GAS SYMBIOSIS

Although the G20 format assumes discussion of global economic issues, the leaders of the United States, Russia, China, Germany, Great Britain, Turkey, France and other G20 states no longer can ignore issues of world politics. On the other hand, the politics cannot completely edge out the economy, and one of its most important components – the energy sector.

The final communiqué of the G20 Summit reflects the need for a more rational approach to extraction of energy resources, avoiding subsidies to support the extraction of inefficient minerals (primarily coal) and expanding the use of natural gas as the most environmentally friendly type of fuel.

According to BP forecasts, the natural gas continues successful expansion over other types of fuel, mainly the coal. Even paired with oil, the natural gas gradually becomes the leading fuel: if 10 years ago the ratio of oil consumption was 60% to 40%, currently we have a balanced situation. In the subsequent decade, the gas will have a 60% share in the consumption of liquid hydrocarbons. At greater extent, the main catalysts of the growth of gas consumption are China and the countries of the southeastern Asia, which mostly use the coal. But Europe also continues to increase the volumes of gas consumption, albeit more slowly. At the same time, Europe is interested in diversification of gas routes and sources.

Shah Deniz-2: main alternative for Europe

In this respect, Azerbaijan remains the main ally of Europe through the implementation of two projects: Shah Deniz Gas-2 and Southern Gas Corridor (SGC). As stated by President Ilham Aliev, in 1996, when the agreement on the development of Shah Deniz gas field was signed, the gas projects were not considered significant. But today Azerbaijan is one of the major gas suppliers. “Nobody in the world and, in particular, in Europe, talked about the energy security. It was believed that the gas projects were not highly profitable. However, we were convinced that Azerbaijan and its gas sector would make its contribution to this issue”, said the President at the ceremony of delivery of the support block of one of the two platforms to be installed at the Shah Deniz gas field.

According to him, Azerbaijan can also provide transit functions along with the local production increase. “The construction of the Southern Gas Corridor continues successfully. All these works are carried out in a coordinated manner. I am confident that they will be completed in 2018-2020, and more Azerbaijani gas will be transported to neighbouring and European countries. The Southern Gas Corridor goes through the territories of seven countries. We have created a new format of international cooperation. Azerbaijan, Georgia, Turkey, Greece, Bulgaria, Albania, and Italy are the participants in this project. At the same time, the next stage of this project will join three Balkan countries including Montenegro, Bosnia and Herzegovina, and Croatia. Thus, we will have new opportunities to export Azerbaijani gas to various countries in the future”, said Ilham Aliyev.

Connecting the three Balkan countries to the SGC project implies the construction of Ionian-Adriatic Pipeline (IAP). SOCAR has already signed a memorandum on accession to this project. Not only SOCAR is interested in gas sales in these countries but it also will have a share in gasification of the Balkans, which is the least supplied region in Europe. SOCAR has already declared an interest for the construction of a gas distribution network in Albania, Montenegro and Bosnia and Herzegovina.

The Southern Gas Corridor attracts more attention in a number of countries willing to transit natural gas to Europe. One of them is Turkmenistan. The Turkmen President Gurbangulu Berdimuhammedov has already held discussions about gas supplies to Europe with the German Chancellor Angela Merkel. He noted that Turkmenistan intended to export its natural gas both to Asian and European gas markets. However, according to Azerbaijani Energy Minister Natig Aliyev, Turkmenistan has not supported these statements with real deeds.

In his interview with APA, Natig Aliyev has noted that Turkmenistan had repeatedly stated its readiness to transport 30 billion cubic meters (bcm) of natural gas to Europe. “But, in fact, the Turkmens want to supply gas to Azerbaijan only while the issue of transporting it from Azerbaijan to Europe still remains open. This is not a serious approach”, said the Minister.

He also added: “As for the construction of the Trans-Caspian Gas Pipeline, Turkmenistan also resigns from responsibilities: They say we will supply the gas, and let someone else construct the pipeline. But who will be doing this? Azerbaijan? As a minister, I am against this. Maybe the European Union? They also cannot do this since EU is a political structure. If the EU is interested, then Turkmen companies should discuss this issue with the EU.”

But SGC has potential customers even without Turkmenistan. According to the Azerbaijani Deputy Minister of Energy Natig Abbasov, the government is currently reviewing the transit of Iranian gas through Azerbaijan, with further transport to Europe via TANAP and TAP pipelines. Iran and Azerbaijan have appropriate infrastructure to implement this project. Also, there is gas pipeline network between Iran and Iraq, which allows for transportation of Iraqi natural gas to Europe using the same route. It is clear that this will significantly increase the distances for the transport of Iranian and Iraqi gas compared to directly transit through Turkey but the advantageous factor is the availability of infrastructure ready to use.

Possible symbiosis

Furthermore, Russia can also join SGC. The revival of relations between Turkey and Russia has refreshed the intentions of both countries to tackle the construction of the Turkish Stream project. Gazprom has already started to get necessary permissions from the Turkish authorities to conduct specific works. Currently the parties to the contract negotiate only the construction of one branch of the pipeline. In his interview with Bloomberg, the Russian President Vladimir Putin has expressed confidence that the Turkish Stream would at least increase the flow of gas supplies to the domestic Turkish market. The supplies from Turkey to the countries of South-Eastern Europe depend on the position of the EU. This implies the EU's intention to restrict additional deliveries of Russian gas based on the provisions of the Third Energy Package, which made Gazprom to refrain from the implementation of the South Stream Pipeline to Bulgaria. This also affects the Turkish Stream, which originally planned the construction of four pipelines with a total capacity of 63 bcm, of which only a quarter would be used to supply natural gas to Turkey and the rest of this volume would have to go to Europe. But similar to the Southern Stream, the EU has expressed the contradictions with the Third Energy Package that forced Gazprom to implement the Turkish Stream gradually. By the way, not only Gazprom was interested in gas supplies to Turkey but it also has expressed its intention to produce electricity using this natural gas.

The Turkish side has made statements about the possibility of connecting the Turkish Stream to TANAP, as proposed by the Turkish Foreign Minister Mevlut Cavusoglu. According to him, Ankara will purchase only 16 bcm of Russian gas annually for domestic needs. The remaining volumes of Russian gas would go through the territory of Turkey and be exported through TANAP pipeline.

The connection of Turkish Stream to TANAP provides necessary diversification but prevents EU from applying the Third Energy Package, which prohibits the gas manufacturers the ownership of gas infrastructure. In this case, Gazprom can sell its gas in Turkey but the exports to Europe may be entirely realized through a completely different company. Or, Gazprom can sell gas to European countries via TANAP and TAP without a stake in the pipeline infrastructure.

In any case, the heavy workload of these pipelines has a positive impact on the effectiveness of projects and brings additional income to shareholders, SOCAR being the leading shareholder.

A Greek soap opera

As we have previously mentioned, SOCAR is not only interested in selling its gas to major European buyers. It also wants to have a share in the delivery of gas to end-users. Therefore, the company is working to establish a distribution network in several Balkan countries and to purchase the Greek operator DESFA. However, the long story behind the purchase of a 66% stake in DESFA has turned to be a full-length soap opera with elements of a thriller movie.

As known, SOCAR won the tender for the purchase of 66% DESFA back in the summer of 2013. According to purchase terms, SOCAR has pledged to pay 400 million Euros for this stake. But the Greek government has changed and the left coalition SYRIZA has come to power. Their election campaign aimed at refraining from IMF loans. However, they could not realize this scenario. At the same time, the new government has tried to change the terms of the Trans-Adriatic Pipeline agreements but had to retreat since they complied with all EU standards. Then the government has focused on DESFA. First, the European Commission has decided to review the terms of contract for compliance with antimonopoly legislation. The EC recommended SOCAR to reduce its stake in gas operator down to 49%. As a result, SOCAR has reached an agreement to sell 17% of shares to the Italian company Snam immediately after the registration of privatization. But, recently, the Greek government has proposed to amend the tariff policy of DESFA. In particular, it was suggested to limit the growth of transport fare for the next few years while originally the intention was to increase the tariffs to 68%.

According to the Greek Minister of Energy, the intention is to limit the growth of tariffs for gas and implies a greater degree of social burden. However, according to the head of SOCAR’s Greek division Anar Mamedov, the share of DESFA’s tariffs in the ultimate gas price is very insignificant.

“DESFA has only 3.2 Euros in 50 Euros per megawatt/hour of average gas price. The rest of this price is made up of gas costs and taxes. Thus, even the increase of 68% is insignificant. In fact, we are talking about an increase of 1-1.5 Euros per megawatt/hour”, said Mr. Mamedov in his interview with the Greek media. This means that a gradual 68% increase in transportation would entail only a 3% rise in gas price during several years.

In the new conditions, the profitability of Greek operator falls to 50%. So, SOCAR declares the need to reduce the cost of DESFA’s shares twice. “The Greek side had taken steps that violate the tender process. In particular, they have violated the initial terms and currently we are waiting the Greek government to appropriately justify these actions. In such circumstances, the reduced profitability of DESFA reduces the original value of the company”, said President of SOCAR Rovnag Abdullayev.

He noted that the company was not going to abandon the deal but intended to assert its rights. SOCAR has joined forces with another potential investor – the Italian Snam.

It is clear that the acquisition of Greek operator promises benefits for the Azerbaijani company, which in addition to the distribution of gas in Greece will also get access to the Greece-Bulgaria pipeline enabling it to sell gas in this country as well. But, of course, everything has its price, and it is not worth indulging in any whims of the Greek government to the detriment of own interests. As a matter of fact, the current Greek government once popular for its tough rhetoric was repeatedly noted to change it to a more reasonable and pragmatic approach.

In fact, it will be difficult for Greece to find a new buyer for DESFA in the current crisis period should they refuse the deal with SOCAR. The Azerbaijani company has already established itself as a reliable investor in the projects implemented throughout Georgia, Turkey, Ukraine, Switzerland, Romania and other countries.

SOCAR has been managing the Georgian gas distribution network since 2009. It is a striking example of effective cooperation of the country with an Azerbaijani company. SOCAR is also the leading company in the country as the largest investor and taxpayer.

The global actor

No matter how the situation will be resolved with DESFA, Azerbaijan has already become the important actor in the global gas market.

Thanks to its global position, Azerbaijan has been awarded the observer status in the Forum of Gas Exporting Countries. During his recent visit to Baku, the Secretary-General of the Forum, Seyed Mohammed Hossein Adeli, has presented President Ilham Aliyev an invitation to the Forum Summit to be held in Bolivia in 2017. At the meeting with Minister Natig Aliyev, Mr. Adeli has discussed the upcoming meeting of energy ministers of participant countries in Doha.

The Azerbaijani gas is already contributing to energy security of the region and aims to expand the supply routes to the promising European continent. We will start by exporting only about 10 bcm of gas per year but this volume will increase 3-4 times thanks to the launch of new gas fields and projects in the coming years. Of course, these volumes are not tangible considering the annual consumption volumes of Europe (500 bcm). However, it is equally important for Azerbaijan to establish the Southern Gas Corridor, which will attract alternative volumes of natural gas to Europe from Turkmenistan, Iraq, Iran, and even Israel. In addition to financial profits, this will ensure stable long-term reputational incomes.

Shah Deniz-2 is close to finalize

The scope of works on Shah Deniz Stage-2 are 77% complete, said Gordon Birrell, Regional President of BP Azerbaijan, Georgia and Turkey.

We do everything according to the plan to deliver the first gas to Turkey in 2018, and to Europe in 2020, said Birrell to our correspondent.

He noted that the company signed contracts totaling $15 billion on the construction of platforms and expansion of the South Caucasus Pipeline to the Georgian-Turkish border.

“We have 24 thousand people working on these projects in Azerbaijan only. 80% of this workforce is the local nationals. Together with Turkey and European countries, this number will exceed 40 thousand people”, said Mr. Birrell.

He added that as part of preparatory works, 10 wells have already been drilled and three of the four reinforcing installations for the extraction of gas from subsea installations have been installed.

“It is the first time that this production technology using the subsea installations instead of fixed platforms is used in the Caspian Sea. For installation, we have completed the construction of the new vessel “Khankendi”, which will be launched into the sea in the second quarter of 2017. In general, we have spent $0.5 billion for the upgrade of all infrastructure objects operated in Azerbaijan, as well as the construction of platforms, vessels, and anchor blocks for Shah Deniz-2. We hope that this infrastructure will continue to be used in other projects of the country as well”, said Mr. Birrell.