ECONOMIC PAUSE

The warm winter and gas saving measures proved to bring the expected effect - spot prices for natural gas in Europe in late February dropped below $450 per 1,000 cubic meters for the first time since August 2021, and the level of reserves in underground gas storage facilities is the highest in the history of observations amid declining gas supplies from Russia this winter. Since the start of the Russian-Ukrainian war, Gazprom has cut gas supplies to the EU by a total of 80% on various pretexts. Rather moderate weather, lower demand and successful efforts to increase supplies from alternative sources have prevented shortages.

Azerbaijan also contributed to the supply of gas to Europe this winter. European leaders always praise the role of Baku in this matter.

"The EU has adapted to the situation by turning to reliable partners. We can now see the first success of this endeavour - Russian oil and gas revenues to Europe have dropped by two thirds, EU gas prices are now lower than before the war, and Europe is focusing on green energy and energy autonomy," President of the European Commission, Ursula von der Leyen, said.

"Azerbaijan currently plays a very important role in the diversification of the EU's energy supply and contributes to the EU's energy security," Latvian President Egils Levits said during his visit to Baku. The Latvian leader underlined that the EU is committed to closer cooperation with Baku in the field of renewable energy.

Control purchase

The Bruegel research company estimates that European countries have so far spent a total of €768b to overcome the energy crisis. Of this amount, €657b have been spent by the EU, €103bn by the UK and €8bn by Norway. Germany has allocated the largest share of this amount for different measures to support its population and businesses (€264.6b). It is followed by the UK (€103.3b), Italy (€92.7b) and France (€92.1b).

At the same time, analysts and industry representatives warn that the energy crisis can last for years if the region fails to reduce demand and diversify gas supplies. Warm autumn and rapid filling of Europe's gas storage facilities this winter bolstered the EU's energy security. Although European storage capacities are still around 60% full thanks to a mild winter, there are concerns about whether there will be enough reserves next summer and winter.

The current level of gas reserves stands at 57.54%, 21 percentage points above the average for the same dates over the past five years, according to the Gas Infrastructure Europe (GIE).

However, Sida Bambawale of energy trader Vitol warns that the current level of gas reserves may create a false sense of security. According to the expert, the gas crisis is not over yet and this regime could last another 2-3 years.

There is a very clear understanding in the EU that there will be no return to Russian gas, which means that preparations for the next winter season should start today.

"We must now focus on preparing for next winter," Ursula von der Leyen said.

In addition to gas reserves in underground facilities, another pressing issue is the cost of energy (electricity and gas) to average European consumers, despite the continuing decline in European spot prices for gas. At the height of the energy crisis last summer, Europeans' electricity and light bills soared by 300% after Russia cut energy supplies.

Delivering a speech in the Canadian parliament, Ursula von der Leyen added that the EU has managed to reduce energy consumption by 20% as part of measures to tackle the energy crisis.

The EU has now decided to take unprecedented steps to tackle this problem and replenish gas reserves for the next heating season. In April, for the first time ever, the EU plans to enter the gas market as a buyers' cartel issuing a call for gas purchase tenders. According to the European Commission, this should help to combat inflation.

European Commission Vice President Maroš Šefčovič said that according to preliminary estimates, the total demand for gas in the 27 EU countries and three neighbouring countries for the next three years is 24 billion cubic metres. The EU expects the first contracts with global suppliers, including from the US to the Middle East and Africa, to be signed tentatively in June, following the announcement of the tender in April.

According to Šefčovič, he had noticed interest in joint purchases from industrial gas consumers in sectors such as steel, aluminium, ceramics, glass and automotive.

On the supplier side, he says more than 50 companies from around the world are interested in cooperating with Europe through a common energy platform.

After the first tender, the EU will organise more joint purchases on a regular basis to ensure that the block has enough gas.

According to the EC, the main advantage of the platform is that the global market will be accessible to small and medium-sized businesses, ensuring that they avoid overpaying intermediaries.

"We are creating a new system that will increase competition, attract new suppliers and lower energy prices. International suppliers have demonstrated great interest since we started the event," Šefčovič said.

The first tender will be symbolic. But it is already clear that if it succeeds, the symbolic alliance can develop into something bigger and can seriously change the European market.

A blow to the budget

In terms of European efforts to reject Russian gas and the effectiveness of sanctions in terms of Russian budget losses, the EU has done well, according to a report by the International Energy Agency.

The IEA estimates that Russia's oil and gas revenues in January 2023 fell by almost 40% compared to the previous year – to $18.5b.

IEA Executive Director Fatih Birol believes that Western sanctions against Russian energy have been effective in terms of stabilising oil markets and reducing Russia's oil and gas revenues. "We expect the decline in Russian oil and gas revenues to be sharper in the coming months. And even more in the medium term, due to lack of access to technology and investment," Birol said.

Meanwhile, Russian analysts believe that Russia can once again take the lead in the European energy market: the construction of a gas hub in Türkiye will contribute to this goal. However, due to the current situation in Türkiye, which recently suffered a terrible natural disaster, the relevance of this project is highly questionable. Either way, we cannot expect the hub to be ready any time soon, especially since Türkiye has put forward a new set of conditions for the project.

The Kremlin acknowledged the possibility of delays associated with the creation of the gas hub due to the major earthquake in Türkiye, but remains confident that the project will go ahead.

"Of course, the [gas hub] project cannot be a priority for Türkiye right now, we understand this. Accordingly, time shifts are possible. The schedules may shift slightly to the right, but in essence this will not affect the implementation of our plans," Russian presidential spokesman Dmitry Peskov said.

Turkish Minister of Energy and Natural Resources Fatih Donmez assured that the work on the legal framework for the Gas Trade Hub in Türkiye was nearing completion.

"The work is ongoing. Our goal is to have it fully operational by the end of this year. It is necessary to make changes to some laws. The issue will be put on the parliamentary agenda in the coming days. After that, the efforts to establish the legal framework will be largely complete," Donmez said.

However, the cost of the project is unknown and, judging by Turkish officials, Russia will most likely have to finance the project itself.

One month after the terrible earthquake in south-eastern Türkiye, on March 6, Çagri Erhan, a member of the Security Council under the Turkish president, approached Moscow with a proposal to build a Turkish gas hub entirely with Russian investment.

"Negotiations on the hub have been put on hold because a lot has changed in Türkiye since the earthquakes. All priorities have changed. In principle, yes, but now we do not have the money to build it. If the Russian Federation has money, please start building the hub. Everything depends on the investment," Erhan said in his interview with Russian media.

Türkiye has indeed been hit very hard by a series of earthquakes, killing over 46,000 people and destroying a huge number of buildings. According to UNDP estimates, the damage caused to the country exceeds $100 billion. This is almost three times higher than the earlier World Bank's preliminary estimate ($34.2 billion). A donors conference in Brussels will focus on rebuilding Türkiye's infrastructure. Indeed, given such huge costs, the feasibility of a gas hub looks highly questionable.

As noted by Turkish President Recep Tayyip Erdogan, the gas hub can be located in the Thrace region in the European part of the country. According to Turkish experts, the gas can then be transferred through three branches, with the southern branch going to Italy, the middle one to Bulgaria, Albania, Kosovo, Macedonia, Serbia and other countries, and the northern one to Romania, Slovenia, Hungary and further to Germany.

In any case, even though Russia believes in the success of the gas hub project in Türkiye, it has decided to focus the efforts on developing the liquefied natural gas (LNG) production to be on the safe side. The strategic objective is to increase the annual production of LNG to at least 100 million tons in the medium term from the current 33 million tons. Incidentally, LNG is the only Russian fuel that has not yet been subject to sanctions. Therefore, the Russian government has decided to multiply its exports. But to do this, it is necessary to develop and implement its own technologies for large-scale liquefaction of gas.

Focus on expansion

In the meantime, Azerbaijan is making concerted efforts to increase gas supplies.

"Azerbaijan is becoming a more important energy partner for the European Union," President Ilham Aliyev said after his talks with the Latvian President Egils Levits in Baku on March 8.

 "The European Commission has always seen us as a reliable partner. Today we are exporting oil, natural gas, electricity, petrochemicals and oil products. I hope we will soon start exporting green energy as well," Aliyev said.

According to the Azerbaijani leader, the supplies of Azerbaijani gas to Europe are increasing every year. Last year Azerbaijan and the EU signed a document on strategic partnership in the field of energy. "Based on this agreement, we are increasing gas deliveries through diversified routes, which have been established relatively recently," Aliyev added.

Speaking at the 10th Global Baku Forum themed Peace Today: Challenges and Hopes, the President of Azerbaijan made public the government's immediate plans for the production and export of Azerbaijani gas.

The plan for this year is to export more than 24bcm of gas, at least half of which will go to Europe. At the same time, Azerbaijan will increase investment in the development of gas fields. By the way, already in 2023, it should start production from the Absheron field, and deep gas production from the Azeri-Chirag-Gunashli block in 2024. In addition, as early as 2023, production from the Stage 2 development of the Shah Deniz field should reach its maximum capacity.

If all goes according to plan, Azerbaijan will be able to produce at least an additional 10bcm of gas within the next 5-6 years.

By 2026, the launch of new renewable power plants and the upgrade of existing plants will save up to 1.5 billion cubic metres of gas, which can be exported.

Discussions are underway to expand the capacity of the TANAP pipeline from 16 bcm to 32 bcm and TAP from 10 bcm to 20 bcm.

Incidentally, Italy, Greece, Bulgaria and Romania are the current buyers of Azerbaijani gas in Europe. The EU countries have already received over 21.5bcm of gas from Azerbaijan through the TAP pipeline, of which Italy has received 18bcm.

Hungary also expects to start buying gas from Azerbaijan at the end of 2023. The initial volume of purchase will be 100mcm with a possibility of increasing it to 2bcm. Serbia is also waiting for the deliveries of the Azerbaijani gas at the beginning of 2024. Italy, Greece and Bulgaria are expected to buy more gas. In addition to these countries, Albania, Moldova, Northern Macedonia, Croatia and other states are in line for the Azerbaijani gas. So, today there are all the conditions to increase gas production in Azerbaijan, the key one being the availability of buyers.