The article was published in the World Energy Weekly (May 29 issue), a publication of a French think-tank specializing in energy issues.
If Azerbaijan is to double its exports to the European Union, it will have to successfully develop the required internal resources, solve a few external difficulties and secure imports of balancing volumes of gas. These are the conclusions of Gulmira Rzayeva, a former researcher at the Center for Strategic Studies in Baku (Azerbaijan’s leading government think-tank), who has close ties to the Azerbaijani government and is currently a Senior Visiting Research Fellow at the Oxford Institute for Energy Studies (OIES). In a paper entitled “Expansion of the Southern Gas Corridor pipelines and future supplies to Europe”, which has just been published, Rzayeva draws up a list of issues that will have to be addressed before the supply of a further 10 bcm/annum of Azeri gas to the EU – a goal set during European Commission President Ursula Von der Leyen’s visit to Baku in July 2022 – can be transformed into a reality. Long-term gas sale/purchase agreements will have to be signed, of course, along with various agreements required to increase the capacity of the TAP and TANAP gas pipelines, which transport gas from Azerbaijan to southern Italy, but sufficient gas reserves will also have to be developed in Azerbaijan itself, which is by no means a foregone conclusion. Baku will also have to ensure that it can, if need be, import gas to meet its local consumption in the event that it fails to produce enough gas to honor its export commitments at the same time. And above all, it will have to persuade Turkey not to play the role of a gas hub, and not to act as a “buyer of first resort” for future volumes of Azeri gas destined for Europe. Otherwise, as the Azeri researcher admits, Azerbaijan will not only lose in financial and political terms, but will also find it difficult to raise funds from banks for the required capacity expansions.
Baku will have to persuade Turkey not to play the role of a gas hub
Upstream – contrary to what one might have imagined – it is TotalEnergies rather than the Shah Deniz consortium that will play the most important role, by developing the Absheron deposit in the Caspian. Gulmira Rzayeva considers Absheron’s resources to be certified and believes that they can guarantee production of an additional 4.3 bcm/annum of gas for an investment that she estimates at $3 billion. In its current phase, at plateau, Absheron will produce 1.5 bcm/annum of gas for the local market, starting in 2024. If it is to increase production to supply the EU from 2028 or 2029, Rzayeva believes that an investment decision will have to be made by 2025. TotalEnergies has an 80% stake in Absheron, while the indigenous state-owned company SOCAR holds the remaining 20%. The Umid field is yet another almost certain additional source of gas in Azerbaijan (SOCAR 80%, Nobel Oil 20%), and its current production of 2 bcm/annum could be increased to 4.3 bcm/annum as from the third quarter of 2026. The rest of the required increase in Azerbaijani gas production depends on the results of ongoing exploration.
In particular, this is the case of the gas expected from the giant Shah Deniz field, which has considerable resources (1,200 bcm) but which needs to be better studied. BP is therefore going to drill an exploration there in late 2023. “All present assumptions and production projections might be changed both in positive and negative ways, once the well has been drilled and data received”, Rzayeva writes. In the current state of knowledge about the field, it should be technically possible, through drilling and compression, to extend the plateau of its two current production phases (which will total 26 bcm/annum from 2024) until 2032. BP is currently exploring the “pre-Fasila” reservoirs of Shah Deniz. If its well yields positive results, additional production of 1 to 1.5 bcm/annum of gas (while also maintaining the plateau of phases 1 and 2) can be expected. More data will be available in 2024. The last known way to increase Azeri production, but which also has yet to be verified, is the possible exploitation of non-associated gas from the Azeri-Chirag-Deepwater Gunashli (ACG) oil fields. These resources are estimated at around 155 bcm, and allow “maximum” production of 4 bcm/annum to be hoped for, according to Rzayeva.
The Azeri researcher doesn’t believe that her country will see “drastic demand growth” within the next five to seven years. It currently consumes about 13 or 14 bcm/annum and she estimates that it will remain within a bracket of 15 to 16 bcm/annum over the medium term. Rzayeva thinks that the deployment of new renewable energy sources (solar and wind) can provide some future power generation (94% of which is currently covered by gas), while an increase in domestic energy prices, which are currently very low, could lead to considerable efficiency gains. Nevertheless, it will probably be necessary to import gas to balance Azerbaijan’s energy supply, as SOCAR’s old fields (which meet most domestic gas needs) are rapidly declining. The researcher doesn’t take into account future increases in gas injection into the ACG fields, although the pressure is declining there. However, she points out that Baku has concluded an agreement with Ashkhabad to double gas imports from Turkmenistan, if necessary, by increasing them to 4 bcm/annum. Turkmen gas currently arrives in Azerbaijan via Iran, and the same route would be used for the additional volumes.
It’s noteworthy that the Azeri researcher doesn’t even mention her country’s Russian gas imports. However, in late 2022, Russian Deputy Prime Minister Alexander Novak declared that “there is an agreement with Azerbaijan to increase our supplies because they still have a gas deficit”. Between November 15, 2022 and March 2023, Russia was to supply 1 bcm of gas to Baku. Russia has already played the role of a backup supplier to Azerbaijan in the past, as noted in an OIES study by Simon Pirani (May 2021). PETROSTRATEGIES estimates that Azeri imports of Russian gas have sometimes reached up to 3 bcm/annum, as Azerbaijan was unable to satisfy its domestic demand (inflated by gas injection into the ACG oil reservoirs in particular) while meeting its export obligations. So, with supplies coming from both Turkmenistan and Russia, it is by no means impossible that almost half of the additional gas that Azerbaijan hopes to sell to the EU is de facto supplied by imports.
Some of the additional gas that Azerbaijan hopes to sell to the EU may really come from Russia
It is precisely such a role as a gas re-exporter that Turkey is hoping to play, rather than acting as just a transit country. However, Rzayeva clearly says that Azerbaijan doesn’t consider such a prospect gladly. She points out that Article 7.8 of the Ankara-Baku TANAP Intergovernmental Agreement of 2013 stipulates that “the [signatory] States expressly agree that all volumes of gas belonging to the Republic of Azerbaijan and planned to be shipped via the TANAP System in excess of an initial volume of sixteen (16) billion cubic meters per year will first be offered to buyers in the Republic of Turkey”, and adds that this means that “extra gas can be exported to Europe only in the event that Turkey declines to buy additional volumes”. However, Ankara could be all the more tempted to exercise the option, as it has started to produce its own gas in the Black Sea (see PETROSTRATEGIES of April 10, 2023) and is working with Moscow to become a “gas hub”. Rzayeva observes that this would allow it to blend Russian gas with other gases and export it to Europe. “This would not be acceptable for Azerbaijan […] By being a gas supplier to those European countries, Baku increases its political weight in the region as well as benefitting financially, especially now, given high gas prices”, says the Azeri researcher.
The fact that Azeri gas is the cheapest that Turkey imports promises to make negotiations between Ankara and Baku all the more difficult. It is therefore in Ankara’s interest to continue to buy it, and at the same low prices if possible, which “mirrors the TTF price with a difference of about 60-70%”, according to Rzayeva. Turkey is in a very strong position indeed, as Azeri gas destined for Europe has to pass through its territory. But Baku nevertheless has a few arguments up its sleeve. Thus, Turkey’s Shah Deniz 1 gas import contract (6.6 bcm/annum), which was extended in 2021, expires in 2024. It may very well be that the price that Turkey will have to pay to continue importing gas from Shah Deniz 1 “might not significantly differ from that for Europe”, says Rzayeva. In other words, Baku can ask for an increase in the “friendly” price granted to Turkey. However, the author of the OIES report remains optimistic. Of course, “it is hard to predict the outcome of the negotiations, however, given the extremely good political relations and unprecedentedly close ties between the two countries, it is quite possible that Ankara and Baku will come to an agreement”, she writes. It remains to be seen what Turkey will ask of Azerbaijan and what the latter can offer it. Such a “deal” may very well go beyond the issue of gas….