What: The EU wants to double Azeri gas supply to 20 billion cubic meters per year by the end of the 2020s.
Why: The bloc is scrambling for alternatives to Russian gas.
And then: Much will depend on the progress of the upstream projects, and whether or not Turkey, which has the first rights to additional supply via the southern gas corridor, will refuse it.
Europe has turned to Azerbaijan as an additional source of gas supply to further phase out its imports from Russia. But the amount of additional gas the country would be able to supply, beyond the 10 billion cubic meters per year that it already sends, will depend on the results of future exploration work in key fields and the renunciation or non of Turkey to its first supply rights.
Currently, all the gas that Azerbaijan delivers to Europe comes from the Shah Deniz Stage 2 project in the Caspian Sea. The country has discovered several other potentially promising fields, but they are all at different stages of exploration and appraisal. This means that there is some uncertainty as to how much additional supply they might provide. In some cases, only one or two wells have been drilled in these fields, and none of their resources can be considered proven or probable reserves.
Of the undeveloped finds in the Azerbaijani Caspian, only Absheron, Umid and Garabagh are proven. Shah Deniz Stage 3, comprising gas reserves below those already in production, is unproven, as are the deeper gas layers of the Azeri-Chirag-Guneshli oil project. Resources have also not been proven at Babek’s prospect.
To begin with, there is the question of the volume of additional gas supply that Baku and Brussels are discussing. As part of a memorandum signed by the Azerbaijani government and the European Commission in July, the two agreed on the potential delivery of an additional 10 billion m3 per year of gas by 2027, bringing the total to 20 billion m3 per year.
Let’s move on to how much gas proven fields could supply. Garabagh, which is being developed by SOCAR of Azerbaijan and Equinor of Norway under a risky service agreement, could supply 2 billion m3 per year to the plateau, based on its reserves and statements by the Azerbaijani government. However, this additional volume would only be ready in 2025-26.
Absheron, developed by a joint venture between SOCAR and France’s TotalEnergies, could produce 5 billion m3 per year, but not before 2027. The existing Umid field currently produces 1.7 billion m3 per year and this could be increased to 3 billion m3. Meanwhile, Babek, located next to the field, could produce 3 to 4 billion cubic meters per year, according to Azerbaijani state estimates, but not for a few years.
At Shah Deniz Stage 3 and ACG Deep Gas, drilling of new wells is due to begin this year, and drilling results will help define resource volumes and production potential. But in any case, it would seem that Azerbaijan has the potential to supply Europe with the gas it wants. However, in all these projects, foreign investment, technology and know-how will be necessary to stimulate development. This is particularly true at Umid and Babek, both of which are geologically complex deposits that currently lack any Western participation.
Investments could also be harder to secure, as many Western majors have announced plans to cut oil and gas capital expenditure over the next few years in favor of renewables and other low-emission technologies. of carbon. This includes BP, the largest investor in Azerbaijan’s oil sector, whose current strategy calls for a 40% cut in oil and gas production over the next decade.
Similarly, Western financiers have pledged to phase out all or part of their fossil fuel investments, including the European Investment Bank (EIB), which played a key role in securing the corridor gas pipeline project. South Gas Company (SGC) which connects Azerbaijan to the European gas market has started.
On the other hand, SGC succeeded at a time when spot gas prices in Europe were generally low. Thanks to the political support of the EU and the nation states receiving Azeri gas, long-term contracts were concluded even if the prices they carried were not always in competition with Russian supply or spot cargoes. of LNG.
Now the situation is very different. Spot prices are now exceptionally high, and Russian supply is unreliable now, and should be phased out as part of EU plans in the coming years anyway. This gives additional Azeri gas, priced under long-term contracts, a competitive edge. Even if there is less political support from Brussels for new fossil fuel projects, market conditions may argue in favor of increased supply.
It is important not to underestimate the role that Turkey will play in determining the amount of additional gas destined for Europe. According to the intergovernmental agreement signed between Azerbaijan and Turkey on the development of the Trans-Anatolian Gas Pipeline (TANAP) section of the SGC, “the States expressly agree that all volumes of gas belonging to the Republic of Azerbaijan and to be shipped via the TANAP system above an initial volume of 16 billion cubic meters per year will first be offered to buyers in the Republic of Turkey.
This essentially means that Turkey will be the first to benefit from the additional Azeri supply, and that it will only be available for Europe when Turkish buyers refuse it. Whether or not they do will depend on a number of factors.
First of all, much will depend on the outlook for the Turkish economy, which in recent years has been in the throes of a major crisis. Second, it will depend on how much gas can be extracted from Turkey’s Sakarya discovery in the Black Sea. Development is already underway and Ankara says production could reach 15 billion m3 per year in 2026.
Third, there is the outlook for Russian gas. With Russian supplies in sharp decline, there will be more than enough supply for the Turkish market. Despite being a member of NATO and selling arms to Ukraine, Turkey has so far sought to play the role of arbiter in the conflict. But that could change, and a sea change in Turkish-Russian relations is certainly possible, as happened in 2015 when the Turkish Air Force shot down a Russian jet carrying out operations in neighboring Syria.