Page 8 - FSUOGM Week 47 2022

FSUOGM COMMENTARY FSUOGM

Commission touted the agreement as a victory in any case, it would seem that Azerbaijan has
in its efforts to diversify EU gas supply. But it was the potential to provide Europe with the gas that
never specified whether the extra supply would it wants. However, at all of these projects, foreign
be sourced. investment, technology and know-how will be
According to Eurasianet, citing a source close needed to drive development. This is particularly
to the Shah Deniz consortium, which is respon- true at Umid and Babek, which are both geologi-
sible for all Azeri gas exports, no additional cally complex fields that currently lack any West-
export deals have been agreed to sell gas from ern participation.
the field, beyond the 10 bcm per year already Investment may also be harder to secure, as
contractually agreed. This raises the question of many Western majors have announced plans to
whether the Russian gas will be resold to fulfil scale back capital expenditure in oil and gas over
the EU deal. the coming years in favour of renewables and
The resumption of Russian gas supply to other low-carbon technologies. This includes
Azerbaijan may simply indicate that Baku is BP, the biggest investor in Azerbaijan’s oil sector,
once again concerned about the domestic supply whose present strategy calls for a 40% cut in oil
squeeze. And indeed, the Azeri-EU deal is only a and gas production over the next decade.
memorandum, and therefore non-binding. But Western financiers, likewise, have made
the timing raises suspicion, and suggests that commitments to phase out some or all of their
Brussels is continuing to support the Russian fossil fuel investments, including the European
war effort in Ukraine, even if indirectly, as Azer- Investment Bank (EIB), which played an integral
baijan could be able to use Russian gas to cover role in getting the SGC pipeline project that con-
its domestic supply in order to free up volumes nects Azerbaijan with the European gas market
for export to Europe. started.
Azerbaijan is, of course, free to import as On the other hand, SGC succeeded at a time
much gas as it wants. But if it is using Russian gas when spot gas prices in Europe were generally
to send more supply to Europe, this would obvi- low. Thanks to political support from the EU
ously undermine the spirit of the Baku-Brussels and nation states receiving Azeri gas, long-term
agreement. It would also serve as another exam- contracts were agreed even though prices under
ple of how difficult Europe is finding it to secure them did not always compete with Russian sup-
alternatives to Russian gas in the near term. ply, or LNG spot cargoes.
Now the situation is very different. Spot
Long-term prospects prices are now exceptionally high, and Russian
Under the July deal, the EU is ultimately look- supply is unreliable now, and is set to be elim-
ing to expand Azeri gas purchases to 20 bcm inated under EU plans anyway in the coming
per year by 2027. In the long term, Azerbaijan years. This gives extra Azeri gas, priced under
could have the potential to fulfil this goal, with- long-term contracts, a competitive edge. Even if
out having to resort to significant amounts of there is less political support from Brussels for
Russian gas. The country has a number of un- new fossil fuel projects, it may be that market
developed discoveries that could be assigned to conditions drive the case for increased supply. ™
the task.
Among the undeveloped finds in the Azeri
Caspian, the Absheron, Umid and Garabagh
fields are proven. Shah Deniz Stage 3, com-
prising gas reserves located beneath those that
are already in production, are not proven, and
neither are deeper gas layers at the Azeri-Chi-
rag-Guneshli (ACG) oil project. Neither have
resources been proven at the Babek prospect.
Karabagh, which is being developed by Azer-
baijan’s SOCAR and Norway’s Equinor under a
risk service agreement, could supply 2 bcm per
year at plateau, based on its reserves and state-
ments by the Azeri government. This extra vol-
ume would only be ready by 2025-26, however.
Absheron, developed by a joint venture
between SOCAR and France’s TotalEnergies,
could flow 5 bcm per year, but not until after
2027. The existing Umid field is currently pro-
ducing 1.7 bcm per year and this could be
ramped up to 3 bcm. Meanwhile Babek, located
adjacent to the field, could produce 3-4 bcm per
year, according to Azeri state estimates, but like-
wise not for a few more years.
At Shah Deniz Stage 3 and ACG Deep Gas,
the drilling of new wells is due to start this year,
and results from the boreholes will help define
resource volumes and production potential. But

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