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Azerbaijan: Baku Close To Gas Pact With Ankara

Azerbaijan appears to be on the verge of signing an agreement for gas sales to Turkey. The country needs the deal to renew interest in Caspian investment. But there are doubts about Baku's strategy of relying on cheaper gas imports and selling at higher prices abroad. Correspondent Michael Lelyveld reports.

Boston, 4 January 2001 (RFE/RL) -- After months of pursuing a crucial gas deal with Turkey, Azerbaijani officials are now predicting an agreement within a matter of days.

On Tuesday, Azerbaijan's ANS television news service quoted officials of the state oil company SOCAR as saying that an agreement on transporting the country's Caspian gas to Turkey "is to be signed in early January."

An official of the Turkish state pipeline company BOTAS confirmed that a deal is close, although a price for the gas has yet to be agreed, Platt's Oilgram news service said.

The reports follow talks between working groups of the two countries on supplies from Azerbaijan's massive Shah Deniz gas field in the Caspian Sea. With some exaggeration, the ANS news service quoted unnamed experts as saying the deposit could turn Azerbaijan into the "world's largest gas-exporting country."

While that result is highly unlikely, the overstatement is a sign of the importance that Azerbaijan attaches to an agreement with Ankara. Last week, the English-language Baku Sun reported that the "pressure is on" for President Heidar Aliyev to sign a contract during a scheduled visit to Turkey on January 15. The paper said some progress may be made with an inter-governmental agreement but that "the Shah Deniz scheme would surely suffer a blow if Aliyev were to return home without a gas sale contract in his pocket, as well."

Baku is hoping that an accord will launch it on a course that it laid out last February, when a group led by the BP oil company announced plans to invest $1.3 billion in the gas export scheme. Since then, BP officials have said the investment could reach $2 billion in the next three to four years, with deliveries as soon as late 2002.

The country needs that boost in investment following several years of disappointing oil discoveries. Since the "contract of the century" in 1994, no comparable oil deposit in Azerbaijan's waters has been found. Gas exports are now seen as critical to Azerbaijan's future. Since the discovery at Shah Deniz, even larger gas supplies have been found at the offshore Apsheron field.

But until now, Turkey has been slow to sign a purchase agreement, prompting Aliyev to suggest last month that Azerbaijan could sell its gas to Iran instead. Turkey has reportedly tried to persuade Azerbaijan that it should join Turkmenistan in a trans-Caspian pipeline instead of pursuing its own export project. The Baku Sun also said that SOCAR officials are worried that Turkey may only want to buy modest amounts of gas.

The success of Shah Deniz is also important to Azerbaijan because of its domestic energy shortage. Last winter, the country was forced to ration electricity when both gas and fuel supplies ran low. This year, the country is paying to import gas from Russia until it can meet its demand with gas from Shah Deniz.

But another report suggests that the key to Azerbaijan's plans is an elaborate substitution strategy. According to the industry newsletter Caspian Investor, Baku is trying to export its gas at a far higher price than it is paying for imports from Russia. The idea is to give foreign oil companies an incentive to invest in Shah Deniz by assuring them that they will not be asked to sell their newly-found gas to Azerbaijani users at low rates.

Caspian Investor said that Azerbaijan has already negotiated contracts to import gas from Russia at a set price of $48 per thousand cubic meters. SOCAR hopes to export Azerbaijani gas at world price levels, which are now about $70 per thousand cubic meters in Turkey, the newsletter said.

One obvious problem with the plan is that Russia is also the biggest gas supplier to Turkey. Moscow is likely to see no reason to keep selling its gas to Azerbaijan cheaply once Baku becomes a competitor in the Turkish market. While Azerbaijan plans to use separate sources of gas, it would effectively be trying to sell Russian gas at a profit in Turkey by substituting one supply for the other.

Azerbaijani officials have also recently complained about the reliability of Russian gas deliveries and threatened to open talks to buy gas from Iran. But a report carried this week by the Times of Central Asia cast doubt on the alternative, saying that Iran has reportedly offered to sell gas to neighboring Armenia at a rate that would be far higher than Russia now charges to Azerbaijan.

A Soviet-era gas pipeline from Iran is also in need of repair at a minimum cost of $15 million to $20 million, the Times of Central Asia said. Other estimates have been higher.

The long list of problems may be a measure of how much Azerbaijan needs a gas deal with Turkey. But even with an agreement, it seems unlikely that all of Baku's problems can be solved.