FOCUSING ON GAS

December is the most fitting time to reflect on the past year and establish new goals, moving forward with confidence and preparedness for the challenges that lie ahead. In Azerbaijan, the culmination of the year is conventionally marked not only by the effervescence of the New Year's season but also by the observance of World Azerbaijanis Solidarity Day on December 31. This day is a poignant symbol of national unity, fostering a sense of solidarity among its adherents, irrespective of their geographical location.

Since 2020, the commissioning of the Trans Adriatic Pipeline (TAP), a pivotal element of the Southern Gas Corridor (SGC), has been incorporated into the commemorative events held on this day. Four years after the launch of TAP, it is evident that the project has met expectations. Despite its recent introduction into the infrastructure landscape, the pipeline has already exhibited its reliability and has evolved into a pivotal component of Europe's energy security, facilitating a stable supply of a novel source of natural gas.

The occasion was marked by the signing of new contracts for gas supplies to Europe, a customary practice at such events. In 2024, the European buyer base expanded with the addition of Slovakia, Slovenia, North Macedonia, and Croatia. This development underscores the mounting interest in Azerbaijani energy resources and their strategic importance for the region.

Continued Expansion

A thorough examination of the new buyers reveals that SOCAR (State Oil Company of Azerbaijan) continues to expand its presence in the Balkans, thereby reinforcing its strategy of diversifying gas supplies to Europe. The policy of expansion in the Balkan gas market, initiated in the previous year, has been confidently sustained in the current year. The signed contracts and increasing supplies clearly illustrate SOCAR's determination to strengthen its position and occupy key market niches in the region. It is noteworthy that the finalization of all new contracts preceded the onset of winter, thereby providing insurance against potential interruptions in Russian supplies or other unforeseen circumstances.

As part of this strategy, Azerbaijani gas exports to Serbia commenced in February 2024. The contract signed in November 2023 between SOCAR and Srbijagas anticipates annual deliveries of up to 400 million cubic meters of gas to Serbia from 2024 to 2026, with a subsequent increase to 1 billion cubic meters starting in 2027. However, the two companies did not have to wait that long—on September 26, 2024, they signed a new contract for transporting additional volumes of gas, specifically 1 million cubic meters per day from November 1, 2024, to April 1, 2025. These agreements will help Serbia reduce its dependence on Russia to some extent and enhance its energy security. Furthermore, starting from September 1, gas was also supplied to Croatia through PPD and MET Group. "The supply of Azerbaijani gas to Croatia ahead of the winter season was a result of successful cooperation between the governments of Azerbaijan and Croatia," noted SOCAR in its press release. While the specific volumes and terms were not disclosed, it can be inferred that the contract is not tied to any specific periods or cubic meters. Clearly, the primary objective is not the volume itself but rather the assurance of receiving Azerbaijani gas if necessary, particularly as cold weather approaches.

SOCAR regarded this development as a significant step towards enhancing energy cooperation between Azerbaijan and Croatia, which will contribute to reinforcing the continent's energy security. Less than two months later, North Macedonia also joined the list of Azerbaijani gas buyers. On November 12, SOCAR signed a memorandum with ESM. The document "supports the efforts of the North Macedonian government to provide the country with natural gas" while aligning with SOCAR's aim to increase its presence in the regional market.

"The memorandum seeks to enhance energy supply stability, improve access to natural gas, and ensure its provision at competitive prices compliant with legal requirements," emphasized ESM in a statement without providing further details, suggesting that terms are flexible.

Pilot and Hybrid Gasification of the Balkans

The transportation of Azerbaijani gas to Albania is also in the planning stages, with an anticipated commencement date of January 2026. Construction on the Trans Adriatic Gas Pipeline has already commenced, with an anticipated annual delivery capacity of 1.2 billion cubic meters. Of this volume, 200 million will be allocated to Albania, while 1 billion will be directed to Italy.

Concurrently, SOCAR intends to initiate a pilot project for gasification in Korça town in collaboration with Albgaz. This initiative is grounded in a Memorandum of Cooperation that was signed on November 12, 2024, in Baku by the Ministry of Infrastructure and Energy of Albania, Albgaz, and SOCAR. A feasibility study for the project has already been completed. The initiation of the gasification project is anticipated to commence in 2025, with its completion expected by 2027.

The financial investment required for this initiative has not been disclosed; however, it is anticipated that the initiative will supply gas to both households and businesses in Korça. The primary objective at this stage is the establishment of a gas distribution network across the city, with a particular emphasis on providing services to local businesses.

The long-term vision for the initiative includes the extension of gas infrastructure to the municipalities of Pogradec and Erseka. The Albanian authorities anticipate completing the country's gasification by 2030.

In the context of gasification, it is imperative to acknowledge Bulgaria's role. Currently, SOCAR, a major player in the energy sector, has a 50% share in natural gas supply in the country. However, it has recently announced an expansion of its operations, with a 7.5% increase in its involvement in the gas distribution sector. Furthermore, SOCAR has initiated direct natural gas supplies to social facilities in the municipality of Ruse in collaboration with the Bulgarian company M-Gas. The initial phase of this project entails the gasification of a school in Nikolovo village, where a compressed natural gas system has been installed. In the forthcoming months, a further ten schools and kindergartens are scheduled to be included in the initiative. This initiative is noteworthy for its dual purpose: it enhances infrastructure and educates young residents about energy sources.

This project continues cooperation with M-Gaz that began in summer 2024. M-Gaz operates across six countries in the region (Bulgaria, Romania, Serbia, Greece, Croatia, and Hungary), presenting excellent opportunities for SOCAR to broaden its collaboration in natural gas distribution.

Controlled Purchase

The primary intrigue of this year remains the situation regarding Russian gas transit through Ukraine to Europe—will it cease or continue from January 1, 2025? With less than a month remaining until this "X" day, there is still no definitive answer.

Currently, natural gas is supplied through Ukrainian territory primarily to Slovakia, Hungary, Austria, and the Czech Republic. In October, the International Energy Agency labelled the future of Russian gas transit through Ukraine as a "key uncertainty" ahead of the winter of 2024/25. Simultaneously, growing confidence suggests that a continuation may not occur. This sentiment is supported by Ukraine's firm stance and recent statements from Russian officials indicating that there are no negotiations between Moscow and Kiev on this matter.

Additionally, uncertainty remains regarding whether Russia plans to maintain gas supplies to Slovakia and Austria in 2025; these countries remain significant energy partners for Moscow within the EU.

It remains unclear how Austria intends to address this situation; however, liquefied natural gas appears to be a likely solution for Austria moving forward.

In terms of Slovakia, SPP—the country's largest energy supplier—was prompt in reassuring its customers that it is actively pursuing solutions to this issue. "SPP supports the continuation of gas transportation through Ukraine on a long-term basis as it represents the most cost-effective solution for our customers. However, due to high risks regarding potential interruptions along the eastern branch, we are implementing measures to guarantee secure gas supplies for our customers ranging from large industrial consumers to households," stated CEO Vojtech Ferencz.

According to SPP, the company has already signed business contracts for purchasing gas from non-Russian sources with bp, ExxonMobil, Shell, ENI, and RWE featuring flexible volumes and terms. These agreements enable SPP to procure gas volumes amounting to up to 150% of its customers' current demands.

In case Ukrainian gas transportation halts completely, SPP intends to take additional measures ensuring supply security until late 2025 and beyond. One possible measure may involve securing a long-term contract for gas from Azerbaijan. This deduction arises from SPP's statement following its short-term agreement with SOCAR signed on November 12, 2024—reports suggest that these deliveries commenced in December.

"Following a successful evaluation of our cooperation with SOCAR, SPP will contemplate entering into a longer-term contract as well. This agreement opens avenues for establishing a long-term partnership ensuring our country's energy security amidst significant supply disruption risks via Ukrainian transit routes," stated SPP.

Synthetic Gas

Presently, ten European countries now have access to purchase Azerbaijani gas: Italy, Greece, and Bulgaria based on long-term contracts with fixed volumes; others under flexible terms. When including Türkiye and Georgia in this count, it totals twelve countries. In 2024, projected total Azerbaijani gas exports are estimated at 25 billion cubic meters, with half directed toward Europe.

Skeptics may question Azerbaijan's capability to fulfil these obligations—arguing that resources are insufficient and volumes too limited to replace Russian gas; however, no such expectation has been established. According to recent forecasts from S&P rating agency, Azerbaijan possesses adequate resources for stable gas exports with further production growth anticipated next year which will ensure compliance with current contracts while allowing for expanded supplies.

The agency forecasts that marketable gas production in Azerbaijan will stabilize at levels between 36-37 billion cubic meters annually. S&P analysts identify several projects potentially contributing to long-term growth in Azerbaijan's gas production: these include the second phase of Absheron field development as well as extraction from deep reservoirs within the Azeri-Chirag-Guneshli field block and advancements at Umid, Babek, and Garabagh fields. "These projects are currently at planning stages and require several years before production may commence (pending implementation decisions)," emphasizes the report.

Production of synthetic gas (e-NG) could serve as an effective complement to these projects. As indicated by its name, e-NG is synthetically produced through combining hydrogen extracted from water with carbon dioxide sourced from either atmospheric capture or industrial waste processes. The synthesis yields methane—the primary component found within natural gas—making this solution environmentally friendly while facilitating seamless integration into existing gas infrastructures.

Synthetic gas holds promise as an important eco-friendly energy source. Undoubtedly motivated by this potential product's prospects, SOCAR signed a Joint Study Agreement (JSA) with Tree Energy Solutions (TES), a global leader in green energy initiatives aimed at developing e-NG production within Azerbaijan.

The JSA seeks to facilitate an assessment by both companies regarding technical feasibility along with economic viability associated with deploying advanced TES upstream module technology across the region. This study will outline project parameters while evaluating its benefits—including green energy infrastructure development alongside job creation as well as environmental impacts.

"Azerbaijan's strategic location coupled with SOCAR's expertise within energy sectors presents optimal conditions for scaling up e-NG production aimed at broader applications. E-NG produced within Azerbaijan can be transported into Europe utilizing existing network infrastructures such as those managed by South Gas Company," noted TES.

Thus, synthetic gas possesses significant potential as a new export product for future markets; however widespread implementation necessitates substantial investments into infrastructure alongside technological advancements before it may evolve into an integral alternative compared with traditional natural gases.

Meanwhile Azerbaijan retains sufficient conventional energy resources readily available—alongside potential capabilities—to satisfy current demands across both regional contexts as well as extending far beyond."