Azernews.Az

ANKARA – Talks between Turkey and Azerbaijan over natural gas sale contracts from the second development phase of the Shah Deniz field have hit a snag over jurisdictional issues and legal rights, a senior executive of the State Oil Company of the Azerbaijan Republic (SOCAR) has said, Todays Zaman reported.

Speaking to a group of Turkish reporters in Baku last week, Khalik Mammadov, vice president of SOCAR, and Vagif Aliyev, general manager of the investments division, said most of the details of the contract, including transit fees, volumes of gas and transportation options, have been finalized. Yet both said the disagreement over what legal jurisdiction will govern the deal still hangs in the air.

Stressing that the Shah Deniz II investment may amount to $25 to 30 billion with the construction of pipelines, Aliyev stated that an investment of this magnitude must be secure. One of the means to achieve such security is a solid legal jurisdiction to protect the interest of all partners. "The legal rules governing the deal could be British or Swiss," he said. In addition to SOCAR, other partners developing the field are the UK’s BP, Norway’s Statoil, France’s Total, LukAgip, Iranian NIOC and the Turkish Petroleum Corporation (TPAO).

Turkey, a key country for carrying Azeri gas to Western markets with one of possible three routes, argues that it should have jurisdiction since most the pipelines traverse Turkish territory.

SOCAR and the state-owned Turkish Pipeline Corporation (BOTAS) signed a memorandum of understanding in June 2010 for the sale of additional gas volumes and the conditions of purchase of volumes intended for the European market.

"We have agreed with our Turkish partners on the main substantive issues during our talks," said Aliyev, adding that "the only thing left for us to do is to convert all these details into a legally binding contract."

The SOCAR executive predicted that the talks, suspended due to this year’s national elections in Turkey, would resume again soon. "We wanted to finalize the talks by the end of April or mid-May, but it did not happen. Hopefully we will pick up where we left off soon," Aliyev said. Noting that the prior agreement with BOTAS from Shah Deniz Phase 1, signed last year, was governed by British legal rules, he said a similar deal can be made for the Phase II gas supplies as well.

The agreement with Turkey has huge significance for Azerbaijan because all three consortiums competing to build the infrastructure to carry gas from Shah Deniz to Europe look to Turkey for the construction of the pipelines or to link up their own pipelines with the existing ones that pass through Turkey. These pipelines are the US and EU backed Nabucco, the Interconnector Turkey-Greece-Italy (ITGI) and the Trans Adriatic Pipeline (TAP). The development of Shah Deniz II is expected to complete by 2017.

Aliyev also underlined that SOCAR wants to open up to the Middle Eastern markets via Turkey. "We have already made preliminary inquiries with potential customer countries in the Middle East. Once Syria is stabilized, we will start selling natural gas to all customers in the Middle East," he said.

Last April, Azerbaijan signed a protocol on economic cooperation between Azerbaijan and Jordan, which included a framework for discussions about the export of an unspecified amount of Azerbaijani crude oil and natural gas to Jordan.

Since no pipeline exists for delivery of Azeri gas to customers in the Middle East, Turkey comes into play as a strategic partner. BOTAS plans to complete a route that will link Turkey to the Syrian city of Aleppo next year. That could allow SOCAR to sell gas to Jordan, Syria and even Israel.

"Syria did express interest in building a pipeline to connect its grid to Turkey, while BOTAS has already completed some of the pipeline construction in border areas," Aliyev said. He also predicted that Azerbaijan could sell gas to Greece via the established network between Turkey and Greece.

More investments in Petkim
Aliyev is also chairman of the board of directors of Petkim, SOCAR’s Turkish subsidiary that produces petrochemicals in the western province of İzmir.

"We have planned to invest $100 million this year alone to increase the capacity of the company," he said, adding that Petkim continued to grow even during the economic crisis in 2008 and 2009.

As for the planned construction of a refinery in Aliaga, İzmir province, Aliyev announced that the company expects to break ground as early as this coming fall. The construction of the refinery, the expansion of an existing petrochemical plant and the construction of a power plant, is expected to cost for $5 billion. It will be one of Turkey’s largest private investments ever made in one region. Petkim secured a license for construction of the refinery last year.

The company will employ around 10,000 workers during the construction of the refinery. Some 1,000 people will be hired permanently following the completion of the project. The refinery will be capable of processing 10 million tons of raw materials, making it one of the most important processing centers in Europe. The plant is expected to be completed by 2015.

Petkim is also planning to expand Aliaga port to accommodate increasing traffic. The company is holding talks with a Dutch terminal operating company to expand and operate the port of Aliaga, which is projected to have a larger capacity than the port of İzmir by 2018. The port is planned to have a container capacity of 1 million 20-foot equivalent units (TEU), while its liquid cargo handling capacity is projected to be around 20-25 million tons. The environmental impact studies for the expansion of the port were competed and town hall meetings with the residents in the area were also held.

With all the new investments, Aliyev said the company is trying to create a "Petkim Peninsula" similar to that of Jurong Island in Singapore, one the most important production hubs in the Far East. "This master plan envisages the establishment of a special industrial zone in Aliaga with investment and development schemes having terms of 25-30 years," he said.

Once the refinery goes into operation, Aliyev said they will start other investment projects. One of them is to build an electric power station in the region from wind power, he said. The company’s application to produce 25 megawatts of wind energy annually has already been approved.

The company is also interested in the sale of İgdas, Turkey’s largest gas distribution network, based in İstanbul, through a tender offer. İgdas services some 4.2 million customers and has an annual distribution of 4 billion cubic meters of natural gas. Asked if SOCAR is interested in the tender, Aliyev smiled and said: "We are an energy company after."

He signaled, however, that the company is not interested in the sale of another gas distribution company in Ankara, Başkent Dogalgaz, Turkey’s second largest natural gas distribution grid. The previous tender was cancelled when the winner failed to come up with the promised financing for a $1.2 billion deal on the acquisition of 80 percent of Başkent Doğalgaz .

Asked whether SOCAR may consider the sale of Petkim for the right price, chairman of the board of directors Vagif Aliyev said, "We won’t sell this company because this is a strategic investment for us."

He emphasized that they consider Petkim to be a long-term investment and hope to expand into other markets from Turkey via Petkim.

SOCAR and Turcas Petrol together acquired 51 percent of the shares of Petkim in 2008 at a cost of $2.04 billion in a privatization deal.

He also said the company is looking for increased profit this year, though he noted most of the profit will go into major expansion investment like capacity increase and the purchase of more raw materials. The company’s investment plan earmarks $3.5 billion to $5 billion for the procurement of raw materials for the next several years.

A project of investments in the Petkim units until 2040 is under development. It plans to reach the volume of output sales at the level of $15 billion by 2015 and up to $20 billion by 2020. The company ultimately aims to be one of the major players in petrochemicals and oil refining in the world.