On July 3 2008, the new president of Russia Dmitry Medvedev official visit to Azerbaijan is expected. It is noteworthy that after the election, Medvedev as the president, first of his visits have been to the former Soviet Union republics. In particular, the first official visit took place to Kazakhstan. There is no doubt that Kazakhstan is a strategic partner of Russia. Between these countries the world’s largest land border is taking place, Kazakhstan possesses a large Russian-speaking population on his territory, which has serious impact on the country. However, one of the main issues of cooperation is the energy industry. Russia is interested in acquiring and transporting Kazakh oil and gas, while Kazakhstan is looking for alternative ways of access to global markets.

Common denominator between Medvedev upcoming visit to Baku and visit to Astana again is energy sphere. It is no secret that Dmitry Medvedev has been one of the leaders of the Russian gas monopoly Gazprom, and in this case, energy is not foreign to him. So it can be expressed that the forthcoming visit to Azerbaijan, Medvedev was drawn precisely the issues existing in the field of energy.
Azerbaijan has for some time conducting an independent energy policy. Successfully carrying out its own production of hydrocarbon deposits, Azerbaijan has managed to create a transport infrastructure to export its own oil and gas with alternatives to Russia routes. In addition, Azerbaijan is seen as a key player in ensuring energy security in the Eurasian space. In this case, this state played a major role as its own resources and the ability to transport Azerbaijani oil and gas on its territory and further to the West.
So in this case motivations which are driven by Russia are not ownership ambitions, but quite realistic targets.

After the opening Shahdeniz deposit in 1999 and started its operation in 2006, Azerbaijan became transformed into a meaningful player in the gas market on the Eurasian space. Already in 2007, the export of Azerbaijani gas arrived in Georgia, Turkey, and Greece and possibly in 2012 in Iran. In doing so, Azerbaijan has several advantages relative to other producers of natural gas in the Eurasian space, in particular Russia, Iran and Turkmenistan.

Primarily, the main gas field in Azerbaijan Shahdeniz is located closest to the European markets from all existing fields.

Secondly, unlike Turkmenistan, Iran and Russia, where the production of natural gas produced from existing fields, and data fields have begun seriously depleted, the deposit Shahdeniz is only started and could still be operated for many years.

Thirdly, because of the depletion of traditional mining deposits, there is a need for new exploration and a start of this new production. However, no such works provided in Turkmenistan, Iran and Russia. In each country, different reasons for that, in general such as lack of capital investment for the necessary work. Thus, Turkmenistan, since its independence, has mainly continued production of oil and gas on its own, that does not give her an opportunity to invest in exploration and development of new deposits. Attracting foreign capital to the development of new deposits has been difficult for several reasons. The export of Turkmen gas runs through Russian territory, and Western companies do not particularly like to once again fall into the addiction of the transportation of Russia. The attempt in the early nineties, creation of alternative infrastructure across the Caspian Sea failed largely because of strained relations between Azerbaijan and Turkmenistan. In addition, low gas prices within the country and the free distribution of its among population, was also the reason why Western countries were reluctant to develop fields in Turkmenistan. In this case, the attachment could not simply pay off.

Quite different situations existed in Iran. This country possesses the second largest after Russia deposits of natural gas in the world; the country has no free funds in order to develop self-exploration. Iran is trying to attract foreign companies to work on its territory, in particular the province of South Pars fields. However, sanctions imposed by the USA in relation to that country have meant that Western companies indeed wish to work in Iran, but don’t want to spoil relations with Washington.

With regards to Russia, after the collapse of the Soviet Union, oil and gas production has become a place of the emerging companies that were not interested to invest in finance development of new deposits. These companies preferred to develop existing fields to increase their income. Russian companies produced prey to surface layers of bedding, which do not require expensive processes, followed by mining at the deposit freeze, as called for additional investments. Now, for the resuscitation of these deposits will be required very large investments.

The situation has not changed and in early 2000-ies, when state-owned Gazprom, virtually monopolized activities in the gas sphere. Gazprom has preferred to buy gas distribution systems and companies in European countries, which were its main investment all these years.

But today the situation in Russia changed. Since 2007, in Russia there is decline in production of natural gas. The main reasons for that, in addition to conservation explored during the Soviet era deposits and reducing the number of profitable fields, is also a reason of sharp reduction in deep exploration drilling. Overall, the decline was more than 5 times between 1980 - and 1998-ies.

In addition, since 1983, as a major area of oil production, Western Siberia has become depleted, and now further gas production will take place in Eastern Siberia and on Sakhalin. However deposits in these regions are increasingly removed from European markets, more difficult to end their transportation markets, and increase their cost.

Based on the above situation can be broadly defined format of talks between Russia and Azerbaijan, during a visit Medvedev to Baku. Moreover, some aspects have been identified in the declaration on the conclusion of long-term contract on shipments of Azerbaijani gas, made June 2, Chairman of the Board of Directors of Gazprom Alexei Miller at a meeting with Azerbaijani President Ilham Aliyev in Baku. In doing so, Gazprom offered to buy the entire free volume, which will be identified during the implementation of the second stage at the Shahdeniz.

Without a doubt, this will be a central theme during the summit talks in Baku on July 3. Russia is interested in importing Azeri gas for several reasons, first and foremost way to prevent the possibility of pursuing pro-Western Nabucco pipeline, which is clearly anti-Russian direction. If the Azerbaijani gas will go to the north, Nabucco will simply have nothing to fill.

The second reason is declining gas production in Russia itself. Skeptics believe that Russia will simply have nothing to cover obligations to supply gas to European consumers. More specifically, concern arose after the project will be completed "South Stream". It is believed that the Azerbaijani gas will be needed just to fill the pipe, since the Russian gas may simply not be enough. Moreover, it may become unprofitable, if the increase in gas production in Azerbaijan will be increased exports to the West direction on existing pipelines and potential Nabucco. Such a situation could not prevent Russia, and therefore will try to achieve the desired during the talks in Azerbaijan.

 Incidentally Turkey also understands the possible developments. It is not by accident that country to make his proposal on the possible purchase of the total obtained in Shahdeniz, gas. This way Turkey is trying to guarantee Russia alternative gas deliveries to the country. It is noteworthy that Turkey becomes consumed up to 70% of its gas only from that country.

Regarding Azerbaijan, Russia might be able to achieve some agreement on deliveries of Azerbaijani gas in this country. However, Azerbaijan is unlikely to relinquish all of the gas extracted to one particular country, Russia. Indeed, the entire energy strategy of Azerbaijan based on providing export its energy alternative transport routes. Moreover, Azerbaijan produced an alternative that is in relation to Russia. Therefore, should happen that something unexpected that Azerbaijan could agree to that.

Today, Azerbaijan has a connection with gas pipelines to Georgia, Russia and Iran. This country more profitable to pursue its gas in different directions than it exported one specific country.

Russia has been in ambiguous activity perceived by the Western countries that in order to ensure energy security in the region and in the hope of Azerbaijani energy, to make its own preventive steps. In particular, the EU approved the draft "the Eastern Partnership", initiated by Poland and Sweden, giving privileged status presupposes a dialogue between Brussels and five Eastern European countries of the former Soviet Union, including Azerbaijan. It is noteworthy that the partnership program is a continuation of initiatives the EU "New Neighborhood Policy" and not making any new opportunities for partner countries. Therefore, the new initiative can be evaluated as a reaction to the EU processes in the countries of Eastern Europe. Fair is worth noting that to expect any concrete steps towards the Union of these countries, at this stage is difficult to expect. On the other hand, the United States, recently announced the possible expansion of NATO in Azerbaijan direction. And although the official Baku more restraint applies to this statement and a policy of balance, they can be assessed as attempts Western partners to guarantee a stable flow of energy from Azerbaijan. In this case Medvedev visit to Baku would be to attract particular interest.

Rovshan Ibrahimov, PhD.

rovsen@azerimail.net

This commentary is from previous USAK’s Energy Review Newsletter
http://www.turkishweekly.net/energy
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