There is a conundrum at the heart of European-Caspian energy relations: the politics are nearly in place, but project deliverability is not. Europe wants to secure substantial volumes of gas from Azerbaijan but, although Baku says it is making progress on plans to develop the fields necessary to meet longer-term targets for European exports, it risks being too late to help out because of long project timelines. Where the politics are not in place is that Turkmenistan, the only Caspian source that could help Europe access the additional gas it needs in 2023-24, remains unwilling to engage in the kind of discussions that would help it contribute to Europe’s requirement for immediate gas supplies.
The key issues are: timings for Europe’s requirement for additional imports (now); the requirements for infrastructure to carry these imports (now); and the timings for potential increases in Azerbaijani supplies (unclear). Then there are the terms under which Turkmenistan might consider exports across the Caspian; Turkey’s role as a potential market; and whether deliveries to the European Union should focus on the Balkans, rather than Italy.
The underlying market context is how countries are managing their gas balances. The table below examines how Europe has rebalanced while losing around 80 billion cubic meters (bcm) of Russian supply.
Additionally, storage has been rebuilt, which in effect means parking current supply for tomorrow’s demand. On the other side of the rebalancing sheet, the principal components are falling demand and liquefied natural gas (LNG) imports. Pipeline imports increased only marginally. Interestingly, the 74 bcm demand fall is very close to the 15 percent reduction targeted by the EU Commission, and achieved through reaction to high prices, not government decree.
Europe has been lucky. Asia has taken less LNG and November was warm. EU total storage capacity in November was 95 percent full; by the end of November it had hardly moved, down to 94 percent. In effect, Mother Nature gave Europe a whole storage month.
Next year will be harder. There will be a full year of reduced (possibly zeroed-out) Russian gas, Asian LNG demand might return, storage will need to be rebuilt, and it might get cold in Q1 2023.
The Commission has spent considerable effort touring pipeline-exporting countries, like Norway, Algeria, and Azerbaijan, in search of more supply. In July, Commission President Ursula von der Leyen and Energy Commissioner Kadri Simson were in Baku and came back with a memorandum of understanding (MOU) on expansion of the Southern Gas Corridor for more gas—from 12 billion cubic meters per year (bcma) to 20 bcma by 2027.
With Shah Deniz nearing full production now, Azerbaijani output will be up 5-6 percent in 2022. Exports will be up too, roughly unchanged to Turkey but up for Trans Adriatic Pipeline (TAP) markets Italy, Greece, and Bulgaria. Energy Minister Shahbazov recently talked about 11.5 bcm to Europe, and this looks realistic. Note, TAP volumes recently have been at 12 bcma.
With reasonable expectations of a small rise in domestic demand and unchanged underground storage levels, Azerbaijan needs imports to balance.
In January 2022, a scheme involving Turkmenistan’s gas exports to Azerbaijan via an Iran 1-2 bcma swap started. Then in November came disclosure that Russia would supply Azerbaijan with 1 bcm between November and March. Exact volumes flowing have not been reported, but the balance above suggests at least 1.2 bcm is needed in 2022. A cynical view would be that Azerbaijan has successfully maneuvered to buy in gas at one price and sell it spot at high European prices.
Meanwhile, Azerbaijani gas exports to Turkey remain down from the 2020 level of 11.5 bcm as a result of only a partial renewal of the Shah Deniz Stage 1 contract, with Azerbaijan preferring to retain some volumes for export flexibility. While commercially this makes sense, it may not politically. In an election year in 2023, Turkish President Recep Tayyip Erdogan will want to ensure maximum gas flows this winter, and Ankara is pressing Baku for an extra 10 bcm.
Erdogan is scheduled to hold tripartite talks with Turkmenistan’s President Berdimukhammedov and Azerbaijani President Ilham Aliyev on December 14. According to a Bloomberg report on December 9, senior Turkish officials have said Erdogan would revive the idea of shipping Turkmen natural gas to Azerbaijan for subsequent insertion to the SGC. Almost certainly, the Turkish idea is based on using compressed natural gas (CNG) for the shipments, which would require construction of compression facilities and either specialized tankers or specialized storage cylinders for loading onto barges. In 2010, the International Energy Agency estimated it would likely cost around $1.40 to $2.00 per MBtu to ship 5 bcma of CNG across the Caspian, compared to costs of around $0.70 to $0.80 for/MBtu for gas transported by pipeline. Commercial sources in Ashgabat told one of the authors at that time they considered CNG transport would be roughly four times as expensive as pipeline gas. The authors regard a CNG Trans-Caspian value chain as being a non-starter.
Azerbaijan is therefore in a curious position. As a major gas producer, it has signed an MOU to carry more gas from Baku to Europe but lacks a clear path to providing all or most of the necessary input itself. Meanwhile, it has to import gas from Turkmenistan via Iran and Russia to help it meet its domestic and export commitments. And while Apsheron Stage 1 should come on-stream in 2023, its 1.5 bcma output is already earmarked for the domestic market.
https://www.atlanticcouncil.org/blogs/energysource/europe-and-the-caspian-the-gas-supply-conundrum/