CONTRACTUAL LIMITS

Azerbaijan is ready to expand the geography of natural gas exports, but this requires new commercial agreements. This was also confirmed by the President of Azerbaijan Ilham Aliyev: “Exploration of new deposits is underway. Large energy companies show a growing interest in the oil and gas sector of Azerbaijan. We can increase the volume and production, but we need to start negotiations now and sign new contracts. After that, we will invest in even greater production capacities,” Mr. Aliyev said in his interview with the Spanish news agency EFE.

What can we expect in the near future? What is the future of gas agreements initiated by Azerbaijan? Our guest is a board member of TAP AG, Murad HEYDAROV.

"Recently, President Ilham Aliyev’s made a statement at the meeting of the NATO North Atlantic Council in Brussels confirming that the four member states of the alliance import gas from Azerbaijan and it was possible to extend this list further. Which countries can import gas from Azerbaijan and the Caspian gas in general in the near future using our infrastructure?"

"Each of the member states of the TAP consortium, which transports Azerbaijani natural gas to Europe via the Trans-Adriatic gas pipeline, is a member of NATO too. This includes Turkey, Italy, Bulgaria, Greece, and Albania.

“Majority of participants in the Ionian-Adriatic Pipeline (IAP) project are also NATO members. Although Montenegro and Albania are not the EU members, they are member states of NATO. We can add Croatia and North Macedonia to this list too. If the potential expansion of the Southern Gas Corridor (SGC) provides access to the Western Balkans, then many of countries in this region are also the NATO members. Mr. President underlined that four countries of NATO, including Turkey, import gas from Azerbaijan and it was possible to expand this geography in the future.

“However, as Mr. President pointed out, we will be able to determine how reliable the existing transport infrastructure is, how well it has been tested for pumping gas in this direction, whether the system needs to be updated,  and concrete buyers of gas during commercial negotiations.”

"Is there any progress with the construction of the Ionian-Adriatic pipeline, which can ensure the supply of Azerbaijani gas to the Western Balkans?"

"In the past two years, there have been no significant changes in the project due to severe lockdown restrictions in Europe, as well as due to a certain instability in the implementation of project tasks.

“However, we have received encouraging signals recently, including the news about broad discussions during the meeting of the Azerbaijani-Croatian intergovernmental commission in October 2021. The outcome of this discussions show that the project has been revived to a certain degree.

“We are optimistic that there will be changes in the IAP in the next 2-3 months. We will then be able to create a project company and step into the next stage of the project.

“Azerbaijan does not participate in the project company, as this is not permitted by Croatian legislation, but SOCAR is included in it as an observer and technical consultant.

“As for the cost of the project, it has not been updated and remains at the same level: €600 million.”

"Recently, Azerbaijan, Turkmenistan, and Iran signed a gas swap agreement. Since there is no decision on the construction of the Trans-Caspian pipeline, what is the likelihood that the swap agreement initiates the supply of Turkmen gas via TAP to Europe?"

"Swap operations also matter when a country does not have territorial, geographic access to the market it is interested in. Thus, swap operations are carried out with partners who have technical access thanks to relevant infrastructure. Turkmenistan is in no way technically connected with Europe, while Azerbaijan is through the SGC. We always say that our infrastructure is open to third-party access. But again this is negotiable.

“Meanwhile, the combination of swap operations and the SGC capacity can theoretically provide access to Europe for the Turkmen gas.”

"What about the Russian gas? To what extent it is possible to transport it via TAP?"

"As I said earlier, any expansion of TAP is regulated by the relevant EU legislation, which does not discriminate against market participants. Accordingly, if any company willing to sell the Russian gas to Europe joins this expansion process in accordance with the EU regulations, theoretically it is possible."

"Azerbaijan started the supply of natural gas to Europe almost a year ago. What are your expectations by the end of the year?"

"We expect that up to 8 billion cubic meters of Azerbaijani gas is delivered to Europe by the end of the year, although even 7.5 billion cubic meters will be a very good result. Transportation of gas volumes via the Trans-Adriatic pipeline is carried out on a contract basis. Each contract provides for certain volumes. So everything is going according to plan.

“In addition, additional volumes of Azerbaijani gas are negotiated on Italian trading platforms.”

"Bulgaria has also requested additional gas volumes under the contract, although the construction of the Greece-Bulgaria interconnector (IGB) has not yet been completed. Is it possible to supply the contracted volumes through an alternative route?"

"Currently, deliveries continue along an alternative route in accordance with the nominations made by the buyer. All talks about additional supplies mainly appear in media; there is a lot of speculation on this issue. But we should assume that there are specific commercial obligations and a commercial agreement. Azerbaijan has not violated its commercial obligations a jot. Nor have we made any changes to them. It is important that Bulgaria and Greece complete the construction of the infrastructure facilities as soon as possible, which will make it possible to receive gas in full, that is, 1 billion cubic meters annually."

"Dates of commissioning of the interconnector have been postponed several times. What is the likelihood of IGB operation by mid-2022?"

"We hope that with the approval of the new Bulgarian government it will be possible to complete the project in due time. Also, there is a certain time interval between the completion of the pipeline and the start of commercial operations. These are two different events. As far as the completion of the IGB construction is concerned, mid-2022 is a more realistic date. As to the start of commercial operations, we need to study further. We are in constant contact with the relevant Bulgarian companies, the IGB consortium and Bulgargaz."

"Albania also claims to receive Azerbaijani gas, but it lacks an appropriate gas transportation system. SOCAR announced its readiness to help in the gasification of Albania and the development of the necessary infrastructure. Any progress report in this direction?"

"That’s right. Adequate infrastructure must be built in Albania for the delivery and distribution of gas. Albania has made certain progress and adopted relevant legislation on this matter recently. There is a new company that will deal with the purchase and sale of gas. There is also a technical operator that will own and operate the gas transportation infrastructure.

“We continue consultations on the most optimal form of obtaining gas by Albania. There are several options, including the supply of LNG, which can be carried out by SOCAR Trading.

“We are currently working on this topic together with AlGas and a few other interested companies. SOCAR Balkans is exploring the prospects for its commercial presence in Albania.”

"Last week, the EU announced planned changes and amendments to the current legislation on mineral resources. How can this prevent the gas crisis taking place on the European market?"

"The EU directive, which introduces major changes to the current legislation, including the gas directive 209-73, will bring the regulatory framework on the operation of the European gas market in line with new realities. There are two new realities: promotion of the EU climate agenda and the challenges associated with the current gas crisis. In fact, the base directive has been updated. It is assumed that gas as a transitional natural resource continues to exist and no one prohibits it. At the same time, a whole system of incentives is being created for the transition to low-hydrocarbon products, including hydrogen and biomethane.

“The document also indicates the validity date of long-term gas contracts until 2050.

“Starting from 2024, operators will have to transport up to 5% of the mixture with hydrogen. Also, another provision is dealing with the response of the EU during gas shortages and the corresponding gas crisis. In particular, the updated directive reflects the proposal of a number of European countries to collectively purchase a product to create a reserve that can be used during gas crises. This proposal was especially actively promoted by Spain. This, as well as a number of purely technical innovations, will make it possible to bring the EU regulations for the gas sector in line with the climatic agenda, EU commitments to achieve hydrocarbon neutrality, and the development of a response mechanism in the event of gas crises.”

"If TAP expands amid the introduction of this directive, will we be able to attract funding?"

"In 2021, none of the Southern Gas Corridor projects was qualified as a project of pan-European interest. Although in previous years, these projects were separately presented in various lists. Currently, neither TAP, nor TANAP (Trans-Anatolian Gas Pipeline), nor the South Caucasus Gas Pipeline are on the list.

“By the way, new procedures have recently been adopted. Thus, the projects related only to the extraction of minerals will not be supported by the European Union. Accordingly, all initiators or organisers of gas projects should probably take this moment into account.

“Either way, new legislation must be adopted at the national level by all member states of the European Union. Therefore, this document will be studied, analysed and there will be some explanations and interpretations. But this is already a step forward. Because until now there has been uncertainty about gas projects: some said that natural gas should be banned, while others said that it should be left as is. Some suggested something in between. And now there is a certainty - gas remains, but there are benefits for low-hydrocarbon products. New mechanisms will be created to protect Europe from any gas shortage and to prevent the occurrence of similar situations in the future.

“But most importantly, there is some stability regarding the future of gas on the European energy market.”