Expansion of Southern Gas Corridor: Beyond hoary thinking and indolent morality
ANALYTICS 21 June 2022 - 09:55
Orkhan Amashov Caliber.Az |
At a time when the circumstances engendered by the war in Ukraine are continuously sending seismic shockwaves throughout the global energy markets, and the EU has effectively been compelled to decisively grasp the perilous side of overreliance on a supplier with whom it has chronically failed to maintain trustworthy relations, Baku’s critical role looms larger than ever.
Europe’s desperate and somewhat belated quest to wean itself off Russian energy sources is evident from the recent measures taken. The sixth package of sanctions agreed upon on 30 May is a testament to the EU’s resolve, which is by no means contrived, but yet is insufficiently unflinching when it comes to the gas component.
The latest measures will immediately impact 75% of Russian oil imports and, by the end of the year, 90% of Russian oil imported into Europe will be eliminated. However, when it comes to gas supplies, continental policy-makers have so far shown some hesitancy in biting the bullet, and a more phased-out approach has been deemed more judicious.
EU energy doctrine and Azerbaijan
At the present juncture, the EU’s energy security vision seems to be hinging on three essential components, namely (i) diversifying supplies, (ii) reducing demand, and (iii) ramping up production of so-called green energy.
Since dashing into renewable energy at lightning speed is plausible only as a rhetorical device and not as a practical option, with reducing demand itself taking longer, diversification of energy supplies seems to be the most expedient measure.
Azerbaijan enters the equation in the context of the European desire to diversify gas supplies. There is a growing realisation in the EU that investment in alternative pipelines is obligatory, albeit hitherto relegated to the bottom rung of the priority ladder.
As of December 2020, Azerbaijan’s energy sources are interwoven into the EU’s critical supplies. The 3500-km long Southern Gas Corridor (SGC) traversing seven countries is the linchpin of Baku’s energy export capabilities, defining its clout and prospects.
Azerbaijani current gas exports stand at 22 bcm per annum, and it is expected that the volume will reach 24 bcm this year. Out of this, 6 bcm goes to Türkiye, and 10 bcm to the EU via the SGC.
“The demand for Azerbaijani gas is growing, the potential is here, political will is here, we should not waste time,” declared President Ilham Aliyev most emphatically and in a no-nonsense manner during the landmark Baku Energy Week in early June.
The increase in Azerbaijani energy export potential will require, inter alia, putting new gas fields in operation and an increase in the capacity of the SGC. For instance, the potential of the Umid gas field, the overall reserves of which are estimated at between 300-600 bcm, has been subject to close scrutiny. It is expected that the annual gas supply from the field may be doubled to 3 bcm, having a significant impact on overall Azerbaijani exports.
But there is another option that has been received with enthusiasm, due to the fact it does not require the development of new infrastructure - a gas swap deal. In December 2021, after extensive deliberation, Azerbaijan finalised a gas swap agreement with Turkmenistan and Iran.
According to the deal in question, Ashgabat has begun sending up to 2 bcm of gas annually to northeast Iran which, in turn, sends an equivalent quantity from its northwest to Azerbaijan.
Investment
What is abundantly clear is that whatever augmentation mode is pursued, there will be a need for massive investment. The optimisation and extension of the SGC are only possible through a collective decision requiring a consensus between all stakeholders. Thus there is an indubitable political element, demanding will and resolve to step in financially.
President Aliyev has clarified a couple of times, both during his numerous interviews and during his latest address at Baku Energy Week, that the gas business is constructed in a specific way. The key tenet is that "you first sell gas, sign the contract, then start to invest and extract". In other words, building infrastructure and new connectors necessarily comes first.
Whilst confronted with a question on Baku’s role in European energy security at the World Economic Forum in Davos on May 23, Azerbaijani Economy Minister Mikayil Jabbarov stated there was available gas, but large-scale investments were needed to extract and deliver this.
As Jabbarov propounded, it could be tentatively surmised that, due to its policy to switch from fossil fuels to renewable energy, the EU severely underestimated the importance of investing in alternative gas supplies in the interim, gas being regarded as a transitional energy form.
The same sentiment was voiced by Energy Minister Parviz Shahbazov, who was in attendance at the World Utilities Congress in Abu Dhabi this week. In addition, the high-ranking official stated that Baku had been working intensively with the European Commission on upgrading the infrastructure to accommodate the increase in gas supply to Europe.
James Durso, a commentator on foreign policy and national security, wrote in Eurasia Review that, in the light of Kazakhstan’s recent announcement to the effect of stopping natural gas exports in 2023 to meet increased domestic demand, there may be a renewed impetus towards financing and expanding the SGC.
Bespoke role
It is clear that Azerbaijan, by virtue of its export credentials, cannot and will not come to the rescue of the continent. Even with the megalithic investment and utilisation of all possible augmentation routes, the 155 bcm per annum received from Russia, prior to sanctions, cannot be compensated via Baku.
Azerbaijan's role is bespoke and aimed at a specific segment of the EU market, namely the South-Eastern section. Currently, more than 8 bcm per annum goes to an Italian interconnector. If doubled, the volume could play an indispensable role for Bulgaria and Serbia, both of which have critical ties with Baku.
Given that Bulgaria's annual gas requirement is around 3.5.-3.7 bcm and Serbia's is 2.7 bcm, Azerbaijan, via the increase in export volumes, will have what it takes to provide sufficient security.
It is difficult to establish, with any degree of certainty, when the aforementioned tailored role will move from mere potentiality to the practical domain. Marijaa Savova, Head of Commercial, Trans-Anatolian Pipeline (TAP), for instance, believes doubling the capacity of the westernmost section of the SGC to 20 bcm per annum is possible, and the objective could be achieved within 45-65 months.
As a key player in the energy market with exponentially growing significance, Azerbaijan is neither given to rodomontade nor driven by an unrealistic perception of its own worth. In Baku, it seems to have long been understood that the criticality of its role is contingent on its bespoke indispensability in the context of South-Eastern Europe and freeing those countries from the Russian gas yoke.
Caliber.Az
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