Page 63 - bne monthly magazine October 2022

bne October 2022 EuraEusraisaia I 63
wells have been drilled into these fields, and none of their resources can be counted as proven or probable reserves.
Among the undeveloped finds in the Azeri Caspian, only Absheron, Umid and Garabagh are proven. Shah Deniz Stage 3, comprising 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 oil project. Neither have resources been proven at the Babek prospect.
To start off, there is the question of how much extra gas supply Baku
and Brussels are discussing. Under
a memorandum signed by the Azeri government and the European Commission in July, the two agreed on the potential delivery of an extra 10 bcm per year of gas by 2027, bringing the total to 20 bcm per year.
Let us move on to how much gas
the proven fields might provide. Garabagh, which is being developed
by Azerbaijan’s SOCAR and Norway’s Equinor under a risk service agreement, could supply 2 bcm per year at plateau, based on its reserves and statements
by the Azeri government. This extra volume 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 producing 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 likewise 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 in any case, it would seem that Azerbaijan has the potential to provide Europe with the gas that it wants. However, at all of these projects, foreign investment, technology and know-how
will be needed to drive development. This is particularly true at Umid and Babek, which are both geologically complex fields that currently lack any Western participation.
Investment may also be harder to secure, as many Western majors have announced plans to scale back capital expenditure in oil and gas over the coming years in favour of renewables
Turkey’s role
It is important not to understate the role that Turkey will play in deciding how much extra gas goes to Europe. According to the intergovernmental agreement signed between Azerbaijan and Turkey on the development of the Trans-Anatolian Pipeline (TANAP) section of SGC, “the states expressly agree that all volumes of gas belonging to the Republic of Azerbaijan and
“Now the situation is very different. Spot prices are now exceptionally high, and Russian supply is unreliable now, and is set to be eliminated under EU plans anyway in the coming years”
and other low-carbon technologies. This includes BP, the biggest investor in Azerbaijan’s oil sector, whose present strategy calls for a 40% cut in oil and gas production over the next decade.
Western financiers, likewise, have
made commitments to phase out some or all of their fossil fuel investments, including the European Investment Bank (EIB), which played an integral role in getting the Southern Gas Corridor (SGC) pipeline project that connects Azerbaijan with the European gas market started.
On the other hand, SGC succeeded at
a time when spot gas prices in Europe were generally low. Thanks to political support from the EU and nation states receiving Azeri gas, long-term contracts were agreed even though prices under them did not always compete with Russian supply, or LNG spot cargoes.
Now the situation is very different. Spot prices are now exceptionally high, and Russian supply is unreliable now, and
is set to be eliminated under EU plans anyway in the coming years. This gives extra Azeri gas, priced under long-term contracts, a competitive edge. Even
if there is less political support from Brussels for new fossil fuel projects, it may be that market conditions drive the case for increased supply.
planned to be shipped via the TANAP system in excess of an initial volume of 16 bcm per year will first be offered to buyers in the Republic of Turkey.”
Essentially what this means is that Turkey will have first dibs on the extra Azeri supply, and it will only become available to Europe once Turkish buyers have turned it down. Whether or not they do so will depend on a number
of factors.
First, a lot will hinge on the outlook for Turkey’s economy, which in recent years has grappled with a significant crisis. Second, it will depend on how much gas can be obtained from Turkey’s Sakarya discovery in the Black Sea. Development is already underway, and Ankara says production could reach 15 bcm per year in 2026.
Third, there is the outlook for Russian gas. With Russian supplies sharply in decline, there will be more than enough supply for the Turkish market. Despite being a Nato member and selling arms to Ukraine, Turkey has so far sought to play the role of arbitrator in the conflict. But this could change, and a drastic shift in Turkish-Russian relations is certainly possible, as happened in 2015 when the Turkish air force downed a Russian jet undertaking operations in neighbouring Syria.
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