Soso Dzamukashvili, Contributing Researcher, Central and East European Studies Specialist
The winter energy crisis is looming in the European Union (EU), mainly caused by Russia’s suspension of gas supplies. By October, Russian energy exports to the EU have seen a 75 per cent decrease. The EU has been eager to diversify its gas imports, as, according to an official statement from the European Commission, “amid Russia’s continued weaponization of its energy supplies, diversification of energy imports is a top priority for the European Union.” On October 1, a new gas pipeline between Greece and Bulgaria was inaugurated at a ceremony in Sofia, Bulgaria- a pipeline which is set to help reduce dependency on Russian gas in the region.
The commissioning of the new Greece-Bulgaria Interconnector (GBI) pipeline was heralded by Baku and Brussels as a step towards decreasing Europe’s dependency on Russian natural gas. The construction of the 182 km pipeline connection, the foundation of which was laid 13 years ago, was completed in a short period mainly thanks to 250 million Euros provided by the EU after Russia cut off Bulgaria’s natural gas supply. The pipeline is connected to the Southern Gas Corridor and will transport gas from the three pipelines that make up the Southern Gas Corridor from Azerbaijan via Georgia and Turkey to Greece. The Greece-Bulgaria Interconnector pipeline will initially carry 1 billion cubic metres (bcm) per year, but will be able to transport up to 5 billion cubic metres per year at full capacity. That raises the potential for Azerbaijan, using Bulgaria’s existing gas pipelines to neighbouring countries, to supply higher volumes of energy further into Europe.
Prior to the commissioning of the GBI, the EU had concluded an energy agreement (Memorandum of Understanding) with Azerbaijan on July 18. The deal envisions Baku working towards increasing its natural gas exports by an extra 4 billion cubic metres of gas to the EU by the end of 2022, setting the total to 12 billion cubic metres. The agreement also envisions energy transfers to reach “at least” 20 cubic metres by 2027. While the Greece-Bulgaria Interconnector pipeline has complemented the energy agreement concluded three months ago, according to the statement of President of the European Commission Ursula von der Leyen, it “is a game changer for Europe’s energy security” and “means freedom from dependency on Russian gas.”
While “emergency” Azerbaijani gas for Europe has garnered worldwide attention, it is not clear whether Azerbaijan could be a real “game changer” and significantly substitute Russian natural gas by becoming the EU’s large energy supplier. Even though official statements abound with positive expectations, considering Azerbaijan’s energy capacity, the question arises whether Baku is able to meet those high expectations and truly help Europe out of the upcoming winter crisis.
A lack of capacity
Azerbaijan has been working for roughly two decades to become a significant gas exporter to Europe, culminating in late 2020 with the commissioning of the Trans-Adriatic gas pipeline (TAP) carrying Azerbaijani gas via Greece and Albania and across the Adriatic Sea to Italy. Under the energy deal between Baku and Brussels, Azerbaijan is expected to deliver 12 billion cubic metres of gas to the EU by the end of 2022. Azerbaijani energy export to Europe is currently being carried out via the Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipelines, which can transport a mere 10 billion cubic metres annually. To date, its exploited capacity is around 8 billion cubic metres, and, therefore, it has little room available. It is worthwhile noting that these figures already include the gas planned to be exported through the GBI pipeline. Considering Azerbaijan’s overall gas production, the pipeline infrastructure currently in place has an insufficient capacity to become an alternative for Russian gas exports to Europe, and represents only a small fraction of the approximately 150 billion-cubic-meter average volume Gazprom has been supplying to Europe every year. This makes Azerbaijan’s impact on Europe’s energy independence from Russia quite unclear. Baku’s capability to significantly increase its energy production and exports has been questioned by many analysts, even though the July memorandum with the EU, as well as the statements of Azerbaijani government officials, are full of promises.
Segments of the Southern Gas Corridor connecting (including the Greece-Bulgaria Interconnector pipeline) Azerbaijan to the EU via Georgia and Turkey (Source: Socar)
In fact, Azerbaijan’s gas reserves remain somewhat limited. The country has a modest scope for increased production and has its own growing demand to satisfy. According to British Petroleum, which operates the Shah Deniz, the largest gas field in Azerbaijan, the country cannot meet gas demand in Europe unless new investments are made. British Petroleum has also made a public statement that its Shah Deniz field cannot supply all the additional 10 billion cubic metres per year that Baku and Brussels have agreed on, and Azerbaijan’s other fields do not appear able to make up the difference. Turkmenistan has been repeatedly mentioned as a possible source, but there is no visible progress in this direction as yet.
Furthermore, Azerbaijan’s own gas production has seen shortages in meeting the surging domestic demand. In November 2021, Baku even made an agreement with Iran to import 1.5 to two billion cubic metres of gas annually. Strikingly, the country’s increasing export commitments have also relied on periodic imports to keep everything balanced. Amid growing gas demands in February, Azerbaijan agreed to deliver an extra 4 million cubic metres of gas per day to Turkey during February – only after the conclusion of a trilateral swap agreement with Turkmenistan and Iran, under which Tehran imports around 2 billion cubic metres of gas from Turkmenistan annually and exports the same volume to Baku. Meanwhile, it appears that Azerbaijan has lately been exporting more gas to Turkey and less to Europe. In August, Azerbaijan’s gas exports to Europe dwindled by 27 per cent from the figure in July, while exports to Turkey rose by 20 per cent, as per the data of Azerbaijan’s Ministry of Energy.
What are the future prospects?
Azerbaijan’s lack of capacity to quickly solve the European energy issue pertains to a lack of production due to underdeveloped fields and the insufficient capacity of the existing pipelines. Azerbaijan possesses several gas fields in the Caspian Sea, the majority of which are currently either under development or awaiting the necessary investment. However, it is worth noting that neighbouring Turkmenistan boasts, according to some estimates, the fourth-largest gas reserve in the world at 20 trillion cubic metres. In January 2021, Turkmenistan and Azerbaijan concluded an agreement to jointly develop the once-disputed Dostlug field in the Caspian Sea, which signals that the two countries both plan to increase their energy exports. However, more investments are still necessary to better exploit the energy potential of the two countries and develop sustainable pipelines that could carry significant volumes of energy. More gas production, coupled with higher demand from Europe, would provide a stronger investment case for the expansion of the current TAP and TANAP pipelines as well. According to Azerbaijani state oil company SOCAR, the TAP consortium is carrying out market studies to make the decision whether or not to invest in expanding the pipeline capacity this year. The EU, along with the US, whose presence has been growing in the region, especially since the recent clashes between Armenia and Azerbaijan, could jointly invest in infrastructure and the development of the existing pipelines. The inclusion of Armenia in the energy projects would also reinforce reconciliation efforts from both sides.
Nevertheless, it is still too early to claim that Azerbaijan will be able to meet the expected increase in its gas export volumes or significantly boost its gas exports to Europe in the short term. The lack of capacity to provide the volume of energy that Europe needs prior to the cold winter remains the biggest issue. Secondly, the volumes of the current pipelines that run natural energy from Baku to Europe are limited. Azerbaijan can only provide a mere 8 per cent of Russia’s previous gas export volume by the winter of this year, and around 14 per cent by 2027, as envisioned in the EU-Azerbaijan energy agreement. Hence, it might take up to a decade for Azerbaijan to become sufficiently capacitated to export the volume of natural energy needed to fully meet the EU’s energy demand and become a game-changing alternative for Russian energy in Europe. To overcome this issue, the EU should invest more in the development of the capacity of gas pipelines and the expansion of gas fields, as well as in the exploration of new ones.