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Azerbaijan: Gas For Turkey Could Be Half Russia's Price

Boston, 21 October 1999 (RFE/RL) -- A new study says Azerbaijan could supply Turkey with Caspian Sea gas at about half the cost of Russia's deliveries through a planned pipeline across the Black Sea.

The estimates, which include project development and pipeline costs, could have a significant impact on the decisions over which pipelines are built. The report concluded that Azerbaijan's newly-discovered gas would also be cheaper than supplies from Turkmenistan or Iran.

The study conducted by the Wood Mackenzie consulting group and reported by Platt's Oilgram News found that the cost of piping gas through Georgia from Azerbaijan's Shakh Deniz field in the Caspian would be low enough to offset the expense of tapping the deep-water deposit.

The consultants based in Edinburgh, Scotland said that Azerbaijan's gas could cost 37 to 46 percent less than the Russian gas that would be piped as part of the Blue Stream project with a line under the Black Sea. The range of costs would depend on the option that Azerbaijan chooses. It could either expand an existing line through Georgia for $230 million or build a new one for $650 million, the report said.

Baku would also have a cost advantage ranging from four to 18 percent over Turkmenistan's plan to build a trans-Caspian pipeline through the Caucasus with U.S. support. If Turkmenistan's gas were piped through northern Iran, Azerbaijan's gas could be 18 percent to nearly 30 percent cheaper, according to calculations based on the study's figures.

Iran's own supplies from its South Pars field in the Persian Gulf would be the most competitive against Azerbaijan. But Baku's costs would still be 1 to 16 percent less, the report said.

While the comparisons are useful, they do not necessarily determine the price at which gas will be sold or the number of pipeline projects that will proceed. Wood Mackenzie concluded, for example, that Iran's pipeline to Turkey will be the first to be completed, giving it an edge over Azerbaijan's gas, despite the higher cost.

Turkey may also elect to buy gas from any number of countries for political reasons, including security, diversity of sourcing or ethnic ties. Although the cost may be higher, Ankara may elect to promote the Blue Stream project because of its relationship with Russia, which is already its primary supplier with lines through Bulgaria, Romania and Ukraine.

Turkey's agreements with Iran and Turkmenistan could also make it difficult to turn away their gas, even if it comes at a higher price. After a visit Tuesday to Baku, Turkish President Suleyman Demirel said his country would buy Turkmen gas because the trans-Caspian project is likely to be finished first. The analysts believe that Azerbaijan may have relatively little time to benefit from its cost advantage, while gas from Shakh Deniz may not be deliverable until 2005.

But the existence of the field, where an estimated 700 billion cubic meters of gas was discovered in June, is bound to influence the price that other nations can charge. The comparisons may also affect the return that Caspian countries and investors can expect.

Turkey has a contract to buy Russia's gas from the Blue Stream pipeline for $114 per thousand cubic meters, for example. But its agreement with Turkmenistan to purchase gas for $78 per thousand cubic meters may be renegotiated after the first six months to reflect market conditions.

Availability of cheaper gas from Azerbaijan could be just such a condition, leaving more distant Turkmenistan with disappointing returns. That risk now seems considerable, as other developers explore Azerbaijan's offshore fields in hopes of finding even greater volumes of gas.

Based on the findings of the study, Russia's costs with Blue Stream would be nearly $31 per thousand cubic meters, while Turkmenistan's cost with the trans-Caspian line would be about $20. But Azerbaijan's cost could be as little as $16.70. Such differences may be hard for Turkey to ignore.

Although Baku may have little time to press its advantage, precious time has already been lost by its competitors. Before Shakh Deniz, Azerbaijan was largely regarded as a supplier of oil while Turkmenistan was seen as a major source for gas that might be piped through either the Caucasus, Russia or Iran.

The discovery at Shakh Deniz has changed all that, ending an era of neat distinctions for policy makers and planners. The rise of Baku as a potential major gas supplier has made it harder to find a formula under which Turkmenistan can compete, particularly since the trans-Caspian line must cross Azerbaijan. The latest reports suggest that an interstate agreement for the trans-Caspian project may be signed in Turkey next month.

But so far, Turkmenistan is still without a single agreed export route in the Caspian competition after years of maneuvering. The country's vast gas reserves should have given it an advantage. But if it loses another opportunity, those reserves could become a greater source of frustration than one of revenue.