Azerbaijan has established itself as one of the key players in the European energy sector, particularly in the context of oil and gas production and export. Thanks to its geographical position and significant hydrocarbon reserves, the country plays an important role in ensuring Europe's energy security. However, like many other oil-producing countries, Azerbaijan faces a number of challenges, including the depletion of reserves at old fields.

In 2023, Azerbaijan's oil and condensate production amounted to 30.2mn tonnes, of which 25.2mn tonnes were exported. Natural gas production was 48.3bn cubic metres (bcm), with 23.8bcm exported, according to the Ministry of Energy – a decline in oil production and an increase in gas production.

The future of Azerbaijan's gas industry

Azerbaijan is a major supplier of energy in the region and continiues to develop its energy infrastructure. Serbian consumers will start receiving Azerbaijani gas in the near future, making Serbia the eighth country to import the blue fuel from Azerbaijan.

Serbia is being hooked up to the Southern Gas Corridor, the major gas pipeline network that distributes Azeri gas, Azerbaijan's President Ilham Aliyev said in a recent TV interview.

"Various interconnectors have been created, and the driving force behind all these interconnectors has become the Southern Gas Corridor, because if we had not come up with this initiative at the time and had not implemented it, there could be no talk of any interconnectors today,” Aliyev said. “All these interconnectors, including the gas pipelines between Greece and Bulgaria, Bulgaria and Serbia, Romania and Hungary, are offshoots of the Southern Gas Corridor."

Despite all the talk of green energy, Azerbaijan continues to expand the geography of gas supplies. In 2007, Azerbaijan transitioned from being a gas importer to an exporter. The first buyer of Azerbaijani gas was Georgia, followed by Turkey, and on the last day of 2020, Azerbaijani gas started flowing to Greece and Italy. In 2021, Bulgaria joined as a customer followed by Romania in 2023.

And more countries are set to sign up for Azeri gas. Hungary will start receiving Azerbaijani gas in 2024. Serbia has already signed an agreement to purchase 400mn cubic metres of gas from Azerbaijan. Starting from 2027, export volumes are expected to reach 1bcm a year. And a little further down the road Slovakia is expected to buy 1bcm and Albania 700mn cubic metres. Commercial agreements have yet to be signed with both countries, but memorandums of understanding are already in place.

In response to increasing demand, Azerbaijan does not plan to reduce its gas production. The country still has sufficient reserves to supply gas to European partners until 2050, when the European Union aims to fully transition to decarbonization.

Azerbaijan’s Shah Deniz gas field is the world's largest gas condensate field with proven reserves estimated at 1.2 trillion cubic metres of gas and 240mn tonnes of condensate.

Production at the field is already running at 1.5bcm at the Absheron gas field, and investments are planned to increase its production to 5bcm of gas can be extracted annually, according to a recent interview with the president.

Another large field will also come online this year; the Azeri-Chirag-Guneshli gas field is part of the state’s Deep Gas project to tap new reserves, which include the development of Shafag, Asiman, Umid, Babek, Nakhchivan and Karabakh gas fields.

As the demand grows and the number of customers increases, the pipeline infrastructure continues to be expanded new pumping stations added to the network. Nevertheless, Aliyev told journalists that Azerbaijan receives significantly less revenue from gas exports compared to oil exports, which remains the main source of income for the country.

New gas pipeline on the horizon

Among the biggest projects on the horizon is a Turkey-Azerbaijan joint venture to construct the new Igdır-Nakhchivan gas pipeline, which will increase exports to meet the rapidly rising European demand for gas, since Russian piped gas to Europe was largely shut down in 2022. This project represents a significant collaboration in the region, aimed at strengthening energy security and diversifying gas supplies to the EU, which is hunting for new sources of energy to replace those of Russia.

Work on the Igdır-Nakhchivan gas pipeline construction is expected to end this year and will complement, or even replace, gas supplies through Iran, creating an alternative route for delivering gas to Azerbaijan's Nakhchivan exclave.

This project plays a key role in the development of the Southern Gas Corridor, which promotes the diversification of energy routes and enhances the energy security of the Eurasian region. It aims not only to supply the Turkish market with natural gas but also to increase the volume of its exports to European countries, as part of a grander plan to create a gas hub in Turkey to supply the EU.

The 97.5-kilometer-long Igdır-Nakhchivan pipeline, including 17.5km in Azerbaijan and 80kmin Turkey, has a daily capacity of 2mn cubic metres of gas and an annual capacity of 730mn cubic metres, which will fully meet Nakhchivan's gas needs.

In the future, there are plans to potentially more than double the pipeline's capacity, expanding its strategic significance and strengthening its role in meeting the region's energy needs.

Decline in oil production as a new reality

The huge Azeri-Chirag-Guneshli (ACG) oil field located in the Azerbaijani sector of the Caspian Sea is starting to see a natural decline in production, according to Gary Jones, the regional president of BP for Azerbaijan, Georgia, and Turkey. Jones says that slowing the rate of production decline is possible with additional investments and the implementation of new technologies.

At the end of last year, BP announced preparations for drilling the first production well from the Central East Azeri (ACE) platform at the ACG block. The first oil from this location is expected to be extracted at the beginning of 2024.

Contrary to the growing gas production, oil production in Azerbaijan is in decline. The volumes produced in 2023 were 7.4% less than those produced in 2022, largely due to the 12.7% reduction in oil production at ACG to 17.8mn tonnes. During 2023, 25.2mn tonnes of oil, including condensate, were transported to global markets. The majority, 22.1mn tonnes, are managed by the ACG consortium, while the remaining 3.1mn tonnes belong to state-owned oil national champion SOCAR.

As a member of OPEC+, Azerbaijan adheres to the norms set by the organisation, which implemented voluntary production cuts last year that will continue for several years to prop up prices in the oil market. Azerbaijan's quota for daily oil production in 2023 under the OPEC+ agreement was 684,000 barrels per day and the quota for 2024 is set at 551,000 barrels per day.

Despite the reduction in oil production, the main Baku-Tbilisi-Ceyhan (BTC) export pipeline continues to play a crucial role in the region’s enegy infrastructure, carrying crude oil from ACG and condensate from Shah Deniz. In addition, smaller volumes of oil and condensate from Kazakhstan and Turkmenistan are pumped through BTC.

Negotiations are ongoing to increase the volume of Kazakhstan oil supplies through Azerbaijan. The only problem is the qualitative differences between Azerbaijani and Kazakhstan oil. As Aliyev previously noted, "with large volumes of supplies through Baku-Tbilisi-Ceyhan, we will lose quality, so to speak, premium, because Azeri Light, which we export through this pipeline, is more valuable than the Brent grade."

The possibility of using the oil pipeline stretching from Baku to the Black Sea port of Supsa on the Georgian coast, which was stopped several years ago, is being considered as one possibility. The length of this oil pipeline is 837km, with a capacity of over 7mn tonnes of oil per year (145,000 barrels per day). If the plan goes ahead, Azerbaijan will benefit not only from the export of oil but also from its transit.

From globalisation to regionalization

Azerbaijani economist and Professor of Economics Elshad Mamedov told bne IntelliNews that the era of long pipelines for transporting gas and oil is gradually giving way to new transport methods.

“We are witnessing a significant shift from globalisation to regionalization, which is especially noticeable in the energy market. This process leads to the development of new forms of cooperation in the transport-logistics and energy sectors,” Mamedov said. “The priority will be the deep processing of natural resources in the region, which already defines new priorities for Azerbaijan. In this context, the country will actively participate in new economic trends, likely moving away from large projects for laying new pipelines in favour of developing the regional economy and integration.”

A new era is dawning for Azerbaijan in the development of pipeline routes, focused on the processing of natural resources in the region. There is a global trend towards creating powerful industrial clusters for processing hydrocarbons, especially in Central Asia. Azerbaijan plans to actively participate in this process. Although the construction of pipelines for gas and oil will remain relevant, the main emphasis will be on the development of the processing sector and the corresponding pipeline infrastructure.

“In the meantime, Azerbaijan is aiming to increase the share of high value-added products, particularly the export of electricity, which represents a significant shift in the country's economic strategy,” noted Mamedov.

Photo: Rodrigo Argenton CC 3.0