Energy sector review in the Caspian: Possible investment opportunities in Baku to boost export potential
With the ongoing conflict in Ukraine, Azerbaijan could potentially reap benefits as the energy supply game shifts in the Caspian Basin. The turmoil has forced Kazakhstan, historically dependent on Russia for oil exports, to explore alternative routes.
Kazakhstan, exporting approximately 62% of its 84.2 million tons of oil via the CPC pipeline to Russia's Black Sea port of Novorossiysk, is now seeking safer and less dependent export routes. To achieve this goal, Kazakhstan's state oil producer KazMunayGas and Azerbaijan's state oil company SOCAR have agreed to expand their existing deal for transiting Kazakh crude via Azerbaijan's main oil export route - the Baku-Tbilisi-Ceyhan (BTC) pipeline. The deal increases annual volume from 1.5 million tons to 2.2 million tons.
The BTC route, however, is more complex, requiring the crude to be shipped across the Caspian Sea by tanker before being fed into the pipeline that carries it to Turkey's east Mediterranean coast, from where it can be carried by tanker to global markets.
Interestingly, Azerbaijan might soon see an increase in transit volume for natural gas as well. The recent preliminary agreement between Turkmenistan and Turkey allows for Turkmen gas to be sent to Turkey either via a swap deal with Iran, or more complex swaps via both Iran and Azerbaijan. This move is primarily to diversify Turkey's gas imports, with approximately 42% coming from Russia in 2022.
Both Russia and Iran are subjected to international sanctions, and the situation could potentially leave Turkey in a bind. To mitigate this risk, Ankara and Ashgabat are discussing a dedicated Trans-Caspian Pipeline (TCP) to transit Turkmen gas via Azerbaijan and Georgia to Turkey, and possibly on to Europe. Reports suggest that the United States supports this project.
The TCP plan, which has been on and off the table for almost 25 years, is once again gaining traction due to the increased interest in diversifying European Union (EU) energy imports. Meeting Azerbaijan's commitment to Brussels, which requires doubling EU-bound exports of its own gas to 20 billion cubic meters a year by 2027, poses a challenge. Progress towards this target has been slow, with Azerbaijani exports in 2023 amounting to only 11.8 billion cubic meters.
Recent drilling by British Petroleum in Azerbaijan's main Shah Deniz gas field has resulted in an additional 750 million cubic meters of gas per year. However, it remains to be seen whether this production will be sufficient to help Azerbaijan meet its commitment to Brussels.
Azerbaijan is also pushing for the development of green/renewable energy. With the country hosting a major climate conference in late 2024 known as COP29, Baku is promoting ambitious renewable energy plans. The interest in going green stems from efforts to reduce domestic gas consumption to free up more for export. However, many energy analysts believe it will take a long time for Azerbaijan to achieve any such hopes. As of February 2023, only 8% of Azerbaijan's power generation came from renewable sources, with just 1.3% derived from wind and solar power.
Baku will first need to develop sufficient wind, solar, and hydro power capacity to generate sufficient supplies for export to make the electricity transmission cable to Romania via Georgia functional. Current efforts rely on international investors such as Saudi Arabia's ACWA, developing Azerbaijan's first grid-scale wind farm, and the UAE's Masdar, developing its first major solar power plant.
The EU also appears interested in developing Azerbaijan's renewable energy capacity. In March 2023, a meeting between Georgian Prime Minister Irakli Kobakhidze and Azerbaijani President Ilham Aliyev announced a feasibility study of the two countries' renewable energy potential, to be completed by the end of the year. This study likely relates to plans announced in late 2022 for an electricity transmission cable to carry power generated in Azerbaijan across the Black Sea to Romania, transiting Georgia.
- In addition to the increased crude oil transit through the BTC pipeline, Azerbaijan might also witness an increase in natural gas transit, as Turkmen gas could potentially be sent to Turkey via Azerbaijan and Georgia.
- As Azerbaijan pushes for the development of renewable energy, news of its ambitious plans will likely be covered, given the country's commitment to the COP29 climate conference and the potential for increased renewable energy exports to Europe.
