Analysis Materials 20 December 2005 12:02 (UTC +04:00)

A working meeting of the Gazprom Open Joint Stock Company (OJSC) board chairman Alexey Miller and the first deputy Prime Minister of Azerbaijan Yagub Eyubov took place today at the company’s central office.

During the talks the terms and conditions of the Russia’s gas deliveries to Azerbaijan in 2006 have been considered. The sides agreed to turn to the European price level (taking into account the transport scheme) and specify the natural gas delivery volumes in 2006. It was decided to sign relevant contracts shortly.

On 1 January 2004 Gazprom started to deliver gas to Azerbaijan. In December 2003 a long-term five-year contract on buy/sale of the natural gas was signed between Gazexport Ltd and the State Oil Company of Azerbaijan (SOCAR), effective from 1 January 2004 and valid till 31 December 2008. The contract stipulates gas deliveries up to 4,5 billion cubic meters a year to Azerbaijan.

Gasexprt has not made any decision on Azerbaijan, while the issue can be resolved by the New Year. At present the SOCAR purchases gas from Gasexport at $60 per 1000 cu m.

The prices are expected to be considerably high in 2006 as compared to 2005. The company is expected to offer $110 per 1000 cu m.

Despite rich oil reserves, the share of gas in the fuel and energy balance of the country comprises around 45%. Over the last few years the gas production in the country was 5.5 billion cu m of gas, whereas the domestic demand for gas in Azerbaijan is 9.5-10 billion cu m a year.

In 2006 BP, an operator of the Shah-Daniz project, will deliver 300 million cu m of gas to SOCAR. Gas to be lifted from TPG-500 (Shah-Daniz) can appear in September 2006. Starting from October 2006, BP offers commencement of gas delivery out of Azerbaijan to Turkey via the currently building South Caucasus pipeline.

The Azerbaijan International Operating Company (AIOC) is probable to present to SOCAR in 2006 a total of 3 billion cu m of associated gas produced from Azeri and Chirag fields. Under the PSA, signed between Azerbaijan and the AIOC shareholders in 1994, gas extracted from the Azeri-Chirag-Gunashli fields along with oil, is gibe to Azerbaijan free of charge. The AIOC can retain gas which the company needs for its oil and gas operations (gas injection to stratums).

The Azerbaijan International Operating Company (AIOC) proposes to produce in 2006 some 4 billion cubic meters of the associated gas on ACG. Part of this gas will be used for operation of facilities on the platforms, the other part will be pumped back to the bed. Certain part of the gas under the PSA (Production Sharing Agreement) is passed on freely to the Azerbaijan’s side. From 2006 Azerbaijan can considerably reduce its dependence on import fuel in connection with the increase of the gas balance within the country through purchasing 2.5 billion cu m of gas from Gasexport in 2006 instead of 4.5 billion cu in 2005. It is also probable to refuse from �import’ gas in favor of private.