Ilham Aliyev opens gas window to Europe Azerbaijan's blue fuel for Old World

Gas prices in Europe amid the shutdown of Nord Stream and half-empty gas storage facilities in Germany, France, and other states in the region are again tending to the winter highs. At the start of trading on Monday, the price of a thousand cubic meters of blue fuel reached $ 1710 on the London ICE exchange, with the prospect of growth in the August and autumn futures still there. Against this background, the cooperation between Azerbaijan and the EU to ensure energy security in Europe becomes even more relevant. That is why a Memorandum of Understanding on Strategic Energy Partnership was signed between Azerbaijan and the EU the day before during the visit of Ursula von der Leyen, President of the European Commission (EC), and EU Commissioner for Energy Kadri Simson to Baku.

Europe is experiencing a growing gas shortage due to the almost complete cessation of supplies of "blue fuel" via Russia's Gazprom gas transportation system. "Germany's natural gas storage facilities are almost 65 percent full, which is not bad compared to the previous period, but it is still not enough to survive the winter without Russian gas," Klaus Müller, head of the German Federal Network Agency (FNA), said, recalling that maintenance work on the Nord Stream pipeline is due to be completed this coming Thursday. "Today, however, a lot depends on whether supplies through Nord Stream will be resumed and how much gas will be pumped," the head of the German Federal Network Agency said.

Whether Russia will resume gas deliveries to Europe via Nord Stream is a rhetorical question. However, it's much more than obvious that the European countries' gas cuts have plunged the Russian gas industry into a deadlock: today almost all the gas pipelines to the West are shut down, and only the Ukrainian route is being used for minor pumping. As a result, in the second quarter of this year, Gazprom reduced its production by more than a third, producing 11.3 bcm (billion cubic meters) compared to 18 bcm during the same period in 2021.

The Russian gas industry has been suffering heavy losses due to the export cessation, but the gas shortage has also affected Germany's largest industry in Europe, as well as households and the country's social sector. Today, as an alternative, Germany and a number of neighboring countries cover their fuel shortages with natural gas from Norway and significantly more expensive liquefied natural gas (LNG) from terminals in the Netherlands and Belgium.

A similar situation is unfolding in France, where, according to La Monde, fears of rising production costs and even plant shutdowns due to rising gas prices and, as a result, electricity prices have intensified. Compared to July 2021, electricity spot prices in France are now 19 times higher, which is also reflected in the use of heating and cooling systems, and rising prices of natural gas are forcing industry and power generation systems to switch to other fuels.

At the same time, price hikes are happening not only during the winter heating season but this summer already: exchange gas prices in Europe have been growing for seven trading sessions in a row since late June. The July and August futures settlement price jumped from around $1400 to $1900 and more per thousand cubic meters. After a brief decline, gas prices in Europe are picking up again: on Monday during the trading at the London ICE, prices rose by 3.6% to $1710 per 1,000 cm, while August futures on the TTF index of the Netherlands reached $1753 per 1,000 cm.

Due to the current situation, the FNA believes that Germany and a number of neighboring countries are likely to face gas shortages over the next two winters, and only by the summer of 2024, there are chances of becoming independent of Russian gas, including the plans to build a number of LPG terminals in Germany and other European countries. At the same time, it is obvious that as the share of LPG in the total fuel balance of the EU countries is increasing, gas prices will no longer be as low as they were in the recent past.

However, these negative trends are already visible today. According to the Bloomberg agency, due to the gas deficit and the rising prices of electricity the total bill for the European energy market this winter will easily exceed $200 billion. And these calculations don't take into account the worst cases: if Russia completely cuts off gas supplies to Europe and the winter is colder than usual, the financial losses can be even more impressive.

Therefore it is not surprising that the EU is increasingly interested in alternative supplies of "blue fuel", including the increase of Azerbaijani gas exports through the Southern Gas Corridor (SGC). This was the main theme during yesterday's visit to Baku by the head of the European Commission Ursula von der Leyen and EU Commissioner for Energy Kadri Simson, who signed an agreement on the supply of additional Azerbaijani gas to Europe.

"The EU is turning to more reliable energy suppliers. Today I am in Azerbaijan to sign a new agreement. Our goal is to double the supply of Azerbaijani gas to the EU in a few years. Azerbaijan will be an important partner for the security of our supply and on the way to climate neutrality," Ursula von der Leyen wrote on her Twitter page.

During the visit, EC head Ursula von der Leyen met with Azerbaijani President Ilham Aliyev, which resulted in the signing of a memorandum of understanding on strategic cooperation in the field of energy between Azerbaijan and the European Union, presented by the EC. "The energy projects initiated by Azerbaijan and supported by the EU have completely changed the energy map of Europe. Today's memorandum is a road map for the future, and we hope that in the coming months Azerbaijan and the EU will finalize a new bilateral agreement", the head of state stated. Ilham Aliyev also noted the historical importance of the fifteen-year active partnership with the EU in the energy sector and outlined key milestones of this cooperation. "For less than two years the SGC has been operating at full capacity, all of its segments are in operation. Energy security issues are more important today than ever before, and long-term, predictable, and very reliable cooperation between Azerbaijan and the European Union is naturally a great achievement," said the President, stressing that the EU also highly appreciates Azerbaijan's significant potential in the field of renewable energy sources (RES). As the President of Azerbaijan stated, the country has already begun the process of investing in wind and solar energy, in particular, the capacity of the liberated territories of Karabakh and East Zangazur in this regard is 9200 MW. And the potential of wind energy in the Caspian Sea is 157 gigawatts, that is, the country has colossal resources in the field of RES. "In addition, of course, we have new gas fields, which we will use in the coming years by increasing gas production. By using renewable energy we will be able to reserve more gas for export, and this is an excellent situation created by our efforts and supported by the EU," Ilham Aliyev said.

The EU's readiness to support Azerbaijan in developing the renewable energy segment was once again confirmed by European Commissioner for Energy Kadri Simson. "Today we are working to ensure attractive and stable conditions for natural gas supplies to the EU, which reflect the long-term nature of the energy partnership between the EU and Azerbaijan and focus not only on gas but also on a clean energy partnership in the future," the Commissioner said.

In turn, EC president Ursula von der Leyen said that the new Memorandum of Understanding on Strategic Energy Partnership signed in Baku includes a commitment to double the capacity of the Southern Gas Corridor, bringing annual deliveries of Azerbaijani gas to 20 bcm by 2027. According to von der Leyen, Azerbaijan exported 8.2 bcm of gas to Europe in 2021 and 2.6 bcm in the first quarter of 2022. According to forecasts, the total volume of exports will exceed 10 bcm by the end of this year. "Increased gas supplies from Azerbaijan will help compensate for the reduction in gas supplies from Russia and make a significant contribution to EU energy security. With the signing of the memorandum, the EU opens a new chapter in energy cooperation with Azerbaijan, and at the same time, we lay the foundations for a long-term partnership in the field of energy efficiency and clean energy," the head of the European Commission said.

At the signing of the Memorandum, it was noted that the sustainable demand for natural gas for industry, the municipal sector, and power generation will continue in Europe after 2030. The European Union recognizes that natural gas will continue to play an important role in the years to come and only by 2050 will it be gradually replaced by other energy sources in line with the commitment to climate neutrality.

As for the potential of the SGC, it allows doubling the throughput capacity to 20 bcm of gas, but this will require considerable capital investments in infrastructure and investments to increase production in the offshore gas fields. In this regard, negotiations are underway to attract financial institutions and investors from the EU to expand the pipeline infrastructure of Azerbaijan and conclude agreements with partners ready to participate in gas production. All these aspects are the subject of further discussions with the EU. As for the potential to increase natural gas supplies, the resource base for this is quite extensive: together with the two phases of Shah Deniz, in the long term the potential of the fields Absheron, Umid-Babek, Karabakh, Shafag-Asiman will be used, the capacity of which, according to estimates of the State Oil Company of Azerbaijan (SOCAR), exceeds 1 tcm (trillion cubic meters) of gas.