Azerbaijan President’s Moscow visit puts gas into buyers market

Azerbaijan may sell its gas from the Shakh Deniz field to Gazprom. The Azeri President confirmed his country’s interest in the deal during his visit to Moscow, but didn’t give final approval.

The meeting of Azeri President Ilham Aliyev with Dmitry Medvedev in Moscow was expected to hammer out a gas deal under which Baku will sell blue fuel to Gazprom. The company is ready to buy 16 billion cubic meters of gas annually from the second phase of Shakh Deniz field in Azerbaijan.

Baku which currently exports gas to Georgia and Turkey, says it is looking forward to new markets – including Russia – and the Azeri President expressed enthusiasm for a deal with Moscow.

“There are no restrictions in this area for Azerbaijan. Cooperation in this sphere is also an element of gas transit diversification, as today Azerbaijani gas is transported to the west. We are very interested in diversifying deliveries and reaching new markets, as any other country is. I hope the company's talks will end successfully.”

Azerbaijan’s state-owned energy company says it will sign a contract with the partner offering the best price. With a 22% cut in export volumes this year that’ll be a tough task for Gazprom. But the Russian energy major needs this contract to protect itself from competing with the Azeri gas on the European market.

The Shakh Deniz field would be the main gas source to fill the EU-backed Nabucco pipeline – a rival to Russia’s South stream gas route, according to Ronald Smith, Head of Research at Alfa-Bank.

“Nabucco and South Stream compete head to head. They are basically competing for the same limited sources of gas that would be large enough to justify building an extremely expensive, large pipeline, that needs to run for 30-40 years. So its not just about enough gas for the next 10 years, you need to have it for 30 or 40. And there’s not room for both pipelines. So the first one to lock the resources will probably get built. To the extent the Russians can lock these up, that is going to hurt Nabucco and help the South Stream.”

Nabucco, however has another possible gas source – Turkmenistan. Germany’s RWE – a partner in the Nabucco project – signed an agreement with Ashkhabad to consider the possibility of Turkmen gas supplies directly to Germany. But it will take at least 7 years to build the pipeline. Russia has transportation routes and more importantly can guarantee money flows now to the energy export dependant Azerbaijan and Turkmenistan.