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Azerbaijan: New Gas Discovery Gives Baku Added Weight

Boston, 29 December 1999 (RFE/RL) - A new Caspian gas discovery off the coast of Azerbaijan could shake up the competition for the Turkish market for the second time in the past year.

On Sunday, a top Azerbaijani official said the huge discovery would put the country in the race not only to sell gas to Turkey but could allow it to supply Europe, as well.

The statement by Ilham Aliyev, vice president of the state oil company SOCAR, may carry added weight in the region because of his appointment to a top post in Azerbaijan's ruling party last week. Aliyev, who is the son of Azerbaijan's President Heydar Aliyev, is widely seen as his successor if the 76-year-old leader steps down.

But the sheer size of the discovery may prove to be as potent as the politics of succession. The offshore Absheron deposit is said to contain an estimated 3 trillion (million million) cubic meters of gas.

If the figure is confirmed, the volume of gas would be nearly five times greater than the offshore discovery at the giant Shah Deniz field, announced by Azerbaijan in June. Shah Deniz was estimated to hold 700,000 million cubic meters of gas, enough by itself to reshape the competitive map of Caspian gas suppliers.

With President Aliyev's announcement on Shah Deniz, Azerbaijan made clear that it did not intend to sit by while Russia, Iran and Turkmenistan fought for lead in the race to supply Turkey with gas. Thanks to its position on the western shore of the Caspian, it was certainly able to demand access to any trans-Caspian pipeline that would cross Azerbaijan from Turkmenistan in the east.

Now with the announcement of an even larger deposit, Ilham Aliyev has effectively gone even further than his father's demand. The intention is not only to compete for the Turkish market but any transit through Turkey to Europe, which is also the goal of Turkmenistan and Iran.

Although any actual piping of gas will still be years away, the strategic calculations are likely to start now. SOCAR owns 50 percent of the Absheron consortium, which is valued at 3,500 million dollars, while U.S.-based Chevron Corporation holds 30 percent and France's Totalfina has 20 percent. Azerbaijan's interest in the new field is even greater than in Shah Deniz, where SOCAR owns 10 percent of the venture.

But timing may be the most important motive. Ilham Aliyev's statement came just days after Turkey said it would open negotiations with Iran over a 120 million dollar penalty for delaying purchases of Iranian gas.

Although Iran has built a pipeline to the Turkish border to deliver gas under a 23-year contract that was supposed to be iron-clad, Turkey has slowed work on its part of the line, reportedly because of U.S. pressure. In the meantime, Russia has pushed ahead with plans for a gas line across the Black Sea to Turkey, while Turkmenistan and the United States have promoted the trans-Caspian line.

Over the weekend, Iran and Turkey agreed to delay further talks over deliveries and penalties until February. But the dispute is a reminder that Iran does not intend to lose its place in line among the countries competing for gas sales. Azerbaijan has now served notice that it will also have abundant gas supplies and a superior position to Turkmenistan, if not Russia and Iran.

The younger Aliyev also appears to be repeating a strategy that worked well for his father. By announcing an enormous gas discovery, he has drawn attention from the diminishing returns of oil in Azerbaijan's offshore sector.

If Absheron turns out to be another deposit without commercial quantities of oil, it will do little to help Azerbaijan's case for building the Baku-Ceyhan pipeline, which needs 1 million barrels of oil per day to be viable. By switching the spotlight to gas, Baku can continue to be the center of the Caspian region, even if its oil discoveries do not live up to the predictions of the past five years.

But the risk is that the region may now hold so much gas that prices will plunge, particularly if Turkey's demand proves to be less than it has forecast. Big investments in pipelines will be needed to bring gas not only to Turkey but beyond it to Europe. Lower prices seem unlikely to help.

The problem for Azerbaijan is how to join in the race for gas sales without destroying it. As the newest competitor, it has compensated by announcing larger and larger finds. The market was already crowded with Russia, Iran and Turkmenistan all vying for gas sales. The addition of Azerbaijan makes the outcome even less predictable.