Azerbaijan's energy role under scrutiny amid EU gas shift
With the expiration of the Russian-Ukrainian gas transit agreement at the end of the year, there is a gap that must be filled by supplies from other sources. Azerbaijan has become an important partner for the EU. However, there is a concern that this country could be used as a gateway for Gazprom, with which the Azerbaijani SOCAR has agreements.
A real storm in Brussels was caused by reports from "Politico" suggesting that gas from Azerbaijan is, in fact, Russian gas. According to these reports, Moscow is using Gazprom's strategic partnership agreement with Azerbaijani giant SOCAR to "launder" its resources, thereby bypassing sanctions.
The European Commission has intervened, strongly denying that the agreement with Azerbaijan could become Putin's Trojan horse. As Tim McPhie, the Commission's spokesman for energy, assured, the so-called Southern Gas Corridor, which supplies EU countries, is only connected to Azerbaijani gas fields, rather than the broader Azerbaijani natural gas system where "mixing" with Russian gas could occur.
Azerbaijan's President Ilham Aliyev also denied suggestions that his country re-exports Russian gas to the Union. Despite this, the agreement, which is significant from Europe's point of view, still raises controversies. Why? Firstly, tracking every molecule of gas in international trade is immensely complex. Concerns arise due to the relationships between SOCAR and Gazprom, as well as Lukoil, which, according to Global Witness, holds a 19.99% stake in the Shah Deniz offshore field (operated by BP), and gas for the EU is extracted from this field.
Secondly, even if the gas sent to the EU is "purely" Azerbaijani, it cannot be ruled out that the growing demand for resources from the Caucasus will still be offset by Azerbaijani purchases from Russia. Consequently, Moscow will benefit anyway.
Europe disarms Putin's grip
"The importance of Azerbaijan for the energy security of European Union countries has increased since Russia started a full-scale war with Ukraine in 2022. Azerbaijan, according to the agreement with the European Commission, has committed to increasing raw material exports to EU countries to 20 billion cubic metres annually by 2027," explains Dr Michał Paszkowski from the Institute of Central Europe in Lublin in an interview with money.pl.
Over the past two years, the Union has been striving to free itself from Putin's resource grip and become independent of Russian supplies. The goal is not only to guarantee the Community's energy security but also to deprive Moscow of revenues from the sale of hydrocarbons in Europe.
That is why the signed agreement with Azerbaijan, which has rich deposits estimated at 2 trillion cubic metres, was so crucial. As the expert notes, in 2023, the country's total gas export increased by 5.3%, with exports to Europe rising by 3.5%, reaching 12 billion cubic metres compared to the planned 12 billion cubic metres in 2024.
Currently, the country exports natural gas to nine EU countries, with Slovakia recently becoming one of them. On 2 December 2024, SOCAR delivered raw material to the SPP company from Azerbaijan. This is the result of an agreement concluded on 12 November 2024, although the terms of the agreement have not been disclosed – presumably, these are small deliveries," notes Dr Paszkowski.
Slovak Prime Minister Robert Fico held talks in Baku in May 2024 about natural gas supplies. According to various reports, two options were considered. The first involves using the existing infrastructure through Bulgaria, and the second one involves an agreement with Russia and Ukraine to replace the transit of Russian gas with Azerbaijani raw material.
According to Marianna Sobkiewicz, senior analyst at the Polish Economic Institute, the second alternative seems cheaper for Slovakia, but we again return to the problem of the origin of the raw material. Here's how such an arrangement would look: Russia would continue to supply gas (labelled as "Azerbaijani gas") to Ukraine, while Azerbaijan would receive gas from Russia (labelled as "Russian gas").
"There would be no actual change in gas flows: EU traders would buy gas from Azerbaijan, which would buy gas from Russia. Such a solution is not preferred considering the EU's goal of complete independence from Russian fossil fuels. Furthermore, the agreement with Azerbaijan could set a precedent for similar agreements in the EU," explains the analyst.
Azerbaijan's role may increase
In the first quarter of this year, about 7% of all gas transmitted via EU pipelines was imported from Azerbaijan, according to "Politico". The country sold about 10 billion cubic metres of gas to Europe this year alone.
"In theory, Azerbaijan could play an even more significant role in Europe's energy market following the expiration of the Russian-Ukrainian transit agreement, which ends on 31 December 2024. However, considering existing contractual obligations, it will be challenging for SOCAR to direct additional supplies to Europe," notes Dr Paszkowski.
It is estimated that at the beginning of 2025, Azerbaijan could have additional resources from several sources:
- Reduced contract between AGSI (Azerbaijan Gas Supply Company) of Azerbaijan and BOTAŞ of Turkey;
- Resumed swap agreement with Turkmenistan;
- Increased production at the Shah Deniz field;
- Early exploitation of the Absheron field;
- Increased natural gas production at the Umid field. It is estimated to be about 2-3 billion cubic metres in 2025.
"However, this is not a volume that would fully fill the gap left by resources from Russia," notes Dr Paszkowski from IES.
Not only gas, but oil
However, Azerbaijan is not only about gas but also oil. This small Caspian Sea nation is listed among the top 30 oil-rich countries globally and is the 20th largest exporter of this resource.
According to official government data, the country's oil reserves amount to 2 billion barrels.
Azeri Light is a type of crude oil that is light and clean, allowing for more fuel to be produced from one barrel compared to, for example, Russian raw material.
It is in Azerbaijan where the Hungarian company MOL holds shares in oil fields. Hungarians use the southern corridor to supply raw materials to the country, thus diversifying imports from Russia.
The oil extracted from the Azeri-Chirag-Gunashli (ACG) oil field, in which MOL Group owns 9.57% of the shares, is transported to Hungary and Slovakia via the port in Ceyhan, Turkey, to Omisalj in Croatia. Then 90,000 tonnes of crude oil are transported to the only refinery in Hungary – in Duna near Budapest, and to Bratislava via the Adria pipeline.
