The Prospects of Delivering Azerbaijani Gas to Hungary

Through which route is it possible to deliver Azerbaijani gas to Hungary? Azerbaijani President Ilham Aliyev answered this question in his interview to Hungarian National Television on the 11th of November:

“Concerning our mutual relations in the energy field, today we discussed this issue with the Prime Minister Viktor Orban and there are reasonable prospects for our cooperation” Azerbaijani President stated.

According to him, Azerbaijan considers Hungary as a partner in the field of energy cooperation and assesses the possible of routes of delivering its natural gas to Hungary.

“This might be either Bulgaria-Romania-Hungary route, or Ionia-Adriatic pipeline project, which will pass through Balkan countries, and then will go to Hungary from Croatia. It needs to be evaluated, which route suits all of us. Taking into account the “South” gas pipeline project that we are implementing and Azerbaijan’s gas reserves, I have no doubt that, Azerbaijan and Hungary will become partners in this field” – Azerbaijan President ended his statement.

Opportunities and obstacles

Then when, in fact, Azerbaijan can send its gas to Hungary? Firstly, it needs to be determined, how much gas Hungary wants from Azerbaijan? There was no talk about this during Ilham Aliyev’s Budapest visit. But previously, Hungarian government revealed its intentions regarding this matter to Azerbaijani side. We need to go a bit further back for this: when Nabucco and Nabucco-West projects were the matters of discussions, official Budapest revealed its intention to buy up to 3 billion cubic meters of gas per annum (bcma) from Azerbaijan. And this was the time when, Hungary was consuming 12,5 bcma of gas.

But right now, gas consumption decreased to 10 bcma. In any case, Hungary’s demand for Azerbaijani gas won’t increase, and also we need to take into account its interests in alternative energies and its steps in preventing the energy losses.

In October 2014, Bogdan Iliesku, a member of the management board of the company called “Transgaz” of Romania, told the media that, in the future his country intends to buy Azerbaijani gas through Bulgaria. “As part of Trance Adriatic Pipeline (TAP) project Bulgaria will import Azerbaijani gas from Shah Deniz Stage 2 gas field using the pipeline which will pass through Greece. Therefore, we can start importing Azerbaijani gas when the infrastructure is ready.” – Bogdan Iliesku stated.

It is viable to think that, later on Azerbaijani gas can go even further into Europe via the connecting pipeline between Romania and Hungary.

But the problem is that, this has been overlooked in Europe so far. Firstly, politicians think that the construction of a pipeline, and operating it and delivering the gas to a consumer is a thing that happens in a blink of an eye – just like delivering the electric power. From this standpoint, producing the first cubic meters of natural gas in the last quarter of 2018 as part of Shah Deniz Stage 2 project does not mean that, the gas will reach Europe at that exact same time. It is crucial to remind that, in the October of this year, Lutz Landwehr, director of TAP consortium, in his interview to DW radio station, told that the commercial sales of the gas from Shah Deniz Stage 2 will start in 2020. Through this pipeline, 10 bcma of  gas will be delivered to Europe which has been sold already based on contracts. So far, there is no gas left to buy.

Shah Deniz Stage 1 began operations in 2006. It has the capacity to produce about 9 billion cubic meters of gas per annum (bcma) and the second phase of Shah Deniz gas field is projected to be operational until 2019, aimed to deliver 6 bcma of gas to Turkey and 10 bcma to EU.

Can Azerbaijani gas be delivered to Hungary via “interconnectors”?

In order to achieve this, gas needs to pass through countries like Bulgaria and Romania. As mentioned before, as part of Deniz Stage 2 project, Bulgaria, Romania and Hungary want to buy 1 bcbma, 1,5-2 bcma and up to 3 bcma respectively. This means, the pipeline that will take separate route from TAP in Greece needs to have a discharge rate of 6 bcma in order to achieve this goal.

But from financial standpoint, how beneficial is this to consortium and to Azerbaijan?

When Shah Deniz Stage 2 consortium declared a tender in 2012 about creating an infrastructure between TAP and Nabucco-West in order to deliver Azerbaijani gas to Europe, one of the terms was that, the pipeline was agreed contractually to have an annual discharge of 10 bcm and later on this could be increased to twice that amount. This means that, the winner of the tender was assured by the Shah Deniz consortium that, this infrastructure will provide twice the amount of gas that will be delivered to the market when compared to the worth of the investment.

Azerbaijan really sees Balkan countries as a future potential market. Hence, the leaders of the countries around the Adriatic Sea constantly utter their interests for Azerbaijani gas. It can be predicted that, in the future another branch of TAP in Albania will be constructed which will be called Adriatic-Ionia. Demand of those countries for Azerbaijani gas is not high, approximately 1 bcma or slightly more each.

From this standpoint, the stage of delivering 10 bcma of gas to Europe might coincide with the start of operating the Azerbaijan's second biggest gas field – “Absheron”, which is planned to start after 2020. Production in that field will become real as late as 2023-2024. Because at the exact same time, the second stage expansion of TANAP-TAP pipelines will commence. Next stage will start in 2026.

Ilham Shaban is Director of the Azerbaijan Centre for Oil Studies, in Baku.