EXTRACTION, EXPORT, AND TRANSIT

Global demand for gas reached an unprecedented high in 2024 and is projected to continue its upward trajectory in 2025, driven primarily by the rapid expansion of gas markets in Asia. This is the forecast from the International Energy Agency (IEA) in its latest quarterly report on the gas market. The IEA anticipates that the situation in global natural gas markets will remain tense in 2025 as demand continues to grow, while supply expands at a slower pace than before the pandemic and energy crisis.

This forecast has already proven prophetic, as evidenced by the European market entering the new year facing a new reality: the transit of Russian gas through Ukraine has ceased, with no prospects for resumption. In response, Russia has adapted its strategy, exploring alternative routes for gas export. This has led to the proposal of supplying Russian gas to Iran via Azerbaijan's transit infrastructure. Concurrently, Baku is proactively pursuing its own gas agenda, with a focus on increasing production and exports from its fields.

A Source of Threats and New Opportunities

The International Energy Agency has reported an increase in global gas demand in 2024 by 2.8%, reaching a record 4.212 trillion cubic metres. The agency notes that initial estimates significantly exceed the average historical annual growth rate of 2% from 2010 to 2020. Over 40% of this demand is attributed to Asian countries, primarily China and India. In Europe, gas consumption increased slightly compared to 2023.

In 2025, global gas demand is expected to reach another milestone, with IEA projections indicating a further increase to 4.3 trillion cubic metres. However, growth rates are expected to moderate to 1.9%, reflecting a shift in the global energy landscape. Asian countries are set to be the primary contributors to this growth, accounting for over 45% of the increase.

Although the cessation of Russian pipeline gas transit through Ukraine on 1 January 2025 does not pose an imminent risk to European Union gas supply security, it may raise LNG import requirements and tighten key market indicators this year, stated the IEA report.

The agency anticipates that, due to the absence of a transit route for Russian gas through Ukraine, Europe will need to increase its LNG purchases by almost 16% compared to the previous year in 2025. This is due to the fact that Ukraine ceased to act as a transit route for Russian gas after the expiration of the agreement between Gazprom and Naftogaz. President Vladimir Zelensky has expressed his readiness to utilise the Ukrainian gas transportation system for the supply of Azerbaijani gas to Europe. He mentioned that he discussed this proposal with Azerbaijani President Ilham Aliyev, emphasising that Ukraine can ensure transit if necessary. At a press conference on 25 January, Zelensky remarked, "We could utilise our infrastructure for other joint initiatives if Europe needs gas that is not Russian." He stated that Azerbaijan produces 40 billion cubic metres of gas, with 25 billion available for export.

However, Slovak Prime Minister Robert Fico has expressed concerns about the potential economic impact of the situation, stating that Bratislava stands to lose €500 million annually due to the cessation of Russian gas transit through Ukraine, which he believes will also have significant costs for the European Union. He stated that this amounts to €120 billion in losses over the next two years.

He also cited expert analysis from both Slovakia and the Czech Republic that predicted a significant impact on gas prices from the halt in supplies from East to West.

It should be noted that prices for "blue" fuel on the main European gas exchange, the Dutch TTF, did react with an increase on January 2 following the cessation of transit, approaching $540 per 1,000 cubic metres. This represents a 25% increase compared to October of the previous year, though it is significantly lower than the peak of $585 per 1,000 cubic metres recorded in August 2023. Consequently, there is no cause for significant concern regarding further price increases or acute gas shortages in Europe.

The European Commission has also indicated that EU gas infrastructure is sufficiently flexible to handle the current situation. "The market has already taken into account changes in certain parameters. There are no alarming trends to report," stated European Commission spokesperson Anna-Kaisa Itkonen.

For some countries in the region, this may present a favourable opportunity to diversify supply sources and enhance energy security through alternative suppliers. However, the choice of the most appropriate course of action is of crucial importance.

Hungary has increased Russian gas imports via the TurkStream pipeline (the only operational pipeline bringing Russian gas to Europe) and has expressed a willingness to supply this gas to Slovakia. However, given the ongoing military actions between Ukraine and Russia and threats to energy infrastructure, dependence on a single supply route poses significant risks to energy security. Therefore, diversifying sources and routes is not just a strategic imperative, but also an essential measure for ensuring a stable and secure energy supply in the future.

An Unexpected TransitRussia is actively seeking new markets for its gas. A strategic memorandum of understanding was signed by Gazprom and the National Iranian Gas Company at the end of June 2024 regarding the organisation of supplies of Russian gas to Iran. The agreement spans 30 years and is expected to generate approximately $10-12 billion annually for Iran.

Following negotiations with Iranian colleague Masoud Pezeshkian, Russian President Vladimir Putin confirmed on 17 January 2025 at a press conference that the project for constructing a pipeline between the two countries is underway. He stated that initial deliveries could reach up to 2 billion cubic metres but could eventually increase to 55 billion cubic metres annually.

The Russian Energy Minister, Sergei Tsivilev, also provided details on the pipeline's route, confirming that it will traverse Azerbaijani territory. He confirmed that the route through Azerbaijan has been agreed upon. We are currently in the final stages of negotiations regarding pricing. Volumes have already been established. As with any commercial matter, there is a need for compromise, and working groups from both sides have been established to develop an approach to pricing.

With regard to the cost of Russian gas fuel for Iran, the head of Russia's Ministry of Energy specified that the basic price-setting solution is based on oil and gas calorific parity with a coefficient to account for discrepancies between the parties.

The initial plan is to pump 2 billion cubic metres of gas through the pipeline, which constitutes just over 1% of supplies to the EU before 2022. By way of comparison, the capacity of both blown strands of Nord Stream was 55 billion cubic metres per year. However, achieving the planned volumes will require time.

According to Valery Andrianov, an associate professor at the Financial University under the Government of Russia, the cost of supplying gas to Iran may be lower than to Europe and China. The expert emphasised that, at this time, it is more critical for Gazprom to maintain export volumes and to find new markets than to achieve high prices. Earlier reports indicated that Iran could purchase Russian gas at $100 per 1,000 cubic metres; however, this figure is speculative and Andrianov believes that the final price will be higher.

Initial plans to pump 2 billion cubic metres will not require new pipelines to be laid. However, achieving potential capacities will require the construction of additional pipelines, both within Russia and in Azerbaijan and Iran. For instance, the transport capabilities of the Mozdok-Gazimammad pipeline allow for the transportation of up to 5 billion cubic metres from Russia to Azerbaijan on an annual basis.

There is a pipeline through Azerbaijani territory that can relatively quickly deliver Russian gas to Iran; however, its capacity is reportedly limited to 2 billion cubic metres per year. In order to increase capacity, it will be necessary to install new compressor stations, a process which may take approximately one year. Even after modernisation, throughput is projected to rise to approximately 8-10 billion cubic metres per year.

The implementation of this project has the potential to enhance Azerbaijan's role in the Caspian Sea region as a transit point, positioning it as a significant gas hub. However, questions remain regarding whether Azerbaijan has agreed to facilitate such transit and whether it is prepared to expand its infrastructure in anticipation of increased supplies, as well as the cost of transit.

Domestic CapabilitiesAzerbaijan continues to actively develop its gas sector, focusing on increasing production and export volumes of natural gas. These efforts are aimed at strengthening energy security and broadening cooperation with international partners.

Significant events are anticipated in the near future, including construction of a new compressor platform at the Shah Deniz field for gathering low-pressure gas and commencing production from deep-gas layers of the Azeri-Chirag-Guneshli (ACG) field by late 2025.

In 2024, the country exported 25 billion cubic metres of gas and plans to continue increasing exports in subsequent years, stated President Ilham Aliyev during a press statement following a meeting with Georgian Prime Minister Irakli Garibashvili. He also announced that new gas fields would come online this year. New fields will be brought into operation in the following years. Consequently, natural gas exports are set to rise.

At the World Economic Forum in Davos, he engaged in discussions with Croatian Prime Minister Andrej Plenković on issues related to increasing gas supplies.

A message on the Azerbaijani leader's website emphasised the role of Azerbaijan in ensuring Croatia's energy security, as well as the ongoing oil and gas deliveries from the country to Croatia and the potential for increasing volumes of Azerbaijani gas exports to Croatia.

I. Aliyev noted that Azerbaijan currently exports gas to ten European countries, eight of which are EU members. In this regard, the EU assesses Azerbaijan as a pan-European energy supplier.

At present, drilling is underway at the ACG for the first production well from the West Chirag platform, which will connect to existing infrastructure for delivering gas ashore. "Considering the time required for connection works, we can expect to see the commencement of deep-gas production by the end of this year," notes BP.

The development of deep-gas reserves at ACG is based on a project signed by shareholders on 20 September 2024. These layers are estimated to contain reserves of 4 trillion cubic feet (approximately 112 billion cubic metres). In its initial phase, production from ACG is expected to reach approximately 0.5 billion cubic metres per year.

The project is expected to enhance operational resilience by diversifying gas supply sources, thereby mitigating risks associated with potential export limitations in the event of force majeure scenarios, as experienced by BP in the past due to technical challenges affecting an underwater pipeline transporting condensate from the Shah Deniz Bravo platform to the Sangachal terminal. To resolve these issues, operations at platforms had to be temporarily halted, resulting in limitations on production and export activities from Shah Deniz. However, production and export operations have now resumed fully, and Azerbaijan is successfully fulfilling its contractual obligations for supplies.

It should also be noted that last year production at Shah Deniz plateaued at 26 billion cubic metres; thus BP's main task now is extending peak production duration by several years. To achieve this goal, the construction of a new compressor platform is planned, requiring billions of dollars in investment. This platform will operate automatically, without the need for human intervention. As stated by company representatives, this will be a completely new platform designed for capturing low-pressure gas from certain layers at Shah Deniz and delivering it to Sangachal terminal.

The final investment decision on this project will be made within this year. This indicates that 2025 promises to be rich with new gas events and initiatives.