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15 February, 2012  ▪  Oleksandr Kramar

The Price of Uncertainty

Ukraine is losing the fight for Azerbaijani gas to the more aggressive Russia and Turkey

At the height of the gas war against Russia, Ukraine lost one of the trump cards which it used to employ in negotiations. In late January 2012, Viktor Yanukovych and Ilham Aliyev announced in Davos that they were going to sign an agreement to set up a Ukrainian-Azerbaijani joint venture to supply liquefied Caspian gas to a planned LNG terminal in Ukraine. But the agreement was never signed. Instead, the sides exchanged another batch of declarations. A reassuring explanation was offered to the Ukrainian public: Azerbaijan called a timeout to work out issues with the October 25, 2011 gas supply agreement it signed with Turkey to ship gas from the second stage of the Shah Deniz field and its further transit to the EU.

A joint gas pipeline with Turkey is a priority for Azerbaijan which Ukraine cannot compete with, if only in view of the special political relations between those two states. However, this project is scheduled to kick off in 2017, which is much later than deliveries of Azerbaijani gas to Ukraine were expected to begin (2014-15). Moreover, the future LNG terminal in Ukraine was projected to receive much smaller volumes per year (2 billion cubic meters initially and up to 5 billion eventually) than the Trans-Anatolian gas pipeline (starting from 16 and later up to 37 billion cubic meters of gas).


It appears, however, that Gazprom has had a hand in thwarting the Kyiv-Baku agreement. On January 23, 2012, Gazprom’s press service announced that, following a meeting between Dmitry Medvedev and Aliyev in Krasnaya Polyana (near Sochi) on settling the Nagorno-Karabakh conflict, Aleksey Miller, the CEO of the Russian gas monopolist, and Rovnag Abdullayev, the president of the Azerbaijan state oil and gas company (SOCAR), signed a new addendum to their current contract for Azerbaijani gas.

In 2010, Azerbaijan exported a mere 0.8 billion cubic meters of gas to Russia. However, as its relations with Ukraine deteriorated over gas conflicts and Kyiv threatened to switch from Russian to Azerbaijani gas, Gazprom began to take preemptive measures and signed the first addendum to the 2009 contract on September 3, 2010 under which it imported up to 1.5 billion cubic meters of Azerbaijani gas in 2011. According to the new addendum, the figure is set to increase to 3 billion cubic meters and will exceed this amount starting from 2013.

This is essentially the same volume of gas that Ukraine hoped to receive at its LNG terminal beginning in 2014. Commenting on the agreement, Miller said that “the exclusion of transit zones enables Azerbaijan to export natural gas to Russia in the most cost-effective way.” He did not mention that Russia is one of the world’s biggest exporters of gas, and imports it from other countries only to strengthen its monopolistic position on the market.

Moscowdoes not even try to conceal its motives in these measures, which is to remove access to an alternative source of natural gas for Ukraine and force it to be more compliant with Russian demands on its gas transportation system. On January 16, Konstantin Simonov, Director General of Russia’s National Energy Security Fund, said: “(Kyiv’s) threats to arrange for liquefied gas to be delivered from Azerbaijan are nothing more than tall tales. Baku does not have these volumes of gas to ship to Ukraine, which, in turn, does not even have a terminal to receive it! (Yuriy) Boyko understands he is fibbing a bit as he continues to pay $400 per 1,000 cubic meters of (Russian) gas. He also realizes that, given this price, the national economy may collapse very soon. Ukraine does not have an alternative to dealing with Russia.”


Apart from these targeted actions on the part of Russia, the current predicament can also be blamed on the characteristic inconsistency and hesitation of the current Ukrainian government in its efforts to diversify gas supplies. As a result, foreign partners, including Azerbaijan, could get the impression that Ukraine’s project to build an LNG terminal will never progress past the planning stage or a feasibility study.

In late 2011, Vitaliy Demianuk, Chairman of the Coordination Council for the LNG Terminal National Project, told the mass media that leading world companies have turned down investment offers for almost a year, citing a possibility that Naftogaz could strike a deal with Gazprom, which would render the terminal profitless. Then the Ukrainian government said that, allegedly in order to expedite the whole process, it could resort to a temporary solution and lease a floating LNG facility at around $60 million a year.

On the one hand, this solution appeared to be “Solomonic” in view of exerting tactical pressure on Gazprom, because it would not require significant investments. (A stationary terminal would cost at least a billion dollars.) But on the other hand, it would leave Azerbaijan without any guarantee that, after settling its issues with Gazprom, Ukraine would not decide to stop leasing the FLNG and purchasing Caspian gas.

Furthermore, in a bid to possibly make an even stronger impression on Gazprom, Ukraine continued its feverish activity to find gas for its terminal outside the Black Sea region. On November 22, 2011, Ukraine’s Ambassador to Turkey Serhiy Korsunsky said at a presentation of national projects in Istanbul that Kyiv was holding consultations with Ankara on the technical issues of having liquefied gas tankers pass through the Bosporus to reach the future LNG terminal. Clearly, these tankers would not be carrying Azerbaijani gas, which must be a concern for Baku.

Therefore, as it was choosing between uncertain projects spawned by the current Ukrainian government and clearly articulated proposals – probably backed up by Moscow’s promises to support Baku in resolving the Nagorno-Karabakh conflict – Azerbaijan decided to go with the Kremlin. Meanwhile, Kyiv received the predictable reply: "We are ready to resume our talk about cooperation if you have a clearer position and we have gas available for export."

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