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STRATFOR: Russia signs off on Azerbaijan to supply Turkey

27 May 2010 08:01 (UTC +04:00)

â€œThe Azerbaijanis and Turks have already agreed to a concrete agreement between the two countries, versus the past deals which were just â€œagreements in principle.â€

From the Azerbaijani point of view, Azerbaijan will supply 8 bcm to Turkey with the possibility to add another 4 bcm in the future for a contract intended to fill the Nabucco pipeline. However, Baku is not under the belief that Nabucco will actually go forward in the future for a number of reasonsâ€”including a lack of additional suppliers of natural gas, like Turkmenistan or Iraq, as well as, many of the Europeans turning from the project, like Austria.

But Azerbaijanâ€™s natural gas deal with Turkey could instead send Azerbaijani natural gas to the Interconnector pipelines from Turkey to Greece to Italy. This will allow Azerbaijan to be the sole provider, since the Interconnectors are a much smaller system than Nabucco.

But to add a twist to the story, Russia has unexpectedly signed off on Azerbaijan to supply Turkey, knowing that Nabucco is nearly dead-in-the-water, but that Azerbaijan could instead supply the Interconnector system. The reason Moscow has agreed is 3-fold. First, Russia is seen as a benevolent neighbor to Azerbaijan and Turkey. Second, the supply from Azerbaijan to the Interconnector is so small that it is not much competition to Russian supplies in Europe. Third, Russia is looking to possibly work its way into one of the Interconnector consortiums â€“ either the one run by Greece or Italyâ€”in order to keep some influence over the line.

According to a STRATFOR source, Turkish Prime Minister Recep Tayyip Erdogan has thus far made a verbal agreement with an advisor to Azerbaijani President Ilham Aliyev for Turkey to pay around $220-270 per thousand cubic meters. This starting price is considerably lower than the Russiansâ€™ earlier offer of $300 per thousand cubic meters. It is unlikely to be a coincidence that these negotiations picked up just prior to Medvedevâ€™s visit. If Baku was moving forward with Ankara on a Shah Deniz II deal, the Russians likely facilitated these negotiations.

Azerbaijanâ€™s demands in this whole affair are quite simple. Baku wants a favorable price on its natural gas, but is also looking for guarantees from Ankara that the Turkish government will not pursue meaningful peace talks with Armenia without first addressing Azerbaijani concerns over Nagorno-Karabakh. Given that the Turkey-Armenia talks have been deadlocked since early spring, Turkey likely has the diplomatic bandwidth to offer such guarantees in the interest of securing this natural gas deal and mending its relationship with Azerbaijan.