery about its ability to meet its export contracts in the long term. Azerbaijan could fill this void. If Russia can secure the second phase of Shah Deniz, it will mean that Europe failed to do so. Sure, Europe will end up with the natural gas supplies anyway, but it will still have to get it from Russia first — at whatever price Moscow demands.