Azerbaijan buys Russian gas, which it will probably sell us at a premium

Azerbaijan has started importing gas from Russia under a deal that is expected to allow Baku to meet its domestic demand, but which raises serious questions about its recent deal to ramp up exports to Europe.

Russia's state-owned gas producer and exporter, Gazprom, announced on November 18 that it started supplying gas to Azerbaijani state-owned company SOCAR on November 15 and will supply a total of one billion cubic meters until March 2023. The agreement stands in any case reserved, a sign that the purpose is not only internal to Azerbaijan.

In a statement released to the Azerbaijani news agency APA, SOCAR said it has been collaborating with Gazprom for some time and that the two companies "are trying to optimize their infrastructure by organizing the mutual exchange of gas flows".

The agreement was signed precisely in view of the peak winter demand period, as Azerbaijan will try to maintain supplies to its domestic gas customers, while meeting its export commitments to Georgia and Turkey, as well as the recent expansion of trade with Europe.

Exports to Europe through the Southern Gas Corridor were expected to reach 10 bcm this year, but under a new memorandum of understanding with the European Union signed in July, Baku has agreed to increase exports to 12 billion cubic meters.

The increase was intended to help Brussels compensate for the loss of Russian gas supplies, which were cut off by Moscow in retaliation for EU sanctions following Russia's invasion of Ukraine. While the deal was highly publicized in both Brussels and Baku, the exact source of the additional gas was never clarified. It seems not impossible that it is Russian gas transited through Azerbaijan, "cleaned" and then resold at high prices deriving from the new contracts.

Problems with the pledge emerged as early as September, when Azerbaijan's Energy Minister Parviz Shahbazov announced that Azerbaijan would export just 11.5 billion cubic meters to Europe this year, without giving any clues as to the reason for the reduction of the export target. Even the provenance of this modest additional volume remains unclear.

A source close to the consortium that owns the giant Shah Deniz gas field, which currently supplies all of Azerbaijan's exported gas, confirmed that no new export contracts have been signed and that the field is currently committed to supplying only the 10 billion of cubic meters previously agreed. So if the production is not Azerbaijani, where does the extra gas that Baku is expected to export to Europe come from?

Now, the news that Azerbaijan will import gas from Russia this winter suggests that Baku intends to use Russian gas to supply its domestic market, in order to free up gas and enable it to meet its commitments with Brussels.

As part of the deal signed in July, Baku also agreed to double exports through the Southern Gas Corridor to 20 billion cubic meters a year by 2027 – the most the existing pipeline network can carry.

This increase will be costly and time-consuming to implement, requiring both the addition of new compressors to existing pipelines and major investments in Azerbaijan's gas fields to produce the necessary gas.

To date, no investment decision has been made for the expansion of the three pipelines that make up the Southern Gas Corridor carrying Azerbaijani gas to Europe, while doubts remain as to where the additional 10 bcm of gas will come from. per year. BP confirmed earlier this year that the giant Shah Deniz field it manages is unable to deliver all of the additional 10 billion cubic meters required.

Azerbaijan has other small gas fields, but even their production should not be sufficient to meet Baku's commitment to Brussels, which suggests that the gas must be procured from other countries in the region.

This has revived long-held hopes that Azerbaijan could transit gas from its neighbor across the Caspian, Turkmenistan, which boasts the sixth-largest gas reserves on the planet. However, this would require large investments because the transit through Iran, as foreseen by the agreements of recent months, is put into jeopardy by the recent political confrontation between Baku and Tehran. At this point it seems increasingly probable that this gas is nothing more than Russian gas escaping sanctions, paid much more expensive than the old long-term contracts linking Gazprom and Western countries. a bargain!

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The article Azerbaijan buys Russian gas, which it will probably sell us at a premium, comes from Scenari Economici .

This is a machine translation of a post published on Scenari Economici at the URL on Thu, 24 Nov 2022 09:00:10 +0000.