The rising demand for ‘blue fuel’ and fantastic growth of its price has formed new realities in the market of traditional energy carriers. Having a special place in the issue of European energy security for the last 5-10 years, what policy will Azerbaijan pursue?
Azerbaijan’s role in European energy security is being realized through TANAP, TAP and the South Caucasus Pipeline within the Southern Gas Corridor (SGC) project. Located in a geographically closed basin, the Southern Caucasus Corridor is a unique industrial project on a global scale as the most obvious example of peaceful cooperation in the purchase and sale of energy carriers. The project enables Azerbaijan to independently export its gas to European markets.
One of the significant moments of this project is the participation of countries from opposite geopolitical poles, their representative companies, and leading financial institutions (Eurasian Development Bank, World Bank, European Bank for Reconstruction and Development, European Investment Bank). Although the cost of the SGC, which is about 3,500 km long, was initially estimated at $ 45 billion, this figure is now $ 33 billion due to cost optimization through operational management.
As a result of the projects implemented within the SGC, countries such as Turkey, Georgia, Italy, Greece, and Bulgaria have become consumers of Azerbaijani gas. Consumers from Balkan countries such as Albania, Montenegro, Bosnia and Herzegovina, and Croatia will also be able to benefit from Azerbaijani gas in the near future through the planned interconnectors and infrastructure to be built, first of all through the Ionian-Adriatic pipeline, which will be the northern branch of TAP. Apart from that, SOCAR helps to create a relevant infrastructure based on the appeals of the interested countries.
Brussels reiterated its hopes for Azerbaijan to supply more gas to Europe amid rising global demand for gas and a sharp jump in its prices, as well as tensions between the West and Russia. Azerbaijan, which exported 19 billion cubic metres of natural gas last year, is able to raise this figure, and the TANAP pipeline will eventually have a capacity of 31 billion cubic metres.
It is no coincidence that at the eighth Ministerial Meeting of the Southern Gas Corridor Advisory Council Azerbaijani President Ilham Aliyev has expressed his confidence that the country's proven gas reserves will be larger.
Experience in the operation of oil and gas fields indicates that these fields have larger reserves than expected. In this regard, there is no doubt that the rising dynamics of Azerbaijan’s gas export will be steady.
- The rate of exports grows year by year. Currently, our main export route is the Southern Gas Corridor. However, we also have other projects. For instance, the “Absheron” project. The gas produced from this field will be used primarily to meet domestic needs due to the rise in the consumption of natural gas in our country. At the next stage, it will be possible to produce 5 billion cubic metres gas from "Absheron" field, which will further stimulate the export potential of the country. In this context, operation of new fields in the future will enable to increase the export rate, - SOCAR representative said.
Considering the interests of all sides and keeping these projects away from the geopolitical games make those projects, implemented at the initiative of Azerbaijan, more attractive. Owing to diplomatic skills of Azerbaijan, effective cooperation between countries with different geopolitical interests within the South Caucasus Corridor has been implemented.
In this context, the President of Azerbaijan has repeatedly stated that we do not intend to have a confrontation with Russia, the largest supplier of gas to Europe. A comparison of the reserves of both countries and the volume of gas they sell to Europe also spoil the games of some biased circles trying to create the impression that Azerbaijan is competing with Russia. From this point of view, not only the participation of Russia’s Lukoil in the SGC project but also the increase in its stock prices let us say that Moscow assessed this goodwill gesture of official Baku. Azerbaijan, which has close ties with both the West and Russia, is helping to fill the gap in gas production in Europe.
Currently, all consumer countries are concerned over the predictions that the prices of "blue fuel" will reach a fantastic level if the West-Russia confrontation escalates. The main problem is related to SPOT-type sales (transactions are made immediately, usually within two days). There have not been concerns with the price of "blue fuel" in gas supplies under long-term contracts as it depends on the price of oil. However, serious volatility in gas prices will remain for some time under the experts’ predictions. Azerbaijan sells its gas under long-term contracts; however, the gas, which exceeds contractual obligations, is being sold through the SPOT system, which brings additional revenue to the budget.
We have both types of sales. The main part, of course, is related to long-term contracts. These are sales within the SGC. The reason is that if we do not have long-term guarantees, we may end up in a bad situation when the demand-supply situation changes. It is better to have a balanced situation, ie both types of sales. In particular, according to European law, a certain volume gas supply must be considered for SPOT-type sales. Importers are also interested in it. When the situation worsened there, Azerbaijan sold more gas than planned through SPOT sales, i.e. at current prices, said Ibrahim Ahmadov.
Azerbaijan, which attaches great importance to gas exports, also pays attention to the annual growth of domestic consumption and providing the population with natural gas. In this regard, raising the level of gasification in the country to 96% has been one of the most important social achievements in recent years. More flexible mechanisms are being put into practice aiming to reach the goals, including the trilateral SWAP agreement on gas exchange among Azerbaijan, Iran and Turkmenistan, signed in November 2021 at the 15th Summit of the Economic Cooperation Organization (ECO) in Ashgabat.
According to the agreement, up to 1.5-2 billion cubic meters of gas will be sent from Turkmenistan to Azerbaijan via Iran in a year. Thanks to this agreement, Iran will be able to meet the gas needs of 5 provinces. Energy experts estimate that the project, which will be implemented without investing in additional infrastructure, will allow Azerbaijan to purchase cheap gas to meet its needs and sell the gas extracted from the Caspian sea, Iran will gain transit opportunities for the future, and Turkmenistan will alter its gas market.
"This is not an unusual step. We have had such cooperation before. We have no direct contact with Nakhchivan, which is an important part of Azerbaijan. Therefore, we try to deliver gas to this land by various means. This was done mainly through Iran, and in the future, it could be through Turkey, or Turkmenistan supplies gas to Iran, which also supplies it to Nakhchivan. Iran itself may want to use this agreement to diversify its exports. On the other hand, Turkmenistan is seeking new alternatives to ramp up gas exports. To that end, Turkmenistan considers cooperation with Azerbaijan appropriate," a SOCAR official said.
Some sources do not rule out a possible increase up to 15 bcm in the volume of gas to be swapped under the recently reached deal [Azerbaijan-Iran-Turkmenistan gas swap deal]. One of the important points is that Azerbaijan stands ready for cooperation with all gas-producing countries.
Thanks to the existing opportunities for cooperation, Russia is likely to join the tripartite SWAP deal soon.
"Azerbaijan acquires gas from Russia and then exports it to Georgia. From this point of view, we are probably the only country that imports gas from and exports it to Gazprom. Russia, which does not share a direct border with Iran and Turkmenistan, can join this cooperation format through Azerbaijan," Ibrahim Ahmadov added.
The SOCAR official said the possible transportation of Turkmen and Iranian gas to Europe can be considered after increasing gas volume under the SWAP agreement, creating the necessary infrastructure and seriously analyzing the technical possibilities. However, Europe should come up with such a proposal. Azerbaijan, which is always open to cooperation with any party on such issues, has secured the implementation of the Southern Gas Corridor project, which is of paramount significance. The Azerbaijani-initiated projects greatly contribute to ensuring the region’s energy security.
The trilateral SWAP deal points out another important factor – the possibility of expanding the network of gas storage facilities in Azerbaijan and turning the country into a gas hub. Now there is a unique chance for Turkmenistan and Iran, which are both rich in natural gas, to benefit from the ample opportunities created by Azerbaijan and the Southern Gas Corridor to have access to European markets.
"Azerbaijan has great potential to become a gas hub, with gas storage facilities with a capacity of 3.5 bcm. The main task ahead is to increase their capacity, which is, first of all, of paramount significance in terms of ensuring our energy security. Temperature fluctuations necessitate the fulfilment of this task, as well," Ahmadov said.
The SOCAR official said Azerbaijan is keen not only on gas exports but also on finished product imports, underlining the importance of the gas processing plant and the petrochemical industry in the country in this regard. The Soviet-era plant processes a certain amount of gas, which is partially used for methane consumption and the petrochemical industry as a raw material.
"Methanol and carbamide (also known as urea) product is a very essential issue. A few years ago, SOCAR commissioned a new carbamide plant, which enables Azerbaijan not only to meet its domestic needs with nitrogen fertilizers but also to export many times more. Ammonia, the raw material for urea, is obtained by processing natural gas," Ahmadov noted.
The abovementioned points affirm Azerbaijan’s preparedness for new realities in the field of gas production, consumption, sale and processing. To that end, the Azerbaijan government prefers a flexible strategy, which allows minimizing possible losses in rapidly changing processes and maximizing profits.
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