NATIG ALIYEV: WE SHOULD ACCELERATE NEGOTIATIONS WITH TURKEY ON GAS TRANSIT

 

Caspian Energy (CE): Mr. Aliyev, do you think the last events have increased or reduced the opportunities of projects on laying trans-Caspian pipelines?

Natig Aliyev, Minister of Industry and Energy, the Republic of Azerbaijan: We should view two aspects here. The first one is a project on carrying Kazakhstan oil via the Caspian Sea and Azerbaijan by means of the Heydar Aliyev Baku-Tbilisi-Ceyhan (BTC) Pipeline to ports of the Mediterranean Sea, which I think will remain in force. When the Presidents of Kazakhstan and Russia sign any agreements, as far as I understand, the matter concerns state-controlled oil. Last year, Azerbaijan produced over 32.5 mln tons of oil. But, you know that these volumes do not fully belong to the state, and even if it is eager to conclude an agreement on carrying the oil that belongs to foreign companies, the state cannot put it into practice. Therefore, in this case the matter also concerns state-controlled oil that belongs to Kazakhstan's state-run KazMunayGas Company. The case is that certain oil will be carried via KTK (Caspian Pipeline Consortium (CPC) and later filled in the Burgas-Alexandroupolis Project. This is a choice made by the Kazakhstan state, and we must not have any claims in this regard. Each country makes its choice like Azerbaijan, Russia, and Kazakhstan seek more favourable conditions for themselves from the points of view of economic benefit, security, and political influence of this or that country.

However, when we speak about the export of Kazakhstan oil via the Baku-Tbilisi-Ceyhan Pipeline, the matter have been always concerned  the East Kashagan Deposit, where oil belongs to Total, ENI, Itochu, etc. This is their oil, and they are to choose the best way of carrying their oil. If they consider it efficient, then using the agreement signed between Kazakhstan and Russia, they will carry oil via KTC, and then ship it by tankers to further pipe it via the Burgas-Alexandroupolis Pipeline, which has an entrance to the Aegean Sea. But I do not think that this alternative will be cheaper than carrying oil via BTC. I am sure that the companies will work in the direction chosen by them, as well as facilitate the real implementation of the intergovernmental agreement signed between Azerbaijan and Kazakhstan. Furthermore, they have already sent us a written request to build up a sponsor group, and expressed their wish to negotiate on preparation of a transport agreement between the governments of the both countries. The work led by Total is going on, but I think it is going very slowly. For example, when BP prepared agreements, the company did not make so many breaks between negotiations on one document to the other one. The work was carried out simultaneously. I consider that the both parties are greatly interested in intensifying the negotiations, and if we can create relevant cost-beneficial conditions for exporters to carry their oil via BTC, they will export it via this route.

On the other hand, if it does not happen, we should not be concerned about it. You may ask why? It is very simple, when we projected BTC; it was intended for 1 million barrels of oil per day. The whole infrastructure - BTC's huge engineering communication facilities is considered for 1 million barrels a day and no more than this figure.

We have already tested the pipeline system on 1 million barrels a day for a few hours and got positive results. BTC is currently piping 820,000 barrels of oil per day. The pipe will operate on its full capacity next year.

 

CE: And what about a long-term outlook?

Natig Aliyev: The improved field development of the block of Azeri-Chirag-Gunashli (ACG) fields has been considered for 50 million tons of oil per year, i. e. 1 million barrels per day. If additional reserves, which are to increase the oil production dynamics, become available, we shall certainly have to put investments into the expansion of the oil piping capacity. I think that if Azerbaijan presently produces 1.2 million barrels a day, then the country will cover all conceivable and inconceivable oil production expectations. Furthermore, it would be better if Azerbaijan kept such a stable level of oil production than boosted the country's oil production.

Therefore, when we speak about Kazakhstan oil, we should take into consideration that the oil pipe currently does not have free capacities for it. When we obtain legally-provided temporary commitments of such supplies, and when serious penalty provisions are imposed if such commitments are not fulfilled, then Azerbaijan, being a party to BTC Co., will give its consent on expansion of the BTC Pipeline's capacity, as well as create relevant favourable tax and investment conditions, etc. Otherwise, should we put investments into the project, which is not provided with corresponding commitments of parties? We do not need such an excitement. We are interested in it, but it is not so crucial to us. I can give you an example: the oil pipeline of Odessa-Brody, where the Ukrainian Government invested 800 million USD. But the pipe operates in a reverse direction as the project is not provided with corresponding resources. They will have much within the mentioned project to link this piping system with most important oil consuming regions to Plotsk with an entrance to the Atlantic Ocean, etc. Therefore, Ukraine has appealed to Azerbaijan and Kazakhstan to fill in the pipe.

 

CE: Does it mean that Azerbaijan is actually joining this system?

Natig Aliyev: Azerbaijan will join it if the route turns to be profitable to us, especially since other aspects, which allow approaching to the implementation of this project more thoroughly, have already emerged.

Azerbaijan is guided only by its own resources, and we have fulfilled our task. We are raising our oil production and this process is intensely going on. We have installed our own infrastructure, which does not depend on anybody. It passes via the territory of the transit countries, which are not oil-producing nations.

We have our own oil strategy. We follow this strategy by consequently implementing it, and I would like to repeat once more that it is based upon our own resources.

 

CE: Mr. Aliyev, will Azerbaijan intensify the production from other fields or not?

Natig Aliyev: We shall do it if new fields are put into operation. It is sufficient to say that only on Shah Deniz deposit, the condensate production from one well will reach 10,000 tons per day. This is a great indicator. If the production is launched, for example, from Inam field, it will be additional figures as well.

Today we speak about the fact that Azerbaijan may stably produce around 60-70 million tons per year if exploratory works on new fields are conducted successfully.

 

CE: According to SOCAR top official, there are quite enough fields, which are similar to Shah Deniz by their structures and reserves. Are any exploratory activities conducted on these fields?

Natig Aliyev: The matter concerns the structures of Nakhchivan, Absheron, Zafar-Mashal. All three fields are similar and comparable with Shah Deniz by their size and geological features. Therefore, when we speak that we may find a field of such a type or class as Shah Deniz deposit, we are not mistaken. On the other hand, wells on Nakhchivan, Absheron and Zafar-Mashal have been already drilled. However, the first ones turned out to be not as convincing as it had previously been expected for oil and gas company's taking risk to lay another well, though companies study and analyze it once more. I think that some time should passed, and I believe that, for example, the structure of Absheron is presently more suitable for deep exploratory drilling, and that we may find a little less reserves there than on Shah Deniz, but it will be the field of such class as Shah Deniz. You may ask what restrains us? Total of France has already expressed its wish to return to the field to develop it. SOCAR is likely to hold corresponding negotiations with the French company, and it is not ruled out that some terms and provisions of the project may be changed. At any case, a new agreement will require a thorough review.

According to the international practice, one out of five structures encompassed by deep exploratory drilling becomes a field. Of course, it is a geological risk of the company, which will carry out these works. Therefore, I think that at first, especially in 1993-1994, one of the elements of the oil strategy of Azerbaijan was to shift this geological risk, which was linked with considerable capital outlay, to foreign companies engaged in developing Azerbaijan's oil sector. The agreement strictly indicates that if a company finds a field, in addition to this company's right on development of the field, etc, in accordance with sharing the terms on profit, capital outlay, etc., the company is to compensate the risk capital, spent during the geological survey. That was a just approach.

It means that you will search for, find, and produce - and all these are your risk. If you have found something, it is perfect, that will allow you to recompense your costs and gain a profit.

 

CE: But is SOCAR able to conduct exploratory activities at its own, and whether the state-run company has corresponding Baku-built plants and facilities for it?

Natig Aliyev: Today the utilization of such plants and facilities costs too expensive. Here the matter is not about staff though management is important in this issue. We are speaking about a financial risk. SOCAR cannot invest 70-150 million USD into one well, which may turn to be empty later. These funds are not considerable for a foreign company with the turnover of many billions of dollars, and they know what the risk is. For SOCAR, these funds are great. SOCAR has always drilled and keep on drilling deep exploratory wells. But not every well reaches its projected depth. There have been a lot of wells, which were abandoned due to different technical reasons. It is important to correctly organize drilling activities not to allow a well to be shut in.

 

CE: But could we use sub-contractors' rendering services at a certain stage?

Natig Aliyev: This is a serious economic issue. I agree with you. I used to say that if there is a serious well, it would be better if sub-contractors were hired. They will be paid, with the responsibility to be shifted to them.

 

CE: How could you assess the possibilities of the Trans-Caspian Gas Pipeline, particularly after signing the declaration on laying the Caspian Gas Main from Turkmenistan to Russia?

Natig Aliyev: Each country makes its choice. In its time, seeking for the diversification of gas transit flows, Turkmenistan concluded an agreement with Turkey on supplying this country with 16 billion m3 per year. The country had seriously treated the issue on laying a Trans-Caspian gas pipeline, but due to the known events related to fixation of the offshore boundaries of the Azerbaijani and Turkmen sectors of the Caspian Sea, the project was frozen at that time. Different political events caused it. The interests of both countries collided with each other. I should say that the world is presently developing in the way aggravating struggle for energy resources. On the other hand, the unprecedented competitive struggle for their involving into global regional projects among companies and countries is going on, and third parties certainly compete for possessing transit corridors.  Therefore, power engineering turns into a factor of diplomacy, pressure and building relations between countries. Turkmenistan has laid a gas pipeline to Iran, and it currently exports 6-8 billion m3 of blue fuel to this country. Turkmenistan has concluded a long-term agreement (25 years) with Russia. It has signed an agreement on construction of a gas pipeline via Afghanistan and Pakistan to India at a level of memorandums, protocols, etc. The fact that Turkmenistan diversifies and assesses different alternatives is quite natural. What can we say? The only thing we may say is the fact that not only Azerbaijan, but also first of all the entire Europe hopes that Caspian gas produced from Azerbaijan, Turkmenistan and Kazakhstan will become one of the alternatives of supplying Europe with blue fuel. You may say that both Kazakhstan and Turkmen gas are piping to Europe via the territory of Russia, and what is the difference for Europe. That is not the point. Europe is currently concerned about events connected with one-side's rising in prices, etc. Europe does not want to depend on one country. Therefore, they say that it would be perfect if Caspian region gas was piped via Azerbaijan, Georgia, the Crimea, and further to the Eastern and Central Europe.

 

CE: Do you mean that the issue on laying a gas pipeline through the bottom of the Black Sea is currently being seriously viewed?

Natig Aliyev: The pipeline will be laid through the bottom of the Black Sea via the territory of Ukraine. However, this project requires to be thoroughly elaborated. If Turkmenistan agreed on laying a Trans-Caspian gas pipeline, then one of its branches would be laid on the bottom of the Black Sea via the Crimea and then further to Europe. Europe is very interested in it, and there are a lot of similar projects available.

 

CE: But Russia has claimed that it expects to export some 100 billion m3 of gas from Turkmenistan...

Natig Aliyev: Russia presently wants to accumulate the whole volume of Middle-Asian gas in its gas distribution networks. But we are saying that each country should have flexibility of its resources supply, as well as should be involved in international integration processes. Turkmenistan presently does carry out such a policy, and I have mentioned it before. The following route - Trans-Caspian Gas Pipeline - Azerbaijan - Georgia and further Turkey - Greece - Italy, or the Crimea (Ukraine) - Poland, etc. may be involved in this strategy. It will turn into a large-scale regional project, and all parties, which will be involved in the project, will gain from its implementation. Such large-scale projects are not the business of a single country. Frankly speaking, presently our own resources are not enough for this project. Therefore, when Europe poses such a task to us, we say that only Kazakhstan, Turkmenistan, and Azerbaijan altogether, can solve it, but not separately at. But the situation may be changed by opening of huge gas fields, for example, Nakhchivan or Absheron, Zafar-Mashal or Araz-Alov-Sharg.

 

CE: Has any progress been achieved in settling the issue of the fields of Araz-Alov-Sharg and Kapaz-Serdar?

Natig Aliyev: No, there has been no progress regarding this issue. In case with Kapaz (Turkmenistan calls it Serdar), we have always been ready for negotiations and I am confident that some day we shall launch them, and in accordance with the international experience on sharing the seabed, we shall see, identify, and say which sector this field belongs to. We do not carry out any aggressive policy at all. Turkmenistan does the same. It means that we can come to an agreement.

 

CE: What is your opinion on the results of the recently held Krakow Energy Summit?

Natig Aliyev: We have just approached this issue. Some media sources have reported that the summit was fruitless. But as a person who participated in this event I can say the following. The Energy Summit was very efficient, particularly the meeting of the presidents of the participating states. I consider that discussed issues were of a serious nature. The presidents expressed their thoughts regarding current situation in the energy market both in Europe and other regions. If to sum up the results of the Krakow Energy Summit with the participation of six countries, this is first and foremost consuming countries' anxiety about their energy security. The key task coming from this is to determine how EU member-states should coordinate to attain friendly commercial relations with those countries, which back Neighbourhood Policy with EU, etc. The participants talked about the aforesaid. Every president expressed his opinion. Each country uses the ways, possibilities, and potential it has. It develops by seeking for new ways. Issues connected with using alternative power sources, nuclear energy, including construction of nuclear power plants (NPP) were viewed during the event as well. Sure, oil and gas seem to remain the only and key sources of energy resources for quite a long time. Therefore, Ukraine, Poland, countries of the Eastern Europe and Baltic are keen to establish energy carriers flow from the Caspian region.

The next Energy Summit is expected to be held in Vilnius in October, 2007. The agenda of the Krakow Energy Summit also included the issue on launching the Odessa-Brody Pipeline, what should be done to carry oil to Plotsk- and Gdansk-based oil refinery plants, etc.   Due to this, a working group consisting of energy ministers of the six countries-participants of the summit were built up. The working group was commissioned to prepare proposals on organizational issues - what kind of company should be established; what it should look like; determine the membership and shares of founders. It will require analyzing the existing resources and capacities, those ones of the Black Sea toward the market, and what ships across the sea. Each of the states should create certain preferences or privileges for the company's operating in the corridor. I think that it should work directly with oil consumers - I mean Plotsk-based oil refinery plant, etc.  These are the issues that should be presently thoroughly studied, and the most important is to put forward a proposal on organization of such an organization after studying them. The decision on establishment of the organization is expected to be made during the next Energy Summit to be held in Vilnius.

The corridor will spread out the territory from the Caspian Sea to Azerbaijan and Georgia, as well as Ukraine, and Poland across the Black Sea, etc. Regarding Kazakhstan, the Representative of the Kazakhstan President in the summit, Deputy of the Kazakhstan Energy and Mineral Resources Minister, Lyazzat Kiyinov claimed that ‘Kazakhstan is ready to take part in the installation of such a corridor, and we expect interesting proposals'.

CE: A dozen of projects have been announced bypassing the Bosporus. How far is Azerbaijan interested in them or vice-versa?

Natig Aliyev: That is a good question. But, at the same time, when I hear it, I say, for example, that I have a garden with apple trees and a neighbour of mine has his own one. What do I care about my neighbour's garden? Azerbaijan will export 50 million tons of oil per year via the Baku-Tbilisi-Ceyhan pipeline, full capacity of which reaches these oil volumes. We fulfilled our task when we had filled in the pipeline. When someone else constructs a pipeline, the flows are quite different. Does Azerbaijan loose anything because of that?

The quite another matter is that we shall carry some 7-8 million tons to the Georgian Black Sea Port of Supsa. If the project of Samsun-Ceyhan is implemented, and if the terms of piping via this pipeline are more advantageous to us than tankers' shipping via the Bosporus, then we shall certainly use this route since the Turkish Mediterranean Sea Port of Ceyhan is an entrance to the ocean and the possibility to freight tankers with the capacity up to 300,000 tons. Moreover, Italy is not far from there. Only commerce can solve such issues.

 

CE: What are the preliminary results of working over the Project of Stage 2 of the development of Shah-Danize field?

 Natig Aliyev:   We have elaborated the technical and technological conceptions, though the final decision has not been taken yet, and that is due to gas purchase and sale.

The matter concerns concrete agreements on supplies of either the transit via Turkey or sale to this country, though we do not prefer the latter. Then it turns to be that we shall sell gas to them, and they, in their turn, will re-export it. If it happens, then we shall be in Turkmenistan's shoes like in the case with Russia. But we do not want it. Therefore, we will need serious negotiations at a governmental level to attain good transition conditions. There are about 2,000 km from the Georgian-Turkish border to the Turkish-Georgian one. On the whole, there are approximately 3,000 km from Baku to Greece, and we need to stipulate for the terms of the transit.

First, Azerbaijan and Turkey should conclude a relevant intergovernmental agreement on the transit. Then, negotiations on commercial conditions of the further gas supply should be held, for instance, with such companies like DEPA of Greece or Italgas of Italy.

We have not had such negotiations yet, but we should initiate them, as well as speed this process up.  As yet we shall delivery gas on the Georgian-Turkish border.

 

CE: Kazakhstan currently has intensions to construct a liquid gas production plant in the Caspian Sea. What is your position regarding the efficiency of this project?

Natig Aliyev:  This is an idea intended by EU to construct a liquid gas production plant on the western coast of the Caspian Sea, and ship it by tankers to Baku, etc. This alternative will be under consideration, if the gas pipeline either is not laid due to any reason or linked with serious troubles, which they are well aware of. 

 

CE: Does it mean that Kazakhstan has gone back on its word abandoning the Trans-Caspian gas pipeline?

Natig Aliyev:   This is the will of the state. In our time, we received notes that indicated not to sign agreements, not to construct, not to permit foreigners to come to the Caspian Sea. If then we had followed that, we could have never had what we have nowadays.

The state is to decide itself what is important to it, and if the state has decided to put it into effect, then no one can prevent it.

 

CE: What about alternative energy sources? At what stage is the studying of use of these energy sources in Azerbaijan?

Natig Aliyev:   I have submitted the President a report on the alternative power engineering programme. We have signed an agreement with a South-Korean company on alternative energy. This is the project with the aggregate capacity up to 20 Mwatt. Ten plants each on 2 MWatt are expected to be installed on the territory Gobustan District (39 км away from Baku in the direction of the ancient Azerbaijani town of Shamakhy). Electricity is expected to be supplied to the grid of Azerenerji OJSC.

Today one KWatt of electricity costs 5-6 cents in Azerbaijan. To generate an alternative kind of energy will cost more irrespectively of whether we shall receive subsidies from the state or not, or else we might forget about alternative energy sources until their price becomes compared with the cost of its generating at heat power plants.

In Germany, for example, alternative electric power costs 12 cents and the state subsidies this sphere. Therefore, it is a very important issue. We should seriously work on the feasibility study, commercial terms, and economy of the project (investments, share holding, capital return, etc.). As soon as we determine our position and all the mentioned issues are settled, i. e., when the process on allotting areas under the project commences, etc., we may launch the implementation of this pilot project. The very substantial aspect is that just the international prices are considered at calculating the commercial expediency of the project, but not those ones of black oil and gas delivery to the system of Azerigaz by Azerenerji.

We are currently working on projects on installation of moderate hydroelectric power stations (HEPS). There is a programme and proposals we view. However, there are a lot of technical issues, which need to be solved. Our rivers excel with their great quantity of dash. Moreover, they are too polluted. But nevertheless, we shall develop this direction there, where it is possible and commercially expedient.

Construction of a nuclear power plant (NPP) is a very serious issue. First of all, this is peculiar technologies, nuclear fuel, special sciences, which are not available in Azerbaijan plus a heavy risk.

 The consequences caused by Chernobyl will not disappear until the end of 21 century. We should not fasten with this issue. In my opinion, this issue is not of current importance to Azerbaijan. 

 

CE: Mr. Aliyev, what is the situation with our chemical industry?

Natig Aliyev:  We have submitted our programme to the Azerbaijan Government for further consideration. The programme is currently reviewed by many ministries and offices of the country.

If we speak about the chemical industry, each company, including Azerkimya, which is an independent company with its position, should be independently engaged in looking for investors and new technologies. If any questions exceed the frames of the competent authority of the company, then they should appeal to the government with a request to facilitate the creation of certain environment.

That refers to all other companies - SOCAR, Azerenerji OJSC, Azerigaz CJSC, Azneftkimyamash OJSC, etc. In our turn, we shall work out development programmes to make the field less power-consuming one. Each field should have its conception and programme. They should view their perspectives and remove those industries that economically unprofitable. 

 

Thank you for the interview