Central Asian deal paves way for non-Russian gas to Europe

Turkey and Azerbaijan have signed a long-awaited natural gas deal, opening the way for the first Central Asian gas exports to Europe. The memorandum of understanding signed earlier today on the sidelines of an energy security summit in Istanbul could be crucial in securing early gas supplies for the proposed ?7.9 billion (Dh34.65bn) Nabucco pipeline, which aims to supply Central Asian and Middle Eastern gas to Europe through Turkey, bypassing Russia.

The agreement also advances Ankara's plan to establish Turkey as an energy hub for oil and gas supplies to Europe. Under the deal, Turkey would have the right to re-export gas from the second phase of production of the giant Shah Deniz field in the Caspian Sea offshore Azerbaijan. "This opens the way for the securing of supplies for projects like Nabucco," said Taner Yildiz, the Turkish energy minister. "The signing today will accelerate the Nabucco project."

The president of Socar, the Azeri national petroleum company, said Azerbaijan planned to send 10 billion cubic metres per year of gas from Shah Deniz II to Europe, starting in 2018. Another 1 billion cubic metres per year could supply customers in Turkey. "This is a step in the right direction," said Reinhard Mitschek, the managing director of the Nabucco development consortium, which is led by the Austrian petroleum group OMV.

The EU has pledged financing for the pipeline because it regards Nabucco as strategically important in reducing Europe's dependence on Russian gas. Last week, the Turkish parliament ratified an intergovernmental agreement with five EU countries on construction of the 3,300km pipeline, which would pass through Turkey, Bulgaria, Hungary and Romania on its way to delivering supplies to an Austrian gas hub on the outskirts of Vienna.

Turkey and Azerbaijan have been in talks since 2008 over a gas agreement, which was a prerequisite for the further development of the Shah Deniz field. The second phase of the big Caspian project was expected to underpin Azeri gas exports to Europe. Negotiations had been complicated by Baku's strong objections to a Turkish proposal to open its border with Armenia, with which Azerbaijan is technically at war in a dispute over the breakaway territory of Nagorno-Karabakh. But in April, Armenia suspended talks aimed at establishing normal diplomatic relations with Turkey.

According to Mr Yildiz, the deal signed by the the Azeri president Ilham Aliyev and the Turkish prime minister Recep Tayyip Erdogan included an agreement on the price of Turkish gas imports from phase I of Shah Deniz. That had been a sticky issue during the protracted negotiations. Mr Yildiz said the agreement would allow the price of the gas to be adjusted according to market conditions, rather than being fixed. Turkey would pay less for Azeri supplies than for Russian imports, he added.

Nabucco is aiming to secure up to 31 billion cubic metres per year of gas from a number of countries, but analysts and some industry sources regard Azeri supplies as crucial to the project's viability. They could pave the way for later supplies from other Caspian states including Turkmenistan, which holds the world's fifth biggest gas reserves, and from Middle Eastern producers including Iraq, Qatar and even Iran.

Ashti Hawrami, the energy minister of the semi-autonomous Kurdistan region of Iraq, said in Istanbul today that Kurdistan was ready to commit surplus gas supplies to Nabucco. That would depend, however, on the region reaching an accord with Baghdad over gas exports. Separately, Baghdad has expressed interest in supplying up to 15 billion cubic metres of gas to Nabucco from untapped fields in the rest of Iraq.

Turkmenistan announced last month that it would soon start building a 1,000km pipeline linking big gasfields in its eastern desert to the Caspian Sea coast, in preparation for exports to Europe. The UAE has expressed interest in backing the project. Even if the Nabucco initiative fails, the Turkish-Azeri gas agreement could bolster rival developments aimed at supplying Caspian gas to Europe. Those include the Italy-Turkey-Greece Interconnector and the Trans-Adriatic Pipeline projects.

The biggest rival to Nabucco, however, remains Gazprom's Southstream project to supply Russian gas to Europe through a pipeline under the Black Sea. Earlier today, Russia signed a deal with Greece for construction of the ?20bn pipeline. [e-mail]