Iran ready to revive Nabucco pipeline project and supply gas to Europe

Iran’s Deputy Oil Minister for International Affairs has said that Iran is ready to supply Europe with gas via the previously aborted Nabucco pipeline, adding that two European countries have already shown interest.

Speaking to the Islamic Republic News Agency (IRNA) on 11 August, Deputy Oil Minister for International Affairs, Ali Majedi, said that, with its major gas fields, Iran could supply gas to Europe via Nabucco and that the abortive gas pipeline project was useless without Iran.

As the international community considers lifting the sanctions against Iran, corporations and governments are strategically positioning themselves to take advantage of Iranian trade possibilities. Delegations from two European countries have already visited Iran this summer to discuss possible routes for gas deliveries, Majedi revealed without naming the countries. He continued that different routes were possible, including supplies via Turkey, Iraq, Syria, Caucasia and the Black Sea, adding that he saw the Turkish route as the most viable option.

The deputy minister said gas from the Shah Deniz gas field in the Caspian Sea would not be solely sufficient for the pipeline, as production at Shah Deniz would not exceed eight billion cubic meters a year, while the designed capacity of the pipeline is at least 23 billion cubic meters, therefore necessitating the need for Iranian involvement. 

Nabucco is an abortive project of a 3,300-kilometer-long gas pipeline from Turkmenistan and Azerbaijan to Germany and Austria and on to the rest of the EU. The project was estimated at €7.9 billion, although in 2012 it was estimated that the project may cost less. OMV Gas GmbH (Austria), BOTAS (Turkey), Bulgargaz (Bulgaria) and Transgaz (Romania) were parts in the consortium for pipeline construction.

Work on the project began in 2002. Initially, plans were to launch the construction in 2011, finishing it by 2014, but the project was repeatedly postponed because of problems with possible gas suppliers. In 2011, it was reported that the launch date was shifted to late 2018. In June 2013, an announcement came that the project had been closed in favour of a more promising project - the Trans-Adriatic pipeline.

For more news and expert analysis about Iran, please see Iran Strategic Focus.

© 2014 Menas Associates

Azerbaijan: Baku hits back after UK minister's criticism

The Azeri Ministry of Foreign Affairs issued a statement in response to recent comments by UK minister for Europe David Lidington on the sentencing of the civil society activist Hasan Huseynli to a six-year prison term on charges of “hooliganism”. Huseynli has headed the Gandja-based Intelligent Citizen NGO and repeatedly criticised human rights abuses in Azerbaijan.

His trial has drawn a barrage of criticisms from local civil society and international observers as well as from the US diplomatic mission. “In recent years the British embassy in Baku worked closely with Mr Huseynli on projects designed to promote social entrepreneurship and strengthen female participation in civil society,” Lidington said. “Mr Huseynli joins a growing number of civil society activists sentenced to lengthy prison terms. I again call on Azerbaijan to address concerns felt by many about the increasingly worrying trend of detentions and prison sentences which appear to be politically motivated.” 

The Azeri foreign ministry called this assessment “unwarranted interference in a sovereign state’s internal affairs” and added that Huseynli’s contributions to civil society development did not exempt him from responsibility for the criminal actions he has been indicted with. It advised Lidington to direct his efforts to the “improvement of the human rights situation” in his home country, instead of lecturing other countries on what they should or should not do.

This incident highlights Azerbaijan’s nearly allergic reaction to any sort of external criticism of its political system, which has been dominated since independence by the clan of the late president, Heydar Aliev. His son Ilham Aliev has ruled the country with an iron fist since 2003 and was re-elected to the presidency with 83% of the popular vote in October 2013. 

The Azeri-British relationship is unlikely to suffer any collateral damage. Britain’s new defence secretary Michael Fallon was in Baku earlier this month in his previous capacity of energy minister. During this trip he reiterated the obvious by saying that Azerbaijan remains a top foreign policy priority for the UK because of its tremendous gas reserves and their significance for the EU’s energy security. There is no better proof of the simple fact that no western country is willing to sacrifice its energy stakes in Azerbaijan for the sake of human rights concerns.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Kazakhstan increases crude oil export duty

The Kazakhstan government has increased the so-called ‘export customs duty’ (ECD) on crude oil from $60 to $80/ton. This change will take effect on 1 April, according to economy and budget planning minister Yerbolat Dosaev, who unveiled the new export tariff at a ministerial meeting.

The ECD increase should boost this year’s projected government revenue by $2.7 billion. The economy ministry has added $1.6 billion to this total in the form of extra tax income to be derived from the exporting industries’ future profits, which are widely expected to ameliorate after the 20% devaluation of the tenge in February 2014.

The ECD was introduced in May 2008 at the rate of $110/ton at a time when international oil prices were as high as $125/barrel. It was argued that the new duty would enable Kazakhstan to benefit fully from increasingly favourable conditions on global markets as well as its expected stabilising domestic effect.

In January 2009, however, the government scrapped the ECD after oil prices had fallen from their historic highs. As the global market stabilised the ECD was re-introduced in August 2010 at the rate of $20/ton. This was applied to all Kazakhstan-based oil exporters except those whose production-sharing agreements guaranteed stability of the customs regime. In January 2011 the ECD was increased to $40/ton and then again to $60 in April 2013.

The government plans for at least 6% GDP growth by the end of 2014, while also containing annual inflation below a 6–8% cap. The benchmark oil price that serves as the basis for all income and expenditure forecasts has also been increased, from $90 a barrel to $95. Some local analysts have already expressed their scepticism about the latter benchmark, given the possible impact of the crisis in Ukraine on future global oil market stability.

Earlier this month the US administration announced its intention to release around 5 million barrels of crude to the market and cited the need to test the sustainability of the US oil infrastructure after a recent surge of domestic production. Some have seen this, however, as a calculated move as part of Washington’s efforts to punish Moscow for its combative stance on

Ukraine’s Crimea peninsula.

While this quantity is clearly too small to have any significant impact on oil prices, expanding US domestic production may upset both Russia’s and Kazakhstan’s medium- to long-term price expectations.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Baku interested in Iraqi natural gas

Azerbaijan has offered Iraq access to the Southern Gas Corridor, in a bid to help the war-torn country to export its gas to Western markets. Azerbaijani foreign minister Elmar Mammadyarov visited Baghdad on 10 February for talks with high-ranking Iraqi officials on deepening bilateral ties. 

“It is a huge project […] and it is open if Iraq has an interest in delivering its own natural gas,” Mammadyarov said during a joint press conference with his Iraqi counterpart Hoshyar Zebari. He added that other countries had already signalled to Baku their interest in contributing gas to the Southern Gas Corridor, although no details were revealed. 

Iraq produces limited quantities of natural gas, most of which is used for domestic consumption. Considerable volumes of associated gas is still flared due to the lack of facilities to use it more productively. But the government is increasingly focused on stepping production for export. 

During his meeting with Iraqi prime minister Nouri al-Maliki, Mammadyarov said that Azerbaijan was planning to open a full-fledged embassy in Baghdad in the near future. A permanent diplomatic mission in the Iraqi capital has already been authorised by the Azerbaijani parliament. “Our companies want to work and invest in Iraq, especially in its energy sector,” he added. 

Azerbaijan is not the only country interested in Iraq’s natural gas resources. Earlier this month, an Istanbul-based newspaper  quoted Turkish energy minister Taner Yildiz as saying that Ankara might prefer gas imports from Iraq to its current gas supplies from Russia, Azerbaijan and Iran. He said the price of Iraqi gas might prove much lower, because it would not have to cross foreign territory and would travel a shorter distance. 

Last June, Ashti Hawrami, minister of natural resources in Iraq’s Kurdistan Regional Government, told the press that his government envisaged the start of natural gas supplies to Turkey as early as 2016. At the initial stage, around 10 billion cubic metres of gas is planned to be supplied across the border. Iraqi Kurdistan is set to begin oil deliveries to Turkey this September.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Caspian: Azeri Light strengthens on Mediterranean disruption

It seems that Azerbaijan is benefiting from the disruption in other oil producers, notably Libya, as well as the uncertainty caused by the situation in Egypt. Throughout August, protests and labour unrest shut down Libya's two key oil terminals, disrupting exports and helping to strengthen the differential on Azeri Light. On 1 August the price of Azeri Light hit Dated Brent plus $3.95/barrel, the highest since May 2012. Later in August BP attempted to sell a 600,000 barrel cargo at Dated Brent plus $4.75/barrel and found no buyers, however.

 

Azerbaijan's reputation for political stability has been one of its biggest strengths, and with turbulence in other key producers unlikely to end any time soon, the price of Azeri Light is likely to remain high. The government, however, is reportedly taking no chances: according to government sources, it is basing the state budget for 2014 on a price for Azeri Light of under $100/barrel (possibly $90) to serve as a buffer against price volatility. For the past two years the Economy Ministry has based the budget on oil at $100/barrel.

 

In other trading news, there were four loadings of Azeri Light, each of 600,000 barrels, scheduled at Georgia's port of Supsa in August, with five expected in September. Loadings of Azeri Light at Ceyhan were reportedly down this month, by 5,785 b/d compared to July. And ONGC Videsh sold its first cargo of Azeri-Chirag- Guneshli oil since taking over Hess's stake in the project. It sold a cargo of 600,000 barrels for loading at the end of August to Statoil for Dated Brent plus $2.70–3/barrel.

 

For more news and expert analysis about the Caspian region, please see Caspian Focus.

 

© 2013 Menas Associates

Caspian: Shootout in northern city raises terror fea

A rare clash between security forces and Islamist militants in the northern city of Ganja this month has raised concerns about the threat of terrorism in Azerbaijan. Although much recent attention has focused on Iranian-backed cells, the militants killed and captured in the April operations were referred to as 'Wahabbis', the catch-all term for hardline conservative Sunnis. The government claimed that the group was linked with Al Qa'ida, had trained in Iran, Syria and Pakistan, and had engaged in combat against NATO forces in Afghanistan.

In the Ganja incident, two people – one militant and one member of the security services – were killed when police stormed a house being used by the groups. Some reports suggested that the two died when the militant set off a suicide vest – if true, this would be the first case of a suicide attacker in Azerbaijan (other accounts reported that the militant set off a grenade which killed the two).

Subsequent operations across the country, mainly in the north but also in Baku and Sumgait, rounded up 17 suspects and netted a large cache of explosives and weapons, including assault rifles and a machine gun. The authorities accused them of planning “provocative acts and terrorist attacks with the view of violating socio-political stability”. The dead militant, allegedly the leader of the group, was identified as Vugar Padarov from Zagatala in the north-west, near the border with Russia.

The arms involved, the location, and the purportedly 'Wahabbi' identity of the suspects suggests that the group may be linked to Russia's volatile North Caucasus. Dagestan, just to the north, has steadily become the focal point of the Islamist insurgency there. In August 2008 Azeri and Dagestani security forces fought a group of militants, including Azerbaijani citizens along the border region. The leader of the dead rebels was the 'Emir' of Dagestan, Ilgar Mollachiyev, who was born in Zagatala.

The details of the latest incident suggests that the threat was fairly serious. There is no information on the planned target but state security structures, foreign embassies, and IOC headquarters are all plausible targets. The timing of the sweep, so close to the Eurovision Song Contest in May, has also sparked alarm that the militants were planning a large-scale attack on the contest. Nonetheless the overall scale of the militant threat remains insignificant and the country's security services are fairly well-equipped to cope with it.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2012 Menas Associates

Monastery dispute stalls Azerbaijan-Georgia border demarcation

Talks on demarcating the border between Azerbaijan and Georgia have stalled again, according to officials at the Georgian foreign ministry. The main issue to be settled is the fate of a 6th century monastery complex which straddles the mutual border.

The demarcation process has been drawn out for years, despite the cordial relations between Baku and Tbilisi and their joint interest in facilitating greater cross-border ties. The old Soviet borders are currently used as a placeholder, whilst the Alazan river also forms a natural boundary along some of the 480km of their boundary.

According to Georgian officials, 160km still remains to be demarcated. The biggest issue is the fate of the David Gareja Monastery, known as the Keshish Dag in Azerbaijan, which sprawls across a mountain slope dividing the two countries – both sides claim that the bulk of the complex lies within their territory. The monastery was founded in the 6th century and is Georgian Orthodox, giving it great significance for modern Georgia.

For Azerbaijan the monastery is significant for two reasons. Firstly it is claimed to be the work of 'Caucasian Albanians', believed to be the ancient inhabitants of Azerbaijan and regularly used as a historical weapon in Azerbaijan's battle with Armenia over who has the 'right' to the disputed Nagorno-Karabakh region. Secondly and more prosaically, the site is viewed as a strategic height which Azerbaijan is reluctant to give away.

Although officials have downplayed the long-running dispute, public opinion is vociferously opposed to any compromise. The rest of the border can probably be delimited without much controversy, but it remains to be seen whether a compromise can be struck over the fate of the monastery.

The lack of a demarcated border has not been much of an impediment to relations between Azerbaijan and Georgia, which are close and based on extensive energy and infrastructure projects. Given nationalist sensibilities in both countries, however, sacrificing anything believed to be an integral part of national history would be a major headache for the authorities. In the South Caucasus 'compromise' is often equated with 'surrender'.

It seems, therefore, that the commission working on border demarcation is simply seeking to put off the issue of the monastery complex for as long as possible. It has not stopped cooperation, and the ambivalence of the status quo seems to be a situation which everyone can live with, for now.

Sources: News.az, Institute for War and Peace Reporting

For more news and expert analysis about the Caspian region, please see Caspian Focus.

Iran, Russia oppose cross-border

Iran and Russia have both announced their opposition to a pipeline across the Caspian Sea, which was backed by the EU last week as a means to bring Caspian gas to Europe.

A trans-Caspian pipeline, running west from Turkmenistan to Azerbaijan along the Caspian seabed, has been under discussion for years, but has never got off the ground due to a lack of commercial imperative and political will. An ongoing dispute between Azerbaijan and Turkmenistan over their maritime border, and associated gas and oil fields, has also stymied progress.

On 13th September, however, the EU's Energy Commissioner Günther Oettinger announced that the EU was would start negotiating a legally binding treaty between Azerbaijan and Turkmenistan to build a trans-Caspian pipeline. Europe, said Oettinger, “is now speaking with one voice” – previous efforts to coordinate the 'Southern Corridor' to bring Caspian gas to Europe have been hamstrung by competing European agendas and approaches. The new mandate will empower it to arrange the legal and commercial requirements of a trans-Caspian system.

The pipeline would enable Turkmen gas to reach Europe without crossing Russian or Iranian soil. The EU is keen to reduce its energy dependence on Russia and avoid politically problematic Iran, whilst Turkmenistan is looking to diversify its energy export routes.

Tehran and Moscow have reacted angrily to the EU's intervention. Iran has stated that it opposes the project on ecological and legal grounds. Russia expressed its regret, and warned that the project did not account for “the actually existing international legal and geopolitical situation in the Caspian Basin today”.

The reference to geopolitics is significant, as it indicates the main reason for Russian and Iranian opposition (notwithstanding ecological protestations) – that a Caspian pipeline would enable Central Asian gas to avoid their territory, reducing their political and commercial leverage.

The other objection is that the legal status of the Caspian Sea, including the littoral states' maritime boundaries, is still unclear. Although most of the states have simply got on with developing gas and oil fields in their presumed sectors, the exact boundaries and the right of states to undertake major projects – like a subsea pipeline – is still legally unclear.

It is likely that Russia and Iran will apply a range of legal and political pressures to stop the pipeline from going ahead. The EU's internal problems and lack of focus towards the Caspian region may make it an unreliable patron for Azerbaijan and Turkmenistan, and unable to push the pipeline through against Russian and Iranian opposition.

Sources: Russian Ministry of Foreign Affairs, Reuters

For more news and expert analysis about Iran, please see Iran Strategic Focus.

Armenia claims to have shot down Azerbaijani

For the first time since the end of outright hostilities between Armenia and Azerbaijan in 1994, an aircraft has been shot down over the conflict zone –an Azerbaijani drone, shot down by separatist forces of the unrecognised Nagorno-Karabakh Republic (NKR).

The separatist authorities, which have close political and military links with Armenia, made their claim on 14th September, and released photos of the wreckage of the drone. Azerbaijan, usually quick and vociferous in denouncing 'Armenian propaganda', did not respond to the allegations until late on 15th September, when a terse statement from the defence ministry said that Azerbaijan “has nothing to do with the pilotless air force jet”.

Armenian and NKR officials have been vocal in discussing the incident. Armenia's chief of Air Defence Forces, Nikolai Babayan, said that drones were very difficult to hit, but that special hardware from Armenia had enabled the NKR forces to shoot it down. A senior Karabakh military official struck a triumphant note, saying that “the aggressor [Azerbaijan] will now feel more restrained because the destruction of such military hardware also shows the extent of the technical sophistication of our army”.

Officials also said that Azerbaijan's drones regularly fly along the Line of Contact between Azerbaijan and territories occupied by the NKR, but that in this instance the drone had penetrated around 10km into airspace claimed by the separatists.

The weapons used to bring down the drone are presumably Russian-made S300s, supplied to Armenia by Moscow as part of their long-standing military alliance. This indicates that, as widely surmised, Armenia has transferred military hardware to the NKR. Pictures of the wreckage indicate that the drone is an Israeli-made Hermes. Armenian groups in the US have said that markings indicate that the drone is supplied by a Canadian company with offices in the US, which would be a violation of an arms embargo imposed on Baku.

The physical evidence and the guarded Azerbaijani reaction suggests that Armenia's claims are genuine. Although ceasefire violations are nothing new, shooting down an advanced aircraft which was conducting surveillance deep in separatist territory represents a qualitative increase in the conflict. Armenia is allegedly producing its own drones, and Azerbaijan will be keen to respond in kind. This suggests that the air is becoming another theatre of the long-simmering conflict.

Sources; Bloomberg, News.az, PanArmenian, Eurasianet

For more news and expert analysis about the Caspian region, please see Caspian Focus.

Azerbaijan's gas reserves boosted by Total find

The French oil and gas major Total has discovered a major gas field off the coast of Azerbaijan, the company announced on 9th September. The field is believed to be one of the country's largest, providing a major boost to Azerbaijan's reserves.

The new field lies within the Ashberon block, which Total has been operating through a subsidiary since it made an agreement with Azerbaijan's state energy firm SOCAR in 2009. Total holds 40 per cent, as does SOCAR, while GDF Suez holds the remaining 20 per cent. The block is located around 100km east of the capital Baku, and around 25km north of the enormous Shah Deniz gas field.

The exact size of the discovery remains open to speculation at present. Total announced that the field as a whole had potential for “several trillion cubic feet of gas and associated condensates”, but on 12th September, SOCAR claimed that the discovery holds around 350 billion cubic metres of gas and 45 million tons of gas condensate.

Whatever the exact size of the field, it provides a major fillip to Azerbaijan's energy reserves, perhaps bringing them to 2.55 trillion cubic metres. Contrary to the hopes expressed by some analysts and officials, however, the new discovery is not necessarily a saving grace for the EU's Nabucco project to bring Caspian gas to Europe. Azerbaijan already possesses sufficient gas for Nabucco to get underway, mainly in the second phase of the Shah Deniz field and recent discoveries in the Umid field.

The problems with developing Nabucco have not therefore been about gas reserves – they have been about building pipelines to export the gas, as well as the technical work to actually extract the gas. This is particularly true in the deep and challenging waters of the Caspian Sea. First Vice-President of SOCAR Khoshbakht Yusifzadeh acknowledged this, saying that extraction from the new field was unlikely to begin before 2021 or 2022. Meanwhile negotiations over the pipeline project which will bring gas to Europe continue.

Azerbaijani officials are nonetheless exuberant over the find, with President Ilham Aliyev calling it a “truly remarkable event” and stating that it shows “that our country possesses great opportunities, great potential and bright future.”

Sources: News.az, Wall Street Journal, Financial Times

For more news and expert analysis about the Caspian region, please see Caspian Focus.