Dec 6, 2006

Azerbaijan Halts Oil Transfers Through Russia

Azerbaijani Prime Minister Artur Rasulzade has announced that his country will be able to cover its energy needs starting Jan. 1, 2007 and will stop the transfer of Azeri oil through the Baku-Novorossisk pipeline. This is seen as a retaliatory measure following Gazprom's proposed increase of the price of Russian natural gas exported to Azerbaijan from $110 to $230 per 1,000 cubic meters.

On November 22, Gazprom announced new price levels for natural gas in an attempt to bring the prices it charges its ex-Soviet neighbors to European levels. These countries have previoulsy enjoyed preferential rates. This move was also seen by some as policial motivated and meant to punish its unruly neighbors, notably Georgia and Ukraine. In the case of Azerbaijan, its president Ilham Aliyev said on December 4: “It is clear that the price of $230 per 1,000 cubic meters suggested by Russia is very high for us. Therefore we have to consider different options. If need be, we should consider reducing the volume of oil being exported to Russia via the Baku-Novorossiysk pipeline in order to provide ourselves with electricity. We have no other choice because we use gas imported from Russia to produce electricity at our power plants.” Today Prime Minister Rasulzade announced Azerbaijan's intention to forgo Gazprom's deliveries and rely on its own reserves instead.

Azerbaijan's decision to not export oil through Russia via the Baku-Novorossiysk pipline is also an economic one. The transit tariff of $2.05 is exactly five times higher than on the shorter alternative route to the Black Sea, the Baku-Supsa pipeline that through Georgia.

This event marks the emergence of the first ex-Soviet country that is independent on Russian energy, notes Stratfor. Russian reaction remains to be seen, but it is unlikely that many others will follow in the near future.

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