Energy Partnership Between EU And Azerbaijan Will Bring About Mutual Benefits

In the context of Bridging Dialogue Initiative, Dimitris Rapidis interviews Ms Gulmira Rzayeva, a senior research fellow at the Center for Strategic Studies (CSS) under the President of the Republic of Azerbaijan and Research Associate at the Oxford Institute for Energy Studies.

The discussion focuses on Azerbaijan's energy projects, challenges and threats, EU's diversification struggle, Greece-Azerbaijan bilateral relations in energy, the liberalization of Turkey's gas market, and the impact of Turkey-Russia prospective energy cooperation on Azerbaijan's projects. 

1. Which are Azerbaijan's major exporting regions and projects in terms of energy supply?

Azerbaijan is currently exporting natural gas to Georgia and Turkey via the South Caucasus Pipeline. This gas is coming from the biggest gas field in the Caspian Sea – The Shah Deniz natural gas and the gas condensate field. The second Phase (SD 2) of the field is currently under development by the consortium led by BP and SOCAR. The consortium will expand its gas market reach to Southern Europe, along with Georgia and Turkey. The sales and purchase agreements with the nine (9) European gas buyers, set for 25 years and worth $100bn, have been already signed and up to 11 bcm/a of SD 2 gas is expected to flow to the Greek, Bulgarian and Italian markets by early 2020.

The TAP pipeline which will deliver this gas to the market, gives many opportunities to the gas-producing companies in terms of shipping to other neighboring countries. The gas can flow to North Italy via the Snam Rete Gas (i.e. ENI affiliated company) system as well as to other countries via existing interconnectors through the development of reverse flows. In addition, once commissioned, the SD consortium will be able to ship some volumes to Balkan countries through the Ionian Adriatic Pipeline as this is the only region in Europe (i.e. excluding Turkey), where demand is expected to double by 2030.

This is not to say that the SD consortium should participate in the transportation to other potential markets as this can increase the cost of gas. However, this development  will safeguard the security of demand for the gas-producing companies, especially during seasonal fluctuations. 

2. Which are the biggest challenges and threats for Azerbaijan's energy policy?

There is a Chinese saying: May you live in interesting time. Luckily or not, we are living in a very interesting time in terms of global energy turmoils. Our region is particularly sensitive and vulnerable to these changes. External factors such as the political crisis in Ukraine, the rapid decrease of oil price around $60 already, the shift on the geopolitical interests of the major powers in the region, all these affect the European natural gas market and its future development – especially supply/demand dynamics, price and pricing models. The possible US LNG suppliers, the EUC policy to reduce the share of gas in the energy mix (e.g. the  increasing role of renewables and efficiency measures; coal perceived as a rather short-term solution) contribute to these changes.

All these developments and challenges turn the market increasingly uncertain and tight for the gas-producing companies that invest billions of dollars in various segments of mega-value chain to produce, transport, and market their gas. The major challenge for Azerbaijan is to make right decisions on its energy projects as these very decisions are going to determine the well-being of the nation for the next 30 years.

The companies that are implementing the projects are faced with even bigger challenges, especially due to growing uncertainties in natural gas market forecasting, whereas supply-led infrastructure projects are interwoven with geopolitical constraints, but also with the current low price for hydrocarbons, a fact that can make upstream projects very costly and with low rate of return. I think that the decision of the government of Azerbaijan and the SD consortium to approve the FID for SD 2 last year (i.e. December 2013) was extremely right, as It secured sale and purchase agreements with the buyers. To be honest, I am not sure if such a decision would be possible under the current circumstances. 

3. What is your opinion on EU's diversification struggle? Could a closer partnership between Brussels and Baku be of mutual benefit?

No doubts that this partnership will bring about mutual benefits. The EU is now putting every effort to diversify its energy resources away from the traditional suppliers in order to mitigate the consequences of possible gas disruptions resulting from the crisis in Ukraine. However, the EU does not have many realistic options on the table. There is plenty of gas in the nearby regions that could be supplementary to Russian gas, but none of these projects have secured the FID of production, nor any binding agreements with the buyers or in terms of the supply-side infrastructure. To the contrary, the Shah Deniz consortium did. 

Market is getting tighter for gas-producing companies due to the reasons mentioned above. According to IEA, the demand will stagnate in Europe at least untill 2020 and the level of 2010 will be only reached around the 2030s. However, there will be enough niche for the gas coming from alternative sources such as SD 2. Up to mid-2020s, European companies would be contractually obliged to import at least 115bcm/a of Russian gas, a number that is expected to reduce to around 65bcm/a by 2030. Countries with strong geopolitical fears with regards to Russian gas dependence will most likely decide either to terminate or avoid renewing their long-term contracts with Gazprom upon expiration. Furthermore, the indigenous production in Europe is declining rapidly and by 2030 the conventional gas production loss of Europe will be around 110bcm/a of gas. The option might be to subtract these declining import volumes from the North African countries, including Algeria and Libya. But the latter is going to face challenges while attracting sufficient new upstream investments, which can cause a decrease in gas production and increase in domestic demand. For instance, gas exports from Algeria are expected to reach 28bcm/a in 2015, whereas in 2020 only 20bcm/a and 22bcm/a in 2030.

4. According to your opinion, what conditions should be met so that Greece and Azerbaijan can develop a fruitful and long-lasting partnership in the field of energy?

With the selection of TAP project we are witnessing how Greece has gained value and importance in both strategic and commercial scale. As the ITGI project was not selected by the SD2 partners, Greece was essentially an outsider, having no direct role to play. However, with the TAP project passing through the Greek territory, the country is no longer a spectator and now it has a greater political and geopolitical role to play. This development has strengthened political and economic relations between the two countries. Azerbaijan is keen to deepen this relationship with the acquisition of DESFA, which is a win-win partnership not only for Greece and Azerbaijan, but also for the EU broadly. In this respect, I do hope that this deal will be approved by the EUC by the end of April 2015. 

In addition, this strategic TSO owns an LNG terminal in Revitoussa and SOCAR could bring more gas in the form of LNG to the Greek market or/as well as to other neighboring markets. For that the capacity of the plant should be expanded. Additionally, the agreement signed between Greece, Bulgaria and Romania, with respect to the establishment of the so-called “Vertical Corridor”, increases Greece's role as an energy transit country.

5. Given that geopolitics are inextricably interwoven with energy policy, do you believe that Turkey could be the "bridge" between EU and Azerbaijan, as well as between other adjacent markets, like Iran or Iraq for instance?

We have to give a credit to the paramount geographic position of Turkey. It gives  many advantages including the fact that it can be a bridge between EU and Azerbaijan. I think that all the attempts of Turkey to use its geographic position and growing market to benefit from it geostrategically can be considered as a rational choice, especially in these turbulent times, and as long as the way of doing it so does not come at the expense of other states' interests. Azerbaijan, having established a strong cooperation with Turkey in the energy sphere has never experienced any serious problem in the transit and marketing of its hydrocarbons to and through Turkey. And in this respect, I am truly confident that this will remain the case for many decades to come, whatever the geopolitical shifts might be in the region. Between Turkey and Azerbaijan, apart from the strong historic and traditional ties, there are also mutual economic and political interests.

6. What is the degree of the liberalization process of Turkey's gas market?

The Natural Gas Market Law, which was an important step towards the liberalization of the Turkish market, was published in 2001. Since then, there has been significant structural changes. Before the Law entered into force, the market share of the state monopolist BOTA was almost 100%; now private companies have a market share of 20%, importing directly from Gazprom via the Western Line up to 10bcm/a of gas. This is paving the way for a multi-actor market structure. But during these 13 years of market reforms, not all targets have been met and the Turkish government has been slow in implementing all provisions of the Law. The main reason why the Turkish government originally suggested the opening of market competition was the growing natural gas demand, mainly driven by demand in power generation. 

Consequently, the government’s number-one concern in terms of market shift, along with all its uncertainties whatsoever, was whether it would be able to provide, in an economically sound basis, a secure supply of natural gas in an increasingly competitive domestic wholesale market, and thus address the growing demand. Turkey still needs to do a lot more in this way. I think that the more effective policy and priority for Turkey would be to grant volume transfers to the private sector, followed by the transfer of actual contracts, once the share of private companies in the domestic market would be sufficient. 

7. What is the impact of the recent Turkey-Russia signed POI on the projects in Azerbaijan?

It will not have any impact on the SD Phase 1 and Phase 2 gas sales to both Turkey and Europe, simply because the volumes have been contracted already by the buyers. We should not forget that only POI is signed, which has not actually any legal force and its realization depends on the geopolitical developments in the region. One thing should be clear as well: besides 3bcm of gas for the Turkish market, there are no new, additional volumes to be transported to the Turkish and European markets, only that the same Russian gas volumes will be re-routed via “Turkish Stream” to bypass Ukraine. Turkey can have a supply shortage in 2016-2017 because of the growing demand; therefore this additional 3bcm is necessary for the Turkish market. 

Of course, Turkey can import additional volumes from Russia in the future, as it is estimated by BOTAŞ that by 2027, Turkey will need to import at least an additional 10bcm/a, and it is not yet clear where this could come from. Turkey has two (2) options to choose: either from the so called “next generation” gas fields in Azerbaijan or from the increase in import volumes from Russia. Any prospective volumes, even stemming from Turkmenistan and KRG, are not feasible in mid-term perspective. I think that the major driving force for the decision of the Turkish government will be the price. Currently, Turkey pays the lowest price for imported, pipeline-transported gas from Azerbaijan.

Ms Gulmira Rzayeva holds a BA in international relations from the Baku Slavic University and an MA in Global Affairs from the University of Buckingham, UK, Ms. Rzayeva has published several scholarly publications focusing on her area of expertise. She is a co-author of the report entitled “Strategic Imperative: Azerbaijani Gas Strategy and the EU’s Southern Corridor”published at the SAM Review Journal of CSS; author of "Natural Gas in Turkish Energy Market: Policies and Challenges" and (forthcoming)"Outlook for Azerbaijani Gas Supplies to Europe in the 2020s and 2030s: Challenges and Perspectives", published at the Oxford Institute for Energy Studies website.