BENEFICIAL TRANSIT

While summer is associated with leisure, relaxation, and novel experiences, there are matters that cannot be postponed until autumn. In this regard, the summer has been a fruitful period for the conclusion of gas agreements, including those between Azerbaijan and Türkiye, Iran and Russia, and Turkmenistan and Iraq. It should be noted that this is not an exhaustive list.

The search for new sources of natural gas, commonly referred to as blue fuel, is an ongoing endeavour in Europe. Concurrently, this process appears to be encountering significant challenges, including Ukraine's decision to halt the transit of Russian gas to the EU from 2025, following the expiration of the current agreement with Russia. European officials and companies are seeking alternative means of maintaining this transit, while the Ukrainian government has stated that it will not enter into a new contract with Gazprom.

One of the currently discussed options is the purchase of gas from Azerbaijan and its subsequent transportation to Europe via Russian gas pipelines that traverse Ukrainian territory.

Concurrently, a number of countries are pursuing independent solutions to their gas-related challenges. Consequently, a memorandum on the supply of gas from Azerbaijan to Slovenia was concluded. Although not legally binding, this agreement represents the initial phase of contract negotiations, which are anticipated to conclude well in advance of the onset of winter.

We Will Help, If We Can

Many EU countries commenced the search for a substitute for gas from the Russian Federation at the outset of the Russian-Ukrainian conflict. At present, Norway is responsible for meeting 30% of the EU's energy demands. However, a number of countries continue to rely on Russian natural gas and have requested that its transit through Ukraine not be disrupted after 2024. The principal purchasers are Slovakia, Hungary, Austria and Italy. In the event of a disruption to supplies, it is anticipated that Austria and Slovakia will experience the greatest difficulties, given the lack of alternative options available to the other two countries.

Kiev has acknowledged that the agreement can be maintained, contingent upon the fulfilment of certain conditions and the involvement of European companies. Among the options currently under consideration are the preservation of transit through Ukraine to Europe and the replacement of Russian gas with Azerbaijani gas. It is not precluded that the gas procured from Azerbaijan by Türkiye will be rerouted to Europe and subsequently replenished on the Turkish market with supplementary supplies from Russia.

At the 2nd Shusha Global Media Forum, President Ilham Aliyev confirmed that Baku had received appeals from the Ukrainian authorities and the European Union requesting assistance in extending the gas transit contract between Moscow and Kyiv. Concurrently, he indicated that Azerbaijan is currently engaged in negotiations with Russia on this matter. "It appears that both parties are motivated to pursue this course of action, given Ukraine's evident need for this gas. Consequently, countries such as Austria and Slovakia will find themselves in a challenging position. The alternative is that they will have to pay hundreds of millions to obtain gas from alternative sources, or they will be unable to access additional supplies. Aliyev stated that, in contrast to other European countries, these two are in a particularly challenging situation.

"Should assistance be required, we stand ready to provide it." It seems feasible to suggest that this agreement could be extended. "It would be beneficial for Russia to have 50 billion cubic metres or more of gas available for sale on the premium market, which is the European market," the President added.

Furthermore, the head of state elucidated another pivotal matter pertaining to the provision of Azerbaijani gas to Europe. The objective remains unchanged: to double export volumes.

"We are progressing in this direction. In 2021, the volume of gas supplied to Europe was in excess of 8 billion cubic metres. It is anticipated that this year the figure will be approximately 13 billion, with the majority destined for Europe. The total volume will therefore be 25 billion cubic metres. Thus, when discussing the objective of doubling supplies by 2027, this equates to 16 billion cubic metres by the end of the aforementioned period. Aliyev stated that the resources are intended to be supplied via the existing transport network, specifically through the Southern Gas Corridor and its interconnectors.

Furthermore, it has been revealed that Azerbaijan has no intention of investing in the expansion of its export infrastructure, given that the EU has yet to demonstrate a long-term commitment to purchasing gas. This is a reasonable assumption, given that the costs of the Southern Gas Corridor have not yet been recouped and the reimbursement process is ongoing.

"All revenue generated from gas sales is allocated towards debt repayment. The EU is requesting that Azerbaijan invest additional billions, although the EU itself has indicated that it will no longer require gas within the next ten years, or potentially even less time. It would be irrational to invest billions in a venture that will not be required in the near future," Aliyev stated.

Additionally, the President highlighted the growing demand for Azerbaijani natural gas in Europe, which is likely to increase the number of buyers of this resource.

First Step to Contract

The initial stage of the contractual process was initiated on 17 July, when SOCAR and Slovenia's largest natural gas supplier, Geoplin, entered into a Memorandum of Understanding (MOU) regarding the expansion of their cooperation in the field of gas supply. This was achieved in Baku following discussions between Rovshan Najaf, the President of the State Oil Company of Azerbaijan, and Bojan Kumer, the Slovenian Minister of Environment, Climate and Energy.

At an earlier event, Baku Energy Week, Tina Sersen, Deputy Minister, spoke about Slovenia's significant reliance on Russian gas, its objective to diversify supply sources and its willingness to collaborate with Azerbaijan on this matter. The signing of the memorandum represents a significant advance in the process of concluding a purchase and sale contract. Given the promptness of the Slovenian government in this regard, it seems likely that the contract will be finalised in the near future.

Slovenia's domestic gas demand is less than one billion cubic metres per year, with the majority of the supply coming from a variety of imported sources. Geoplin is responsible for approximately 50% of the country's retail market demand for this product.

It is of great significance for Slovenia to ensure the security of its gas supplies from a multitude of sources, thereby diversifying the provision of natural gas. Slovenia is a relatively small country with a modest economy, and it is wholly reliant on imports from external sources for its gas requirements. Azerbaijan, which is rich in gas reserves, represents a significant opportunity for diversification of our gas supplies. In this regard, Azerbaijan represents a natural choice for Slovenia, according to Kumer, who was assessing the signed document.

According to experts, Slovenia could receive Azeri gas via Italy. This necessitates merely a slight augmentation in the capacity of the cross-border pipeline between the two countries, which could be accomplished within a year.

Meanwhile, practical work has commenced with the objective of expanding SOCAR's commercial presence in the Bulgarian gas market. The State Oil Company has commenced the provision of "blue fuel" to industrial enterprises in Bulgaria via Bulgaria's M-Gaz. These activities are conducted in accordance with the agreement between the governments of Azerbaijan and Bulgaria on the further development of cooperation in various areas, including the energy sector, and in accordance with SOCAR's overarching strategy. The initial recipient of this gas was Bulgaria's Asarel Medet Mining and Processing Combine (MPC), with which the State Oil Company entered into a memorandum of understanding in May of this year.

The Asarel Medet mine is the largest open-pit copper and other ores mining and processing company in Bulgaria. It produces and supplies high-quality copper concentrates and copper cathode. "Obtaining access to Azeri gas represents a significant step towards optimising our business operations and enhancing the efficiency of our value chain," the company asserts.

Turkmen Swap

In addition to Europe, Türkiye is also actively engaged in matters pertaining to the supply of gas. Moreover, the Turkish side has recently engaged in a considerable amount of activity within the sphere of purchase and sale, reaching new agreements with Azerbaijan, Iran and Turkmenistan. The signed documents, whether in the form of a memorandum or a contract, serve to confirm that the Turkish partners are not engaged in mere rhetoric and are, in fact, pursuing their stated objective of transforming Türkiye into a regional gas hub with a high degree of confidence.

It should be noted that Türkiye is a recipient of gas produced under Shah Deniz Stage 1 and 2 projects. In the third quarter of 2021, the parties entered into a new agreement on the purchase and sale of gas from Stage-1. The agreement stipulated the transportation of 3.5 billion cubic metres of gas annually to Türkiye from the end of 2021 to 2024.

Furthermore, prior to the contract's expiration, the Azerbaijan Gas Supply Company and BOTAS reached an agreement during the Baku Energy Week to extend the contract on the same terms. The current agreement provides for the annual supply of 3.5 billion cubic metres of gas to Türkiye until 2030.

Additionally, four further agreements were concluded between SOCAR and BOTAS. These concerned the supply of natural gas by the State Oil Company to Türkiye, the supply of natural gas to the Bulgarian market via Türkiye, the establishment of a framework for cooperation in the field of deliveries to Nakhchivan and Turkmen gas via Azerbaijan and third countries to Türkiye, and the third agreement concerned the aforementioned framework.

The aforementioned documents serve to consolidate the agreements reached in May.

Ankara is contemplating the possibility of receiving Turkmen gas via Iran on a swap basis, with some of it potentially destined for Türkiye via Azerbaijan. "With the implementation of the aforementioned swap, our primary focus is now on Turkmen gas supplies to Iran, which will then be supplied to us either at the Iranian border or via the Azerbaijan-Iran connection. In the initial phase, the projected volume is estimated to be between 1.5 and 2 billion cubic metres per year. "This could also serve to guarantee the security of supplies to Europe," Turkish Energy and Natural Resources Minister Alparslan Bayraktar informed Bloomberg. It is anticipated that a definitive agreement will be reached during the minister's visit to Turkmenistan. It is also noteworthy that Iran and Türkiye are connected by the Tabriz-Erzurum-Ankara gas pipeline, which has a capacity of 14 billion cubic metres per year. However, only 10 billion cubic metres are used annually. This gives rise to questions regarding the potential for swapping Turkmen gas through Iran and Azerbaijan for Türkiye. However, given the Turkish government's efforts to reach agreements with its neighbours, it is unlikely that Iran alone will suffice, and Azerbaijan will not be a sufficient alternative.

Türkiye has already had the experience of receiving Turkmen gas through Iran on a swap basis. It is therefore plausible that Azerbaijan may well repeat these operations, adding to them the function of a transit country, given that the necessary infrastructure is in place. It would therefore be relatively straightforward to deliver Turkmen gas to the Turkish market via Azerbaijani territory.

In conclusion, the introduction of gas into the Turkish market will enable Türkiye to diversify its sources of gas imports and establish the groundwork for eventual transportation to Europe.