[NGW Magazine} Azerbaijan throws weight behind gas

This article is featured in NGW Magazine Volume 2, Issue 12

By Ilham Shaban

A petroleum pioneer for over a century, Azerbaijan is now having to shift its energy towards gas field development for its own use and export.

Azerbaijan plans to raise as much revenue from gas as it does from oil by the middle of the next decade. The question is how to attract investment to develop gas projects while the oil price is a half of what it was in 2013.

Last year gas-related export revenues accounted for 10.6% of the total value of exports, compared with 2.9% in 2013 – thanks to the much lower oil price that has inflated the percentage belonging to gas. 

But even in a low oil price environment, gas projects in Azerbaijan can still profitable and attractive for foreign companies, Socar’s deputy vice-president for investment and marketing, Vitaliy Baylarbayov, told NGW. 

As well as pipeline exports, there are other options for foreign companies to secure their long-term revenues, such as selling locally-produced gas to customers in Azerbaijan without worrying about fluctuations in global oil and gas prices. An example is French Total, operator of the Absheron field in the Caspian.

Total has approval to start drill a development well in this field in September and if all goes well, it will take a final investment decision by year-end. It could be producing 1.5bn m³/yr of gas by 2019 in first stage, which it would sell to domestic markets. 

Baylarbayov said that alongside exporting gas via Southern Gas Corridor (SGC), Socar Carbamide (Urea) and Socar Polymer projects would also become operational soon, while the Socar Methanol plant started earlier this year. 

The total natural gas demand of these projects would be 1.3bn m³/yr. Azerbaijan’s domestic gas need was 11.5bn m³ in 2016.

Baylarbayov added Azerbaijan spent $1bn building a six-generation semi-submersible drilling rig, the Heidar Aliev, to drill deepwater reservoirs such as Azeri-Chirag-Guneshli’s gas layer. The rig will start drilling in Absheron for first time in September. 

Shah Deniz 4 

“Let me announce for the first time that according to the latest geological studies, the reserves of Shah Deniz exceed 1.2 trillion m³. We will drill in depths between 7,300-9,000 metres and in the next ten years we plan to develop not just the third phase (SD3), but even a fourth. Even discounting Shah Deniz, Azerbaijan can produce another 15-20bn m³/yr of gas from other new gas fields”. 

Azerbaijan’s proved recoverable gas reserves are more than 2.6 trillion m³, Baylarbayov said, adding that it potentially can reach 3.45 trillion m³ in future. 

In addition to producing 10bn m³/yr gas from SD1, Azerbaijan produces 12.5bn m³/yr associated gas from the Azeri-Chirag-Gunashli (AGC) block of oil fields, of which about 9bn m³ are re-injected to maintain oil production. Baylarbayov said that the fields contain also have about 500bn m³ of deep dry gas reserves as well.  

Southern Gas Corridor Project 

SGC will bring Azerbaijan gas resources to Europe for the first time. This project was sanctioned in December 2013 and from 2018 will supply gas to Turkey and in 2020 first gas volumes will reach markets in Europe. Initial capacity of project is 16bn m³/yr, but final capacity is 31bn m³/yr.

A driving force behind the SGC, Natiq Aliev, the energy minister, passed away June 9. No successor has been identified.  

“The SGC transits seven states in six different regulatory systems. The project involves 11 different investors, reaching 12 different gas buyers. Socar and BP are present along the entire value chain of the project. The project, earlier estimated close to $45bn of investment, will now be implemented at substantially lower cost thanks to the management and procurement practices and the lower commodity prices during the period of construction,” Baylarbayov said. 

The project was designed for a long-haul of supply of gas. Thus, the gas supply contracts to Europe are exceptionally long-term, up to 25 years, and transit agreements even longer. “European buyers trusted Azerbaijan as a reliable supplier for this long period, which is a stark contrast with the length of contracts with many other suppliers. The SGC is also profitable in varying oil price environments”. 

The SGC, defined by the European Commission as a project of common interest, has benefited from loans from a variety of public finance institutions, including the EBRD, the Asian Development Bank (ADB), the World Bank and the Asian Infrastructure Investment Bank illustrating its contribution to public interest. The project seeks additional funding from public institutions. EBRD is considering additional loans as is the European Investment Bank.

In recent years, European policy makers have engaged in promoting the development of multiple new natural gas projects in its periphery: Caspian gas, central Asian gas, eastern Mediterranean gas, Middle East gas and more. The next stage of development of the SGC will facilitate harnessing these projects together into Europe. 

Important for Europe 

The SGC will bring the first new volumes of natural pipe gas to Europe in decades. While other supply projects have rerouted existing gas supplies to Europe, this project increases the amount of pipeline gas available for use within Europe. In the last decade, gas demand in Europe in certain periods has declined, and in many cases, not been replaced by renewables, but by coal.  

“Despite declarations and policy programs, unfortunately coal use is growing in many markets in Europe. Additional volumes of gas from diversified sources will create conditions for gas to retain its place or even grow as part of Europe’s fuel mix and thus contribute to Europe’s reduction of carbon emissions and air pollution,” Baylarbayov said.

He added: “In the next stage, SGC will aim to reach additional markets in Europe. One spur of the SGC that seems to be gathering significant commercial and political support is the establishment of the Ionian-Adriatic Pipeline going across Albania, Montenegro, Bosnia and Herzegovina, to Croatia. From here, SGC gas supplies can reach additional markets in central Europe.”

The SGC has served as a catalyst for building of interconnectors in southern Europe. For several years, the EU has spoken about the importance of interconnectors, but in southern Europe it did not happen until this project established the much-needed interconnectors.  

The SGC already is linking several markets in Europe that have not been linked before, such as Greece and Italy. In its report on the state of the EU Energy Union released on February 1, the European Commission pointed out the need for expanding interconnection among Europe’s gas markets.

He said: “Azerbaijan is not competing with other gas suppliers in the European market.  Thus, Azerbaijan does not want to supplant existing supplies to Europe, but rather make greater volumes available for consumers in Europe.  In addition, with the wave of instability affecting most of Europe’s periphery, including in regions where several of its existing gas suppliers are located, it is important that Europe widens the number of its gas suppliers. Azerbaijan does not operate in a zero-sum manner in relation to other suppliers but aims to create opportunity for Europe to consume more gas. An additional principle is that the SGC infrastructure will be available for use by multiple suppliers without any discrimination as to their origin or intended destination.”  

He added that Azerbaijan operates on the premise that energy supplies should never be used as a tool for political or other forms of coercion. “Azerbaijan’s only political goal through the gas export is reinforcing co-operation and greater integration with the project’s transit states and markets.”