Caspian Overview: Socar Talks with Banks for SGC Funding
Azerbaijan has been negotiating with international financial institutions to borrow $5bn to fund its share of the construction costs of the Southern Gas Corridor (SGC) gas export route, finance minister Samir Sharifov said this week.
He told UK daily Financial Times that the talks are in progress with the World Bank (WB), the European Bank for Reconstruction and Development and the Asian Development Bank.
A WB spokesman told NGE July 20 that it is considering supporting Azerbaijan’s investments in the SGC because of its critical importance to energy security in the region and to Azerbaijan’s development priorities. "At this moment, we are reviewing ways to support the investment in cooperation with other financing partners and will fully disclose project documents in the course of project preparation," the bank said.
Azerbaijan has already sold $1bn Eurobonds and is preparing to sell the same again in further bonds to finance SGC. A source at WB told NGE June 2 that "Baku has applied to the WB for a loan of $500mn, the talks are under way... the process should be wrapped up by the end of the year."
The current cost of SGC including upstream work on Shah Deniz 2 (SD2), is now estimated at around $40bn, including $9.3bn for the Trans Anatolian gas pipeline (Tanap), $6bn for the Trans Adriatic pipeline (TAP) and $23.8bn for developing SD2 as well as the expansion of the South Caucasus line (SCPX).
The project is expected to deliver 6bn m3/yr to Turkey and 10bn m3/yr to EU by 2021 and this volume to reach 31bn m³/yr in the 2020s.
The Azerbaijani project has been approved by the European Commission as one compliant with the Third Energy Directive. It could help the EU to diversify gas exports and reduce dependence on Russian Gazprom, whose gas supplies about a third of the European market. During 2015 Gazprom exported about 159bn m³ to Europe, including 27bn m³ to Turkey. However, Gazprom eyes more gas sales to EU by 2021.
The Azerbaijani pipeline does not pose an immediate threat to Russian gas in Europe, said RusEnergy consultant Mikhail Krutikhin. He mentioned that there will be serious competition after 2020 when it is planned to increase gas export. “After 2023-2026 gas could be exported not only from Azerbaijan, but also from Iran, Turkmenistan as well as Iraqi Kurdistan, where the volume of potential export exceeds 30bn m³/yr. Some of the Russian gas could be ousted from the southern Europe, including the Italian market,” said the expert.
Azerbaijan's total gas output increased slightly, while the commercial gas production decreased by 9% in 1H16.
Baku prioritized gas re-injections, oil sales
Socar vice president Rahman Gurbanov told NGE July 20 that this year, commercial gas output would fall slightly as more gas is needed for re-injection into the Azeri-Chirag-Guneshli (ACG) oil block to maintain crude oil production level. The block accounts for three-quarters of Baku's total oil output. Rahimov said that thanks to the greater gas re-injection, crude oil output from AGC actually rose in the first half of this year by 0.4% to 21.04mn mt in 1H16.
He said that Baku had expected a drop in oil output over this period, but that didn't happen, although it is expected in the latter half of the year. Azerbaijan's oil production is expected to fall by 1mn mt to 40.745mn mt in 2016. Associated gas accounts for 45% of Azerbaijan's total gas production and a fifth of the country's commercial gas output.
Gurbanov said that for Baku, keeping oil output high is the priority. Azerbaijan's commercial gas production is expected to fall slightly to 18.5bn m3 in 2016.
Baku eyes other gas markets
Alongside the participant countries in SGC, including Greece, Albania and Italy, Socar is also eyeing gas exports to Romania and Albania. The state company has already signed a MoU with Albania to export gas (through the Interconnector Greece-Bulgaria), while the company signed another MoU with Romanian Transgaz on July 19.
The document envisages cooperation between the companies in field of gas transportation and gas transit using Romania’s capacity.
The memorandum also envisages the possibilities of exporting LNG and natural gas to the Romanian market and its sale on the basis of long-term or spot contracts, with the Azerbaijan-Georgia-Romania Interconnector project also named.
It was mentioned during the signing ceremony that the memorandum will open the possibility for deeper cooperation between Socar and Transgaz and expanding operations in southeast Europe and the Balkan region.
“The memorandum will also contribute to expansion of cooperation between the countries in field of energy, in particular, gas supply, transportation, marketing and sales,” said Socar.