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    Merkel's Caucasus Trip Sets the Ball Rolling

Summary

Encouraging more German companies to work in Azerbaijan is her goal, rather than importing Caspian Sea gas.

by: Dalga Khatinoglu, Ilham Shaban

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Merkel's Caucasus Trip Sets the Ball Rolling

The German chancellor Angela Merkel concluded a three-day trip to Caucasian countries August 26. During her visit to Georgia as first destination, a 400mn m3-capacity underground gas storage project received a €150mn German development bank KfW’s loan; the total investment in the project is €220mn-€250mn.

In Azerbaijan, negotiations were dedicated to various gas-related issues, from Caspian gas exports to EU to domestic projects. German Uniper – which has inherited from its former owner E.ON a 1.45bn m³/yr gas purchase deal with the Shah Deniz consortium for power generation in Italy – signed another contract for energy efficiency projects, including flared gas reduction.

Azerbaijan loses 790mn m³/yr (including from flaring), or about 4% of total sale gas production. A part of the loss relates to gas-to-power operations. Uniper will help Azerbaijan to modernize the power sector, which accounts for over half the country’s total 12.2bn m³/yr demand.

Azerbaijan hopes that other German companies will become involvement in the country’s projects. Over the last 15 years, the country has received $250bn in investments, of which half came from abroad. But German companies were only responsible for $1bn.

A government source told NGW that German VPC has already studied the country’s electricity sector and prepared a plan on energy efficiency improvement. It is not clear how much the energy efficiency projects would cost, but, Hermes export credit guarantee had already provided €30mn loan to Uniper, based on 2015 agreement, to collect the various gases from the AzeriKimya petrochemical plants by 2020.

State-run Socar’s deputy vice-president for investments and marketing told NGW that the range and number of new projects have not been determined yet. “The efficiency projects can include cutting flaring, gathering various gases in petrochemical and industrial plants, improving gas network, cutting electricity losses and so on.” The grid loses about 2.7bn kW/h/year in Azerbaijan, or about 11% of total power generation., nearly all of which is gas-fired.

Before Merkel’s Caucasus visit, some media reported that US president Donald Trump was concerned about Germany’s rising dependence on Russian gas and its support for the 55bn m³/yr Nord Stream 2 line. But Merkel reportedly said in Georgia that NS 2 would not make Germany dependent on Moscow; and that Azeri gas in not competitive with Russian gas.

Despite Germany’s lack of interest in Caspian Sea gas, Merkel discussed the 3,500-km Southern Gas Corridor (SGC), planned to deliver 6bn m3/yr gas to Turkey and 10bn m3/yr to EU in 2020 for 25 years in the first step.

The project needs another supplier in the second phase, when the deliveries to EU are projected to double in 2025. Addressing the TransCaspian pipeline project, Azeri president Ilham Aliyev said during a joint press conference that Turkmenistan as a supplier should show initiative and then, Azerbaijan as transit country can evaluate the situation. “Of course, Baku as transit country has willingness on realization of TransCaspian project, but firstly Turkmenistan should show initiative”.

Recently five Caspian littoral states signed a 24-article convention, whose 14th article allows construction of a subsea pipeline but only if it meets with environmental standards – a condition that opens the way for Russia and Iran to challenge it in future.

The TransCaspian pipeline, an idea floated a few decades ago, was to carry 10bn m3/yr and cost $5bn, but Turkmenistan has financial commitments for other projects, notably the unlikely-looking 1,800-km Tapi pipeline: costing $10bn and planned to export 33bn m³/yr to Afghanistan, Pakistan and India. The other three countries having 5% share. The figure is huge for a country as small as Turkmenistan: its annual budget in 2018 was set at manat 95bn: that is $27.29bn based on the official exchange rate but only $11.2bn in open market exchange rate.

The other option is connecting Turkmen offshore fields to Azerbaijan’s Azeri-Chirag-Guneshli Block (ACG) or Shah Deniz field in Caspian sea and deliver a restricted amount of gas to Baku for transport to EU. But the ACG pipeline can only carry 3.5bn m³/yr, and is filled with associated gas deliveries to Baku.

Shah Deniz pipelines are 550 metres underwater and, apart from capacity restrictions, connecting a new pipeline would be a challenge, technically; and also commercially as some shareholders in Shah Deniz have no share in the SGC pipeline.

Azerbaijan’s gas export/import routes

Pipelines

Countries

Volume (bn m³)

2017

2016

Baku-Tbilisi-Erzurum (export)

Turkey

6.300

6.254

Georgia*

0.815

0.793

Gazi-Mahammad-Qazakh (export)

Georgia**

1.380

1.166

Shirvanovka- Gazi-Mahammad (import)

Russia

0.349

0

Astara- Gazi-Mahammad (Import)

Iran***

1.490

0

Julfa-Nakhchivan

0.271

0

* Including 315mn m3 as BP-operated Shah Deniz’s gas transit fee to Turkey and 500mn m3 of sale gas export

** Socar’s own gas export to Georgia

*** Turkmenistan exports gas to Azerbaijan based on swap deal with Iran.

Source: Socar, BP, NGW

Azerbaijan also plans to export 0.5bn m3 Shah Deniz stage 2 gas to Turkey in 2018 via SGC. SD2 Gas flow to the Trans Anatolian pipeline (Tanap) started in July 2018.