BAKU/TBILISI, March 1 (Reuters) - With Europe flooded by gas, there is little sense of urgency in supply talks between Azerbaijan and Turkey, but commercial interests dictate they will reach a deal key to reducing energy dependence on Russia.
The two have been negotiating since mid-2008 against a backdrop of political tension, drawing dire warnings that Europe could lose out on key gas for the planned Nabucco pipeline.
Azerbaijan wants to hike the below-market price, and has warned it will otherwise sell elsewhere, striking deals to sell small volumes to Iran and Russia to drive the point home.
Washington’s envoy for Eurasian energy, Richard Morningstar, said in January that significant further delays in talks "could see the window of opportunity for putting in place this key piece of a Southern Corridor close".
At stake is access to the second phase of the Shakh Deniz project, expected to come on stream later in the decade and potentially providing the market with an extra 16 billion cubic metres of gas per year — half of Nabucco’s planned capacity.
Nabucco would transport Caspian and Central Asian gas via Turkey and the Balkans to central Europe — the so-called Southern Corridor route. This would cut out Russia, which now supplies about a quarter of the gas consumed by western Europe.
But the proposed route faces competition from a similar pipeline project, South Stream, backed by Russian state-run energy giant Gazprom. Gazprom is offering to buy as much gas as Azerbaijan can produce.
A rift between traditional Muslim allies Azerbaijan and Turkey over moves by Ankara to mend ties with Armenia — Azerbaijan’s enemy in the conflict over rebel Nagorno-Karabakh — has fed the sense of alarm over the fate of the negotiations.
But analysts say politics are not holding up the deal. Azerbaijan is unwilling to commit to terms so far in advance of Shakh Deniz II coming online in 2014-16 and an oversupply of gas to Europe has removed any real sense of urgency.
"The Turks are struggling with their economy at the moment. They don’t want to pay much more than the original $120 per 1,000 cubic metres agreed for Azeri gas," said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies.
"The Azeris don’t see why the Turks should not pay a ‘European price’ which they have to pay for all other gas, and which the Azeris are getting from the Russians. This dispute is not primarily political. It’s primarily commercial."
WAITING GAME
Stern said the availability of liquefied natural gas (LNG) at relatively low prices — partly responsible for a 3-year delay to the launch of Russia’s giant Arctic Shtokman gas field until 2016 — removes urgency for an agreement.
But Azerbaijan could hold the upper hand in a few years’ time when supply tightens again, Stern said. "If there is no agreement, there is no Nabucco."
Faced with a backlash from Azerbaijan, Turkey has backed down on a deal with Armenia to establish diplomatic ties and open their border, which Ankara closed in 1993 in solidarity with Azerbaijan during the Nagorno-Karabakh war.
A senior Turkish government official, who asked not to be named, said: "We believe that an agreement can only be reached by easing the political problems and persuading the Azeri side."
But analysts say there is no reason to believe Azerbaijan will turn its back on Turkey as an export route to Europe.
"I see nothing to suggest that Azerbaijan in relation to this negotiation has changed its stated policy, which is to have Europe as the main market for its export gas," said Caspian energy expert Laurent Ruseckas.
"For commercial and strategic reasons they’ve identified Europe as the most important target market for the gas, and that includes Turkey on the way."
Ana Jelenkovic, research associate at Eurasia Group, said Azerbaijan was playing a waiting game.
"I think for (Azerbaijan) the strategy is to wait until it gets closer to supplies coming online, make it evident to both the Turkish side and the European side that there are other markets for these gas supplies," said Jelenkovic.
"That’s where the deals with Russia and Iran come into play. The goal here is to get the Europeans to force Turkey’s hand."
