Azerbaijan and Georgia finally sign gas agreement

Oct 12, 2001 02:00 AM

After several months of wrangling over transport charges, an agreement allowing Azeri gas to pass through Georgia on its way to the eastern Turkish town of Erzerum was finally signed by the presidents of Azerbaijan and Georgia on September 29th. This was an important -- but not the last -- step needed to prepare for laying a 1 000 km pipeline which would bring natural gas from Azerbaijan's Shah Deniz field, offshore in the Caspian, through Georgia to Turkey.
The first leg of the specially-dedicated pipeline, from Baku to Tbilisi, will follow the route of the Baku- Ceyhan oil pipeline- later branching off to Erzerum. Under the terms of the agreement -- as signed by the presidents -- Azerbaijan is to pay Georgia $ 2.50 for every 1 000 cm of gas pumped through the during the first five years of the contract, with payment rising to $ 5 per 1 000 cm during the subsequent 20 years of the contract's life.
In lieu of payment, Georgia is to given the option of receiving as much as 5 % of the gas pumped every year free of charge for its own use, which it is likely to initially opt for. Tbilisi would also be able to buy an additional 500 mm cm of Azeri gas per year at the discounted price of some $ 55 per 1 000 cm.

Just a few days after the two presidents had signed the agreement, however, an official from SOCAR (the State Oil Company of the Azerbaijan Republic) insisted that no final decision on transit tariffs had been reached. Such a decision could only be made when the group sponsoring the gas pipeline had been formed and the maximum cost of the project had been estimated. At present BP and Norway's Statoil, who jointly own 51 % of the Shah Deniz gas field, are already conducting engineering studies for pipeline, but they are seeking additional investors. SOCAR itself owns 10 % of the field.
Construction of the pipeline had originally been scheduled to begin in late 2001, but has now been pushed ahead to mid-2002. If all goes as scheduled, the pipeline, when completed in late 2004 or early 2005, should be able to transport 7.2 bn cm of gas a year from the Shah Deniz field, which is estimated to hold 700-1 000 bn cm of gas. According to an agreement signed earlier this year, Azerbaijan has scheduled to provide Turkey with 2 bn cm of gas in 2004, rising gradually to 6.6 bn cm in 2007.

Before construction of the pipeline can begin, however, the parliaments of Turkey, Georgia and Azerbaijan must still ratify the host-government and inter-governmental agreements. In addition, the Shah Deniz shareholders must also give the go-ahead for construction if they decide that the project is commercially sound. BP officials are hoping that the project will be approved before the end of the year so that the 2004-2005 target can be reached.
With September 20th the seventh anniversary of what Azerbaijan calls "the contract of the century," the 30-year agreement with foreign oil companies, drawn up to exploit the Azeri, Chirag and Guneshli fields in the Caspian- believed to be Azerbaijan's richest offshoredeposits -- the Azeris are taking pains to sweeten legal procedures for foreign companies. A new law is scheduled to be adopted before the end of the year that will simplify the complicated process of approving production-sharing agreements. At present, each one has to be ratified by parliament.
Under the celebrated "contract," the nine companies from seven countries working on the prize off-shore deposit have already injected $ 2.4 bn into Azerbaijan's economy, with total income over the 30 years foreseen at $ 70 bn. It is clearly in Azerbaijan's interest to have such companies stay, unencumbered by regulatory difficulties.

Source: The Oxford Business Group
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