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RUSSIAN GAS HAVE TO RIVAL WITH AZERI BLUE FUEL'

Analysis Materials 11 April 2006 12:04 (UTC +04:00)

In future Russia is probable to increase gas prices for CIS countries, Natik Aliyev, the Azerbaijani Minister for Energy and Industry, said. Such statement by the Minister has enough exact grounds. Being a major supplier of natural gas to Azerbaijan, Russian company Gasprom increased gas prices repeatedly.

Gas prices increase

Gazprom started gas delivery to Azerbaijan on 1 January 2004 on the base of a 5-year contract on natural gas purchase signed in December 2003 between Gasexport and SOCAR. The contract envisages delivery of 4.5 billion cu m of gas a year. As to price of gas, it is much more predisposed to rise. In 2004 gas was delivered to Azerbaijan at the price of $52 per 1000 cu m. In 2005 the countryРІ imported 46.8 billion cu m of Russian gas at the price of $277.2 million. It is 2.4% less than 2004, while 9.7% more than 2005 when gas was delivered the at the price of $60 per 1000 cu m.

At present Azerbaijan purchase Russian gas at the price of $110 per 1000 cu m, which is more two times than last year. In the end of 2005 Moscow, represented by Casprom and Baku, represented by Yagub Eyyubov, the First Deputy Prime Minister, held talks on new terms of Russian gas delivery to Azerbaijan in 2006. Then the sides agreed upon transition to European prices (with consideration of transport scheme) and clarify the volume of natural gas deliveries in 2006.

This year Azerbaijan intends to acquire from Russia around 5.5 billion cu m of natural to cover domestic need, whereas rise in prices makes the country to decrease the gas supply to 4.5 billion cu m of gas.

We are not the only suffered

What to do if demand causes supply and the same time ruse in prices. Besides, rise in prices of Russian gas also touched upon all consumers. Starting from this year Gasprom is transiting to market relationships with all former USSR states and world countries and increased the gas prices 1.5-2 times for countries, except Belorus. . Besides to Azerbaijan, Armenia, Gergia and Moldova also purchased gas at $110 per 1000 cu m. Since 1 January Ukraine has beer purchasing gas at $95 per 1000 cu m from RosUkrEnergo, which in its turn buys it Gasprom at $230. Average price of the Russian gas for European Union countries is $235 per 1000 cu m.

Armenia agrees to pay Gasprom a doubled sum starting from 1 April 2006. Armenian company ArmRosgasprom announced, the cost of natural gas delivered by the Gasprom to Armenia has been also increased twice - $110 per 1000 cu m from 1 April. According to Russian media reports as nearer ally of Russia in S Caucasus Armenia counted on milder policy by Gasprom, while the hopes were not justified. Armenia did not rule out that the variant proposed could be reconsidered if the sides reach agreement over the compensation mechanisms. This year Armenia even submitted an appeal for 2 billion cu m of natural, whereas last year ArmGasprom imported approximately 1.7 billion cu m of gas.

The cost of deliveries has been increased for Georgia from $64 to $110 per cu m since the beginning of the year. Rise in the price of deliveries did not affect the final gas prices for Georgian consumers in the period from January to April 2006, as the government did not undertake subsidizing the difference in prices in the amount of $16m. However, the government will shortly outline new increasing tariffs for consumers of the Georgian regions.

Gas deliveries from Russia continue…

Azerbaijan does not lay a task to refuse from Russian gas import. The Energy Minister said that first there was not such a task and second, it would be ineffective for economy and fuel and energy balance. Despite rich oil reserves, share of gas in the countrys field and energy balance is approximately 45%. Over the past few years the gas production in Azerbaijan comprises 5.5 billion cu m, whereas Azerbaijans domestic demand in gas is 9.5-10 billion cu m a year.

Thus, gas import from Russia will be maintained for many years to come, but again will depend on export prices.

Therefore, Azerbaijan is conducting talks with Iran on purchase of 1 billion cu m of natural gas. Aliyev said it will enable to hold more flexible talks with Russia. Moreover, gas purchase from Iran will enable to develop alternative directions of gas delivery to the country to cover the domestic demand.

At present Azerbaijan carries out energy exchange with the Iran and swap operations targeting covering the volumes of Iranian gas delivery to Nakhchivan Autonomous Republic are underway. Measures for increase of the gas volumes are being taken currently.

The purchase of Iranian gas will depend on its price. This winter Georgia acquired Iranian gas through transit via Azerbaijan at the price of $110-$120. If Iranian gas is cheaper for Azerbaijan, it will enable for more efficient supply of the country.

…, but there are alternatives

From 2006 Azerbaijan can considerably decrease its dependence on import fuel in connection with the increase of gas balance within the country. This year it is particularly planned to raise domestic gas production following the commencement of the gas production on Shah Deniz.

BP, an operator of the project, can deliver up to 300 million cu m to the SOCAR in 2006. The prices will be of course lower than the export prices. According to forecasts, this year 7.3 billion cu m of gas will be delivered to Azerigas joint stock company. Gas on the Shah-Deniz TPG-500 platform might appear in September 2006. Starting from October 2006, BP offers to set up gas deliveries from Azerbaijan to Turkey via the currently building the South Caucasus Pipeline.

In 2006 the AIOC could deliver to Azerbaijan 3 billion cu m of associate gas to the SOCAR lifted from Azeri and Chirag fields. in compliance with the Production Sharing Agreement (PSA) signed by Azerbaijan and AIOC shareholders, gas lifted on ACG altogether with oil (associate gas), is presented to Azerbaijan free of charge. The AIOC can retain the gas which the company needs for oil and gas operations (in particular, reverse gas pumping to stratum).

In March the Azerbaijan International Operating Company (AIOC) handed in 236.25 million cu m of associate gas to Azerbaijan. 1.71 million cu m of the total delivery was transported by the Azerbaijani gas refinery plant and 234.54 million cu m - to system of Azerigas.

169.1 million cu m of the total delivery was lifted from the Central Azeri field and 67.1 million cu m Chirag field. A total of 635.56 million has been handed over Azerbaijan in the first quarter of 2006.

Moreover, the SOCAR has its own program on increase of gas production in the existing fields, in particular, on Gunashli. The 5-year program stipulates increase of production from 2 to 4.5 billion cu m a year. At present Azerbaijan possesses gas reserves not only on Shah Deniz field, but also on Gunahsli, 8 Mart and Bahar fields. At present Azerbaijan possesses considerable capacities to increase and set up production from these fields.

In compliance with the statistic bulletin of the Italian company ENI, from 1993 to 2005 Azerbaijan increased the estimation of the natural gas reserves from 52% to 1.37 trillion cu m. If in 1993 the estimated reserves of natural gas comprised 900 billion cu m, after 12 years - in 2005 it rose to 1.37 trillion cu m. the document underlines that the current estimation of the fuel reserves has not been reconsidered since 2000.

Thus, with consideration of the SOCARs plans of producing some 4 billion cu m of natural from its own fields in 2006 in addition to 3 billion cu m of fuel to be delivered from the ACG, Azerbaijan could considerably release itself from dependence on import, purchasing in 2006 up to 2.5 billion cu m of gas from Gasprom in stead of 4.5 billion cu m of gas expected in 2006. It might also refuse from Рђ можеС' Р±С‹С'СЊ Рё РІРѕРІСЃРµ РѕС'кажеС'СЃСЏ РѕС' others gas preferring its own.

In its turn Georgia could refuse from the Russian gas preferring Azerbaijani fuel. If the price of 1000 cu m of Azerbaijani gas is lower than the Russian gas offered to Georgia, Tbilisi can refuse from purchase of the Russian gas in favor of the Azerbaijani fuel. Such variant is probable if the price turns out lower than the Russian fuel, The Georgian Ambassador to Azerbaijan, Zurab Gumberidze, stressed.

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