Monday, 25 July 2011

Caspian Energy Update

A few interesting recent developments in the Caspian energy field from last week.

Firstly, the dispute between Turkey and Azerbaijan over an agreement for the Nabucco pipeline continues. Officials at Azerbaijan's state energy firm SOCAR have complained that they have yet to receive a copy of the Product Support Agreement, signed on June 8 in Turkey by the Nabucco project partners and the Turkish government. Azerbaijani representatives declined to attend the signing ceremony - apparently because Baku was unwilling to give its full approval to Nabucco whilst various legal, political and commercial issues are outstanding. 

Indeed, SOCAR has also complained that a bilateral transit agreement between Turkey and Azerbaijan had not been signed either. SOCAR Vice President Elshad Nasirov complained that the Product Support Agreement implies Azeri gas transiting Turkish soil, yet Ankara has not pushed forward with the transit deal.

These kind of public spats over Nabucco are nothing new, but with each iteration they take on a new urgency. And the lack of sufficient confirmed investment is also testing Baku's patience: Nasirov complained that SOCAR had sent many delegations to Europe to push for funding, but had received little in the way of investment guarantees.

Secondly, in a related matter, Azerbaijan has announced that it is negotiating an increase in the quantity of gas and oil it pipes through Russia, according to Foreign Minister Elmar Mammadyarov. The statement was made as part of a standard ministerial meeting and doesn't represent anything concrete - yet. Baku has consistently increased the volume of its energy exports to Moscow over the past two years, and in light of the ongoing disagreements with Turkey, a further hike in export volumes is likely.

Lastly, Polish President Bronislaw Komorowski - who also holds the EU's rotating presidency - is in Baku today, seeking to push for progress on Nabucco. President Komorowski has also been mandated by Brussels to resolve differences between Azerbaijan and Turkmenistan on a gas transit deal. Turkmen gas would need to flow westward under the Caspian to plug into Nabucco and to make the project viable. Currently the two sides have shown a lack of interest in moving forward with an agreement, despite making progress in settling a dispute over their maritime boundaries. 

Bringing Turkmenistan on board may depend on the ratification of a Partnership and Cooperation Agreement with the EU. To date Brussels has been hesitant about ratifying the PCA, citing serious concerns with Ashgabat's human rights record. Without this stamp of approval and the associated improvement in trade links, Turkmenistan is reluctant to play ball with the EU.

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