ENERGY SPECULATIONS

There are ongoing debates on various international platforms about the global economic consequences of the war in Ukraine and Western sanctions on Russia.

In fact, the war has effectively put an end to Russia's Nord Stream 2 (NSP2) gas pipeline project. EU's refusal to import Russian oil and gas is now on the agenda. Despite the urging statements from the leading EU states to do this as soon as possible, Europe is not monolithic in decision making. Therefore, it will be difficult to decide on a complete and irrevocable rejection of Russian energy sources.

Russia believes that the NSP2 project will be in demand even in the distant future, meaning that it will be impossible to replace the Russian supplies to the European market. The Russian government underlines that if Brussels wants to return to NSP2, gas supplies to Europe through this pipeline will be impossible before 2028. However, if the Europeans manage to suspend their dependence on the Russian gas, the future of NSP2 in Europe do not look promising.

The Davos discussions

Meanwhile, the EU continues discussions on introducing a gradual embargo on Russian oil supplies as well. The issue is still in limbo because of Hungary's position. However, President of the European Council Charles Michel is confident that the member states will be able to achieve a consensus on the oil embargo against Russia before the summit of the EU leaders slated for May 30-31, 2022. "I still believe that we will be able to resolve this issue before the EU Council. It will require dialogue, a lot of political effort, and we are working very hard to stay united and to make decisions," Michel said at a press conference on May 25.

President of the European Commission Ursula von der Leyen said in her interview with MSNBC that Europe should think strategically about introducing an embargo on Russian oil supplies and maintain a balance to avoid harming the European economy.

According to Leyen, in the long term Europe will completely abandon Russian fossil fuels "and will never go back to them again".

Discussions continued at the annual World Economic Forum (WEF) in Davos, Switzerland, a common discussion platform for the global political and economic elites. Ukraine represented by President Vladimir Zelensky, who opened the forum, again urged the participants to tighten sanctions against Russia and impose an embargo on the export of Russian hydrocarbons.

Fatih Birol, Executive Director of the International Energy Agency (IEA), said that the international community's desire to diversify energy resources because of the Russia-Ukraine war is understandable, but we should not forget the significance of clean energy and energy efficiency worldwide.

"I understand that our first reaction to this situation is to secure additional supplies of oil and natural gas. But this reaction should not be based on fossil fuel infrastructure in the coming years," Birol said.

At the same time, the IEA head is worried that the situation in Ukraine can be used as a pretext for a new wave of large-scale investments in fossil fuels: "If this comes true, we can forget about achieving our climate goals in the future forever.”

As for the possibility of imposing an embargo on Russian gas supplies, Birol noted that it would be extremely difficult to cut off all these supplies in a single day. However, there are plans to significantly reduce these imports and replace them with liquefied gas (LNG).

"If Russian gas supplies are reduced and replaced annually by LNG, renewables and, in some countries, nuclear power and energy efficiency, Europe will eventually reduce its imports of Russian gas, because Russia has completely lost credibility as a reliable energy partner," Birol said.

He also recommended the Europeans to lower the temperature of heaters in their homes to reduce dependence on Russian energy resources, because Europe expected a rather difficult winter, including in Germany.

"One of our analyses shows that if we adjust the temperature of heaters by two degrees, this would be enough to save 20 billion cubic metres, which is equivalent to the gas coming from the Nord Stream 1," Birol claims.

In fact, The actual capacity of the Russian-German Nord Stream 1 pipeline is almost three times larger. According to official data, Russia exported more than 59 billion cubic metres of gas to Germany via this route in 2020-2021. It is unlikely that European consumers will want to break their contractual obligations by following Birol's recommendation, although a reduction of even 1/3 of supplies can be very painful for Russia.

Meanwhile, the Russian government believes that Europe will not give up on Russian gas so easily, as its imports cover 40% of Europe's total consumption.

As to the future of Nord Stream 2, Russian Deputy Prime Minister Alexander Novak expressed his confidence that the pipeline would be in demand in the European market. "For political reasons, the project has been frozen for now. But I believe that in the future it will be in demand. Technologically, it is quite an advanced and competitive project compared to other projects. I believe that it will be in demand," Novak said.

He noted that investors were reluctant to invest in oil and gas projects in the US, as the new White House administration supports the development of green energy.

Investment in production

Currently, there are heated discussions on the investment in oil and gas projects on a global scale. The energy transition policies observed in a number of countries, where state support for renewables is closely associated with the refusal of hydrocarbons from the energy and even transport sectors, discourage investors from investing in the sector.

The issue was also addressed by Azerbaijan’s Economy Minister Mikayil Jabbarov, who pointed to the country's significant hydrocarbon reserves in Davos. "They ask Azerbaijan to increase energy supplies. We are happy to do this. However, investments in the sector have been insufficient over the past few years due to the changed policies of financial institutions towards fossil fuels, including natural gas," said Jabbarov.

He added that Azerbaijan had additional energy resources to increase gas supplies to Europe. "Do we have volumes of gas that are not supplied? Yes, we do," he said.

There are reserves indeed, given that a number of discovered fields are not scheduled for commercial development before 2025-2026. Plus there are ongoing works to build the resource base through exploration drilling in the Azerbaijani sector of the Caspian Sea.

Azerbaijan currently exports its natural gas exclusively under existing contracts, which specify specific volumes. Given the gas crisis in Europe, it is not surprising that Azerbaijan has already received appeals from a number of European countries to increase gas supplies. However, it is not about desires only. After all, the practical realisation of this issue will require new contracts and additional investments to increase production by drilling new wells, optimising the gas transportation infrastructure to eliminate gas losses and increasing the capacity of export pipelines.

Europe's desire to reduce its dependence on Russian gas as quickly as possible in favour of alternative sources and Europe's new approach to natural gas, which has temporarily been classified as a sustainable activity for investors, suggest that Azerbaijan should have no problems attracting investors to gas projects. After all, Azerbaijan has far-reaching plans and is ready to use the gas to produce hydrogen and the existing export route to deliver the hydrogen mixture to Europe.

Productive energy dialogue

"The war in Ukraine was a warning to Europe to diversify its energy resources. EU wants to diversify its energy resources to end fuel dependence on Russia," Lithuanian President Gitanas Nauseda said in Baku on May 18 following his talks with his Azerbaijani counterpart Ilham Aliyev.

Incidentally, Lithuania is the first EU country to completely abandon Russian oil, gas and electricity and expects that "one day" Azerbaijani gas will start flowing into the country.

According to President Nauseda, this will be possible due to the new gas pipeline linking Lithuania and the Baltic states with the European gas network, the throughput capacity of the Lithuanian LNG terminal, gas pipelines between Azerbaijan and the EU, and the goals of the two sides to deepen cooperation.

In general, in addition to switching to new gas suppliers and increasing purchases of LNG, EU also plans to double the share of renewables in its energy mix to 45%, reduce energy consumption by 2% now and by as much as 13% by 2030.

To accelerate the transition to green energy, the European Commission suggests making solar panels mandatory for all office and public buildings starting from 2025, and for new residential buildings from 2029. Gas-fired boilers would be replaced by heat pumps, while onshore and offshore windmills will have to be approved under an accelerated programme.

Given the intention to diversify energy supplies, we can expect that the energy cooperation between the EU and Azerbaijan will expand beyond fossil fuel supplies.

To prove this, President Ilham Aliyev in his address at the Azerbaijan-Lithuania Business Forum said that this year Azerbaijan launched an energy dialogue with the EU covering many areas of the energy sector, including oil, gas, electricity, hydrogen and renewable energy sources.

"There is a full understanding between us. We are working with great encouragement, because this provides benefits to all the parties involved. Azerbaijan needs reliable and long-term markets, markets with fair regulation and legislation. This is the European market. European consumers need additional energy resources. That’s why EU considers Azerbaijan a contributing party," President Aliyev said.

Azerbaijan also intends to adjust its plans for the development of renewable energy sources and to increase the share of this sector in the country's total energy mix to at least 30%, and preferably to 40% by 2030. "In this case, energy generated from renewable sources could be more attractive to European consumers. We are working on it," Aliyev said.

In short, expansion of relations between the EU and Azerbaijan is in the interests of both sides. They have much to offer each other, and they are obliged to realise these opportunities.