PASSION FOR GAS: TO BE CONTINUED

It is expected that this year will be full of events for the global gas market, especially amid the decisions taken at the end of the previous year.

First and foremost, the European Union introduced the gas price ceiling contrary to the establishment of a Russian-Turkish gas hub in Turkey—the idea actively promoted by Russia.

It is also expected that Azerbaijan expands the geography of its gas exports. By the way, Romania has already been receiving the Azerbaijani gas since January 1, 2023. Other Balkan countries, including Serbia, are next in line.

In addition, the number of natural gas producers will also increase, with Turkey planning to be one of them in this new capacity.

Gas ceiling

Apparently inspired by the introduction of a $60 per barrel price cap on Russian oil on December 2, the EU countries after months of discussions following the Christmas holidays have agreed to apply a similar mechanism to natural gas as well.

The agreement was reached at the fifth emergency meeting of the EU Energy Ministerial Council on December 19. Specifically, the meeting participants established a gas price ceiling at all European hubs at €180 per megawatt hour (about $2,000 per 1,000 cu.m.). "We welcome the EU ministerial agreement on a gas price ceiling of €180 per megawatt hour. This agreement includes a price limit for all European hubs," the Polish permanent representation stated.

It is assumed that the ceiling will work as part of the European gas market adjustment mechanism. Basically, it is a price limit, which should trigger the adjustment mechanism. The cap will be imposed when the TTF futures exceed this threshold within three days. It will become effective on February 15, 2023 and will not apply to OTC transactions.

The EU Agency for the Cooperation of Energy Regulators (ACER) will continuously monitor the markets and publish a ‘market adjustment message’ on its website in case the adjustment mechanism applied. By January 23, 2023, the European Securities and Markets Authority (ESMA) together with ACER will publish a preliminary implementation report.

The approved mechanism, as explained in Brussels, is designed "to protect the citizens and the economy from excessively high prices". It is expected to limit "overpricing of gas in the EU that does not reflect the global prices, while ensuring security of energy supply and stability of financial markets”. The European Commission is confident that with the new mechanism, the European community will be better prepared for next winter and a new phase of storage filling, which is expected to be more difficult than in 2022.

Hungarian Foreign Minister Péter Szijjártó does not seem to share the joy of his colleagues at all, calling the gas price ceiling a pointless and harmful measure because the heating season has already started, while the mechanism has been introduced retroactively. Hungary has always been against such restrictions as they could threaten European energy supplies, Szijjártó said. He is afraid that the decision could affect the long-term (15 years) annual contract of 4.5bcm, which Budapest signed with Gazprom in September 2021.

According to experts, the price cap mechanism mainly targets Gazprom because of its  contracts mainly linked to forward quotations for a month in advance and beyond (which is what the ceiling applies to).

However, it is argued that to understand the impact of the EU price ceiling on Russia, it is necessary to know for certain what contracts Gazprom has signed with countries ‘behind the scenes’. The price quoted in those contracts may well be linked to global oil prices, hence being completely independent of the EU's TTF spot market price cap. Incidentally, a similar logic applies to Azerbaijani gas, which is mainly supplied to Europe on the basis of long-term contracts, although partly spot supplies are also available.

As expected, Moscow's reaction to the new EU decision was negative. "Despite the fact that the limits are set rather high, it is a matter of principle. It is interference into market pricing processes. And if today we accept this generous limit, tomorrow we will have to accept a limit infringing upon our interests. That is why it is out of the question. We will never accept such distortion and destruction of the market pricing process," Russian presidential spokesman Dmitry Peskov voiced the official position of the Kremlin.

Russian Deputy Prime Minister Aleksandr Novak said that the decision was "populist in nature. European partners still do not fully understand how this mechanism will work". He believes the introduction of a price cap on the European market could lead to gas suppliers switching to other platforms where there are no such restrictions.

"The Europeans are doing this as if against Russia and price growth, blaming Russia for price growth. This will in fact primarily affect European consumers and European suppliers, because the main suppliers to Europe today are Norway, Algeria and American LNG. And these suppliers will suffer in the first place if this somehow concerns them," Novak added.

Overall, it is impossible to assess the effectiveness of the new mechanism and its impact on markets, as gas prices in Europe have not reached critical levels yet. They were above €275 ($3,025 per thousand cubic metres at current exchange rates) at the end of August 2022, when operators rushed to reach the 80 per cent occupancy, and over €180 ($1,980 per thousand cubic metres) in September 2022.

Currently, the gas price on the European market is around $800 per thousand cubic metres. However, with the deterioration of weather conditions and the resumption of industrial activity after the Christmas and New Year holidays, a further price rise is quite possible.

New gas flows

In parallel to the introduction of the adjustment mechanism to curb gas prices, the EU has also taken steps to diversify its supplies with new contracts for LNG and pipeline gas.

For example, the EU became the world's largest LNG buyer last year (24%) leaving China (15%), Japan (17%) and South Korea (11%) well behind. As compared to 2021, in 2022 Europe increased import volumes by as much as 58% - up to 101 million tons, which is equivalent to 137bcm of gas. These volumes are close to those supplied to Europe from Russia in 2021 (about 140bcm).

As for pipeline gas, Romania was the first recipient of non-Russian gas this year. Since January 1, SOCAR began the transportation of gas to the country under a contract with Romgaz signed in December last year. The contract provides for the purchase of 300mcm of Azerbaijani gas during the first quarter of 2023.

Meanwhile, on December 31, 2022, Azerbaijan together with its partners in the Southern Gas Corridor (SGC) celebrated the second anniversary of the start of commercial gas supplies to Europe. According to a Twitter post by the Azerbaijani Energy Minister Parviz Shahbazov, in just two years, the consumers in Italy, Greece and Bulgaria have received more than 19.4bcm of Azerbaijani gas through the Trans-Adriatic Pipeline (TAP).

The Russian-Ukrainian war has significantly increased European interest in the natural gas from Azerbaijan.

"Since the start of the Russian-Ukrainian war, we have received requests from more than ten countries. These include the countries that already buy gas from us today and want additional supplies, and the countries that have never bought gas from us, but are willing to join this program. Certainly, this means the growing role of Azerbaijan in this area. And of course we need to take advantage of this", President Ilham Aliyev said in his interview with local television channels.

"Our economic and political importance is growing. If we look at the pipelines feeding Europe, we can see that there are not many of them. Existing suppliers are simply increasing their gas production because there is great demand in Europe. Azerbaijan is the only one among the new suppliers," President Aliyev said.

To increase exports, which is one of the main priorities of the Azerbaijani government, Baku expects to produce at least 10bcm of additional gas volumes in the next 5-6 years. Additional production is expected both from the Shah Deniz field and from a number of other fields.

"This year, if everything goes according to our plan, we should start the production from the Absheron field. Next year, if there are no unexpected circumstances, we expect the gas production from Azeri-Chirag-Guneshli field, the so-called deep-water gas," Aliyev said.

He also revealed Azerbaijan's plans for gas exports in the current year. The total volume of supplies will be about 24bcm, of which almost 12bcm will be supplied to Europe.

President Aliyev recalled that with the opening of the Interconnector Greece-Bulgaria (IGB), Azerbaijani gas started to flow to the Bulgarian market and to Romania starting from this year.

"We are working on the interconnector, which is going to connect the common grid with Serbia. We have already started the negotiations with Belgrade. We have also started active negotiations on the gasification of Albania, as this country is only a transit country. There is no gas network in Albania, and it is quite a costly affair. We offered our services in this case," the President said and added that the issue of approving gasification locations is now being discussed.

In February this year Baku will again be open for discussions on its contribution to European gas supplies and the expansion of the Southern Gas Corridor. Serbian Minister of Mines and Energy Dubravka Djedovic has already confirmed her intention to join the meeting of the Advisory Council for the South Gas Corridor project.

In addition, Bulgarian President Rumen Radev has announced that a project for additional supplies of Azerbaijani natural gas to Europe will also be presented at the same meeting slated for February 3 in Baku.

"This is a project that will make it possible to start the supplies of additional gas volumes from Azerbaijan to Europe with minimal funds and immediately. Romania, Hungary, Slovakia and Austria have joined this project at Bulgaria's initiative," President Radev noted.

Bulgaria, which stopped receiving the Russian gas in spring 2022, has also ensured the diversification of its sources of natural gas. In addition to commissioning of the IGB pipeline, which provides the Azerbaijani gas in full volume (1bcm annually), in the first days of the new year Bulgaria also signed a 13-year agreement on the import of liquefied natural gas through the terminals in Turkey. This means about 1.5bcm of natural gas annually, which will go through the old Trans-Balkan pipeline used to transport the Russian gas before the Turkish Stream.

New gas hub?

Turkey has a well-developed LNG import system, with four receiving terminals. By signing the above agreement, Ankara expects to increase its role in ensuring the energy security of Bulgaria and Europe. In addition, Turkey attaches great importance to this document in the context of the creation of a Russian-Turkish gas hub.

In parallel, Ankara is trying to transform Turkey into a strategic energy hub at the crossroads of Europe and Asia.

In July 2022, Ankara discovered the Cukurova oil field in the south of the country. In mid-December, the Turkish authorities reported on the discovery of another field with 150 million barrels of oil worth $12bn.

In late December, the Turkish president announced the discovery of a new 58bcm gas field in the Black Sea. According to the Turkish president, the discovery increased Turkey's gas reserves in the Black Sea to 710bcm. Now the country expects to reach the maximum level of gas production in the Black Sea within four years, which will reduce imports of gas by 30%.

"We are determined to turn Turkey into an energy hub for the Caspian Sea, the Mediterranean and the Middle East. Our ultimate goal is to proclaim Turkey's energy independence by completely abandoning foreign oil and natural gas. We will unite East and West not only with our bridges in Istanbul and the Dardanelles, but also with energy bridges," Recep Tayyip Erdogan said at a regular meeting with the members of the government.

That is why Ankara has welcomed Russia's initiative to create a joint Russian-Turkish gas hub. Turkey has already began the implementation of the project, according to the Turkish Minister of Energy and Natural Resources F. Donmez. The Turkish authorities expect that over time the European countries will be increasingly interested in the project.

"We think there will be many customers from Europe on this platform," Donmez believes. He added that the platform will have market-based mechanisms for selling natural gas, and Ankara does not intend to impose any restrictions on the gas hub being established in Istanbul.

According to the minister, there are plans to transit not only the Russian natural gas, but also energy inflows from other countries. Currently, Turkey receives gas from 12 countries, including Azerbaijan.

The reality, however, is not as clear as the good prospects of the hub promised by both the Russian and Turkish officials. The process of creating the hub will take more than a year and will require a lot of investment. But currently there are no countries or companies publicly expressing their intention to become a participant/investor in the project. Turkish interest in such a hub to strengthen the country’s transit position is quite understandable. But it is hardly a coincidence that Ankara is negotiating with Moscow on a serious (over 25%) discount on the Russian gas imports and a deferral of payment—the process, which is taking place in parallel (!) with the development of the gas hub.

In February, Turkey will initiate an international conference with European gas consumers and suppliers in Istanbul, where it plans to discuss the creation of the hub. Perhaps the outcome of this event will give some clarity about the future of the project. However, given the current geopolitical situation, most experts are very sceptical about any serious interest from the third parties.