Second Shah Deniz deal between Azerbaijan-Turkey still up in the air

Following thorny negotiations, Turkey and Azerbaijan agree on the price of the natural gas coming from Shah Deniz 1.

Turkey will pay around $260 to $300 per cubic meter.

Energy Minister Taner Yıldız is ready to go to Baku to sign the deal, but Azerbaijan won't sign it until agreement is reached on a separate deal involving the purchase of 4 billion cubic meters of gas from Shah Deniz 2.

Though Turkey and Azerbaijan have agreed on the price of the natural gas coming from Shah Deniz I, another agreement that involves gas reserves at the Shah Deniz 2 field is reportedly still pending.

“We have offered a reasonable price [for natural gas from Shah Deniz 1] to Azerbaijan and our offer has been accepted,” Turkish Energy Minister Taner Yıldız said last week.

After thorny negotiations that went on for more than a year, the two countries have agreed on a formula that will set the price of gas between $260 and $300 per cubic meter, the Hürriyet Daily News & Economic Review has learned from reliable sources.

Turkey has been buying Azerbaijani gas for $120 per cubic meter, or one-third of global prices. But this rate was valid for the first year of the agreement, which was signed in late 1996. The new deal will be valid as of April 2008, which means there will be back payment made to Azerbaijan.

Negotiations over new pricing from the Azerbaijani gas field Shah Deniz I had strained bilateral ties, as the Azerbaijani government wanted to increase the initially agreed price, valid for only one year, to international levels, which are around $300.

Energy Minister Yıldız is said to be ready to go to Baku to sign the agreement, but the Azerbaijani government also wants to seal a deal on the price of gas that will be bought from another gas field, Shah Deniz II.

Separate negotiations were being undertaken by Turkey and Azerbaijan on the purchase of gas from Shah Deniz 2. The two sides have agreed on the quantity, which will be around 4 billion cubic meters per year, but disagreement continues over the transit fee as well as the price of the natural gas.

According to Yıldız, Turkey still insists that its price offer for the transit fee and natural gas from Shah Deniz 2 project was reasonable. However, he said, this offer has not been accepted yet.

The government in Baku is telling Ankara it needs to know the price since it will have to make an investment worth $20 billion. Baku wants a package deal and does not want to sign the deal on the first phase without reaching a consensus on the second.

Striking a deal on Shah Deniz 2 will be important for the realization of the Nabucco project, which foresees the construction of a pipeline to Europe via Turkey to carry Caspian natural gas. Russia also wants to buy Azeri gas in order to maintain its dominance over the European market.

Turkey’s reconciliation process with Armenia, an archrival of Azerbaijan, has put further strains on the gas negotiations.

/Hurriyet Daily News/