Stabilising the pipedreams of Europe
Azerbaijan is reinvesting its oil revenues into emerging sectors and social programmes to fuel development. Through the ‘Azerbaijan 2020’ national development concept, the country aims to double its GDP per capita by 2020 with an annual average GDP growth rate of 7 percent in non-oil sectors.
October 9th, 2013
Azerbaijan’s existing pipelines have long propped up energy supplies in much of Europe, and its future networks can offer a solid backbone to Europe’s energy security. A multibillion dollar deal signed with Turkey means the recently approved Trans-Adriatic Pipeline (TAP) will carry gas from the Shah Deniz fields to Italy before going on to consumers in Germany, France, Switzerland and, potentially, the UK.
Providing energy is a familiar role for the country. As long ago as the turn of the last century, Azerbaijan supplied approximately half of the world’s oil needs, while today international companies such as BP are flocking to the country to participate in its thriving oil and gas industry. The state-run energy giant SOCAR stands at the heart of the sector’s growth, with US$60 billion invested in the sector since the country’s independence and continuing expansion into Europe. According to OPEC figures, Azerbaijan’s oil reserves amount to 7 billion barrels as of last year. The country also boasts 2.6 trillion cubic metres of proven natural gas reserves, and SOCAR’s investments have been invaluable in tapping into the nation’s vast hydrocarbon wealth.
“Everything has to be completed by the end of 2018,” insists SOCAR vice-president Elshad Nassirov of the TAP project which was approved back in June. “The first flow of gas will be one billion cubic metres. It will then take several years to reach peak production of 16 billion cubic metres, out of which six billion will be sold in Turkey and ten billion will be available for the gas consumers in Europe.”
Leading foreign investment has been BP who, together with SOCAR, represents more than one third of the Shah Deniz consortium that in June chose the TAP project to eventually deliver up to ten billion cubic metres of natural gas to Greece, Italy and south-east Europe every year. “TAP is also likely to have an effect on western Europe and may have an impact on helping to reduce gas prices more generally through increased competition,” says Kjetil Tungland, the company’s managing director.
“Once in Italy, TAP will plug into the Snam Rete gas network from where gas can then be supplied to Switzerland, France, Austria, Germany, Belgium and the UK through various pipeline systems. As more and more gas interconnectors are built, Europe’s energy market will become even more integrated with the result that I’m sure we will frequently find Azerbaijani gas being used in the UK in the future,” he added.
Delivery of gas to the pipeline is expected in 2019, with close to 900km of construction to be carried out to realise the new corridor project, and the increase in competition to Russian and Norwegian supplies will be key for countries like the UK and Germany to be able to drive down energy costs.
The mature Azeri–Chirag–Guneshli (ACG) oil field is another key part of the Azerbaijani energy makeup. Dubbed the ‘contract of the century’ when it was signed in 1994, the deal between the government and BP (as part of the Azerbaijan International Operating Company) enabled efficient exploration of the vast oil reserves. ACG’s fields, holding an estimated 5-6 billion barrels of oil, account for the vast majority of Azerbaijan’s total output, which is then pumped to the Sangachal Terminal south of Baku and sent along another series of key pipelines including Baku-Tblisi-Ceyhan (BTC). Partly funded by the World Bank and opened in 2006, the BTC was widely considered one of the most important projects the region had ever seen, providing a crucial Mediterranean port outlet in Turkey via Georgia and another much-needed alternative to Russian supplies.
Tapping into Europe
The successful TAP pipeline bid was chosen by the Shah Deniz consortium to open up the transport of natural gas from the Caspian and Middle East to Italy, and joins a vast network radiating out from Baku that includes the Trans-Anatolian Pipeline (TANAP) and Baku-Tbilisi-Erzurum. TAP will start on the Turkish border with Greece, cutting across Albania to its final destination, from where it can reach major European markets, offering an attractive alternative supply to that from Russia and North Africa.
What’s the alternative?
Like many oil-producing countries, Azerbaijan is keenly aware of the environmental threats caused by the hydrocarbon industry, and has made the conscious decision to apply new technologies to reduce of pollution and promote new, clean ways of powering the nation. To this end, Azerbaijan established in 2009 the State Agency for Alternative and Renewable Energy Resources (SAARES), which is dedicated to exploring and producing environmentally sustainable energy, from solar to wind power.
Akim Badalov, head of SAARES, calculates that renewable energy could comfortably make up to 20 percent of the country’s overall energy mix. By 2020, he estimates that the country will be able to take advantage of its 2,400-3,200 hours of sunshine per year to boost its solar production capacity to 600MW, while waste-to-energy, biomass and thermal sources are also being looked at.
In addition, Azerbaijan’s rivers have a hydropower potential of 40 billion kWh, of which 16 billion kWh would be economically viable. Preferential tariffs are already in place for the development of small hydropower plants.
Meanwhile the country – whose capital city’s name Baku is widely believed to be derived from Persian words meaning “wind-pounded city” – is starting to harness its considerable wind power potential, estimated by the European Bank for Reconstruction and Development to be around 1,500MW.
Azerbaijan hopes to raise over US$7 billion in alternative energy investments by 2020, with opportunities ranging from the construction of wind power plants in the Absheron Peninsula, the installation of small hydropower plants in the Nakhchevan Autonomous Republic, the building of solid waste recycling plants around Baku,to supply residential settlements with electricity and heat, and the development and production of renewable energy technology – including photovoltaic panels and wind turbines – at the Sumgayit Technologies Park, taking advantage of the financial incentives, tax exemption and infrastructure offered by the state.
Cleaning up the Black City
An unfortunate legacy of Azerbaijan’s rapid Soviet industrialisation and oil development is the pollution and environmental damage to Baku and the Absheron peninsula. The government, as part of a wider national mood of ambition and renewal, is making a serious attempt to deal with these issues, with initiatives ranging from the planting of trees to the replacement of topsoil, while also seeking ways to avoid future hazards arising from the continued development of its energy resources. The efforts are paying off: the 2012 Yale Environmental Performance Index ranked the country as having made the second-best progress on environmental standards of all countries surveyed over the past decade.