Gas problems go beyond Azerbaijan

Sometimes the foresight of the Azerbaijan Government surprises. Not refusing the Russian gas import last year, today Azerbaijan could also be involved in the whirlpool of the prices for the 'blue fuel'. The matter is that on the eve of the new year, the Russian gas monopolist Gazprom began increasing the gas prices for its clients in accordance with a special formula of accounting gas prices bringing the gas prices to the world oil prices. The gas prices for Russia are also increased by Turkmenistan and Uzbekistan. However, everything is still stable in Azerbaijan.

Turkmenistan, Russia, Ukraine and Uzbekistan

After replacement of the Turkmen Head, the new government made a decision increasing the price for the strategic product by 30% for the only client - Russia. Thus, if in 2007 Turkmenistan and Russia confirmed gas price at $100, Gazprom agreed to purchase gas from Turkmenistan for $130 per thous. cu.m from 2008. From the second half year of 2008 Russia will purchase gas for $150 per thous. cu.m and from January 2009 the prices will be determined based on the market principles. The Uzbek side also intends to transfer from regional to world prices of fuel.

Thus, mainly Ukraine suffers because large part of the gas which Ukraine purchases from Russia is supplied by Turkmenistan. It also includes Uzbek gas. Accordingly Russia and Ukraine reached an agreement that in 2008 the gas prices on the border of the two countries will total $179.5 per thous. cu.m. According to the experts, the increase in the gas prices will have the most negative impact on the chemical industry of Ukraine.

Azerbaijan

Refusing the Russian gas import at the beginning of 2007, Azerbaijan appeared in the way of energy independence. In addition, putting Shah Deniz field into operation enabled Azerbaijan to export gas to Georgia and Turkey and it transformed Azerbaijan into gas exporter. Due to it, the problems with the Russian gas price increase went beyond Azerbaijan.

However, formerly Azerbaijan also suffered Russian gas price increase. Thus, in 2004 the Russian gas was supplied to Azerbaijan for $52 per thous. cu.m., in 2005 - $60, in 2006 $110 and in 2007 Azerbaijan had to pay $230 per thous. cu.m. today Azerbaijan is concerned by the issue linked with the contracts with its partners and own gas supply next year and the situation with the Russian gas is observed from the outside.

According to 2008-2011 budget forecasts, some 25.5bln cu.m of gas is supposed to be produced in Azerbaijan in 2008, with 10.4bln cu.m. of associated gas produced in Azeri-Chirag-Guneshli fields, 7.1bln cu.m from Shah Deniz field and 8bln cu.m of gas produced independently by the State Oil Company of Azerbaijan.

In the next years, the gas production on all indicators (excluding SOCAR) is expected to increase. The greatest rates of gas production growth will be observed in Shah Deniz field. In January to November Azerbaijan received 1.35bln cu.m of gas (an increase of 26.1% from the forecasts) from Shah Deniz field. According to the data by the State Oil Company of Azerbaijan (SOCAR), currently three wells are working in the field. The potential daily production makes up nearly 15mln cu.m. of gas. The fourth well will begin working in the field this year. After this, the gas production is supposed to increase by 5bln cu.m.

The level of the SOCAR gas production remains unchanged and makes up 8bln cu.m. Even taking into consideration this factor, Azerbaijan may fully ensure the internal gas demand and become a gas exporter.

Budget forecasts for gas production in Azerbaijan in 2008-2011:

Expansion of forecasts for gas production in Azerbaijan in 2008-2011:

As regard to the gas export from Shah Deniz, the plans remain unchanged. The main gas receivers from this field are Turkey, Georgia, Azerbaijan and Azerbaijan International Operating Company for the demands in the pumping stations of Baku-Tbilisi-Ceyhan pipeline.

According to the existing contracts on the gas supply from Shah Deniz field, Turkey will receive 6bln cu.m of gas per year, Azerbaijan - 1.5-2bln, AIOC - 0.2bln and Georgia - 0.8bln, with 0.8bln cu.m as payment for transit.

Summary table of the gas operations by Turkey in the long-term perspective (mln, cu.m):

Source: Botas

According to last year's indicators, the price of the gas produced from Shah Deniz field for Azerbaijan will total $58 per thous. cu.m. The gas price for Georgia will amount to $63 and Turkey - $120. However, the exported gas prices may be increased because the contracts contain formula bringing the prices to the worldwide prices for the energy resources.

On 28 November 2007 State Oil Fund of the Republic of Azerbaijan received the first payment of 1,8 mln. dollars from Azerbaijan Gas Supply Company (operated by Statoil) in accordance with the Agreement signed between Azerbaijan Government and foreign extractive sector companies on the exploration, development and production sharing for the Shah Deniz prospective area in the Azerbaijan sector of the Caspian Sea.

The State Oil Fund of Azerbaijan is pessimistic for the incomes from the development of the gas resources in the Country, particularly from Shah Deniz field. The previous forecasts were made taking into consideration that Shah Deniz field will be put into sustainable operation already in 2006, but it took place in the mid 2007. Azerbaijan Gas Supply Company