PREDICTABLE AND RELIABLE

On July 26, EU ministers reached a political agreement to reduce the EU gas demand in the upcoming winter. The plan is to reduce gas consumption in Europe by 15% before next spring. At the same time, Europe is speeding up the search for alternative sources of gas suppliers to implement the REPower EU plan to phase out energy supplies from Russia "well before 2030".

The EU views the signing of the Baku memorandum on increasing the delivery of Azerbaijani gas to the European market over the next few years to be one of the most important achievements in this direction. The document was signed in Baku on July 18 between the Azerbaijani President Ilham Aliyev and the President of the European Commission Ursula von der Leyen.

To each their own

The situation on the global gas market remains tense. Russian gas monopoly Gazprom has resumed gas deliveries to the EU via the Nord Stream 1 (NSP1) pipeline following the maintenance works, but has not increased the volumes despite Brussels' fears. Moreover, since July 27, the company has reduced the supply from the current 40% of the planned capacity to 20% (to 36 million cubic metres, mcm, daily against the planned 167mcm) claiming maintenance works on another gas turbine. Reaction from Gazprom's European ‘partners’ came immediately: Russia was accused of starting an energy war against the EU, with a call on European countries to prepare for a possible cut-off of Russian gas supplies at any time.

This pushed the spot price of natural gas in Europe to $2,300 per thousand cubic metres for the first time since March.

Certainly, this compels Europe to look for alternative supply routes and each European country is doing this the way it sees fit. The Baltic states and Germany, for example, rely on the liquefied natural gas from the Middle East or the USA, some of which is expected to arrive at floating terminals that are still under construction. Central European countries think of increasing the role of Norwegian gas through the Baltic Pipe pipeline with a throughput capacity of 10 billion cubic metres (bcm), which runs from Norwegian fields in the North Sea through Denmark and the Baltic Sea to Poland and is due to be commissioned in October 2022. Italy buys gas from Algeria and Azerbaijan.

As of July 2022, Azerbaijan has exported 13.5bcm of gas from the Shah Deniz field to Europe since the launch of its gas export system on December 31, 2020. Of these volume, 1.4bcm have been delivered to Greece, 440mcm to Bulgaria and 11.66bcm to Italy.

Overall, the history of energy cooperation between Azerbaijan and the EU goes back more than fifteen years. The document signed in July was the third cooperation agreement after the 2006 Memorandum of Understanding and the Joint Declaration on the Implementation of the Southern Gas Corridor (SGC) project in 2011.

Reliable partner

"Energy security issues are more important today than ever before. Long-term, predictable and very reliable cooperation between Azerbaijan and the European Union is a great achievement. The signed memorandum is our road map for the future. Implementation of our plans will certainly increase trade turnover for the benefit of our nations. I am confident that relations between the EU and Azerbaijan have a great future, and we will be able to solve all the planned issues", President Ilham Aliyev said in his joint press statement with Ursula von der Leyen after the signing of the document.

Mr. Aliyev described energy cooperation between Azerbaijan and the EU as "predictable and reliable".

Mrs. von der Leyen underlined that increased gas from Azerbaijan would compensate for the reduced gas volumes from Russia and contribute to EU’s energy security.

"The EU has decided to bypass Russia to turn to more reliable and trustworthy partners. I am pleased to name Azerbaijan among them. You are indeed an important energy partner for us. You have always been reliable not only in terms of security of supplies, but also in terms of climate neutrality. The Memorandum of Understanding we have just signed further strengthens our energy partnership," Mrs. von der Leyen said.

Disclosing the details of the document, she said that it included three priority areas for the development of energy cooperation with Azerbaijan: increasing gas supplies, developing renewable energy sources and a commitment to reduce methane emissions throughout the gas supply chain.

"With this memorandum, we commit ourselves to expanding the Southern Gas Corridor. This is already a very important supply route for the EU, transporting 8bcm of gas annually. In the next few years, we will increase the route’s capacity to 20bcm. By enhancing energy cooperation Azerbaijan is already increasing gas supplies to the EU from 8.1bcm in 2021 to the expected 12bcm in 2022", EC President said.

Regarding RES, according to Mrs. von der Leyen, Azerbaijan has huge potential in this field. "In particular, I would like to mention wind energy from the sea and green hydrogen... In addition to supplying fuels, Azerbaijan will gradually become an important and reliable partner for the European Union in supplying renewable energy," she said.

Talking about commitments on reducing methane emissions, EC President called on Azerbaijan to join the Global Methane Commitment, which has been supported by 119 countries so far. In her opinion, Azerbaijan has made great progress and "it has something to show and present".

In short, the new deal is beneficial for each side and significantly expands opportunities for cooperation in the energy sector without limiting it solely to energy supplies. In terms of the gas agreements, the EC leadership has provided Baku with firm guarantees that the EU member states will buy Azerbaijani gas and Baku can now confidently negotiate long-term supply contracts directly with buyers. In turn, Azerbaijan has confirmed its readiness to support the EU in the matter of increasing the supply, which will also bring a lot of income to the country. Also, Brussels now can increase the volume of gas imports through an alternative source.

As for renewable energy sources, Brussels believes that by developing green energy, Azerbaijan will be able to reduce its domestic demand for gas and direct the freed volumes to exports. Baku and Brussels share the same interests in this regard. Azerbaijani authorities are also ready to intensify investments in RES, including freeing up additional volumes for gas exports. In particular, through RES projects that have already been launched, Azerbaijan will be able to free 500mcm of gas to export in 2024.

As noted by the Azerbaijani and EC presidents, the potential for renewable energy development in the country is indeed considerable. "We have already conducted a preliminary assessment of our potential. I can say that the potential for solar and wind energy in the liberated territories of Garabagh and Eastern Zangezur is 9,200MW. The wind energy potential in the Caspian Sea is 157GW. In short, we have huge resources. We also have new gas fields which we will use in the coming years. This is how we are going to increase local gas production. By using renewable energy, we will provide more gas for export. This is an excellent situation created by our efforts and supported by the European Union," Mr. Aliyev said.

Lining up for gas

Doubling the supply of gas to Europe by 2027 will require the expansion of the capacity of the Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipelines, which are the integral components of the SGC. This means increasing the capacities of these pipelines from 16bcm to 31-32bcm (TANAP) and from 10bcm to 20bcm (TAP).

In both cases the capacity of both pipelines will be increased by installing additional compressor stations. This will require an investment decision by the shareholders of TANAP and TAP pipelines.

At the same time, there is no particular issue with the sources to be used to fill both pipelines. In addition to the already developed Shah Deniz field and the associated gas from the Azeri-Chirag-Guneshli (ACG) block, there are reserves waiting to be produced, including the second stage of the development at the Umid-Babek field, deep gas reserves at the ACG field, as well as resources from the Absheron field, etc.

Currently, the main buyer of Azerbaijani gas in Europe is Italy, which purchased more than 80% of the total supplies in 2022. The rest is shared by Greece and Bulgaria. There is a big queue for Azerbaijani gas in Europe. This primarily includes the countries of Eastern Europe and Western Balkans: Hungary, Romania, Moldova, Serbia, Albania, Northern Macedonia and Croatia.

Bulgaria, which has recently refused to buy gas from Russia and thus requires additional, guaranteed sources of supply, also wants more gas from Azerbaijan. The outgoing Bulgarian Prime Minister Kirill Petkov visited Baku on July 21 to hold talks with the Azerbaijani leadership on just that issue.

"Azerbaijan is ready to supply Bulgaria with 500mcm to 1bcm of natural gas annually in addition to the already agreed volume of 1bcm," Mr. Petkov said.

According to Mr. Petkov, Bulgaria now has to decide how to deliver these volumes. "We are working on it. The good news is that we have gas, but we have to determine how to deliver this volume," Mr. Petkov noted.

Romania, which consumes 11bcm of gas annually, also relies on Azerbaijan. "We still need to import 2bcm, so we have to find a solution. Azerbaijani gas is one of the possible solutions for us, and we hope to reach an agreement with the government of the republic. If it is possible, we want to import all the gas we need from Azerbaijan. Negotiations are underway and when they are over we will announce the results. But we are on the right track," the Romanian Energy Minister Virgil Popescu said.

He added that Romania could receive Azerbaijani gas through Turkey by means of reversals through the Trans-Balkan gas corridor (Ukraine-Bulgaria-Turkey) or from LNG terminals, as well as through the Greece-Bulgaria Interconnector (IGB).

By the way, the implementation of the new EU-Azerbaijan memorandum will contribute to deepening the relations between the countries of the Caspian and Black seas also in the field of power generation. It is about creating an energy corridor between Azerbaijan, Georgia and the EU through Romania and organising the supply of electricity to the EU.

"We want to build a wind energy bridge between the Caspian Sea and the Black Sea and bring this energy to Europe via Romania. We have a project that we are working on—to build a submarine cable across the Black Sea from Georgia to Romania, then to Hungary and other European countries," the Romanian Energy Minister told Antena 3's Before the Nation show.

Winter is just around the corner. Experts from Rystad Energy point out that with the reduced level of supplies through NSP1, it will be quite difficult for the EU to achieve the target level of gas reserves in underground storage of 80% by November 1. The European Commission has estimated that cutting off Russian gas transportation to the EU could cut GDP by 1.5% if the winter is cold and the region does not take proactive measures to conserve energy. Nevertheless, with the new gas agreements between the EU and Azerbaijan, at least Italy, Bulgaria and Greece will have fewer headaches this winter about how to heat homes and power industry. Next year, Romania and Serbia can join that list too.