Europe Turns to Azerbaijan for Gas: How Big Could This Be?

On 18 July, President of the European Commission Ursula von der Leyen paid a high-level visit to Azerbaijan, crowned with the signing of a new gas export deal between the EU and Baku. The parties agreed upon expanding the volume of gas exports from Azerbaijan to Europe from last year’s level of 8 billion cubic metres (bcm) to around 20 bcm by 2027. They also agreed to work on boosting Azerbaijan’s export potential in the renewable energy sector, including offshore wind and so-called green hydrogen. Speaking in Baku, von der Leyen emphasised the EU’s long-term partnership with Azerbaijan and declared it ‘a reliable partner’, comparing it to an aggressive and untrustworthy Russia. She only briefly touched upon issues related to human rights and media freedom that have long spoiled relations between Baku and Brussels. In turn, President Ilham Aliyev praised the country’s level of partnership with the EU and expressed hope for its sustainable improvement and growth.

Azerbaijan is a new player in the European gas market. Before 2020, the only European buyer of Azerbaijani natural gas was Greece, purchasing a fraction of the fuel running through the Baku-Tbilisi-Erzurum pipeline completed in 2007. However, Caspian gas has long been on European leaders’ radar, and in 2011 Azerbaijan launched its most ambitious gas project, later named the Southern Gas Corridor, by signing a joint declaration with the European Commission which envisaged the delivery of Azerbaijani gas as far as Italy. It is believed that a vicious campaign against its completion organised in Italy was being tacitly ignited from Moscow to prevent the growth of Baku’s geopolitical significance for the West. Gas transit from the major Shakhdaniz-2 field through the two-pronged Corridor (consisting of the Trans-Anatolian Pipeline, or TANAP, and the Trans-Adriatic Pipeline, or TAP) to several European countries – Greece, Bulgaria, Albania and Italy – finally started in late 2020. In 2021, the Azerbaijani share of the EU’s aggregate gas imports of about 350 bcm was slightly above 2%, while 45% – or 155 bcm – came from Russia.

Russian aggression in Ukraine put the fragile framework of European energy security under immediate threat. Russian policymakers and experts do not conceal their willingness to use gas leverage as a tool to destroy the united Western coalition supporting Ukraine. It is therefore hardly surprising that since 24 February, Brussels, as well as individual European governments, have been working hard to ensure as much import substitution as possible. This process is being spurred by Russia itself, as Gazprom has already cut exports to Europe by 60%. The bloc’s proposed gas replacements by the end of 2022 – which include LNG diversification, renewables, heating efficiency, pipeline diversification, biomethane, solar rooftops and heat pumps – amount to around 102 bcm annually, or about two-thirds of the amount imported from Russia. Europe has already secured record-high imports of LNG; its biggest bets have now been made on the US, Qatar, Egypt and Israel. However, Azerbaijan features in the continent’s energy diversification plans as well. But what explains the visible importance Europe attaches to this relatively minor producer in a geopolitically fragile region?

This year, Azerbaijan is expected to sell up to 12 bcm of natural gas to Europe. The delivery of volumes double the current amount should not be difficult – it would not require the construction of a second pipeline, only the installation of more compressors and other minor infrastructure. However, does Azerbaijan have the capacity to raise this volume to 20 bcm by 2027? Thus far, the answer is rather negative. In 2021, the country’s gas production constituted 43.8 bcm, and it is expected to exceed 50 bcm in 2026. Even if we assume a further increase by a similar volume in 2027, it means Azerbaijan’s export potential to Europe will likely equal about 15-16 bcm. Hence, to fulfil the stated target, 4–5 additional bcm of fuel will need to be added to the pipeline. The potential source of this difference can clearly come from nowhere but Central Asia – and primarily Turkmenistan. In an article for Asia Times, Canadian expert Robert Cutler claims that the interest in connecting with Central Asia has been an intrinsic – and maybe even the major – element of the European interest in concluding a deal with Baku.

The idea of bringing Turkmen gas through the Caspian Sea to Europe has been around for a very long time. The sparsely populated Central Asian republic is believed to contain 50 trillion cubic metres of gas reserves, the fourth largest in the world. While China has long been almost the exclusive importer of Turkmen gas, the West used to be very keen on getting its share as well. An ultimately failed project called Nabucco presupposed the delivery of Turkmen and Azerbaijani natural gas, mixed with supplies from Iraq, as far as Austria. However, political difficulties surrounding deals with the ultra-closed Turkmen government, exacerbated by Russian opposition to the project and the high costs to be paid, killed off European interest. The abundance of Russian gas was not conducive to taking on rather risky projects, either. Lasting disputes between Baku and Ashgabat over the contested oil and gas fields in the middle of the Caspian also precluded any effective cooperation.

However, things seem to be changing. First of all, the prospect of gas shortages threatening Europe with a cold winter and recession is forcing European leaders to be more proactive and nimbler. Furthermore – and very importantly – Azerbaijan and Turkmenistan have finally resolved their dispute by agreeing to divide the contested gas field equally, renaming it to Dostlug (‘friendship’).

By signing the agreement on the legal status of the Caspian Sea in 2018, Russia lost the formal reasons that enabled it to oppose the construction of any pipeline – or in fact any activity which could potentially harm the Caspian’s ecosystem – without its direct permission. The US-based interest group TransCaspian Resources Inc claims that the construction of the Trans-Caspian interconnector between Turkmenistan’s and Azerbaijan’s fields in the Caspian will require just $400 million of investment and may be completed in as little as four months. According to their estimate, up to 12 bcm per year can be transported through this interconnector, as against approximately 5–6 bcm needed to implement the Azerbaijan–EU deal.

Moreover, Turkmen media (which are extremely unlikely to publish anything not directly approved by the authorities) have mentioned that Ashgabat is conducting negotiations with Baku, Tbilisi, Ankara and Brussels about the possibility of exporting gas. Prospects for cooperation with Kazakhstan, though more distant due to technical reasons, are also on the table. On 24 August, President Kassym-Jomart Tokaev visited Baku, and oil transit from Aktau to Baku and then further west through existing pipelines was discussed by the two leaders. It is possible that the success of this scheme could pave the way for discussing the creation of gas-carrying infrastructure.

Another much-discussed issue right now is the degree of significance that the relatively modest addition to the European gas supply from Azerbaijan will have. Some experts have criticised Brussels for signing a deal with the allegedly ‘non-democratic and militaristic’ country which cannot provide more than 4–5% of the gas needed to replace European imports. This reasoning is very far from the truth and, at best, misleading. Those who belittle the modest volume of Azerbaijani exports miss the specific character of the highly geographically divided gas market, where transport opportunities are costly and not interchangeable. For any particular country or region, the range of plausible suppliers is limited and does not necessarily include all those available on the global market. This is why entering long-term contracts on more or less fixed prices has been a typical feature of the natural gas market. In Europe, potential clients for Azerbaijani gas are concentrated in the south and southeast of the continent: Italy, Greece and the Balkan countries. Needless to say, most of them are among the most socioeconomically fragile EU members (or candidate countries). Many of them are also particularly vulnerable to Russian infiltration and pressure, as the failed coup d’état in Montenegro, the constant instability in Bosnia and Herzegovina, and the recent government change in Bulgaria have shown.

In the current situation, the EU is deemed responsible for ensuring a normal winter without blackouts and economic collapse around the continent. Should the worst-case scenario happen in any EU country, it is likely to be engulfed with protests calling for a change of government and normalisation with Russia – and these demands would stand a serious chance of being satisfied. Such an event is likely to produce a domino effect as more and more countries, not relying on Europe to resolve their vital problems any more, would opt for a similar path. A significant chunk of the political spectrum in some leading EU countries, such as Italy and France, contains Russian sympathisers who will push hard for a U-turn on sanctions in this case. Thus, an acute energy crisis in one small European country – maybe not even an EU member – may shatter the whole region’s security and debilitate the European policy of countering Russian aggression and revisionism. Any system is as sustainable as its weakest element, so numbers matter little if the planned gas purchases can ensure the energy security of certain European countries.

Finally, a point must be made that growing energy collaboration between Azerbaijan and Europe increases the chances for a sustainable, peaceful solution to the Azerbaijan–Armenia conflict in the near future. As the clashes between the two sides in early August revealed, without full normalisation, certain risks will continue to haunt regional projects involving the South Caucasus. The presence of Russian ‘peacekeeping’ forces does not help to alleviate the situation either. The considerable activity of the European Commission, which organised two meetings between Aliyev and Armenian President Nikol Pashinyan in Brussels in April–May 2022 and a third on 31 August, attests to Europe’s newfound interest in a hard presence in the South Caucasus. For a long time, the EU has not been perceived in Baku or Yerevan as a key actor precisely because of its unwillingness to deal with the unpleasant issues of war and peace negotiations. Now that Brussels is willing to do that – to ensure its own political and economic security – such two-way cooperation may bring tangible and lasting benefits to both sides in a time of global turmoil.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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