Brussels and Baku signed an agreement in July to double supplies to 20bn cubic metres a year by 2027 — one of a string of new deals struck by the EU to replace Russian gas in response to the war in Ukraine, amid fears of winter shortages and rationing.
But expanding the 3,500km Southern Gas Corridor (SGC) from the Caspian to the Adriatic requires billions of dollars of investment and contracts for European companies to buy the gas long past 2027, said Elnur Mammadov, Azerbaijan’s deputy foreign minister.
“Whoever is interested in investing, whether it’s public or private, they [must] put their money on the table in order for us to be able to increase their capacities,” he said in an interview. “I wouldn’t say that there is a disagreement [with the EU], but this is . . . an important part of this puzzle.”
“Currently there’s a desperate need for Europe to find alternative suppliers,” Mammadov said. “We need to be sure that this . . . is not a sort of spontaneous demand in light of the war in Ukraine, which one day will end and then all of a sudden you start buying back from Russia and say, ‘hey, well we don’t now need the gas’.”
Mammadov said that while Azerbaijan was happy to contribute its share of the necessary investment, it also expected the EU to step up, although he was not aware of concrete figures yet being under discussion.
The total cost for the SGC, which began supplying gas to Italy in 2020, was about $40bn.
Before Putin’s full-scale invasion of Ukraine in February, Russia provided about 40 per cent of the EU’s gas needs. That has fallen to less than 10 per cent, offset by higher imports from Norway and liquefied natural gas shipments.
Laurent Ruseckas, at S&P Global Commodity Insights, said that while Azerbaijan could increase gas exports to Italy and Bulgaria marginally in the short term, substantial additional volumes would require significant investment both in production and transportation of the gas.
“No country is going to take on billions of dollars in development risk without knowing they have a long-term buyer,” Ruseckas said.
“This is part of the wider debate: we know Europe needs additional gas in the short to medium term, but the longer term outlook is a lot less clear given environmental goals.”
The European Commission declined to comment when asked if talks were ongoing with potential private and public investors.
An EU official said that “considering the present EU gas situation and outlook”, the bloc was confident the expansion of the pipeline would “creat[e] opportunities for all partners involved as Azerbaijan’s energy will have greater access to the EU market”.
“Building on the positive track record of energy co-operation and the successful start of gas deliveries via the Southern Gas Corridor at a crucial juncture, the EU views Azerbaijan as a reliable and strategic energy trading partner,” the official added.
Complicating the SGC investment case is both the pipelines’ structure and ownership.
The SGC is made up of three separate pipelines: the South Caucasus Pipeline (SCP) through Azerbaijan and Georgia, the Trans Anatolian Pipeline (TANAP) across Turkey, and the Trans Adriatic Pipeline (TAP) through Greece, Albania and Italy.
Britain’s BP and Azerbaijan’s state energy group own parts of all three pipelines, while Turkish state companies own stakes in SCP and TANAP.
SCP is 19.99 per cent owned by Russian oil company Lukoil and 10 per cent owned by Iran’s state oil company, potentially presenting hurdles for any EU investment decisions.
Only TAP is majority controlled by EU companies, with 55 per cent held between three energy groups — Snam, Fluxys and Enagas.
Henry Foy in Brussels and David Sheppard in London
