ANNIVERSARY SURPRISE

Baku Energy Week recently commemorated its thirtieth anniversary. True to tradition, the event welcomed a multitude of guests. This year's edition introduced B2B meetings and the signing of unforeseen agreements as a novel feature.

The occurrences of this week have reaffirmed that fossil fuels will remain sought-after for the foreseeable future, underscoring the sustained interest in oil and gas. Most crucially, the investor focus on Azerbaijan's oil and gas sector is not merely present but notably pronounced.

The Hungarian Move

One of the main events of Baku Energy Week was the signing of an agreement by the Hungarian MVM Group to acquire a 5 percent stake in the Shah Deniz gas field development project. We must acknowledge the Hungarian side's tenacity in its aspiration to receive Azerbaijani gas and its capability to achieve this. Following last year's agreement between MVM Group and SOCAR for the purchase of 100 million cubic metres of gas, the statements from the parties hinted at the possibility of concluding a contract for even larger volumes, yet not entering Shah Deniz as a shareholder. The surprise was a success.

The Shah Deniz field currently boasts a production capacity of approximately 79.5 million cubic metres per day, or about 29 billion cubic metres annually. Production is conducted from the Alpha (Stage-1) platforms of the field development and Bravo (Stage-2). Substantial hydrocarbon reserves have guaranteed reliable and stable production for nearly two decades. In total, over 218 billion cubic metres of natural gas and 371 million barrels of condensate have been extracted since the field's discovery.

Natural gas is supplied through the Southern Gas Corridor system to Azerbaijani, Georgian, Türkiye, and European consumers based on long-term sales and transportation contracts.

Until recently, the shareholdings of the parties in the Shah Deniz field development contract were as follows: bp (29.99% - technical operator), LUKOIL (19.99%), TPAO (19%), NICO (10%) and CJSC Cenub Qaz Dehlizi (21.02%). Concurrently, the composition of foreign participants altered, when in 2015, Norway's Equinor exited the project and was succeeded by Malaysia's Petronas. Following the latter's divestment, the process of altering the composition of foreign investors in the project will conclude by the end of 2024.

The Hungarian MVM Group inked two agreements at Baku Energy Week: with Cenub Qaz Dehlizi CJSC (Southern Gas Corridor) for the acquisition of a 5% stake in the Shah Deniz development project and with Azerbaijan Gas Supply Company Limited (AGSC) for the acquisition of a 4% stake in South Caucasus Pipeline Company, tasked with the operation of the South Caucasus Pipeline (Baku-Tbilisi-Erzurum). The transaction is anticipated to finalize in the third quarter of 2024.

Thus, Cenub Qaz Dehlizi's share in the Shah Deniz project diminishes from 21.02% to 16.02%, AGSC's share in SCPC reduces from 21.02% to 17.02%.

Guaranteed Diversification

For Hungary, which relies significantly on Russian gas imports, the agreement represents a strategic maneuver. At a press conference alongside his Azerbaijani counterpart Jeyhun Bayramov, Foreign Affairs and Foreign Trade Minister Péter Szijjártó did not conceal his elation, accentuating that the accord would inaugurate "a new dimension in Hungary's energy security and elevate the nation to a more prominent position in the global energy market."

Szijjártó also reminisced that the majority of the gas from Shah Deniz is exported to Europe via the Southern Gas Corridor: "In effect, we will possess the means to satisfy a substantial portion of our gas requirements. Hungary will become…

Hungary's Energy Minister Csaba Lantos is also confident that the acquisition of a stake in the Shah Deniz project will grant the country access to additional natural gas. Concurrently, although the transaction was executed by a company wholly owned by the Hungarian state, it will not impose any extra fiscal pressure on the state budget, as MVM utilized its own resources to secure the stake.

MVM Group CEO Károly Matrai, addressing the Baku Energy Forum, stated that the Shah Deniz agreement was the most significant deal for the company, and the procurement of a stake in the Azeri gas project is a pivotal element in the strategy of diversifying gas supplies to Hungary and diminishing reliance on a singular source. He remarked that besides the contract for the procurement of 100 million cubic metres of gas, SOCAR dispatched 50 million cubic metres of gas to Hungary's storage facilities last year.

In essence, the agreement is of paramount importance for Hungary, which is exerting every effort (akin to the rest of Europe) to curtail its reliance on Russian gas. Nonetheless, Budapest is pursuing this objective in its unique manner, not by rejecting supplies from Russia, but by augmenting them with alternative sources. Having journeyed from Baku to Russia, P. Szijjártó commented on the new gas accord with Azerbaijan on the fringes of the St. Petersburg International Economic Forum, noting that Budapest has no intention whatsoever to forsake Russian gas. "When we speak of diversification, we are not alluding to the substitution of one source with another. We are referring to the advent of additional energy suppliers. That's why we never relinquish reliable partnerships. But undoubtedly, the more sources at hand, the greater the security," P. Szijjártó asserted with confidence.

According to Kommersant's estimations, the acquisition of a 5 percent stake will facilitate Budapest in receiving in excess of 1.5 billion cubic metres of gas annually from Azerbaijan. For context (though not entirely comparable, given the volumes implicated), under the extant agreement with Russia's Gazprom, Hungary procures 4.5 billion cubic metres annually. The accord was ratified in 2021 and is valid until 2036.

The novel deal has endowed Hungary with a guaranteed gas source and safeguarded it against various force majeure scenarios: such as interruptions in gas supplies from Russia or postponements in amplifying the capacity of the Southern Gas Corridor, among other unforeseen contingencies.

Azerbaijan, reciprocally, will benefit from an augmentation of energy relations with Hungary, an escalation in the magnitude of Hungarian investments in the nation's oil and gas sector, and a surge in the volume of trade turnover. These are merely the economic advantages. Hungarian MOL's investments in Azerbaijan's oil sector have already surpassed $2 billion. Moreover, the same enterprise has commenced utilizing Azerbaijani oil to fabricate diverse fuel types at its refineries in Slovakia and Hungary.

Potential Participant

The intrigue surrounding the Shah Deniz field persists. The prospect of another contender entering the fray, this time from Asia, remains a topic of speculation. Here, the focus is not on China, but rather on fraternal Uzbekistan, or more precisely, Uzbekneftegaz.

Laziz Kudratov, Minister of Investment, Industry and Trade of sunlit Uzbekistan, disclosed on the sidelines of the Second Interregional Forum held in Guba in May that Uzbekneftegaz harbours an interest in partaking in the Shah Deniz project, is in discussions with SOCAR, and a pact regarding the Uzbek company's induction into the project could be formalized in the ensuing months.

"We are engaged in dialogue with SOCAR concerning its involvement in oil and gas production ventures in Uzbekistan. In parallel, the matter of Uzbekneftegaz's entry into gas production initiatives is presently under deliberation and nearing the conclusive phase," he articulated.

Kudratov also underscored that the share issue remains a topic of negotiation. "We are optimistic it will materialize shortly," the minister pledged.

The project is intricate, necessitating legal acumen, with the involvement of international consultants. Yet, optimism prevails regarding the outcomes," the minister highlighted.

Anticipation builds towards August, when it will be revealed if a consensus has been reached and if another significant player will join the project. Indications suggest such an arrangement will materialize. By welcoming Uzbekneftegaz into Shah Deniz, SOCAR may anticipate a reciprocal gesture, gaining entry to substantial oil projects in Uzbekistan. This aligns with the company's strategic goals through 2035, namely, participation in upstream projects overseas.

Transit Contracts

Discussing gas, we must acknowledge another pivotal event of Baku Energy Week - the signing of five accords on natural gas supply and transit between SOCAR and the Turkish firm BOTAŞ. The ceremony featured Mikayil Jabbarov, Minister of Economy of Azerbaijan and Chairman of the SOCAR Supervisory Board, alongside Alparslan Bayraktar, Minister of Energy and Natural Resources of Türkiye.

These accords originate from the Agreement on Cooperation in the Field of Natural Gas signed by the two governments on 14 May this year. Owing to these accords, Azerbaijani gas will traverse to Europe and Nakhchivan via Türkiye, while Turkmen gas will navigate to the Turkish market through Azerbaijan and Iran.

AGSC and BOTAŞ have also prolonged the Azeri gas supply contract to Türkiye, set to expire this year, until the end of 2030.

Regarding Azerbaijani gas delivery to Nakhchivan via Türkiye, a notable development is anticipated this year. By year's end, Turkish officials aim to operationalize the Igdir-Nakhchivan gas pipeline, ensuring warmth for our compatriots in Nakhchivan come next winter. Alparslan Bayraktar remarks that the construction of a gas pipeline with a daily capacity of 2 million cubic metres is "progressing vigorously". "We aspire to complete this pipeline promptly. This winter, Nakhchivan's gas will flow through Türkiye, via Igdir," Bayraktar assures.

Partner Search

Baku Energy Week was abound with intriguing events and declarations. A speech by Slovenian Minister of Environment, Climate and Energy Tina Sersen merits attention. She conveyed Slovenia's reliance on Russian gas and its quest for dependable partners to diversify its supply, with Azerbaijan regarded as a potential ally.

"Azerbaijan is a significant ally not just for the European Union but also for Slovenia. Slovenia represents 1 percent of the EU's natural gas consumption. Our dependence on Russian gas is evident, yet in this new era, our objective is to forge new partnerships and diversify our gas supply sources. Slovenia anticipates enhancing energy collaboration with Azerbaijan," Sersen articulated, voicing confidence that such cooperation would fortify her nation's energy security.

The Minister also lauded Azerbaijan's leadership of the 29th session of the Conference of the Parties to the UN Framework Convention on Climate Change (COP29), vowing support for Baku at the Conference and contributing to its success.

Incidentally, Slovenia stands a good chance of forging a gas sector partnership with Azerbaijan, especially considering plans to boost Azerbaijani gas transport to Europe to 20 billion cubic metres annually by 2027.

Numerous instances showcase Baku's fruitful cooperation with EU nations in gas supply and energy security. Given the forecasted bright future of gas as a transitional fuel, Azerbaijan's roster of partners is set to expand with new entrants. However, the replication of the Hungarian model appears improbable.