THE MORE, THE BETTER

After its launch for European consumers, the Southern Gas Corridor (SGC) project received support from the EU and the US for further development. Shareholders will focus all their efforts on the attraction of new sources of gas supplies, as well as on the search for new markets for European buyers. It will not be easy to determine the cost of the system expansion, conclude sale and purchase contracts, find sources of funding, etc. Nevertheless, the growing number of countries interested in importing gas from Azerbaijan gives reason to believe that no serious problems are expected with the implementation of the second phase of SGC.

Gazprom’s warning

“Southern Gas Corridor helps the European Union to diversify its energy supply, providing more choice and competition for our citizens. At the beginning of this year, we already see a decline in gas prices in Italy. This marks the beginning of our success as well as a new partnership. Thanks to SGC, the EU and Azerbaijan are currently strategic energy partners,” European Commissioner for Energy Kadri Simson said.

Although the SGC has been operating at full capacity for almost two months, the "veterans" of the European gas market has been actively observing its progress.

In early February, the Russian gas giant already warned that gas supplies from the Russian Federation to Italy, to Gazprom's second export market after Germany, in 2021 may experience “some fluctuations” due to the entry of a new supplier, Azerbaijan.

“As soon as the Trans-Adriatic Gas pipeline (TAP is the European component of the Southern Gas Corridor - R+) reaches its annual design capacity of 8bcm on the border of Greece and Italy in the 1Q-2Q2021, this may cause some fluctuations in the volume of supplies to Italy from other suppliers during the period of market adaptation to a new source of pipeline gas,” Gazprom wrote in its quarterly report.

According to the Italian operator Snam, gas supplies to Italy via TAP began on December 31, 2020 and are stable at almost 10mcm daily. Moreover, if in December 2020 Italy received 82mcm, in January - 92mcm daily through Austria (physically it is Russian gas only), then in February supplies through Austria fell to 52mcm, while in 2020, the daily indicator was at the level of 58mcm.

Undoubtedly, the supply of 10bcm of Azerbaijani gas to Europe in the following 25 years will make certain adjustments to the current situation on the European gas market. Project shareholders inspired by the successful launch of the first phase of the project are trying to significantly adjust the gas supplies to Europe from the Caspian Sea by implementing a new stage. The main outcome of the regular meeting of the Consultative Council on the implementation of the Southern Gas Corridor project held on February 11 in Baku was the firm intention to double the capacity of the system to cover a larger number of countries that buy Azerbaijani gas. The main target is the Western Balkans. In the long term, it is planned to use SGC for the delivery of a hydrogen mixture to Europe, taking into account European plans to implement the Hydrogen Strategy. So, the goals are set, and the rest is easy.

The Balkan knot

In fact, the SGC system (3,500 km) is designed for the annual supplies of 6bcm of Azerbaijani gas to Turkey through the TANAP gas pipeline and 10bcm of gas to Europe.

European consumers received the first gas from Azerbaijan on December 31, 2020. This year, through the SGC, it is planned to export about 1bcm of gas to Georgia, at least 8bcm to Turkey, and more than 5bcm to Europe. SGC is planned to reach full capacity by 2023.

“Now, when the first phase of the project is over, we are thinking about the next phase. By the end of the second phase, we will ensure the production of gas from the undeveloped fields, which will create new transit opportunities for new suppliers,” Azerbaijani Energy Minister Parviz Shahbazov said.

Expansion of the system will make it possible to supply already 20bcm of gas to Europe annually. At the same time, Azerbaijan is confident that there will be demand for Azerbaijani gas, and not only from among the current buyers.

“At the next stage of the SGC expansion, we hope to access additional markets in the Western Balkans. We will open gas supplies to the citizens of Albania and other countries of the region,” Elshad Nasirov, Vice President of SOCAR for investments and marketing said.

EU hopes that Azerbaijani gas supplies to the Western Balkans will begin as soon as possible. According to the EU Commissioner for Neighbourhood and Enlargement Policy Olivér Várhelyi, the EU even wants to hold certain discussions with Azerbaijani partners on this issue.

“Last October, EC approved an investment plan for the Western Balkan region. EU assistance for the economic recovery of the region reached 9 million and 20 million euros, respectively. Currently, the Western Balkans are experiencing certain problems with gas supply, which is an obstacle to the economic development of the region. Therefore, the issues of gas supply to the Western Balkans occupy a special place in this investment plan,” Várhelyi said.

In this regard, there are hopes with the construction of the Ionian-Adriatic Pipeline (IAP). The 516km-long pipeline will pass through Albania, Montenegro, Bosnia and Herzegovina and Croatia. The throughput capacity of the pipeline will be 5bcm annually, half of which will be delivered to Croatia.

“Completion of the TAP gas pipeline creates opportunities for the IAP gas pipeline construction. We have already signed MOUs with the Western Balkan countries. After the construction of the IAP, we will be able to expand the supply route and create new opportunities for the countries of the Western Balkans,” Azerbaijani President Ilham Aliyev said.

No technical difficulties

Hungary also shows an interest in importing Azerbaijani gas. But to do that, it will have to complete the construction of the missing section of the pipeline. According to the Hungarian Foreign Minister Peter Szijjarto, it became clear that the supply of Azerbaijani gas is literally a matter of national security, and the country expects to start purchases from the mid-2020s.

“It is important for us that we can buy gas from as many sources as possible. A direct gas transmission link was established between Azerbaijan and Europe, and MVM began to prepare contractual relations with the Azerbaijani gas company. It is quite realistic to expect that Hungary will buy gas from Azerbaijan starting from the middle of this decade,” Szijjarto said.

He instructed Hungarian enterprises producing electric power and natural gas to begin negotiations with SOCAR of Azerbaijan on contracts for the supply of Azerbaijani gas to Hungary.

Obviously, the supply of Azerbaijani gas to the Western Balkans and other countries depends on a number of aspects. The most important issue here will be the cost of expansion of the South Caucasus pipeline. This summer the TAP consortium plans to begin a mandatory phase of market research to double the capacity of the Trans-Adriatic Gas Pipeline (TAP). “This work will begin in July 2021. We expect clear results by October 2021. The TAP consortium will conduct market trials at least every two years to propose doubling of TAP's capacity to 20bcm annually,” TAP Managing Director Luca Schieppati.

Murad Heydarov, Chairman of the Board of the TAP consortium, said that the SGC infrastructure even in its initial design phase provides for further expansion. “Therefore, access is open for not only gas producers from Azerbaijan, but also from the Caspian region and the Mediterranean, who will be able to supply gas to their markets through the Southern Gas Corridor system,” Mr. Heydarov said.

According to M. Heydarov, after the expansion of the SGC, the total throughput capacity of TAP will reach 20bcm, TANAP - 31bcm, and the South Caucasus Pipeline – 30bcm annually.

“Technically, the SGC system can be easily expanded, but the increase in the capacity of the TAP gas pipeline must be in accordance with the strict requirements of European legislation, in particular the gas directive. The decision is taken on the basis of commercial feasibility in accordance with the legislation of the EU and other countries along the route,” Mr. Heydarov said.

Resource opportunities

As for the availability of resources to ensure the efficiency of the second phase of the SGC, the statements of President Aliyev remove all possible doubts. At the moment, the main source for the Southern Gas Corridor is the Shah Deniz field, which has already produced 137bcm of gas.

“Our proven gas reserves are 2.6 trillion cubic meters. According to new information, this estimate may increase. If we take into account the deep water blocks of the Azeri-Chirag-Guneshli (ACG) fields, we have distinct potential," Mr. Aliyev said at the meeting of the SGC Advisory Board.

At the same time, he noted that there were also a number of other promising gas fields, including Babek (estimated reserves of 400bcm), Absheron (350bcm), Umid (at least 200bcm).

“These are fields with proven reserves, they will contribute to gas production in the Azerbaijani sector of the Caspian Sea. There are other projects in the exploration stage and we look forward to new discoveries in the coming years. Thus, these diversified oil and gas pipelines will serve to increase the production capacity of our network,” I. Aliyev said.

In addition, is is expected to continue the developments for the export of Turkmen gas through the Southern Gas Corridor and the Dostlug field. On January 21, 2021, the governments of Azerbaijan and Turkmenistan signed a memorandum of understanding on the joint exploration and development of the field. According to the document, the shares of Azerbaijan and Turkmenistan in the development of the filed will be 30% and 70%, respectively. "This new cooperation with Turkmenistan will open up more opportunities for connecting Central Asian gas to the Southern Gas Corridor," SOCAR said.

Russian oil company LUKoil has also expressed its readiness for partnership in this project. Thus, it can be assumed that there will be no objections from the Russian side to the future export of Turkmen hydrocarbons through Azerbaijan to Europe.

“We welcome LUKoil's intention to take part in the development of Dostlug and are ready to consider specific investment proposals,” Turkmen President Gurbanguly Berdimuhamedov said at a meeting with the head of the Russian company Vagit Alekperov on 18 February.

Dostlug is located east of the Azeri-Chirag-Guneshli fields and can be connected to the existing pipeline infrastructure, which is currently used to supply oil and gas from ACG. This can save Turkmenistan from unnecessary costs and create good opportunities for the country to diversify routes for the export of hydrocarbons.

Meanwhile, Ankara recently announced its readiness to help Ashgabat in organizing such exports. “We, as Turkey, are ready to do everything to ensure the supply of Turkmen gas to Turkey and its transit through Turkish territory to European markets. This issue was discussed on February 23 during a trilateral meeting with the foreign ministers of Azerbaijan and Turkmenistan,” Turkish Foreign Minister Mevlut Cavusoglu said after the meeting.

On the same day, the foreign ministers of Azerbaijan, Turkey and Turkmenistan signed a declaration expressing support for projects aimed at delivering natural gas and energy resources of Turkmenistan to Turkey and the rest of Europe via Azerbaijan.

Participants of the SGC project also expect the transportation of gas from the Eastern Mediterranean through this corridor. "The supply of Israeli gas from the Eastern Mediterranean through TANAP to Europe is the most economically viable option, and we support it," SOCAR Vice President E. Nasirov said.

By the way, SOCAR has already assessed the potential of the TANAP gas pipeline to transport hydrogen mixture to Europe. “We have completed our research and analysis of the transport of hydrogen to Europe through TANAP. A mixture containing up to 20% hydrogen can pass through TANAP in the future, and the pipeline is already technically ready to transport hydrogen without any additional investment,” Mr. Nasirov believes.

The completion of works on the Southern Gas Corridor does not the end of the history of the export of Azerbaijani gas to Europe. This is only the first chapter, with all the fun in the following chapters of history.