The Analytical Group of AzVision.az

Exit a “Blue Deadlock” | Longread

// Azerbaijan's transformation into a ‘gas bridge’ promises good opportunities for all sides

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ne of the most striking lauds of most folks, including those of Azerbaijan, goes like that: “May your fire never dim”. Moreover, the worst malediction, on the contrary, is: “May your fire dim”. Fire is a sacred notion, which has a practical alternative in the modern world: Gas. Current problems in the global gas market instigate Europe to find new solutions not to let the light dim. Options are few.

 Challenging mission

We often come across different ideas on this issue, but they are not as realistic as they sound. One must consider that all radical solutions take at least ten years to accomplish. In principle, no massive switching to new energy sources is expected in Europe before 2030. Under existing circumstances, the situation had to be controlled for at least ten years.

It is not an easy mission. The current gas demand of Europe is about 530 billion cubic meters per year. This number may reach 600 billion soon. Although the gas demand of the ‘old world’ grows year by year, the gas sources do not adjust at this pace. The picture illustrates the structure of the dynamics of growth of European gas demand compared to sources. 

Although European gas demand rises, supply from traditional sources decreases. Source: International Energy Agency (IEA)

As can be seen, demand is growing, while sources are declining. For instance, although the amount of gas production from Groningen field in the Netherlands was 50 cubic meters in 2013, this number is 4 billion cubic meters now. The gas will run out soon. “Groningen” remains the biggest field in Europe. Even after 55 years of operation, there are 800 billion cubic meters of gas there. However, the government of the Netherlands considers that further operation of the field may weaken the earthquake endurance here.

Gas production at the Groningen gas field of the Netherlands, one of the traditional gas suppliers of Europe will completely run out by 2030. 

The largest gas producer on the Norwegian continental shelf “Equinor” statedit has reached the limit and will not be able to increase gas transmission to Europe from now on.

We need to add that Russia’s long-term contracts with the European countries will expire in 2025. Whether those contracts will be extended or not, is another issue. The issue will depend not only on the fundamental indicators of the market but also on Europe’s imaginations about security.

What can be done in such a situation? Reforms in the gas market, changes in the mechanism are in place, but it is impossible to avoid deepening the diversification of sources. However, the number of sources is few. In his interview with AzVision.az, the director of Russia’s Energy Development Foundation Sergey Pikin said: “Gas resources of the world are running out”. Qatar, Australia, and America need to pass gas transitions from Asia to Europe. In this case, the gas price may reach $3000.

Sergey Pikin: Azerbaijan cannot be a rival to Russia in the European gas market. However, it can keep its place. 

It means that changing gas from one market to another is not a successful solution. A more reasonable way is to figure out how to deliver volumes that cannot reach the European market. Which one and how?

 Way out of the deadlock

In this case, the issue of putting the gas of the Caspian basin on the European market comes into being. Ian Bremmer, an American political scientist, President of the Eurasia Group said that Azerbaijan is a reliable supplier for Europe in the face of current geopolitical tensions.

 

Adding that Azerbaijan has vast transit opportunities for the transportation of energy resources, the expert said: “The Southern Gas Corridor (SGC) has been an important new source of supply, especially to Italy.” 

On November 28, 2021, Azerbaijan, Iran, and Turkmenistan signed a SWAP agreement on the gas exchange. The agreement launched on December 22 allows for gas exchange between the countries using the existing infrastructure without additional investment. According to the agreement, Turkmenistan will transport 5-6 million cubic meters of gas per day to Azerbaijan via Iran; therefore, an annual volume will reach 1.5-2 billion cubic meters.

Trilateral gas swap deal signed by Iran's Petroleum Minister Javad Owji (R) and Azerbaijan's Foreign Minister Jeyhun Bayramov

Currently, this scheme is intended primarily to supply Nakhchivan with gas. However, if it practically provides Turkmen gas transmission into the network of Azerbaijan and Turkey, an important question arises: is it possible to increase the volume and transport it to Europe via the Southern Gas Corridor? 

Swap solution 

Oguzhan Akyener, the chairperson of the Turkish Energy Strategy Marketing Research Center (TESPAM), told AzVision.az that the Turkmen gas considered in the swap agreement is almost enough to meet Nakhchivan's needs. A lot of work needs to be done to get additional gas from Turkmenistan. It requires an enlarged swap agreement. In this case, the main problem is the capacity of the pipes.

Ilham Shaban, an energy expert and head of the Oil Research Center stated, the actual transmission capacity of the Southern Gas Corridor is currently 16 billion cubic meters per year. There are eight compressor stations constructed along the route of the corridor. When upgrading the power of each station the transmission capacity of the Southern Gas Corridor can reach from 16 up to 31 billion cubic meters. 10 billion cubic meters can be considered for additional volume. In this case, this volume accounts for the gas of Turkmenistan, Iran, and even Russia.


Oguzhan Akyener: “Larger swap agreement should be discussed to purchase extra gas from Turkmenistan.”

Currently, Russia exports more than 1 million tons of Caspian oil per year to the world market via the Baku-Tbilisi-Ceyhan pipeline. From 2015 until now, 10 million tons of Russian oil were transported through this pipeline. This experience proves that such cooperation is possible. 

- Lukoil also actively produces gas in the Russian sector of the Caspian Sea. It can direct part of this gas to Azerbaijan via the Mozdok-Hajigabul pipeline, and from there to the world market. It is possible to transfer 1 billion cubic meters of gas in a year through this route, the expert said. 

In this scenario, Azerbaijan becomes a regional hub bringing benefits to all parties. The Caspian littoral states have an excellent opportunity to sell their gas to Europe at a high price, almost without incurring additional infrastructure costs. It is a unique opportunity for Turkmenistan and Iran, which have large natural gas reserves, to enter European markets. 

Regional junction 

It is significant for Azerbaijan to exchange gas with all gas-producing countries in the region. As a result of such cooperation, Russia may join the multilateral SWAP agreement in the future. Today we purchase gas from Russia and sell it to Georgia. Russia, which does not have a direct border with Iran and Turkmenistan, can also cooperate with those countries via Azerbaijan. 

At present, Turkey plays a ‘gas hub’ role in Central Asia. Gas from Arabic countries, Russia ("Turkish Stream"), and Azerbaijan enters Turkey and from there is directed to Europe. 

An aide to SOCAR Vice President Ibrahim Ahmadov told AzVision.az in a videocast project that Azerbaijan could play that role in the South Caucasus.

Ibrahim Ahmadov: There are all necessary opportunities to turn Azerbaijan into a regional gas hub. 

Azerbaijan’s gas output reached 19 bcm last year. One of the tasks ahead is to increase the capacity of Azerbaijan’s gas storage facilities which currently allow storing 3.5 bcm of gas.  

The SOCAR official also did not rule out Azerbaijan’s possible consideration of the prospects for transporting Turkmen and Iranian gas to Europe after expanding its technical capabilities. However, the Turkmen and Iranian sides need to come up with such a proposal. Having an opportunity to enter the European gas market without any additional investment in the future can be considered attractive for any country. The Ionian Adriatic Pipeline, a TAP branch, has already delivered more than 10 bcm of natural gas to Europe. Through this route, gas from the Caspian Sea will be delivered to Albania, Montenegro, Croatia, and Bosnia and Herzegovina. 

Speaking to AzVision.azIvan Us, Candidate of Economic Sciences, Chief Consultant of the Center for Foreign Policy Studies of Ukraine's National Institute for Strategic Studies said, EU Commissioner for Energy Kadri Simson is likely to visit Azerbaijan soon to reach an agreement on increasing gas supplies via TAP. 

EU’s High Representative for Foreign Affairs and Security Policy Josep Borrell earlier called Azerbaijan, the US, and Qatar one of the EU’s main sources of gas supplies. 

Thus, Azerbaijan stands a chance of becoming a significant player in the European gas market, which, in turn, can open up an opportunity for all regional countries.

The European Commissioner for Energy Kadri Simson does not hide the fact that Azerbaijan is one of the most significant alternative sources. 

The Resource of the Future 

Regardless of the future of energy, global demand for natural gas will keep growing. Natural gas, considered the cleanest of all fossil fuels, is also of great industrial significance. Today, nearly 250 different products are made from natural gas. Mineral fertilizers are undeniably among the most important products on that list.

The first stage of gas processing manufactures ammonia, which is already a fertilizer in itself and is used as a raw material for nitric acid, nitrate, and urea production in the subsequent stages. For that reason alone, growing gas prices, in parallel, are leading to an increase in fertilizer prices, and indirectly in food products in Europe.

The SOCAR Carbamide Plant is one of the largest projects of the state economy. With an investment of 800 million euros, the plant will produce 650,000 tons of carbamide per annum, using 435 million cubic meters of natural gas as raw material. 

Azerbaijan is very keen not only on exporting natural gas as raw material but also on selling finished products. A Soviet-era gas processing plant in Azerbaijan testifies to the existence of the gas industry in the country. A few years ago, Azerbaijan commissioned a new carbamide plant. The plant enables the country not only to meet its domestic demand for nitrogen fertilizers but also to export them. Exporting nitrogen fertilizers is considered to be more profitable than selling gas as a raw material. 

Azerbaijan’s plan to expand gas processing is likely to grow the demand of local industry for natural gas as a raw material, which contributes to the expansion of opportunities for swapping gas as a raw material. 

Perspective 

Oil was the determinant of the geopolitics of the 20th century, whereas natural gas is picking up the baton in the 21st century. The globe is currently thinking over what the energy source of the future is, not ruling out the dominance of hydrogen energy. Where does the hydrogen come from? The world has not yet achieved technical capabilities for obtaining unlimited amounts of hydrogen from seawater. Until then, the raw material from which the first element of the periodic table will be obtained is natural gas. Accordingly, natural gas will continue to dominate in the intermediate stage of post-oil-and-gas human development. This sole factor suggests that natural gas will become the major resource of the 21st century and shape the geopolitics of the new century. That future is now.

  16 March 2022    Read: 1177    Can be read: 17 min.

17 min.