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Azerbaijan’s energy export prowess: In search of augmentation role

20 May 2022 17:55 (UTC+04:00)
Azerbaijan’s energy export prowess: In search of augmentation role

By Orkhan Amashov

The West-Russia rupture over Ukraine, the ramifications from which will likely only intensify henceforth, has sent seismic shockwaves throughout the entire energy market, dramatically increasing the need for alternative supplies and, against this backdrop, Azerbaijan’s clout, within the grand scheme of things, seems to have assumed heightened significance.

Although in terms of sheer volume, Baku is no match for Russian gas and cannot come to the rescue of Europe as such, with the right investment and optimization of the Southern Gas Corridor, it is more than probable that its importance in the context of diversified energy security for South-Eastern Europe will be magnified.

New but old

Whenever there is an energy crisis in Europe engendered by virtue of a disagreement with Russia, the question that invariably arises relates to which source or sources should be seen as an alternative. In this vein, Azerbaijan ranks highly amongst the countries entering the equation.

Once the strengths and weaknesses of Baku's export capabilities are duly evaluated, the next question appears to be what could be realistically done to augment its role in Europe's diversified energy security. The answer to the latter is constantly modified, albeit within the same configuration, entailing a set range of possibilities.

For all its manifest desire to extricate itself from the Kremlin-dominated web of energy routes, the EU is not ready to bite the bullet. Some elements of indolent morality that characterized its former self are still omnipresent. Not that it has backtracked, but "cold turkey" involving detoxification from Russian energy sources is unlikely to be pursued with the vehemence initially presumed.

Rauf Khalilov, a renowned London-based lawyer who has worked with Europe’s energy giants, is skeptical of the EU’s resolve to carry out the threat. "The West has made itself dependent on oil and gas like a junkie dependent on crack". Khalilov contends that, if a reliably alternative “clean” source is not found, it "will succumb to the idea of knocking on the door of the supplier".

Indeed, Europe's resolve is yet to stand the test of time. On 16 May, the European Commission softened its stance against Russia, confirming that EU companies can pay for Russian energy without breaching the bloc’s sanctions against the Kremlin. To keep the gas flowing, there will be a need to comply with Russian demands in the interim.

Yet, the EU is ultimately looking for plan B in the long run. That plan, in its different guises, involves Azerbaijan. Although Baku cannot be viewed as an answer to the aforementioned mega-crisis, its tailored role in terms of the South-Eastern section of Europe is already potent and visible.

Bulgaria and Serbia have recently inked a new deal with Baku to import one billion bcm of gas via the Southern Gas Corridor (SGC). Serbia is a potential recipient of Azerbaijani gas in late 2023. Its deliveries are to come through Bulgaria via the EU-funded project signed back in 2018.

Baku’s export via the SGC is 10 bcm per annum, the preponderant part of which goes to an Italian interconnector. Bulgaria needs between 3-3.5 bcm per annum, whereas the respective figure for Serbia is around 2.7 bcm.

Modes of augmentation

Neil Watson, a British journalist who has written extensively on Azerbaijani energy geopolitics, believes that, since the SGC was deliberately built at overcapacity to carry Turkmen and Iranian gas in the fullness of time, it is no surprise that Baku is augmenting its clout in the market through a wide range of measures.

One of the options for increasing Azerbaijani export is via the optimization of the SGC pipeline, increasing its annual capacity by 1 bcm. This will require billions of investment dollars and a principled decision to boost both production and pipeline capacity. The consortium members that own the Azerbaijani fields and the sequential pipelines that comprise the SGC seem to be having some opinion differences as to the future roadmap.

SOCAR, a major shareholder in the consortium, counts on doubling the export capabilities of the westernmost section of the SGS to 20 bcm per year. BP, on the other hand, is cautiously reluctant to conceive such an increase engendered by the Shah Deniz 2 field, the gas exports from which only, in its view, will not achieve the capacity.

The untapped reserves in the Azeri-Chirag-Guneshli (ACG) oil field are more highly appreciated by its operator, BP. Adding its gas potential to the SGC’s export capabilities would require major investment, requiring the production agreement to be altered.

Gas swap option

But there is another option received with enthusiasm, due to the fact it does not require the development of new infrastructure - a gas swap deal. In December 2021, after extensive deliberation, Azerbaijan finalized a gas swap agreement with Turkmenistan and Iran.

According to the deal in question, Ashgabad has begun sending up to 2 bcm of gas annually to northeast Iran. Iran then sends an equivalent quantity from its northwest to Azerbaijan.

John Roberts, an energy analyst at the Atlantic Council, whom I occasioned to meet in Shusha in late April, believes that the swap deal could be expanded to a 6 bcm volume per annum, with the extra gas being navigated to Turkey, and then on to Europe. Turkey's current gas transit network has sufficient spare capacity, amounting to a 4-5 bcm volume per annum, and Ankara could thereafter utilize two separate export pipelines to Bulgaria and Greece.

In energy matters, Azerbaijan is not given to rodomontade. It is conscious of its strategic worth and potential, yet it understands that for Baku’s export credentials to be improved, a billion-worth investment is obligatory.

The focus is to increase its bespoke indispensability through an increase in productivity and export volumes and to augment its niche role in relation to the specific segment of the EU energy market. Given its track record of being a reliable and no-nonsense partner in the energy sector, Azerbaijan has the makings of an actor primed to play a pivotal role in the future of even vaster swathes of Europe.


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