FROM WORDS TO CONTRACTS

The deficit of gas, diversification of European energy supply sources, market demands, energy efficiency and transition to green energy are issues that have long been at the heart of negotiations at various levels and formats. A productive dialogue on these issues has recently taken place in Baku at the 9th meeting of the Southern Gas Corridor (SGC) Advisory Council and the 1st meeting of the Green Energy Advisory Council.

Obviously, Europe has been increasingly showing interest in Azerbaijan in terms of long-term energy supplies, with some European countries expecting to receive Azerbaijani gas as soon as possible. To make sure that Baku does not have second thoughts, they have already began signing contracts, with Romania and Hungary being the most successful among the European countries.

"A secret weapon"

Hungary is one of the few EU countries that remains dependent on Russian oil and gas supplies. Perhaps it’s the only country to consistently oppose Brussels' energy sanctions against Moscow. Hungarian authorities have even agreed to pay for Russian gas in roubles, for they believe the potential rejection of it would lead to the destruction of the national economy.

The position of the Hungarian leadership is quite understandable, as the Russian supplies account for about 85% of the national gas imports (over 12 million cubic metres daily) via the Turkish Stream pipeline. In the future—until 2050—Hungary plans to suspend imports of Russian gas thanks to large-scale electrification. According to government estimates, by 2030 the share of natural gas in the total energy consumption of Hungary will decrease from 36% to 25%, i.e., by 2.4 billion cubic meters (bcm).

For now, the diversification of supplies is one of the challenges for the incumbent Hungarian government. According to the authorities, the most realistic scenario seems to be the import of the Azerbaijani gas through Turkey.

Natural gas was the key topic of discussions during the official visit of Azerbaijani President Ilham Aliyev to Budapest. During the meeting with his Hungarian counterpart Katalin Novak, President Aliyev expressed the hope that energy cooperation between the two countries could become more intensive in the future.

Novak noted that the economic and energy crises caused by the Russian-Ukrainian war has increased the value of strategic partners such as Azerbaijan, "with which Hungary has excellent bilateral relations".

"To diversify our energy resources, we need good friends and partners, because we are currently dependent on Russian oil and gas," Novak said.

Hungarian Prime Minister Viktor Orban also pointed to the importance of diversifying the sources and routes of energy supplies to Europe, which in his view is the only promising answer to the current situation.

"Azerbaijan has always been our friend. Today it is the strategic partner for all of Europe," Orban said in a joint press statement with President Ilham Aliyev.

By the way, doubling the supply of Azerbaijani gas to Europe by 2027 and organising the supply of green energy from Azerbaijan to the EU via the Black Sea bed puts Hungary in a very advantageous position. Thus, the country will be able to meet its own demands and enjoy all the privileges of a transit country, as all these energy flows will go through Hungary.

A logical outcome of the Azerbaijani-Hungarian talks was the signing by Ilham Aliyev and Orban of a joint declaration on the Extended Strategic Partnership between Azerbaijan and Hungary and six other documents, including on cooperation on natural gas, plant protection, migration, peaceful space activities, establishing friendly relations between the cities of Shusha and Veszprém, and cooperation between the foreign ministries of the two countries.

President Aliyev regards the memorandum on cooperation in the gas industry as an important step that will launch the mechanism of natural gas supplies.

"Today energy security is an issue of global significance. I believe it tops the global agenda. Azerbaijan's rich oil and gas resources allow us to be a reliable natural gas partner for Europe for at least a hundred years to come. The leadership of the European Commission calls Azerbaijan exactly that: a reliable partner," President Aliyev said.

Hungarian authorities have repeatedly stated their intention to buy gas from Azerbaijan, even mentioning a figure of up to 2bcm per year. The country expects to start the purchase of the Azerbaijani gas soon, but the volume of the purchase is a subject for future negotiations.

Following President Aliyev's visit to Budapest, it was reported that Hungary, Romania, Bulgaria and Slovakia had asked the European Commission to allocate funds for developing infrastructure, building new and increasing the capacity of existing interconnectors to deliver Azerbaijani gas to Europe.

The more the better

While Hungary is going through the early stage of gas purchases from Azerbaijan, Romania can already please its consumers with natural gas from a new source thanks to the SOCAR-Romgaz contract signed last December.

The gas is supplied to the Romanian grid from Bulgaria through the Interconnector Greece-Bulgaria, which is a branch of the TAP gas pipeline. This is a short-term contract covering the period from January 1 to April 1, 2023 to ensure the deliveries of up to 300mcm of gas. However, this does not diminish the significance of the agreement, even considering the Transgas estimate of the annual gas consumption in Romania being about 11-12bcm. The main thing is that the country now has an alternative source of energy and a reliable supplier, which has prompted Bucharest to conclude a one-year contract. The new agreement between SOCAR and Romgaz was announced by the Romanian President Klaus Iohannis, who arrived in Baku with a two-day official visit on February 2. The document was signed on February 3 during the 9th ministerial meeting of the Consultative Council on the Southern Gas Corridor. The contract provides for the supply of up to 1bcm of gas to Romania from Azerbaijan.

"On the basis of this [new agreement], additional volumes of gas will come to our country in 2023-2024... Regional cooperation, diversification of sources and routes are based on the underlying principle of projects such as the Southern Gas Corridor. We are confident that Azerbaijan, as a reliable partner, will continue to initiate such projects," President Iohannis said.

At the same time, Bucharest is ready to deepen its strategic partnership with Azerbaijan and implement regional projects of important strategic importance not only in the energy sector, but also in trade, investment, digitalisation and agriculture.

Azerbaijan sees good prospects for expanding cooperation with Romania in the field of transport, in particular between the ports of Baku and Constanta, as well as for increasing the volume of mutual trade. In addition, there are great expectations from the implementation of a joint project to lay a high-voltage power line on the Black Sea bed from Georgia to Romania to supply green energy from Azerbaijan to Europe.

Receiving his Romanian counterpart in Baku, Aliyev underlined the successful operation of SOCAR in Romania, which has so far created a network of over 70 petrol stations and several fuel depots in the country.

"Today our cooperation is reaching a new stage. During my visit to Bucharest [in December 2022], we signed an agreement on the supply of natural gas to Romania. Thus, Azerbaijani gas will reach a new destination in Europe. In parallel, using Romania's capabilities, the gas will be transported to other European countries," the Azerbaijani leader said.

Meanwhile, Chisinau also plans to benefit from the energy cooperation between Baku and Bucharest in order to diversify energy sources.

"We will follow the path of diversification of energy sources for our country. I am glad to see the expansion of strategic partnership between Romania and Azerbaijan in the energy sector. Undoubtedly, this partnership benefits Moldova!" Andrei Spinu, Deputy Prime Minister and Minister of Infrastructure and Regional Development of Moldova, said on social media.

Apparently, Moldova intends to buy gas from Azerbaijan through Romania under a contract signed between SOCAR and Romgaz SA. "Under the agreement, Azerbaijani gas will get into the Trans-Balkan gas pipeline and into Romania via Turkey. This will allow Moldova to buy it as well. We will use this additional source of gas," speaker of the Moldovan parliament Igor Grosu explained.

Prospects for the Southern Gas Corridor

Ilham Aliyev and Klaus Iohannis continued their discussions on energy cooperation the next day, within the framework of the Consultative Council for the Southern Gas Corridor.

The 9th meeting in Baku was a good opportunity to sum up the progress of the past year and operations within the SGC project, to assess the changes in the global gas market, energy challenges, to discuss new cooperation proposals and steps to double the system's throughput capacity.

"The Southern Gas Corridor was opened just over two years ago. Today we are talking about the expansion of TANAP from 16bcm to 32bcm and the expansion of TAP from 10bcm to 20bcm. It really demonstrates the great demand for alternative sources of energy. It demonstrates the great demand for further diversification of energy supplies. We are ready for that," Aliyev said.

European Commissioner for Energy Kadri Simson acknowledged that gas will continue to play an important role in the EU's energy transition over the coming decades. "As long as we build up energy supplies, the Southern Gas Corridor will remain one of the stable and competitive sources of pipeline gas supplied to the EU. It also creates an economic opportunity for other countries in the Caspian region to join forces with Azerbaijan to secure new gas markets," Simson said.

Serbia and Albania confirmed their willingness to import Azerbaijani gas during the meeting. At the same time, Serbia, according to Minister of Mines and Energy Dubravka Djedovic, expects the first deliveries of Azerbaijani gas in early 2024. "It also depends on the speed of commercial negotiations of all the parties involved. We hope to make the negotiations as efficient as possible so that gas from Azerbaijan can reach Serbia as soon as possible," the minister said.

According to Albanian Deputy Energy and Infrastructure Minister Ilir Beitia, Baku and Tirana are working on the possibility of supplying 700mcm of gas annually, with Albania planning to reserve the volumes from the second 10bcm that Azerbaijan will export to Europe [after the TAP gas pipeline expansion].

Incidentally, there is some clarity with potential buyers of additional Azerbaijani gas. The remaining question is when will the actual work on the expansion of the Southern Gas Corridor system begin?

Given the multi-component structure of the SGC system, with three pipelines in different countries operated by different operators, the process will be costly and according to various estimates will take roughly 4-5 years. Perhaps this is why the deadline has been slated for 2027 in order to finish the process on time.

As for the TANAP gas pipeline, the Turkish Minister of Energy and Natural Resources Fatih Dönmez assured that this will happen in the next 3-4 years.

With regard to increasing TAP's capacity to at least 20bcm, the operating company TAP AG has proposed to carry out these works in stages. The company conducted the first phase of mandatory market tests on January 16-22, 2023 to make sure that shippers could request additional long-term capacities. As a result of testing, the company launched the first phase of the capacity expansion of the TAP pipeline to 1.2bcm annually.

Energy of the sea

The development of green energy and the implementation of the 1,195 km submarine electricity cable Black Sea Energy (1,000MW) were the subjects of separate discussions at the ministerial meeting on February 3.

The project will be basically an energy corridor to deliver green power produced in Azerbaijan through Georgia and the Black Sea to Romania, with subsequent transportation to Hungary and the rest of Europe.

For the first time, Baku hosted a meeting of the Green Energy Advisory Council to discuss the project with a small number of participants, including Azerbaijan, Georgia, Hungary and Romania.

Azerbaijani Energy Minister Parviz Shahbazov, Georgian First Deputy Minister of Economy and Sustainable Development Romeo Mikautadze, Hungarian Minister of Foreign Affairs and Trade Peter Szijjarto and Romanian Energy Minister Virgil-Daniel Popescu discussed the concept for further activities in the development and transmission of green energy.

Before the meeting, President Ilham Aliyev outlined the key issues of discussions: the responsibility of each country within the project, potential involvement of private companies, either as a consortium of companies or with each country doing its part of the works in its sovereign territory, and cooperation with international financial institutions.

The parties have not specifically announced the outcome of discussions, except that they agreed to establish a working group within two weeks to coordinate the implementation of issues related to the transfer of green energy from the Caspian Sea to Europe.

By the end of this year, the parties plan to complete a feasibility study for the project. For this purpose Georgia decided to request $75 million from the World Bank. The funds will be used to conduct detailed geophysical and geotechnical studies of the Black Sea seabed, to reinforce the overland power line on the territory of Georgia, as well as for project consultants. In general, the European Commission has already announced its intention to provide €2.3b for building the cable, which will be the longest in the world. The construction of the cable will take 3-4 years.

The next meeting of the Green Energy Advisory Council will take place next February, which means that there is enough time to assess the feasibility of the project, decide on its parameters (budget, timing), sources of funding and make a plan for further action.

The President of Azerbaijan approved the strategic partnership agreement signed between the governments of Azerbaijan, Georgia, Romania and Hungary for the development and transmission of green energy. In other words, the document is now effective, and Azerbaijan officially gave the green light to start the implementation of the Black Sea Energy project. It is now up to the rest of the stakeholders to move.