Azerbaijan crucial to Western hopes of increased Caspian gas exports

WASHINGTON, Feb. 5 (UPI) -- No Caspian nation has been more affected by the perfect storm of the global economic bust, Russian-Ukrainian gas disputes and the Georgian-Russian conflict than Azerbaijan. In 2009 Baku will attempt to juggle multiple concerns, from raising exports amid falling prices to remaining on good terms both with Western consumers and its giant northern Caspian neighbor Russia.

Its partner may be none other than Iran.

In the past six months three seismic events have impacted the export of Caspian hydrocarbons -- Russia's five-day conflict with Georgia, the subsequent global economic slowdown and the precipitous drop in energy prices, and last month's Russian-Ukrainian gas dispute.

For better or worse, Azerbaijan has emerged as ground zero in the covert new Great Game energy war between the West and Russia for domination of both Caspian energy and its transit resources. Caught between the two competing power blocs, last year Azerbaijan began to develop its own variant on Washington's favorite mantra regarding Caspian exports: Happiness is multiple pipelines. In reality, Baku had little choice, and a policy was instituted during the Russian-Georgian clash that saw Azerbaijan branch beyond using Western routes to begin again shipping oil northward through Russia via the Baku-Novorossiysk pipeline and begin sending oil eastward to Iran. The policy was, in fact, an expedient policy born of necessity, as a mysterious explosion on the Turkish segment of the Baku-Tbilisi-Ceyhan pipeline two days before the outbreak of hostilities had shut down its favored Western export route via Georgia.

The Ukrainian-Russian natural gas dispute frightened Brussels about the reliability of Russia as a gas exporting partner and gave additional impetus to the West's most ambitious (and expensive) project for procuring Caspian natural gas, the 2,050-mile Nabucco pipeline. The only gas currently committed to Nabucco is 8 billion cubic meters promised by Baku from its offshore Caspian Shah Deniz field. As Nabucco's projected throughput is to be 31 bcm, Nabucco promoters are touting the idea that somehow Turkmenistan can be inveigled to provide the missing 22 bcm via an underwater Trans-Caspian Pipeline to run from Turkmenistan's Turkmenbashi eastern Caspian port to Baku.

There is regional interest in Nabucco, but whether it will translate into political action and natural gas commitments is quite another matter. On Jan. 10 Turkmen President Gurbanguly Berdimuhamedov hosted Azeri President Ilham Aliyev and Turkish President Abdullah Gul for a meeting in Turkmenbashi to discuss trilateral cooperation issues. Notably, the meeting did not end with a joint communique, despite Aliyev's and Gul's promotion of Nabucco.

For all the camaraderie on display in Turkmenbashi, significant obstacles remain in Azeri-Turkmen relations, impeding Ashgabat's participation in Nabucco, most notably the unresolved final status of the Caspian seabed, which has yet to be definitely resolved 18 years after the collapse of the Soviet Union, and Turkmenistan's already promised future exports to both Russia and China.

Given the hydrocarbon potential of the Caspian waters, Azerbaijan, Iran, Kazakhstan, Russia and Turkmenistan have spent nearly two decades squabbling over their respective self-proclaimed sectors, and until the issue is resolved, international funding for TCP remains problematical at best.

There are also bilateral Azeri-Turkmen Caspian disputes, most notably over ownership of the Kyapaz field (known as Serdar in Turkmen), that have long been a stumbling block in relations between Azerbaijan and Turkmenistan, and until they are resolved, undersea pipelines remain wishful thinking.

Nabucco also has its local critics. Azeri political scientist Ilgar Velizade noted Nabucco's high cost, now estimated at $11.8 billion to $13.1 billion, is untenable in the context of the current global financial crisis and consequently believes that the less expensive Poseidon pipeline option, which would deliver natural gas to Italy from Shah Deniz, could be as important for Europe, Azerbaijan and Turkey as Nabucco. Velizade added, "Hypothetically speaking, it could also be used as a link for the delivery of gas from Turkmenistan and Kazakhstan. Particularly since a date has been set for the start of construction: 2009."

While it was an article of faith of the Bush administration's promotion of multiple pipelines that they should avoid both Russia and Iran, the latter, while currently the 800-pound diplomatic elephant in the room because of its nuclear energy program, in fact may prove the missing element in getting Nabucco off the ground.

Aliyev is showing signs of fatigue over issues of Nabucco funding, throughput, construction timetables and other imponderables, telling journalists at the recent World Economic Forum at Davos, Switzerland, "It's a good question, how long we are going to wait?" noting that with proven natural gas reserves of 2 trillion cubic meters, Azerbaijan "does not have a very big margin of time to figure out what to do."

Enter Iran.

Following discussions last week between Naft Iran Intertrade Co. Ltd. and State Oil Co. of the Azerbaijani Republic, Iran's Deputy Oil Minister Hossein Noghrehkar-Shirazi told reporters that Tehran has proposed investing $1.7 billion for a 10 percent share in the Phase Two development of Shah Deniz.

"The second phase of the Shah Deniz field will go on stream in 2013 and 2014," he said, "and currently a lot of countries have asked to buy gas from the Shah Deniz consortium, and Iran has been placed in the list of those who are interested."

The Iranian proposal is a master chess move, as it provides Nabucco with start-up cash while undercutting Gazprom's efforts to buy up all future Caspian and Azeri natural gas production, which would effectively doom Nabucco. The offer also provides for Iran's own natural gas security from Shah Deniz's Phase Two while giving it potential access to advanced Western technology to begin bringing its own massively underdeveloped fields online. Last but not least, the investment also neatly sidesteps Washington's ILSA sanctions regime, as it represents Iranian foreign investment into a trusted Western energy partner rather than Western companies eager to enter the Islamic Republic's market.

There are already strong signs that the European Union is also about to break away from total support for U.S. sanctions, as on Feb. 3 the European Parliament adopted a document calling on Iran and Uzbekistan to support Europe's energy diversification efforts by pledging to export natural gas to the continent, further emphasizing the Nabucco pipeline's importance to EU efforts to break Moscow's tightening grip on its energy imports.

It remains to be seen if charter "axis of evil" member Iran and the EU will be able to use their Nabucco interest to pry open the U.S. sanctions regime, but one thing is certain -- after last month's energy scare, shivering Eurocrats in Brussels are looking farther afield than the former Evil Empire for their future energy needs, and if that means quietly telling Washington that it's time to take a new look at Iran, then the Obama administration had better prepare for some frank and candid diplomatic discussions.