Page 4 - FSU OGM Week 22 2021

FSUOGM COMMENTARY FSUOGM

OIES casts doubt on

SGC expansion

Unfavourable market and political conditions make the project unlikely

CAUCASUS A report published by the Oxford Institute The Shah Deniz 1 contract is likely to be
for Energy Studies (OIES) has cast doubt on renewed eventually, the OIES report argues.
WHAT: whether an expansion at the Southern Gas Cor- “The background is a solid economic and
A report published by ridor (SGC) gas pipeline network will go ahead, political relationship: Turkey now imports two
OIES views the SGC pointing unfavourable market and political thirds as much gas from Azerbaijan as from
expansion as unlikely to conditions. Russia; and the two governments ... are on good
go ahead. The SGC network carries gas from the BP-op- terms,” the report states. “Nevertheless, the
erated Shah Deniz field in Azerbaijan to Georgia, stand-off in negotiations, and interruption of
WHY: Turkey and Europe, consisting of the South Cau- flows, is indicative of changing market trends
The failure of the Shah casus, Trans-Anatolian and the Trans-Adriatic – which in turn may produce changes in Azeri
Deniz group to strike a pipeline. Following the Trans-Adriatic pipeline’s upstream producers’ gas sales strategies.”
deal with Botas shows the completion at the start of this year, BP, SOCAR Closing down some of Shah Deniz’s wells
difficulties of marketing and its partners are preparing to conduct market would be a “very undesirable option” for its oper-
Azeri gas. tests this June on doubling its capacity to 20bn ators, especially as this will also mean they can-
cubic metres per year. not fulfil contracts for condensate supplies from
WHAT NEXT: the field. As such, the group will look to market
The project is also Turkey's strategy shift the gas elsewhere, including in Europe, for stor-
unlikely to garner much Shah Deniz’s first phase has for years supplied age, and for sale to the domestic market. The
EU support given the 6.6 bcm per year of gas to Turkey, but the con- Shah Deniz consortium is likely to use a combi-
push to decarbonise tract with Turkish firm Botas expired on April nation of these options, the OIES report argues.
energy. 17, bringing supplies to a standstill. Botas instead Gas flow data indicate that it has opted first to
wants to import more spot-priced LNG to save market the gas in Europe, where it will fetch the
on cost. highest price. There is limited room to store the
For BP and its partners at Shah Deniz, the gas, as Azerbaijan’s two main storage facilities
failure to agree terms with Botas “highlights have a combined capacity of only 2.9 bcm.
the difficulties of marketing Azeri gas; sales in Selling the gas domestically would help solve
Europe are inhibited by transport costs, there is Azerbaijan’s gas supply squeeze. But wholesale
limited volume flexibility upstream, and sales and retail prices in the country are priced at
to the domestic Azeri market are constrained below the cost of production and supply, with
by low regulated prices,” Simon Pirani, a senior the gap covered by state-owned SOCAR and the
research fellow at OIES, explained. The non-re- Azeri treasury. The Energy Charter Secretariat
newal “is indicative of broader problems: chang- estimates that Azeri retail gas prices are up to 13
ing market conditions in Turkey and Europe times less than prices in the EU.
may further frustrate timely exploration and OIES estimates the cost of delivering Shah
development in the Caspian Sea, which in turn Deniz’s gas to Italy at $273-293 per 1,000 cubic
could undermine prospects for expansion of the metres, which is substantially higher than cur-
SGC to Europe this decade.” rent prices at Italy’s PSV hub. This also makes
Turkey also buys gas from Shah Deniz’s sec- the gas much more expensive than supplies from
ond phase, under a contract that runs from June Algeria, Libya, Russia and Norway.
2018 until 2033, with supplies having nearly “The Shah Deniz consortium’s current
reached their plateau rate of 6 bcm per year, dilemma highlights a general problem for Azeri
according to BP. producers: while domestic prices are very low,

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