Azerbaijan set to boost gas and electricity supplies to Southern Europe Anaysis by Caliber.Az

The gas price in Europe rose again to the winter highs due to the decision of Russian Gazprom to completely suspend gas supplies through the Nord Stream pipeline from 31 August to 2 September due to the repair of the only gas compressor in operation. The price of a thousand cubic metres of "blue fuel" reached $3,000 on Monday on the ICE London exchange, with the prospect of rising autumn futures remaining. Against this background, the issue of cooperation between Azerbaijan and Europe in the field of energy security becomes even more relevant. This week Sofia will begin negotiations with Baku to increase gas supplies, and the day before the possibilities of preferential supplies of Azerbaijani electricity to Serbia were discussed.

The situation with Russian gas exports to the EU has been deteriorating since late July due to the reduction of supplies via Nord Stream to 20 per cent of its maximum capacity because of the shutdown of several gas turbines. The situation was exacerbated by anti-Russian sanctions restrictions, which delayed the return of a Nord Stream turbine being repaired in Canada: after lengthy negotiations, Montreal-based Siemens Energy did return the repaired turbine to the FRG. It is appropriate to recall here that because of sanctions, another turbine was not returned to Russia on time from Siemens Energy's repair base in Canada. Well, the other day, Russia's Gazprom decided to decommission the mainline equipment in order to overhaul it in another segment of the gas pipeline - at the Portovaya compressor station.

The news caused an immediate jump in spot gas prices: pipeline gas prices in Europe topped $3,000/mcm on the London ICE on Monday, and September futures on the TTF hub in the Netherlands jumped to $3024, which is by no means a ceiling. The historic high for gas prices in Europe was in March this year when April futures reached $3898.

Gazprom earlier voiced the possibility of restoring gas supplies to 33 million c/m per day once the work is completed and there are no technical faults in the gas transmission infrastructure. However, given the incompatible approaches on a number of EU and Russian political-economic positions, such statements have no relevance today. It seems that the situation with gas and electricity prices in the EU countries will be even worse in the coming autumn and winter than it was at the beginning of this year, after the outbreak of the war in Ukraine and the adoption of the first sets of anti-Russian sanctions. The threat of an even greater gas shortage is inevitable due to a number of objective and subjective factors. The Kremlin, which has chosen energy blackmail as its most effective leverage on the collective West, will try to squeeze maximum concessions from the EU or, at the very least, introduce a split in the insufficiently monolithic position of the collective European leadership.

On the other hand, the EU has so far failed to make any noticeable progress on the issue of increasing alternative gas supplies: its own production from European fields (including in the North Sea) has been declining for years. Attempts by Germany, France, and other European industrial giants to compensate for the lack of pipeline gas by building up supplies of considerably more expensive liquefied natural gas (LNG) have not been very effective. In addition to the high price factor, the EU faces a shortage of gas tankers and LPG receiving and liquefaction capacity, which comes mostly from terminals in the Netherlands and Belgium. The construction of new terminals in Northern and Western European ports is mainly at the project stage and the first facilities will only be operational in two to three years' time. Another downside has been abnormally hot weather in Europe, which has led to a reduction in power generation in the renewable energy segment, including a drop in wind generation capacity and a reduction in hydropower generation due to the damming of rivers and reservoirs. The shortage of water for reactor cooling has also led to forced capacity reductions at nuclear power plants in France.

The situation threatens to cause a serious economic crisis in Europe. "With the energy crisis, Germany could face a winter recession and inflation could reach 10 per cent in the autumn," Joachim Nagel, president of the Bundesbank (German central bank), said the other day. A similar picture can be seen in several other EU countries where work has ground to a halt or output is being cut at a number of energy-intensive businesses, above all in petrochemical and fertiliser production, metallurgy, cement production, and so on. In addition to industry, expensive gas has increased the cost of generating electricity in combined heat and power plants many times over, hitting households and the municipal sector.

Nevertheless, the EU and, to a greater extent, the US believe that, despite the current difficulties, efforts to reduce dependence on Russian energy resources will soon bear fruit. For example, according to US Secretary of Energy Jennifer Granholm, all her colleagues in the EU are determined not to repeat the mistakes of the past, and the position of European leaders regarding the launch of Nord Stream 2 will remain as rigid in the future - the possibility of operating this line is ruled out, despite the difficult situation with energy resources. The EU's main focus is on increasing LPG supplies and building the relevant infrastructure, developing the renewable energy segment, and diversifying imports of natural gas and electricity.

In this regard, considerable hopes of the southern European states are turned to Azerbaijan, which is increasing gas and electricity supplies to the Old World region. Thus, at the end of July this year, a record was broken in the daily volume of gas transported from Azerbaijan to Europe via the Southern Gas Corridor (SGC) - supplies increased to 37 million c/m per day. According to the State Customs Committee (SCC), the total export of Azerbaijani gas in the first half of the year exceeded 11.364 billion cubic meters which are 9.5 per cent more than the same period last year. At the same time, deliveries to Italy for the reporting period increased by 2.8 times, to Greece by 1.7 times, and to Bulgaria by almost 28 per cent.

Further expansion of supplies to Bulgaria is seen as very promising, given the launch of the Greece-Bulgaria interconnector (IGB) in the first decade of July. Azerbaijani gas deliveries via the Trans Adriatic Pipeline (TAP) to the Balkan region started at the end of December 2020, and together with Italy and Greece the "blue fuel" was also supplied to Bulgaria, but in considerably smaller volumes than originally expected. Bulgaria's gas exports in January-June 2022 were 160 million cubic metres but, taking into account the commissioning of the interconnector, the figure is expected to reach 600 million cubic metres by the end of 2022, and eventually to one billion cubic metres. As Bulgarian Energy Minister Rosen Hristov noted the other day, during the current week Bulgaria will start negotiations on increasing the volume of natural gas supplies through the SGC, with plans to bring supplies from Azerbaijan to about one-third of the total volume of natural gas consumed in Bulgaria.

At the same time, exports to the deficit-ridden European market of Azerbaijan's electricity are seen as very promising. According to the Ministry of Energy, in January-July 2022 Azerbaijan's electricity exports rose by 26.3 per cent, exceeding 1.037 bn kWh and in case of such dynamics will exceed last year's record levels. In recent years, Azerbaijan's electricity was exported mainly to Georgia and Türkiye, but before the COVID-19 pandemic, Azerenerji was able to establish swap supplies of electricity to Greece, and Romania, Bulgaria, and Hungary from May 2019. This positive trend was resumed at the end of last year: Azerbaijan, in partnership with Türkiye, re-established swap supplies of electricity to Bulgaria and Greece with the expectation of expanding them to other southern European countries by 2024.

But it appears that the geographical expansion of electricity exports will happen much earlier. Thus, during a telephone conversation between Azerbaijani President Ilham Aliyev and his Serbian counterpart Alexander Vucic on Sunday, a preliminary agreement was reached on the supply of the necessary volumes of Azerbaijani electricity to Serbia on favorable terms.