As we all live in the present, it is very hard to fully assess the future implications of decisions supported or made by political and business leaders. An extraordinary game of geo-strategy is under way to lock in long-term agreements, notably in the energy sector.

At a global level, the transit routes of future oil & gas pipelines become the object of a power struggle involving not only the suppliers and end-users but also the transit countries. Intensive courtships are under way where a ménage à trois, or more, may be the best option to prevent any country from being in a dominating position to rule a region and exercise political or economic pressure.

Let’s take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.

Nabucco and the competing projects

Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe’s dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco’s estimated cost is about  €8 billion with a completion date of 2014 while south Stream’s estimated cost is from  €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia’s largest company and the world’s largest gas producer.

Nabucco and the supplier countries

Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available – as underutilizing the pipelines is not a viable option – but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guardée such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.

The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: ”Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.”

This statement and contract are interesting because the agreement provides for a supply of 500 million cubic meters starting in January 2010, with potential increases depending on Azerbaijan’s export potential. This comes at a time when Gazprom has interrupted its deliveries of gas from Turkmenistan since April 2009, arguing a lesser demand from Europe. A few days after being in Azerbaijan, Miller was meeting with the President of Turkmenistan but no decision was reached regarding resumption of gas imports from Turkmenistan.

Who is holding whom by the tail?

The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.

Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An “unfortunate” explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009. Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas.  Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.

Needless to say that Turkmenistan’s announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: “Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan’s strategy of diversifying energy export routes to world markets.”

Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: “Turmen Gas – Caveat Emptor” http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html In any event, the potential of Turkmenistan should not be underestimated.

Nabucco and the transit countries

Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU’s energy security objectives to reduce its dependency on Russia gas.  The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria – which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects – will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees. Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.

Russia: just another shrewd player but…

One may think that Russia pockets the difference from rates below market prices, but the reality is that Russia uses the discounted gas for its own domestic needs. It also has been using it to supply Ukraine under very favorable terms, and Ukraine has been very vocal in resisting Russia’s attempts to raise prices. Note must be made that Ukraine imports the bulk of its natural gas from Turkmenistan via Russia. Countries like Russia and Ukraine have been resisting passing on price increases to end-users to avoid social unrest and have been struggling to keep non-competitive industries afloat. One way of doing so is by keeping the cost of energy low. The adverse effect is that Ukraine is one of the most energy inefficient countries in Europe.

A point must be made that Russia should not just be perceived as a natural bully but more as a wounded bear. Russia, like any country, is looking after its own interests and is not always subtle about it, even more so as it feels that everyone is ganging against her, rightfully or not. Russia is also confronted with its own economic reality, most notably the over reliance of its economy and state budget on oil & gas revenues. Efforts to diversify the economy have failed to generate visible results. It is therefore essential for Russia to secure a guaranteed income flow from the sale of it oil and gas, and from the oil and gas of its neighbors, that it buys to resale at a profit or that it routes through its extensive pipeline network for a fee. But things change: sourcing oil and gas from or routing it via Russia is no longer the only option.

… a new transportation mode is emerging

As the gas pipeline battles are under way, a new trend is emerging which is the transition towards Liquefied Natural Gas (LNG). That transportation mode of natural gas through seaborne tankers will open new markets, alleviate the dependency of some countries on existing pipeline routes, and reduce the number of players able to impact proper delivery and pricing.

This article was submitted by OilPrice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics.

While many Western investors remain fixated on somehow acquiring a slice of Turkmenistan’s natural gas riches, despite a recent scandal over the country’s actual reserves, there is another country further east whose energy and mineralogical reserves have been overlooked – Uzbekistan.

While a number of factors are responsible for this oversight, including relative geographical isolation (Uzbekistan, along with Liechtenstein, is one of the world’s doubly landlocked nations, requiring crossing two other nations to gain access to the oceans), which currently limits energy exports available for the global market, there are a number of pluses that the country has for investors willing to “think outside the box.”

With a population of 27 million, Uzbekistan is Central Asia’s most populous and dominant power. A conservative fiscal policy since 1991, including inconvertibility of the national currency, the som, has shielded its citizens from the hyperinflation that ravaged other former Soviet republics, but the policy previously diminished potential foreign investment.

Since the global recession that began a year ago, however, Uzbekistan’s fiscal conservatism, previously dismissed by the foreign investment community, has looked more and more like a pragmatic policy that isolated the country from the worst aspects of the recession in stark contrast to other post-Soviet states that fervently embraced free market capitalism like Lithuania, whose economy contracted 18.1% this year and is expected to shrink further by 3.9% in 2010. In a move certain to be welcomed by foreign investor Uzbekistan is slowly moving towards making its currency convertible but whenever it happens, for the present the country offers a fiscal stability unmatched by many of its more free-market neighbors.

And now, the good news about the country’s resources. In 2006 Uzbekistan’s natural gas reserves were estimated at 1.798 trillion cubic meters (tcm). During the Soviet era Uzbekistan was the USSR’s third-largest producer of natural gas, accounting for more than 10% of the Soviet Union’s production, trailing only Russia and Turkmenistan. In 1992, the country’s first year of independence, Uzbekistan produced 42.8 billion cubic meters (bcm) of natural gas. Uzbekistan currently produces 60 bcm of natural gas annually, an amount nearly equal to Turkmenistan’s production. Uzbekistan’s reserves are primarily concentrated in Qashqadaryo province and near Bukhara in the country’s south-central region. During the 1970s Uzbekistan’s largest natural gas deposit at Boyangora-Gadzhak was discovered in Surkhandaryia province north of the Afghan border.

Unlike its energy-rich neighbors to the West, Kazakhstan and Turkmenistan, nearly 80 percent of Uzbekistan’s production, about 48.4 bcm, is currently reserved for domestic use at heavily subsidized rates. Of the remaining 12 bcm of natural gas that Uzbekistan exports, more than half currently goes to Russia, with the remainder to neighboring Central Asian states.

Under Uzbekistan’s fiercely patriotic President Islam Karimov relations with Europe’s favorite bête noire, Russia’s state-owned gas firm Gazprom, have been subject to fierce negotiations to win an equitable price for the country’s exports. Like other former Soviet republics, the Uzbek government chafed under Gazprom’s “buy cheap, sell dear” policies and in early December 2008 scored a significant negotiating success by getting an agreement that in 2009 Gazprom would pay $305 per thousand cubic meters (tcm). To put the accomplishment in perspective, Uzbekistan’s state gas company Uzbekneftegaz sold gas to Gazprom for $130 per tcm in the first half of 2008, which then rose to $160 in the second half of 2008.

Those betting on the eventual pacification of Afghanistan and the subsequent pipelines that would crisscross the country to deliver Central Asian gas to the massive Pakistani and Indian markets would also do well to take note of Uzbekistan’s persistent, low key policies over more than a decade attempting to bring peace to its hapless southern neighbor. The initiatives put forward by Uzbek President Islom Karimov during the NATO summit in Bucharest in April 2008 take on heightened importance as one of the few foreign policy ideas offering some hope to quelling Afghanistan’s three decades of turmoil.

Nearly completely overshadowed by the Bush administration’s relentless efforts to have Georgia and Ukraine join the alliance, Karimov proposed that the UN’s Afghanistan “6 plus 2″ assembly, established in 1999, be revived by expanding it into a “6 plus 3″ ensemble by including NATO because of its anti-terrorist operations in Afghanistan among the “six” members Uzbekistan, Tajikistan, Turkmenistan, Pakistan, China and Iran and the “two,” the United States and Russia.

Noting that that it is impossible to solve Afghanistan’s problems without the direct involvement of neighboring countries, which have felt the destructive impact of the Afghan crisis for more than 30 years, as Afghanistan’s problems are now of global nature, Karimov told his audience in Bucharest that their resolution must also be global, with the participation of members of the international coalition that comprise NATO’s International Security Assistance Force (ISAF). Karimov concluded by noting that the current situation in Afghanistan precludes a purely military solution and that while it is possible to continue increasing the foreign military presence there, without a clear model of national reconciliation it will be impossible to end the conflict.

Needless to say, one of the benefits of peace and the aforementioned pipelines for Uzbekistan would be that it could export its surplus gas through Afghanistan to southern Asian markets for a higher price than it receives at home or Gazprom’s miserly accountants. Acting on Tashkent’s belief that economic assistance is of greater utility than military operations, Uzbekistan has become involved in a host of reconstruction projects in Afghanistan, including railways, power generation, mining, agriculture, irrigation, education and the exchange of specialists as well as providing its neighbor with construction materials, metals, fertilizer, food and other goods. Uzbek companies and engineers have built 11 bridges in the Mazar-e-Sharif-Kabul area and are finishing the construction of a 275-mile high-voltage line capable of transmitting 150 megawatts from Termez to Kabul across some of the world’s most mountainous terrain, which when it becomes fully operational next month, will provide power and light not only to the capital but the country’s five northern provinces.

For now, Uzbekistan remains largely a transit country rather than a net energy exporter in its own right. But the fiercely independent nationalist policy that Tashkent has followed since 1991 indicates that any company whose policies most benefit the country will have an inside track, and as the old saying goes, “fortune favors the bold.” Chinese, Malaysian, Russian and South Korean companies have already begun investing in Uzbekistan’s energy infrastructure – what do they seemingly know that American and European companies do not?

This article was submitted by OilPrice.com who focus on Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics.

Since the opening up in the mid-1990s, uranium exploration in Mongolia by international companies has not been  subject to any clear national policy or close regulation.

In the last few years, however, the Government has sought to exercise more control over the whole mining sector and earlier this year it set up MonAtom to undertake uranium exploration and mining on behalf of the state, as well as to pursue nuclear energy proposals. It will hold the state’s equity in uranium and nuclear ventures, under the Mongolian Nuclear Energy Agency.

In mid-July, after consultation with the International Atomic Energy Agency, Parliament passed a Nuclear Energy Law to regulate the exploration and mining of uranium and give the state a greater degree of ownership and control of those resources. Along with this the Government set up Dornod Uran, a joint venture company between MonAtom and Russia’s ARMZ to develop two uranium mines in Mongolia — Dornod and nearby Mardai. A Japanese partner, evidently Marubeni, is also expected to be later involved in the work of this joint venture.

The development is of particular interest to Russia due to its proximity to the Priargunsky operations, allowing possible creation of a ‘single infrastructure. At least until mid-August, Canadian based Khan Resources owned a 69% share in the Dornod project, mostly through its 58% subsidiary Central Asian Uranium (CAUC). The balance of CAUC, which holds Mongolia’s only uranium mining license, was owned by MonAtom and ARMZ, each with 21%.

A definitive feasibility study released in March 2009 showed that the $333 million project was sound, on the basis of 24,780 tons of indicated resources, including 20,340 tons of probable reserves. Annual production of 1,150 tons over 15 years from 2012 was envisaged.

However, the Nuclear Energy Agency has announced that the joint venture of MonAtom with ARMZ will develop the project to annually produce about 2000 tons. Khan is uncertain where it stands, having apparently been dispossessed as it sought to negotiate an investment agreement with the Government.

Gurvanbulag is another deposit, about 30 km away, which has been held by the Canadian Western Prospector Group. This March the company agreed to a $25 million takeover by China’s CNNC International, a 74% subsidiary of CNNC Overseas Uranium Holding and through it, of SinoU. MonAtom appears to be positive about this development.

The Asian Development Bank  is extending $780 million to Pakistan for priority energy efficiency projects that will secure the country’s growing energy needs, whilst reducing reliance on fossil fuels.

The $1.18 billion Energy Efficiency Investment Program underpins Pakistan’s first-ever initiative to make both the pursuit of energy security and low-carbon growth a single strategic priority. The 10-year program puts energy efficiency and the adoption of clean technologies at the heart of government planning and public investments.

“The mainstreaming of energy efficiency into policy and planning marks a radical change for Pakistan and creates a major opportunity for new clean energy investments,” said Bayanjargal Byambasaikhan, Energy Specialist with ADB’s Central and West Asia Department.

Pakistan currently suffers from a huge gap in energy supply and demand, resulting in regular, lengthy power outages, which are a key factor behind its present economic difficulties. The power deficit stems from growing consumer demand, combined with a lack of new investment, large-scale system losses and inability to attract the private sector. The government has responded with interim measures such as rental power generation, but this is a short term measure that falls well short of the country’s needs.

“Energy efficiency saves money, and is the quickest and most climate-friendly way of bridging the energy gap and securing energy supplies,” said Mr. Byambasaikhan.

The Multitranche Financing Facility will finance short to medium-term energy efficiency projects, including the replacement of incandescent light bulbs with more efficient and cost-effective compact fluorescent lamps. The facility, which will release funds in tranches, will provide a portion of the government’s 10-year energy efficiency investment plan, estimated at $3.8 billion.

Targeted energy savings under the program will reduce the country’s energy intensity, while cutting greenhouse gas emissions by an estimated 30%. The overall gains in annual savings by fiscal year 2019 are expected to be around $4 billion. Major social benefits, such as increased household incomes, jobs, and reduced poverty levels, will flow.

The program will help the government reduce public expenditures and subsidies, easing the debt problem in the power sector which has weighed on attempts at improvements in the past. It also removes financial barriers to investment in clean energy technology, opening the way for increased private sector involvement with ADB, and other development partners, helping to leverage commercial financing support. Projects in the program are expected to be eligible for earning carbon revenues under the Clean Development Mechanism of the Kyoto Protocol.

Through the facility, ADB will extend $760 million in loans from its ordinary capital resources in tranches. It will provide a further $20 million from its concessional Asian Development Fund. Cofinancing equivalent to €150 million will be provided by Agence Française de Développement, with the government financing $200 million equivalent.

South Korea became the first Asian country to join the Asian Development Bank’s (ADB) Future Carbon Fund on Friday, with a $20 million commitment to acquire post 2012 carbon credits, according to a news release by the bank.

The partnership agreement, signed by Korean officials in Manila, comes just weeks ahead of international climate change talks in Copenhagen, where governments are set to negotiate a treaty to succeed the Kyoto Protocol, which expires in 2012.

“On the eve of the Copenhagen talks, the Republic of Korea’s commitment to acquire carbon credits sends a clear signal to the international community that there will be a strong post 2012 framework to achieve a low carbon economy,” said XianbinYao, Director General of ADB’s Regional Sustainable Development Department.

The Future Carbon Fund was approved by ADB’s Board of Directors in July 2008 and became operational early this year. It is designed to help mitigate the effects of climate change by offering a mutually beneficial solution for both developing and developed member countries.

This is achieved by helping governments, companies and institutions acquire Certified Emission Reductions (CERs) or carbon credits that are generated through ADB-financed projects in developing member countries.

Armenia is fully complying with an agreement to import natural gas from neighboring Iran, Energy Minister Armen Movsisian said on Thursday, denying claims to the contrary made by Iranian officials.

Rasul Salmani, a top executive from Iran’s national gas exporting company, was quoted by the ISNA news agency as saying late last week that the current volume of Iranian gas deliveries is well below the level defined by an Armenian-Iranian supply contract signed in 2004.

Under the terms of the “take-or-pay” agreement, Armenia was to buy 3 million cubic meters of gas a day by the end of this year. Only a third of that volume is now being pumped through a pipeline inaugurated by the two governments late last year. Salmani said the Iranian side could demand a compensation for the shortfall from Yerevan.

Speaking to RFE/RL, Movsisian dismissed the claims. He said the agreement also stipulates that Armenia is to receive the planned amount of Iranian gas only after being in a position to pay for it with large-scale electricity supplies. That will happen only after the construction of a third high-voltage transmission line linking the Armenian and Iranian power grids, he said.

“So there is no danger today of them taking actions against us,” Movsisian told RFE/RL. He said work on the line will start next year and take about 18 months.

The construction was originally due to get underway in 2008. The reasons for its delay are still not clear.

“It is necessary to solve the issue of constructing a third high-voltage transmission line within the shortest possible time,” Iran’s ambassador to Armenia, Seyed Ali Saghaiyan, said in an interview with the Yerevan daily “Azg” published on Wednesday. He complained that the Armenian government has yet to take “serious steps” in that direction.

Movsisian countered that the matter should not be taken out of the broader context of Armenian-Iranian energy cooperation. “It’s not just about the gas pipeline, it’s about the entire program,” he said. “The entire program is not yet over.”

The minister downplayed the problems hampering its implementation. “There is nothing extraordinary in our relations today,” he said. “Everything is going according to plan.”

Copyright (c) 2009. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

The president of Iraq’s Kurdish regional government (KRG) described to European lawmakers on November 10 the differences his government has with the Baghdad government, RFE/RL reports.

Masud Barzani spoke before the European Parliament’s Foreign Affairs Committee, noting disagreements his government has with Baghdad over the rights and profits from oil and gas reserves, much of which are in the KRG.

Barzani also complained that the Iraqi Finance Ministry controls Kurdistan’s share of the Iraqi budget — 17 percent of the total — and uses it “at times as a weapon” in the ongoing struggle over revenue distribution.

He said he wants revenues collected by Bagdad to be forward directly to the Kurdish budget because “Baghdad’s policies have failed, ours [have] not.”

Barzani also spoke generally of the investment opportunities that await European investors in Iraqi Kurdistan. He said the relative security of the Kurdish region means it “could be the West’s gateway to Iraq,” and he called for further European development assistance.

In addition, Barzani spoke positively of the latest steps by Turkey to deal with its ethnic Kurdish population.

He added that the recent Iraqi electoral law will change the country’s political map in ways that are difficult to predict. But Barzani warned that a “totalitarian ideology remains in the minds of many people” and a return of that ideology in Iraq “would be a catastrophe.”

Barzani, 63, was first elected KRG president in 2005 by the regional parliament. He was reelected president by the citizens in the region
in a direct vote in July.

Copyright (c) 2009. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

As much of the world applauded Turkey’s historic recent rapprochement with Armenia,  Azerbaijan was left feeling out in the cold and abandoned by its closest ally.

Baku had argued strenuously that a deal to reestablish relations between Ankara & Yerevan should not be signed while Armenia continued to occupy Nagorno-Karabakh, and it threatened to take unspecified countermeasures if one was.

Speaking at a nationally televised cabinet meeting, Azerbaijani President Ilham Aliyev revealed one of those steps: “It is not a secret to anyone that for many years Azerbaijan has been selling its gas to Turkey for one-third of market prices. “Aliyev added: “What state would agree to sell its natural resources for 30% of world market prices, especially under current conditions? This is illogical.”

Aliyev presented the move as a purely commercial decision and did not explicitly link it to the Turkish-Armenian deal. Azerbaijan currently sells Turkey natural gas at the bargain rate of $120 per thousand cubic meters. But the timing of Aliyev’s announcement, less than a week after the accord between Yerevan & Ankara was signed, left little doubt. If Baku follows through on the move, analysts say it could severely undermine — if not completely kill — the Western-backed Nabucco pipeline project to bring gas from the Caspian Sea to Europe via Turkey.

“Potentially this is very important because it could potentially deliver a knockout blow to Nabucco. Without Azerbaijan it would be even more difficult than it is,” says Federico Bordonaro, an energy-security analyst with the Italian-based group equilibre.net.

The Nabucco project, which is designed to bypass Russia by bringing gas from the Caspian region via Georgia & Turkey into the rest of Europe, is a key element of a Western strategy to break Moscow’s stranglehold on Europe’s energy supplies & establish alternative routes & suppliers for the continent.

Russia, on the other hand, is pushing its own competing pipeline project, called South Stream, that would transport Russian gas to Europe via the Black Sea and Bulgaria. Aliyev said one option for Azerbaijan would be to export its gas to Europe via Russia, which analysts say would dovetail with Moscow’s pipeline plans.

“We should not rule out the possibility that the Russians are trying to use these tensions in order to turn Azerbaijan against Nabucco and directly or indirectly [support] South Stream,” Bordonaro says.

Indeed, as the Turkey-Armenia rapprochement gained steam & it became clear that it would proceed without progress on Nagorno-Karabakh, Aliyev began moving closer to Moscow. He met with Russian President Dmitry Medvedev at a summit of the Commonwealth of Independent States (CIS) in Chisinau on October 9, just before Turkey and Armenia signed their accord.

On October 14, Azerbaijan signed a deal to sell 500 million cubic meters of natural gas annually to Russia’s Gazprom starting in 2010. Speaking about the deal, Aliyev said the 500 million cubic meters was just a starting point and that there was “no upper limit” to the amount of gas Baku could sell to Russia.

While Aliyev’s move has heightened fears that Azerbaijan may be moving quickly into Moscow’s orbit, some observers say he could be bluffing in an attempt to influence Turkey’s parliament, which is due to debate the agreement normalizing relations with Armenia on October 21.

“The Azerbaijanis could be saying [to the West and Turkey] that if you are not supportive of us on Nagorno-Karabakh, we will choose South Stream over Nabucco,” Bordonaro says. “It is difficult to say if they are bluffing or not. But we shouldn’t rule out that they are not bluffing.”

Turkey broke off diplomatic relations with Armenia in 1993 in support of Azerbaijan, which was fighting a losing battle against ethnic Armenian separatists in Nagorno-Karabakh.

In response to Azerbaijan’s anger over the normalization with Armenia, Turkish Foreign Minister Ahmet Davutoglu assured Baku that its support remains unchanged, saying, “Azeri soil is as sacred for us as our own.”

Turkish Energy Minister Taner Yildiz indicated on October 19 that Ankara is ready to pay more for Azerbaijan’s gas, suggesting more negotiations were on the horizon.

One of the most talked about pieces of news in Kazakhstan’s oil & gas industry is that Caspian gas, in particular, from Azerbaijan may turn 180 degrees around & begin flowing east toward China, rather than west to Russia & Europe.

This unexpected idea originated in Kazakhstan. The president of the national oil and gas company KazMunaiGas, Kairgeldy Kabyldin, has proposed to his counterpart, head of state oil company of Azerbaijan SOCAR, Rovnag Abdullayev, to send Azerbaijani gas to a Chinese pipeline that will run through Kazakhstan.

“It is fact that all Caspian resources are currently west oriented. And if today some suggest that we connect through the Caspian Sea from east to west, why can’t we do it from west to east?” he asked, responding to a question as to how the gas from Azerbaijan will get to Kazakhstan. The presidents of the 2 state companies talked about the positions of their countries at the IV Eurasian Energy Forum.

As far as further transportation overland is concerned, KazMunaiGas is now creating a system, Kazakhstan-China, that will include the oil pipeline Atasu-Alashankou and a gas pipeline referred to in the official papers as Asian. The first gas is expected to fill this pipeline as soon as December this year. At this stage, it will carry Turkmen gas, which will transit through Uzbekistan & Kazakhstan towards China.

In addition, Kazakhstan is planning to start the construction of another, so-called “internal” gas pipeline this year, Beineu–Bozoi–Shymkent. It will carry gas from Kazakhstan’s oil fields in the west of the republic to southern regions that still depend on gas supplies from Uzbekistan. The pipeline will not be completed until 2011. However, by synchronizing the Asian gas pipeline with Beineu–Bozoi–Shymkent, it is quite possible that it could be used to deliver Kazakhstan gas to China as well. No prizes for guessing who is financing these pipeline projects … China via state owned CNPC (HKG: 0135), China’s largest oil and gas producer and supplier.

“Thus, taking shape is a whole new gas infrastructure “West-East” capable of moving the flows of gas towards China. This is why we have suggested to the gas-rich Azerbaijan to consider our proposal to diversify the supplies,” the KMG president concluded. “There are no parochial interests here, just for the purposes of diversification of supplies of gas producing countries,”

Asked how it could be technically possible to bring gas from Baku to Aktau by sea, he said: “Nothing is impossible as long as there is a market and a good delivery infrastructure. Azerbaijan already has about 5,000 kilometres of submerged gas pipelines in the Caspian Sea.”

Analysts believe that Azerbaijan’s decision will depend in this case on 2 sides: Kazakhstan and China. For Azerbaijan to be interested in supplying its gas to the east, China should provide commercial proposals, and Kazakhstan – transit tariffs. According to analysts, it should not take Kazakhstan & Azerbaijan more that half a year to lay a submerged gas pipeline between their zones of the Caspian shelf.

It is possible that a price offer from China may interest SOCAR, which is currently promising its gas to the EU sponsored Nabucco Pipeline. Any forthcoming offer from China would put further pressue on Northern Europe, as they are regularly squeezed by Russia’s Gazprom regards oil transit via Ukraine. Gazprom & it’s partners will be pleased, as this refocusses attention on the proposed Nordstream Pipeline, which is being promoted to push gas from Russia to the EU via the Baltic Sea, bypassing traditional transit stations in Ukraine, Belarus & Poalnd.

Heritage (LSE:HOIL) understands that since 14 October 2009, all production from the Taq Taq oil field has been diverted into the local market. Production for export has ceased, in coordination with the other operators in the region, and export production is not expected to recommence until a payment mechanism is in place. Exports commenced on 1 June 2009, so far no revenue has been received for any exported production and none is expected until there is an agreement on the payment mechanism between the Federal Government of Iraq and the Kurdistan Regional Government.

According to Genel, the current gross production capacity of the Taq Taq oil field is approximately 35,000 bopd which is expected to increase to approximately 60,000 bopd by the end of December 2009 as new production facilities are completed. Average gross production for the Taq Taq oil field in September 2009, according to Genel, was 29,580 bopd, of which approximately 52% was sold into the domestic market, in part driven by the opening of the Erbil refinery in July. Current local demand for oil products in Kurdistan, as estimated by Douglas-Westwood Limited, an independent provider of business research and analysis, is approximately 130,000 bpd and this has historically been met through imports from neighbouring countries or other parts of Iraq.

Elections took place in Kurdistan at the end of July and a new government is in the process of being formed. A caretaker government is currently in place whilst the new Prime Minister forms his government, which is expected to be completed by early November. Heritage and Genel continue to monitor progress on the formation of the new government and expect formal approval of the proposed transaction once the new oil and gas committees are formally appointed, together with an understanding of the pricing and payment mechanism which is to be established for international sales from Kurdistan.

In addition, Heritage understands the FSA investigation previously disclosed continues and that the parties concerned are assisting with the FSA’s enquiries. Heritage confirms that discussions with Genel are continuing with the terms of the merger nearing formal agreement. Both sides remain committed to successfully completing the proposed transaction, however the transaction is taking longer to conclude than had originally been estimated. We hope the implementation agreement can be signed and the prospectus published before the end of the year.

Tony Buckingham, Chief Executive Officer, commented: “The understanding we have obtained in the past few months of the Genel assets and the domestic market for petroleum products in Kurdistan means that we remain committed to the Genel Energy merger.

It will create a leading company with oil production, exploration and refining capacity in the Kurdistan Region and is expected to generate significant value for shareholders as well as substantial tax revenues for the people of Iraq. The transaction is taking longer to conclude than both parties had originally planned, however we believe the implementation agreement can be signed and the prospectus published by the end of the year.”