Azerbaijan’s gas will flow to Turkey through new $2.6 billion pipeline
Azeri gas reserves are world class; 10 trillion cubic meters possible

When the "Contract of the Century" to explore Azerbaijan’s oil prospects was signed in the White House in 1994, everyone’s focus was on oil, not natural gas. That quickly changed when subsequent explorations led to the discovery of a world-class natural gas field in the Shah Deniz field.

Gas reserves in that field are now estimated at between 700 billion and one trillion cubic meters, and with other potentially large reserves in the Absheron and Inam structures, natural gas looms large as a potential foreign exchange earner for Azerbaijan. If those reserves are confirmed, Azerbaijan’s gas could total up to 10 trillion cubic meters.

The primary market for Azerbaijani’s natural gas is Turkey. To get the gas from Baku to Turkey requires the construction of a new gas pipeline, removal of the Turkish government’s monopoly on the gas market, and an agreement with Georgia on gas transit fees.

The Turkish parliament took the step toward market liberalization early this year. That done, Azerbaijan and Turkey signed an agreement whereby Azerbaijan will supply almost 80 billion cubic meters of gas to Turkey, beginning in 2004.

Negotiations with Georgia seemed to go along well, but then hit a snag last summer. Georgia suddenly demanded higher fees, claiming that it was being short-changed when it compared offered rates to world transit fees.

Media reports suggested, however, that the World Bank had encouraged the Georgians to shift their position. The Bank, so reports say, was anxious to ensure that Georgia would be in a position to pay back its loans in the face of a deteriorating economy.

BP Exploration (Shah Deniz) Ltd, the gas field consortium’s operating company, put pipeline development on hold until the parties could come to an agreement. In early October Georgia and Azerbaijan agreed on terms, but those terms have not yet been disclosed. BP welcomed the concord, and construction planning for the pipeline is now moving ahead. The pipeline is slated to cost $2.6 billion.