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. Last Updated: 07/27/2016

Russia, Azerbaijan Seek Broader Gas Ties

Talks between Russia and Azerbaijan on Friday paved the way for a gas supply agreement that may undermine Western Europe's efforts to reduce their energy dependence on Russia.

"We have a very high chance of entering a full-blown agreement" on gas supplies, President Dmitry Medvedev told reporters after a meeting with his Azeri counterpart, Ilham Aliyev.

Last month, the head of Azerbaijan's national energy company met with officials of Russia's state gas monopoly Gazprom and gave a preliminary pledge to supply gas to Russia from 2010.

But details of a potential supply deal remain scant, as both sides have yet to agree on the terms. There has been no indication of the volumes being considered, prompting some analysts to suggest that a deal between the two countries may be little more than a gesture.

"Volumes from 2010 can only be tiny. We are talking about very small, symbolic volumes," said Jonathan Stern, a gas expert at the Oxford Institute for Energy Studies. "It lays down a marker, which says, we, Gazprom, are interested in importing Azeri gas."

However, any broadening of the deal could yet undermine Western Europe's efforts to reduce its dependency on Russian gas supplies by throwing into doubt the viability of the U.S.- and the EU-backed Nabucco project — a pipeline that would run from the Caspian Sea region to Europe, bypassing Russia.

But Azerbaijan has so far given only lukewarm backing to Nabucco, which would source gas from the second phase of Azerbaijan's Shah Deniz field initially — scheduled to produce gas in 2014-15 — with hopes that Turkmenistan will join later.

The EU depends on Russia for about one quarter of its gas needs, and has sought to diversify its sources. Concerns over Russian imports intensified after a Russian-Ukrainian gas dispute in January left Europe without gas for nearly two weeks.

The Nabucco project, however, has stalled amid concerns over its financial viability and whether there is enough gas to fill the pipe.

"Medvedev's goal here is to prevent Azerbaijan from taking part in any trans-Caspian project," said Alexander Nazarov, an energy analyst at Moscow-based Metropol Bank.

Aliyev noted that a deal with Russia would entail little additional investment, because there are no transit countries to traverse, and the pipelines are already in place.

Russia's overtures to Azerbaijan follow a recent souring of relations between gas-rich Turkmenistan and Russia. Russia, which has a virtual monopoly over Turkmen gas exports, angered Ashgabat recently when it announced it was reducing its intake of Turkmen gas because of a downturn in global demand.

Turkmenistan then accused Gazprom of causing a pipeline blast last week on its border with Uzbekistan that shut off the Central Asian country's gas exports.

Earlier this week, Turkmenistan signed an agreement with Germany's RWE, a member of the Nabucco consortium, inviting the European company into the country to explore gas fields and ship gas to Europe.

"It's a shot across the bows," Stern said of the RWE deal. "It's a shot that says 'we are interested in other markets. And if you don't take the gas you said you were going to take from us, we are going to become increasingly interested."'