LNG for Europe: Baku and Bucharest to diversify energy supplies Review by Caliber.Az

For eight months now, countries of the Old World have been experiencing an unprecedented fuel and energy crisis caused by the war in Ukraine and the sanctions confrontation with Russia. Against the backdrop of these negative events, Azerbaijan is reliably ensuring the energy security of European countries, including increasing gas supplies through the Southern Gas Corridor (SGC). However, along with pipeline exports, Azerbaijan is studying the prospects of entering the European market with other types of fuel. In particular, the other day the State Oil Company of Azerbaijan (SOCAR) and Romanian Romgaz agreed on a joint project to build a liquefied natural gas (LNG) plant in the Black Sea region.

Natural gas exchange prices in Europe fell slightly in October, helped by a slowdown in economic activity and reduced fuel purchases in China, warm weather which delayed the start of the heating season and significantly increased wind power generation. Pipeline gas supplies from North Africa are gradually increasing and exports of Azerbaijani gas through the TAP pipeline to consumers in Italy, Greece, and Bulgaria are also on the rise. By the end of the current year, it will reach 11.5 billion cubic metres. All this helps European states to fill their underground gas storages (UGS) relatively successfully: by the middle of October, commercial gas reserves reached 100 billion cubic metres. And Gas Infrastructure Europe estimates that European storage levels are already close to 92% of the target.

Nevertheless, analysts at the Baltic News Service (BNS), the largest news agency in the Baltics, claim that gas prices in Europe are still about twice as high as oil prices, and one should not count on a further decrease in the price of "blue fuel", on the contrary, prices may increase again during the winter period.

The fact that the Old World gas market is far from stable is also evidenced by the significant overheating of the European liquefied fuel market. Liquefied natural gas (LNG) shipments from the Gulf States and the US to EU states have increased manifold, with around 70% of all US exports now being diverted to the European region. The high intensity of transshipment has led to a number of logistical problems: in particular, dozens of LNG ships are currently berthed off the Spanish coast, unable to unload due to a lack of regasification terminals in ports. The situation is similar in the Dutch and German harbours, with a disastrous lack of LNG terminals in Germany's northern ports and the construction of new terminals will not be completed before 2024-2025. On the other hand, the freight rates for special LNG tankers have risen sharply: since the start of this year, freight rates have increased six-fold to $450,000 a day and, considering the demand, will continue to rise.

The current situation in the European gas market testifies to the fact that due to the lack of pipeline supplies the region will require offshore transshipment of liquefied fuel for many years to come. Therefore, the EU is very interested in the diversification of supply sources and the involvement of the South Caucasus, Central Asia, the Middle East, etc. in the process.

In this context, a new Azeri-Romanian initiative that envisages the construction of a liquefied natural gas plant and LNG terminals on the Black Sea coast looks very promising. Last Wednesday, during a visit to Romania a memorandum of understanding, was signed between SOCAR and the Romanian company Romgaz, headed by Economy Minister Mikail Jabbarov and Energy Minister Parviz Shahbazov to jointly develop a feasibility study of the project of construction of appropriate infrastructure in the Black Sea region. It is noteworthy that the subject was discussed in early October during the official visit of Azerbaijani President Ilham Aliyev to Bulgaria. During a series of meetings in Sofia, the head of state discussed prospects for energy cooperation with Romanian Prime Minister Nicolae Ciucă, including prospects for joint ventures in the production and export of LNG.

The details of the new project have not been made public yet, but according to Romanian media quoting the Romanian prime minister, the memorandum provides for joint investments with SOCAR in a liquefied natural gas plant on the Black Sea coast, construction of a regasification terminal and other facilities necessary for LNG transportation. It is also known that the partners will engage an international company as soon as possible to develop a feasibility study and design the new facility, and this process is expected to be completed in the near future. "Eventually we hope to have two terminals - on the eastern and western shores of the Black Sea - so that we can diversify and complement the gas supply corridors from the Caspian basin to Europe," Nicolae Ciucă was quoted in the Romanian media.

Assessing the prospects of the new initiative, Alexander Karavayev, Russian expert and researcher at the Institute of Economics of the Russian Academy of Sciences, told Caliber.Az that the Azeri-Romanian memorandum in a certain sense became a sensational event, stressing that the project was announced just a few days after Turkish President Recep Tayyip Erdogan confirmed readiness to support the initiative of Russian President Vladimir Putin to redirect gas flows from the Baltic to the Black Sea. "The memorandum between Romanian Romgaz and SOCAR plays a dual role: it helps expand the geography of Azerbaijani and, in the future, Caspian gas exports, and at the same time strengthen Romania's position in the EU as an energy hub and dealer - supplier of Caspian energy resources," Karavayev said.

Here it is appropriate to remind that it is not the first time that Baku and Bucharest turn to the idea of processing Caspian natural gas and transshipment of liquefied fuel to the European market. Thus, in April 2010, Romania, Azerbaijan, and Georgia signed a memorandum on the implementation of the Azerbaijan-Georgia-Romania Interconnector (AGRI) project, providing for the transportation of natural gas produced at the Shah Deniz offshore field to Europe. The project involved the construction of the corresponding liquefaction infrastructure on Georgia's Black Sea coast and a decompression terminal in the Romanian port of Constanta. The decompressed gas was then to be directed using the existing pipeline infrastructure to meet the needs of Romania and other European countries.

However, this project was never implemented for a number of reasons. First of all, because the construction of the liquefaction plant and regasification terminal in the port of Constanta and the purchase of special gas tankers required from SOCAR and its partners a billion investments, while the payback period would have been decades, given the relatively low gas prices of 12 years ago.

Obviously, the situation today is somewhat different, as high demand and gas prices in Europe contribute to a relatively quick payback of such a project. However, even in this case, there are a number of issues related to the source of financing for the construction of the plant, terminals, procurement of gas carriers, and, most importantly, the readiness of EU institutions to participate in lending to such undertakings. The more so because today Europe has no desire to conclude 20-year long-term contracts for the purchase of gas. At the same time, the capacity of the future enterprise is important, as high profitability is achieved if the LNG plant is designed to process significant volumes of gas feedstock.

"But in this case, it is necessary to determine the sources of raw materials, as the natural gas produced in Azerbaijan at Shah Deniz and other offshore fields is almost fully contracted as part of the supply obligations in the SGC system: in particular, through the Trans Adriatic (TAP) gas pipeline to Italy, Greece, and Bulgaria, and in future Montenegro, Serbia and other Balkan countries are already 'in line' to receive volumes of Azerbaijani gas. Free reserves of "blue fuel" are not so much, given Baku's commitment to increase exports to Europe up to 20 billion cubic metres in the next five years," Karavayev said. Therefore, the expert does not rule out the possibility that Azerbaijan could direct part of the domestic quota of gas to liquefaction, buying Turkmen, Iranian or Russian gas instead.

This conclusion is not without reason, especially because, since January 2022, Baku, Tehran, and Ashgabat have established a successful swap operation: an average of 5-6 million cubic meters of Turkmen gas daily comes to northeastern Iran, and the Islamic Republic, in turn, passes the appropriate volume of gas to Azerbaijan through the cross-border pipeline. In the first half of the year our republic received about 1.5 billion cubic metres of Turkmen gas, and today the technical possibilities for a doubling of supplies are being agreed upon. Expansion of this scheme over time will allow Azerbaijan to find additional volumes of gas to supply the prospective LNG plant as well.