As recently reported in The Financial Times, Azerbaijan – already a growing force on world oil markets – is carving a role for itself both as a natural gas exporter and as a strategic gas transit route linking the Caspian region with the west.  As the article notes:

“…2007 marked a turning point in the country’s gas fortunes, when the huge Shah Deniz field in the Caspian Sea began feeding gas into a the new South Caucasus Pipeline across Georgia to Turkey.

After more than four decades of dependence on Russian imports, Azerbaijan became self-sufficient in gas.

Murat Heydarov, an adviser to the president of Socar, the state oil company, says: “These are the crowning achievements of our gas strategy: to end dependence on imports and gain access to European markets.”

The gas strategy would have sounded fanciful in the early years of independence. Foreign investors who flocked to the republic in the 1990s were looking for oil, not gas.

When a BP-led group clinched the so called “contract of the century” to develop the giant Azeri oilfields in 1994, it agreed to hand over to Azerbaijan associated gas production for nothing.

In the meantime, the global energy landscape has changed. Prices have soared to record highs amid fears of supply shortages, and gas has swung into demand as an environmentally-friendly fuel.

The Caspian region is now a major target in Europe’s quest for a new source of gas to compensate for declining North Sea production and to supplement supplies from Russia and north Africa.

Professor Jonathan Stern, the head of gas research at the Oxford Institute of Energy Studies, comments: “In European eyes, Azerbaijan in the past five years has moved from nowhere to being the key to whether – and if so when – the so-called ‘fourth gas corridor’ to Europe can become a reality.”

Azerbaijan is flanked by places with much larger gas reserves than its own, including Russia, Iran and central Asia. Its gas strategy is focused on Shah Deniz, a huge field in the Caspian Sea discovered by a BP-operated consortium in 1999.

The development undertaken so far at Shah Deniz is capable of producing 8bn cubic metres of gas a year, all of which is already committed to consumers in Azerbaijan, Georgia and Turkey, fed by the South Caucasus Pipeline.

The field also yields substantial volumes of condensate, a light form of crude oil, which is exported via the Baku-Tbilisi-Ceyhan oil pipeline to the Turkish Mediterranean.

There is growing evidence that Shah Deniz’s potential as a gas supplier is far greater. The discovery last year of a deep new reservoir indicates that the field will eventually be capable of producing at least 20bn cubic metres a year of gas.

Mr Heydarov says: “We now have the foundation to believe that Azerbaijan will be a real player on the international gas market after 2012.”

But outlets must be secured in Europe and new pipelines built beyond Turkey before BP invests in expansion of Shah Deniz. Three pipeline routes to carry Caspian gas to Europe are being considered.

Nabucco, a €5bn project supported by Austria, Hungary, Romania, Bulgaria and Turkey would run 3,300km to Baumgarten in Austria.

Other projects under consideration would route Caspian gas across the Adriatic to Italy via either Greece or Albania.

Political backing for the pipelines is strong – the European Union regards Nabucco as the cornerstone of its plan to ease its dependence on Russian gas, already the source of about half its imports.

The EU is also encouraging the revival of a project to build a gas pipeline across the Caspian Sea to bring Central Asian gas to Azerbaijan for export in the South Caucasus system.

Turkmenistan severed contact with Azerbaijan after a row about the ownership of Caspian Sea oilfields, when Sapurmurat Niyazov, Turkmenistan’s former president, who died in 2006, was in power.

Gurbanguly Berdymukhammedov, the new leader of Turkmenistan, has re-opened talks with Azerbaijan about offshore demarcation that could set the stage for an agreement on a trans-Caspian gas pipeline linking the two republics.

The EU has urged Kazakhstan to join the project.

Azerbaijan is eager to expand its role as a gas transit state. Mr Heydarov says: “Azerbaijan can guarantee all the gas transport provisions of the Energy Charter, free access, decent tariffs based on market realities and no discrimination for gas producing countries.”

However, Russia, reluctant to cede its monopoly over central Asian gas export routes, objects to the construction of trans-Caspian pipelines on environmental grounds.

Two Russian pipeline projects launched last year aim to absorb central Asian gas at source and saturate European markets targeted by Caspian producers.

The two projects include Pricaspiysky – a pipeline skirting the east coast of the Caspian to bring an extra 20bn cubic metres a year of Turkmen and Kazakh gas north into Russia – and South Stream – a pipeline from Russia across the Black Sea to Bulgaria.

Azerbaijan stopped importing gas from Russia last year, when Shah Deniz came onstream. Socar offered to export some of its surplus gas to Dagestan, a Russian republic in the north Caucasus, but Gazprom declined the offer.

But Professor Stern says: “In the long term, it might make sense for Russia to import gas from neighbouring Azerbaijan to free its own supplies for delivery to more distant European markets…”