Azerbaijan's gas exports edging up amid oil market escalation risk Сaliber.Az outlook

The risks related to Israel's war with Hamas, as well as the conflict in Ukraine, have today displaced classical economic factors, becoming a key dominant influencing the policies of the energy behemoths, OPEC leaders and oil traders. These trends make it difficult to predict the future of the oil and gas industry, supply and logistics systems, and all global operations. Azerbaijan is one of the few market players that manages to overcome this uncertainty and implement an export strategy for the supply of "blue" fuel through the Southern Gas Corridor (SGC). Thus, in January-August, our country's SGC partners from the EU increased the import of Azerbaijani gas by almost 6%.

"The growing threat of a surging military conflict in the Middle East is aggravating, which is why commodity traders, investment funds and maritime companies specialising in oil transportation should immediately review their strategies. So far, oil quotations and futures rates have managed to keep under relative control, and freight for transport demonstrates stability at the upper boundary of the cost," believes Cyril Widdershoven, senior researcher at Hill Tower Resource Advisors.

However, as the expert believes, the situation will fundamentally change if the possible consequences of a multifaceted conflict cover the Eastern Mediterranean, the Suez Canal, the Red Sea and the Persian Gulf - regions where the key routes of maritime transport of energy resources are located, as well as providing almost half of the world's maritime trade. "The cost of such a conflict would be staggering, jeopardising the future of the macro-economy and huge investments," Widdershoven stressed.

Analysts of the World Bank (WB) express similar concerns: the recently published report of the bank says that the cost of oil on commodity markets may jump above $150 per barrel in case of further aggravation of the conflict in the Middle East. In the report, the WB experts outlined three possible scenarios: "In case of a major Middle East crisis and a significant disruption of oil supply chains, its global supply may decrease by 6-8 million barrels per day: as a result, oil prices may initially rise to $140-157 per barrel. A localised military and political conflict (like the Iraq war in 2003) would result in a 3-5 million barrels per day reduction in oil supply and a rise in prices to $109-121 per barrel. If the scale of the crisis is comparable to the consequences of the civil war in Libya in 2011, prices will rise within the range of $93-102 per barrel.

At the same time, we should not ignore the fact that in addition to the prevailing military and political factors, the global energy market continues to be influenced by the April decision of OPEC+ countries to cut oil production by 1.66 million bpd in 2023, as well as by the agreements of the cartel and its partners adopted in early June on a target production cut of about 1.4 million bpd from 2024. Voluntary steps on additional oil production cuts have been taken by Saudi Arabia and Russia, which is also intended to strengthen the preventive measures taken by OPEC+ countries to maintain stability and balance in oil markets. Thus, according to some data, in 2023-2024, the decline in the oil industry in Russia alone may reach 30 per cent.

In general, the efforts to stabilise the commodity market are well justified: price volatility has noticeably decreased since July and according to 42 analysts and economists who participated in a recent Reuters poll, the average price of Brent in 2023 is estimated at $84.09 per barrel. Well, the price of December futures for Brent already today exceeds the average annual forecasts: so, on the morning of October 31 on the London exchange ICE Futures price of Brent was $87.81 per barrel, having increased after a decrease on Monday.

It is noteworthy that all of the above events took place amid intensified recession in the EU and the US at the beginning of this year, as well as a decline in China's trade performance, which reduced demand for energy resources. On the other hand, since the beginning of the year, the efforts of Washington and Brussels have been aimed at reducing hydrocarbon prices. In particular, having exhausted the possibilities to put pressure on Saudi Arabia and other OPEC cartel members to increase production, in recent months the US has been looking for alternatives to increase supply on the oil market.

In particular, this trend can be seen in the possibility of easing the oil embargo against Venezuela, and the recent talks in Barbados between the opposition and Venezuelan President Nicolas Maduro are clear evidence of this. In addition, the U.S. has taken unprecedented steps to unblock $16 billion of Iranian funds frozen in South Korea and Iraq. In turn, international sanctions control over Iran, which is rapidly increasing its oil production, reaching 3.4 million barrels per day by the end of October, has weakened.

According to Hamid Hosseini, spokesman for the Union of Iranian Oil, Gas and Petrochemical Exporters (OPEX), Iran is gradually increasing its oil exports in response to rising demand in global markets. Such a tangible increase in external supplies has been made possible by the sale of crude oil stored in floating storage facilities, and until recently these reserves were under close sanctions control by Western countries. Bloomberg experts attribute the key factor in the increase in Iranian oil exports to China, which in recent times has been buying this raw material not through "grey" schemes, but quite openly.

Due to the complexity and multifaceted nature of global factors, the unfreezing of long-standing military conflicts, and the intensification of confrontation between OPEC+ countries and the Western bloc in their desire to reduce or expand oil production, it would not be prudent to make any long-term forecasts regarding prices for energy raw materials. However, it is obvious that if the confrontation in the Mediterranean and the Persian Gulf escalates, this conflict will not directly affect the countries of Central Asia and the South Caucasus, which act as an alternative supplier of energy resources to the EU region.

Even if guided by the soft forecasts of the World Bank regarding the prospects of events in the Middle East, according to which the price of a barrel of Brent oil will be in the range of $93-102, Azerbaijan will be among the beneficiaries of these processes. Certainly, our country is interested in further growth of oil prices, as it will be possible to compensate for losses due to an objective decrease in oil production at the Azeri-Chirag-Guneshli field (ACG) and other offshore areas. Thus, last year the country produced 2.9 million tonnes of oil with condensate, with a decline of 6.9%. In turn, the State Oil Company of Azerbaijan (SOCAR) also slightly (0.1%) reduced production in January-September 2023, producing just over 5.819 million tonnes of oil.

However, if oil prices fall to a minimum of $75 in 2024, as experts of Fitch Ratings believe, our country is insured against such a negative scenario, as when drawing up the budget parameters for 2024, the revenues of the state budget of the republic are calculated based on an average oil price of $60 per barrel.

However, the main advantage of Azerbaijan (regardless of the events in the Middle East and Ukraine) is the fact that our country has recently intensified economic cooperation with Eastern and Southern European countries on the gas track. The priority of this vector for Baku is quite obvious - the Caspian region is recognised as the basis for a long-term export strategy within the framework of blue fuel supplies through the Southern Gas Corridor (SGC). Azerbaijani gas has been exported to Italy, Greece and Bulgaria for almost three years, and in 2023 deliveries will be established to Romania and Hungary. The resource base for supplies is also increasing: for example, gas production by SOCAR alone in January-September 2023 exceeded 6.428 billion cubic metres, an increase of 8.9% compared to the three quarters of last year.

At the same time, for eight months of the current year, Azerbaijani gas supplies to the EU countries increased by 5.9%, and in general, about 12-12.5 billion cubic metres of "blue" fuel will be exported to Europe by the end of the year. In turn, Azerbaijan exported over 7 billion cubic metres of gas from the Shah Deniz field to Turkey during the reporting period, which is 22.9% more than the corresponding figures of the last year.

Shortly, the volume of gas and the number of EU countries receiving Azerbaijani "blue" fuel will increase significantly, said Luca Schieppati, Managing Director of the TAP AG consortium, speaking at the RCS Academy Green & Blue Talk in early October: "More than 28 billion cubic metres of Azerbaijani gas has been transported to Europe since the launch of TAP. As for doubling the capacity of TAP - the pipe has already been laid and the doubling works will not take long, at least in the Italian section." According to the Managing Director, it is planned to increase annual volumes of Azerbaijani gas transportation by more than 20 billion cubic metres by 2027-2028.