BAKU
By Lada Yevgrashina
Could Azerbaijan fill the gap in gas supplies to Europe if an escalation in the stand-off between Russia and the West over Ukraine leads to a reduction in Moscow’s exports?
The answer is far from straightforward and would require time, development of the ex-Soviet state’s industry and money.
The deployment of tens of thousands of Russian troops on the Ukrainian border and the reaction of the United States and NATO has caused a scramble among policymakers to come up with the military, strategic and economic contingency.
The Kremlin says it has no intention of invading its ex-Soviet neighbour – nearly eight years after seizing Crimea and the Donbas region – but is pressing for “security guarantees”—including commitments that Ukraine will never become a member of the Alliance.
The U.N. Security Council has scheduled a sitting for Monday and European leaders have launched their own diplomatic initiatives to bolster weeks of talks involving Moscow and Washington.
And stable gas supplies remain at the top of the agenda – gas prices have soared past $1,000-$1,300 per thousand cubic metres and oil futures now top $93 a barrel. Underground storage areas in Europe stand filled to 60 percent capacity – far less than last year – and the European Commission fears cold February weather could exhaust them quickly.
Seeking alternatives
And President Joe Biden’s administration is looking for alternatives – fast.
“…We’ve also been working to identify additional volumes of non-Russian natural gas from North Africa and the Middle East, Asia, and the United States. We’re in discussion with major natural gas producers around the globe to understand their capacity and willingness to temporarily surge natural gas output and to allocate these volumes to European buyers,” White House spokeswoman Jen Psaki said last week.
“And we’re also engaging with major buyers and suppliers of LNG to ensure flexibility in existing contracts and storage is managed and enables diversion to Europe.”
According to data from the Vortexa analytics company, Russian gas flows to Europe in December 2021 dipped to new minimum levels of 10.3 billion cubic metres (bcm) (8 million tonnes liquefied natural gas equivalent) compared to 14 bcm in December 2020. Shipments of LNG to Europe rose to 6.9 million tonnes in December 2021 against 5.25 million a year earlier.
And Gazprom’s flows through pipeline slowed even further in January 2022, prompting Europe to boost shipments of LNG – which stand at a record 8.6 million tonnes for two weeks.
The United States has redirected some of its LNG shipments from Asia to Europe (more than 40 tankers) to make up for shortfalls in supply, but the capacity of terminals in Europe to receive and process LNG is limited.
Both the EU and the United States consider it worthwhile to pursue talks with Azerbaijan on providing additional gas volumes – the EU Energy Commissioner Kadri Simson is due to hold talks in Baku in early February and a meeting of the EU-U.S. Energy Council is set for 7th February in Washington.
Industry experts remain sceptical over whether Azerbaijan would be able to provide the additional supplies necessary to make up for shortages, at least under current conditions.
“Azerbaijan’s daily gas output is not at a level sufficient to come up with additional supplies to be sent to Europe,” Gulmira Rzaeva, Managing Director of Eurasia Analytics Ltd and an advisor to the World Energy Council-Global Gas Center, told the Tribune.
“Technically it would be very difficult for Azerbaijan to increase its gas output at this time or even in the next two years. And if the EU wants to secure more gas from Azerbaijan now, it would be practically impossible.”
Azerbaijan’s main gas field, Shah Deniz, produces more than 70 million cubic metres of gas per day – shared between domestic and foreign consumers. Azerbaijan’s output in 2022 is expected to total 45-46 bcm compared to 43.9 bcm – and there is at least a hypothetical possibility of boosting exports.
But an informed source at the state energy firm SOCAR told the Tribune the distribution of products to customers and limits on export pipelines practically ruled out any increase in exports.
The source said up to 15 bcm of gas production was pumped directly into strata to improve productivity rates – of the remainder, 8.4 bcm to be sent to Turkey and more than 9 bcm to European customers. Georgia accounted for a further 4 million cubic metres per day and Azerbaijan’s domestic needs totalled 13-15 bcm a year.
“And with this 2022 distribution plan in mind and accounting for possible production we have gone ahead with purchases of up to 2 bcm of gas from Turkmenistan in 2022 and the shipments already started in January,” the source said.
And capacity limits on pipelines meant that Azerbaijan could ship no more than 11-11.5 bcm to Europe, the source said, and increased flows could also infringe safety considerations with Shah Deniz.
“If the EU needs additional Azerbaijani gas now, we can help, but the volumes, quite frankly, cannot be compared with Russian volumes,” the SOCAR source said. “In technical terms, within three years, we will be able to increase gas exports to Europe. And, of course, we would need to know now whether the EU needs that gas.”
Boosting exports, updating pipelines
The deputy head of SOCAR’s communications department, Ibragim Akhmedov, told The Tribune that the Trans Adriatic Pipeline – part of the Southern Gas Corridor (SGD) transporting Azerbaijani gas through Turkey and the Balkans to Italy – would hit a plateau of 10 bcm this year and “the question of expanding its capacity is on the agenda”. A separate Baku-Tbilisi-Erzerum pipeline takes gas to Georgia and to Turkey. And gas is also sent to Turkey through the SGD as part of the Trans-Anatolian pipeline (TANAP).
“The TAP consortium is carrying on market tests and over the course of the year will decide on expanding the pipeline’s capacity,” Akhmedov said.
This would amount to a doubling of capacity on the SGC – and Azerbaijan is hoping to count on long-term contracts with European consumers in parallel with any pipeline expansion.
European customers receiving gas from Shah Deniz have since the end of 2020 been subject to 25-year contracts with annual volumes of 10 bcm under a deal signed with nine companies in 2013.
SOCAR says Azerbaijan is seeking agreement from the EU and European companies on long-term contracts for additional volumes from Shah Deniz and other Caspian gas fields in order to determine the level of investment required for vital infrastructure development.
“If there is an urgent need as we saw in Turkey, some volumes, of course, would be made available,” Elin Suleymanov, Azerbaijan’s ambassador to Britain, told Bloomberg in an interview. “But Azerbaijani volumes are not comparable to Russian volumes. That is obvious.”
Suleymanov was referring to additional Azerbaijani gas shipments to Turkey currently because of Ankara’s difficulties in securing supplies from Iran.
“Any immediate increase in gas supplies from Azerbaijan will be limited. Significant increases will require European buyers to sign long-term gas contracts,” he said.
Energy infrastructure is an expensive proposition – the SGC was built at a cost of $33 billion and any further expansion will require major investments – and time. And investors will want assurances that the gas produced will have buyers.
Other factors to be taken into account include Europe’s planned transition to clean energy forms and the impending use of pipelines from Russia and other countries to transport hydrogen and purified methane.
Azerbaijan, therefore, finds common ground with Russian President Vladimir Putin in seeking long-term contracts for supplying gas – as part of any plan to invest in increased exports to Europe.
“We don’t look at energy security and potential expansion and increase in volumes through a short-term crisis, you cannot succeed with short-term mandates,” ambassador Suleymanov said. “It’s long-term planning, it is a process, it’s not like someone shows up and says ‘Give me more gas’.”
Azerbaijan is therefore playing its game with the EU, a game that meets its strategic interests. And whether Europe plays along will depend to a great extent on what happens in February 2022.