Despite other South Caucasus countries (Armenia and Georgia), Azerbaijan is not dependent on natural gas import from the third countries, as it is energy-independent due to its vast energy resources. Whereas, until 2007, Azerbaijan was importing Russian natural gas for its domestic consumption. However, after Russia increased its gas prices for Azerbaijan and Azerbaijan’s State Oil Company (SOCAR) augmented domestic gas production, Azerbaijan suspended its gas import from Russia. In 2008, during his visit to Azerbaijan, the CEO of Gazprom Alexei Miller had made a proposal to Azerbaijan’s President Ilham Aliyev to buy Azeri gas on market prices with long-term contracts. Accordingly, in 2009, Russian Gazprom and Azerbaijan’s SOCAR signed a purchase agreement for 500 million cubic meters of Azeri gas by Russia per annum. This agreement has been amended there times in 2010, 2011 and 2012, respectively for purchase of 1 bcm, 2 bcm and 3 bcm per annum by the end of 2014 and is supposed the possible extension of agreement.
Surprisingly, in June 2015, Head of Gazprom, Alexei Miller declared that the Gazprom is ready to supply several billion cubic meters of natural gas per year to Azerbaijan again, to meet the needs of the country, since existing purchase agreement of 2009 allows suspending and resuming the gas supply any time. SOCAR clarified that Gazprom will supply gas for the Azerbaijan Methanol Company (AzMeCo) in Garadagh region, which was left without raw materials, as it did not sign the contract in time, with the State Oil Company. Gazprom and AzMeCo, officially signed an agreement in early September for the purchase of 2 bcm/a of natural gas from Russia’s Gazprom Export LLC as of 20 September. Although, the amount of “2 bcm” seems grandiose for AzMeCo’s activities.
Earlier, during their meeting in Saint Petersburg in June 2015, the Heads of SOCAR and Gazprom, respectively Rovnag Abdullayev and Alexei Miller had discussed the import of Russian gas by Azerbaijan again, precisely by SOCAR, but not AzMeCo. Rovnag Abdullayev stated that both parties agreed on temporary swap operation for gas supply by importing 2 bcm of Russian gas by Azerbaijan’s SOCAR to keep them in its underground gas storages (‘Garadagh’ and ‘Kalmaz’) and later to supply back that gas to the southern regions of Russia as of 2017. Thus, along with AzMeCo’s purchase, Gazprom will supply Azerbaijan around 4 bcm of natural gas. Actually, earlier, Rovnag Abdullayev had also mentioned that SOCAR holds negotiations with Iran on swap operation regarding Azerbaijan’s gas storage facilities. Because, during his visit to Iran in July 2015, Head of SOCAR mentioned that, Azerbaijan can save Iranian gas in its massive gas storages. Because, “after 2008, Azerbaijan has invested in this sector to increase the capacity of the gas storage from 800 million cubic meters to 3.5 billion cubic meters. The volume of gas storage facilities reaches even 5-6 billion cubic meters”, Abdullayev said.
Head of SOCAR said that, since we have expanded the capacity of our gas storage facilities and Gazprom has a surplus of natural gas, we decided to store these amounts in our gas storage facilities. Given the fact that, Gazprom decreased its gas import from Turkmenistan and Uzbekistan this year (probably due to surplus in its domestic production and falling gas demand of Europe) and because of delay in Turkish Stream’s first leg to Turkey (which leaves more extracted gas aside), the surplus of Russia’s gas production is understandable.
Although SOCAR was exporting Azeri gas to Russia’s southern regions since 2009, due to high gasification of Azerbaijan’s regions (90%) and increasing demand in the country, this year State Oil Company diverted that amount (which should be exported to Russia) to the domestic market. Consequently, SOCAR could not save an additional volume of gas to export to Russia’s southern regions and for country’s industrial facilities (such as AzMeCo), since the extracted gas from the Shah Deniz field has been already contracted for Turkey and Georgia. Import of Russian gas by Azerbaijan for its industrial affairs (AzMeCo), will help latter to secure SOCAR’s contracted Azeri gas for Southern Gas Corridor, as well as for Turkey and Georgia.
However, as it was reported from Gazprom, “export of Russian gas to Azerbaijan will help to meet the growing gas demand of Azerbaijan”, the nature of agreement with Gazprom is slightly unusual of traditional swap operations, but it is rather commercial agreement with SOCAR. This raises a question, whether SOCAR’s gas reserves or production decreased to the extent that the Company cannot meet the domestic demand. Because, Trend.az reports that, “proven gas reserves of SOCAR as of January 2015 amounted to 54.96 bcm versus 61.15 bcm by the end of 2013” referring to the report on “The Sustainable Development of SOCAR 2014”, published on the official website of the State Oil Company. Meanwhile, according to the latest figures of the State Statistical Committee of Azerbaijan, there are slight difference between gas production figures of 2013 (29.240 bcm/a) and 2014 (29.555 bcm/a), though it makes 315 mcm per annum.
Whereas, the possible fall of production might also related to financial shortages due to fall in oil prices and devaluation of Azeri manat. Because, the Head of SOCAR, Rovnag Abdullayev had said that, SOCAR has started the evaluation of proposals from international oil and gas companies for joint development of the “Umid” and “Babak” gas fields. According to him, work on these fields requires a complex technical development program and a large amount of investment. The fall in world oil prices, to a certain extent, affected the company’s motivation to invest in new projects. Earlier, President of SOCAR Rovnag Abdullayev had said that, “the base oil prices in the previous budget was laid at $90, but now it’s 50 dollars. This is twice less. Therefore, oil revenues will be also twice less.” Actually, the revenues of the State Oil Company reduced for seven months of the beginning of the year, as SOCAR transferred 874.255 million AZN to State Budget, 21.77% less than that of the previous year.
Following those developments, recently, SOCAR Turkey Energy declared that it can buy 7% in TANAP project, out of SOCAR’s 58% stake. Rovnag Abdullayev explained that, purchase of SOCAR’s 7% in TANAP by SOCAR Turkey Energy is a part of solving the financing problems, thus SOCAR Turkey Energy will be able to participate in financing of the Project. Moreover, in early 2015, following the Greece’s request for stake in TAP project, Vice President of SOCAR Elshad Nasirov said that “If Greece finds a solvent company [for] TAP as the shareholder, SOCAR is ready to sell part of its share to it”. Thus, since falling oil prices and devaluation of Azeri Manat are supposed to endanger the commerciality of Southern Gas Corridor, SOCAR is eager to sell part of its shares in TAP and TANAP in order to secure financing of pipeline from its side. However, the temporary financial problems or the slight production shortage will unlikely hamper the smooth implementation of the Southern Gas Corridor in a substantial way, since the gas for SGC has been already contracted.
Ilgar Gurbanov, Independent Analyst on Energy Affairs