BAKU
By Lada Yevgrashina
Azerbaijan and the European Union have started discussing scenarios about expanding gas export routes from production fields in the Caspian to Europe, principally the Balkans, through the Southern Gas Corridor (SGC).
The ex-Soviet state is on an EU list of countries to be considered to ensure energy supplies for the 27-nation bloc. And two EU Commissioners, Kadri Simson (Energy), and Olivér Várhelyi (Neighborhood and Enlargement) made Baku their second stop on 4th February on a fact-finding tour which also took them to Qatar. They then headed to Washington for a meeting of the U.S.-EU Energy Council.
The notion of the meetings was to determine which countries were most apt to ensure ample, stable gas flows in view of political uncertainty surrounding Russia as a supplier – amid alarm over the presence of tens of thousands of Russian troops near Ukraine. Due account is also taken of forthcoming changes as the worldwide energy transition away from fossil fuels proceeds and the EU’s “Green Deal” rules come into effect.
From the standpoint of supply, Azerbaijan is certainly trending in the right direction. Gas production in 2023 could exceed 48 billion cubic metres (bcm), compared to 43.9 bcm in 2021 and a projected 45 bcm in 2022. And from 2024, production levels could approach 50 bcm and peak there for several years.
For the moment, that means about 37-39 bcm available for domestic and foreign buyers, allowing for some gas to be sent back into strata to improve output levels and 15-16 bcm for domestic consumers.
Azerbaijan’s chief gas field Shah Deniz will be the driving force behind any increase in production (1 trillion cubic metres in reserves – 12 percent already extracted) with numbers likely to hit a peak in 2023 – more than 25 bcm per year, a plateau likely to last several years. And from 2023, a new gasfield, Absheron, is due to come on stream, operated by Total Energies with stocks of 350-400 bcm. Work is also due to begin on two other Caspian fields – Babek (stocks of 400 bcm) and Umid (200 bcm with production rising every year) as well as the project deep-gas Azeri-Chirag-Guneshli.
Azerbaijan’s exports in 2021 stood at 19 bcm — with 8.5 bcm sent to Turkey, about 7 bcm to Italy and the rest shared by Georgia, Greece and Bulgaria.
Turkey is due to secure more than 8.6 bcm from Azerbaijan in 2022, Georgia more than 2 bcm and European countries more than 9 bcm.
The talks with the EU commissioners in Baku laid bare the fact that Azerbaijan at this time has no additional volumes that could be sent to Europe – but those volumes will appear in 2023.
A priority: the Western Balkans
Both sides agreed that the western Balkans could become the priority market for Azerbaijani gas and the EU is seeking assistance from the ex-Soviet state in boosting shipments to help the region reduce its consumption of coal as part of the EU’s Green Deal strategy.
A source at state gas and oil company SOCAR that gas flows through the Southern Gas Corridor, already made up of a network of pipelines extending from Turkey to southern Europe, could pass through three proposed gas “interconnector” lines as well as pipelines connecting Bulgaria to Serbia and Romania.
From this spring, a company is being formed to oversee the operation of the proposed Ionian-Adriatic Pipeline running from Albania to Montenegro and Bosnia to the port of Split in Croatia.
Intensive preparatory work is proceeding on the BRUA project (Bulgaria, Romania, Hungary, Austria) linking Bulgaria with its neighbours and now deemed a “project of common interest” (PCI)
“It was decided in Baku that countries in the west Balkans will each establish their demand for gas from Azerbaijan and put forward their calculated assessments. Once we have an understanding about the volumes of gas that they need, we can start commercial talks and study technical and commercial scenarios for supplying our gas to the region,” said another source in the Azerbaijani gas industry.
“We will have a look what upstream investments we need and what resources we have to supply the gas. There are no deadlines for this research. Talks will be on a bilateral basis.”
Energy supply in the western Balkans was also a major discussion point at the U.S.-EU Energy Council in Washington, with participants reaffirming in a statement “the importance of advancing transparent, integrated, and competitive energy markets in the Western Balkans, and associated market and regulatory reforms…”
It called for further coordination “on the energy market and regulatory reforms and support for decarbonisation in the Western Balkans, in particular, to phase out unabated coal for power generation and inefficient fossil fuel subsidies. The Council also underlined the need to ensure the security of energy supply, notably through access to alternative supply sources.”
Balkan countries make supply plans
In terms of Azerbaijani gas supplies, the gas industry source said Baku had no exclusive right to supply the western Balkans.
Albania, though which passes the Trans-Adriatic Pipeline (TAP), part of the SGC, plans to buy Azerbaijani gas in 2023 while securing liquefied natural gas (LNG) from other sources. Northern Macedonia has expressed interest in the LNG terminal under construction in the Greek port of Alexandroupolis (capacity 5.5 bcm per year, may start operations in 2023). Montenegro is considering the construction of an LNG terminal and Croatia now operates just such a terminal at Krk and plans to expand it.
At the same time, TAP — carrying Azerbaijani gas to Italy through Turkey, Greece and Albania — will conduct a market test in July to determine the scale of shipments from potential suppliers alongside Shah Deniz – seen as a key element in discussions four scenarios to expand the line.
The broader SGC at this time has a maximum annual capacity of 10 bcm, the volume assumed in 25-year contracts with nine European companies signed in Baku in 2013. Expansion is possible up to 20 bcm per year.
“Let’s not forget that in accordance with the EU procedures, expanding the TAP could take 45-60 months,” a SOCAR official told the Tribune. “And no one is going to expand it for short-term contracts. The minimum period for reserving capacity is five years.”
“The SGC was conceived as a transport system that could be expanded in accordance with concrete projects to supply gas along its entire length. It is open for all gas producers and I believe in prospects for its expansion.”
The EU’s Green Deal: Who needs gas?
But the difficulty with the plan may lie with the introduction from 2025-2026 of the EU’s Green Deal aimed at reducing dependence on fossil fuels so that Europe will need less gas from Azerbaijan.
From 2025, according to EU rules, gas carried by pipeline will have to contain no less than 5 % hydrogen or purified methane.
For the moment, the EU has classified gas as an important fuel for the transitional period, while stressing that at some point gas will have to be low-carbon – passed through a carbon capture trap. And that requires additional investment.
Gas in the EU is primarily used to generate electricity. And from 2030, under EC rules, power stations will have to use more and more low-carbon fuel, meaning that gas in its current form will not be needed from 2030.
A compromise might be found in using current gas compositions, but securing a lower price from the buyer to account for carbon taxes to be paid by electricity generators.
”Even now, any action undertaken by operators of gas transport networks is subject to close attention from public opinion and regulators as part of the Green Deal and the decarbonisation strategy to reduce methane emissions and adapt compressor stations along the pipeline route to low-carbon regulations,” an official from the TAP consortium told The Tribune.
“If a mixture with hydrogen needs to be in the pipeline, we’ll have to get hydrogen from Greece or Italy. We are constantly consulting regulators and civil society on this.”
It is quite clear that Europe intends to stick to its Global Climate Action Agenda. New projects are underway to develop solar energy in African deserts – and energy from those projects could make its way to the southern European market within two to three years.
The use of LNG is expanding, shipped from the United States, Qatar, Algeria and Nigeria.
All these developments amount to a major headache for producers and suppliers of pipeline gas now in a hurry to boost sales through long-term contracts.
And Azerbaijan, no exception to this rule, is also playing the game.