Most up-to-date challenges for Azerbaijan’s mid & long term natural gas exports

Elchin Hasan's picture
Elchin Hasan, Independent Oil and Gas Researcher, A former BP Azerbaijan employee
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As known, Azerbaijan is going to export 16 bcm of natural gas to Europe as of 2019-20 from the Shah Deniz II field through TANAP & TAP pipelines. The other large fields under explorations are Absheron (by Total/SOCAR/Engie PSA) and Shafag-Asiman (by BP/SOCAR PSA) that have not been marketed yet. For this, a number of factors from both demand and supply side need to be met.

The IEA believes that European natural gas demand will not drop, if doesn’t substantially grow, within the next five years. The IEA forecast for imports is 30% rise for the same period. It actually sounds to be favourable for Azerbaijan’s exports. However, whether it will indeed be that advantageous for the country or not is still under question.

Particularly due to plummeting oil prices, the price decline in contractual gas in Europe is estimated to be 20-30% for the last 2 years. Significantly narrowed price differential between Europe and Asia, that has been hitherto shaping arbitrage opportunities, has also made the European market more attractive for LNG suppliers relative to past years. The current effects on European trade will be probably doubled within the next 2-3 years by the Australian boom by 2017. New policies from the European Energy Union prioritise LNG imports not only due to regasification overcapacity and recent price stimulations, but also for political security reasons. The above-mentioned trends to some extent reduce the long-term interest in Caspian gas that can almost only be transported via pipelines.

Apart from these, Iran seems to be very keen to export its gas, with lower production costs to Europe after much warming political relations with the West despite still continuing technological, financial and political barriers.

Lower demand for Russian gas and the “Big Bear’s” gradual orientation on the Asian markets should not be treated as significant opportunities for Caspian gas because Russia’s gas production capacity exceeds its outputs by more than 100 bcm which means they can immediately meet any European need once it occurs. Plus, falling prices may on the other hand be advantageous for Russia as a lower-cost supplier relative to most of its competitors.

The main local challenge regarding production and domestic consumption is that the former is not expected to noticeably rise in the mid-term while the latter is accelerating which will reduce the amount of export volumes. Currently, the domestic demand is about 11 bcm per year which is hardly met by the remaining volume by equal terms. Such a dilemma should compel the government to push the new projects such as Absheron and Shafag-Asiman forward despite unfavourable actual prices. On the other hand, current long-term plans are promising as the government states to have planned to raise production to 50 bcm by 2050.

What is the good news then? Obviously, the general content of European energy policies putting reducing Russian dependence on the top of the agenda is in favour, but not the guarantor, of Azeri Caspian gas. The frozen Turk Stream deal as a result of deteriorated political relations between Turkey and Russia is also a positive sign for Azerbaijan. Moreover, American LNG suppliers have also started to hesitate in large exports to Europe due to lowered prices and have put South America and Asia as priorities. Other analyses derive from the Middle East rivals. Until the last year some countries in the Middle East such as Cyprus, Israel, Iraq, Qatar and even Egypt was in some sense treated as competitors for Caspian gas, while today they are not for different reasons.

Overall pros & cons analyses clearly suggest that there is a point to develop major offshore gas fields of Azerbaijan. Growing domestic demand in the country also suggests the vitality of new developments.

Join the Conversation: Do you agree with Elchin? What are the key challenges and perspectives for Azerbaijani gas to Europe? Leave your comment below.

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