Gas from Azerbaijan: A non-binding wish list

It was a PR coup for Azerbaijan’s President Aliyev when EU Commission President von der Leyen sealed a new energy partnership with him. But the agreement is not binding – and enormous investments are necessary.

EU Commission President Ursula von der Leyen had received criticism for her recent appearance with Azerbaijan’s President Ilham Aliyev in Baku. The main topics discussed were the status of human rights and democracy in the country that Aliyev has ruled autocratically since 2003. Von der Leyen, on the other hand, praised Azerbaijan as a reliable gas supplier: A new chapter in energy cooperation is opening with Azerbaijan, which is an important partner in efforts to become independent of fossil fuels from Russia.

Specifically, a doubling of the gas supply is planned by 2027 from the previous 8.15 to 20 billion cubic meters per year – recorded in a declaration of intent signed by von der Leyen and Aliyev. But how realistic is this goal and was Leyen’s performance in Baku worth it?

Non-binding wish list

The statement on doubling gas supplies is the most specific in the seven-page memorandum of understanding between the EU and Azerbaijan tagesschau.de present. However, it says only “The two sides aim to support bilateral natural gas trade, … depending on economic viability and market demand.”

In addition to natural gas, it is about climate targets, energy efficiency, renewable energies, the use of green hydrogen and the construction of power lines – but only with formulations such as “both sides are trying”, “both sides are trying or “both sides agree”. stresses that the MoU “does not create any binding legal or financial commitments or commitments” between the EU and Azerbaijan or in relation to any third party.

“Significant investment” required

The letter of intent states that “considerable investments in the expansion of the pipeline network of the Southern Gas Corridor and in the upstream project development” are necessary. Where exactly these are to come from is not specifically described. There is talk of “cooperation also with international financial institutions”.

The non-binding nature is based, among other things, on the fact that natural gas production is in the hands of companies and that investors have to be found. The Azerbaijani energy company SOCAR is owned by the state. But its deputy vice-president Vitali Baylarbayov stressed on August 5 at an online round table of the US think tank Atlantic Council that extensive investments from outside are necessary. Matthew Baldwin, the EU Commission’s Deputy Director-General for Energy, remained vague at the event. He spoke of possible private investors.

Expansion of the pipeline system

The gas travels through the Southern Gas Corridor, a network of pipelines through the South Caucasus to Turkey, Greece, Albania and Italy. The branch into the EU is called the Trans-Adriatic pipeline and was put into operation at the end of 2020.

According to Azerbaijani energy expert Gubad Ibadoghlu, their capacity is currently 10 billion cubic meters of gas per year and can be expanded to reach the targeted 20 billion cubic meters. But just like the other sections, the expansion not only requires investments, but also at least the five envisaged years – including the renegotiation of existing contracts. This was also confirmed by SOCAR Vice President Baylarbayov.

Russian group Lukoil involved

The gas is produced in the Shah Denis gas field 70 kilometers southeast of Baku. It is located in the deep sea area of ​​the Caspian Sea. The operator is the British group BP, which holds a share of almost 30 percent.

The second largest owner since February is the Russian group Lukoil with a share of almost 20 percent. Lukoil is a private group. In March, the company spoke out against the war in Ukraine. But his boss Vagit Alekperov resigned in April without giving any reason.

Dealing with entrepreneur Mikhail Khodorkovsky and his Yukos group is just one example of how private companies are not safe from the Russian state.

alliance with Russia

Aliyev also agreed an alliance with President Vladimir Putin two days before the Russian attack on Ukraine. Asked by a reporter, Aliyev said that Azerbaijan does not want to compete with Russia on the gas market, even if it can supply comparatively little gas. He also emphasized that an increase in delivery requires a long lead time.

In a brief analysis on the website of the London School of Economics, energy expert Ibadoghlu recalls an explosion on a pipeline in Turkey 14 years ago that has not yet been fully explained. A similar “accident” could happen now, “if Russia sees its interests threatened.”

BP refers to capacity limits

The British group BP is also cautious. The news platform Eurasianet quoted BP as saying in May that the extent to which the capacities of the southern gas corridor could be expanded is being examined. The group has also been pointing out for a long time that an increase in funding cannot be achieved from the Shah Denis field. It is possible to use gas reserves in the Azeri-Chirag-Guneschli field, from which oil has mainly been pumped so far. But the investments and the renegotiation of the subsidy contracts would take several years in the best-case scenario.

A problem for investors is the massive corruption in Azerbaijan. Reports from organizations and the media silence the leadership by restricting democratic freedoms. Von der Leyen himself referred to the need to create the conditions for investor confidence.

Gas from Turkmenistan for own needs

To cover its own needs, Azerbaijan agreed a gas deal with Turkmenistan in December 2021. As part of this, Turkmenistan supplies gas to north-eastern Iran. In turn, the same quantity is delivered to Azerbaijan from north-western Iran. This “swap” circumvents the problem that there is currently no pipeline connection between Azerbaijan and Turkmenistan. According to experts, this deal could be expanded and Turkmen gas could be supplied to Europe.

However, SOCAR Vice Director Baylarbayov expressed reservations: They are open to supplies from countries that could bring gas to the Southern Gas Corridor. Matthew Williams from the EU Commission, in turn, confirmed information that so far three percent of the EU’s gas requirements come from the South Caucasus. An increase to 20 billion cubic meters per year from 2027 still remains small compared to previous Russian deliveries. They amounted to 150 billion cubic meters.