Diversification of gas supply sources & routes: The EU-Azerbaijan gas deal and the impact of the Armenia-Azerbaijan conflict

Estimated Reading Time: 7 minutes

 

THE 2021 – 2022 GLOBAL ENERGY CRISIS

2021-2022 witnessed an unprecedented global energy crisis, with nations worldwide struggling with shortages and high costs of crucial energy resources such as petroleum, natural gas, and electricity. This crisis stemmed from the COVID-19 pandemic and resulted in a complex interplay of factors, including labor shortages, economic fluctuations, geopolitical tensions, and the ever-present threat of climate change. To make matters worse, the 2022 Russian invasion of Ukraine added another layer of uncertainty to the already delicate energy landscape.

The COVID-19 pandemic was the initial cause of the current crisis. The pandemic led to a sudden and significant reduction in global energy demand, which, in turn, caused a drop in oil extraction. This drop amplified the effects of the Russia-Saudi Arabia oil price war in 2020. As the world adjusted to the new normal, the Organization of the Petroleum Exporting Countries (OPEC) struggled to respond effectively, further exacerbating the already delicate balance between supply and demand.

In 2021-2022, Europe faced a significant energy crisis due to the Russian troops' ominous buildup near the Ukrainian border and their subsequent invasion. This created a multifaceted challenge as energy routes and resources were at risk, demanding prompt attention and comprehensive solutions. In this exploration, we will delve into the intricate web of events and factors that coalesced to create one of the most significant energy crises of our time. We will examine the far-reaching consequences and potential lessons for a more resilient future.

The Russo-Ukrainian War saw international sanctions imposed on Russia, which were intensified following the 2022 Russian invasion of Ukraine. Elsewhere, the Nord Stream 2 pipeline's certification was frozen. Moscow, prior to the invasion, had already declined to raise exports to European markets and reacted to EU sanctions by first lowering gas deliveries to Germany via Nord Stream 1, and ending them completely in September 2022. During the same month, gas leaks took place, thus resulting in making the pipes becoming completely nonfunctional, following suspected sabotage activity.

 

ENERGY TRANSITION

Aside from inflationary tensions, the 2021 - 2022 energy crisis has also boosted the use of coal in energy production globally. But this comes at a cost: coal or oil derivatives emit greater quantities of carbon dioxide and air contaminants than gas, thus the switch to coal delays the transition to greener energy sources - a longstanding objective for many EU countries.

Europe has been leading with respect to the international climate approach, vowing to diminish emissions to at least 55% below 1990 levels by 2030, though embargoes on Russia are destroying global reserves of fossil fuels with severe price hikes. Nonetheless, the Russo-Ukrainian war in 2022 risks tarnishing years of formidable and consistent work to decrease emissions on the European continent. After a period of success in decreasing Europe's carbon footprint, nations are now unable to keep anything ‘off the table’ - not even the reopening of coal-fired power plants or even extending oil imports, as well as lengthening the phase-out for nuclear energy.

Furthermore, it was estimated that if Russian gas imports were to terminate in the months following the invasion, an estimated 25% of Europe's gas demand could not be met at zenith times for a winter similar to that in 2021. Moreover, that shortfall is due to a deficiency of proper transport infrastructures such as pipeline capacity and Liquefied Natural Gas (LNG) terminals, while the supply interval can be sealed by 2025 if natural gas consumption drops by 20% across Europe, and infrastructure is developed at the same time. The use of LNG can play a significant role in enhancing the diversity of gas supply and improving energy security in the European Union. Countries in Europe that have access to LNG import terminals and liquid gas markets are much better equipped to withstand possible supply interruptions compared to those that solely rely on a single gas supplier.

European policy-makers, in March 2022, decided to substitute Russian fossil fuel imports, partially through diversified sources and partially by switching to Europe-based coal energy production. With Russia being a key partner for materials utilized for clean energy technologies, a general damaging effect on the climate emissions path has been foreseen.

On the whole, the response has seen a return to coal and other polluting energy sources, subsidizing expenses, relieving gas taxes, or even reducing the cost of carbon dioxide emissions. These short-term resolutions decrease electricity bills but move precisely in the opposite direction of what is required to contain the 1.5-degree increase in temperature, advancing the probability of a climate catastrophe.

 

DESIGNING THE MEDITERRANEAN ENERGY HUB

The establishment of a Mediterranean gas epicenter in Southern Europe will diversify the EU's energy suppliers and routes. Consequently, the EU is committed to a dynamic energy discussion at a political stage with Eastern Mediterranean and North African partners. Taking into consideration the immense prospect of Algeria, both for traditional and unconventional gas resources, and also the new gas resources in the Eastern Mediterranean and the associated infrastructure growth projects, the Mediterranean region can function as a pivotal source for supplying gas to the European Union. Therefore, Cyprus, Egypt and Israel, due to their significant offshore gas reserves, established the Eastern Mediterranean basin as a strategic ally for the EU in its endeavor to diversify its gas stockpile routes. The two major options to transport gas from across the Mediterranean to the EU, and the global market, would either be via pipelines or in the form of Liquefied Natural Gas. Specifically, there are two significant Projects of Common Interest in gas: the Eastern Mediterranean Pipeline, and the CyprusGas2EU LNG terminal.

 

SOUTHERN GAS CORRIDOR

In 2008 the European Commission proposed the initiative of the Southern Gas Corridor, a natural gas supply project commencing from the Caspian and Middle Eastern regions to the European market. The objective of the Corridor is to manage to diminish Europe's dependency on Russian gas and to diversify sources of energy supply, while the route itself, from Azerbaijan to Europe, is composed of the South Caucasus, the Trans-Anatolian and the Trans-Adriatic Pipelines. Inaugurated during the last quarter of 2020, as of March 2022, the Corridor supplied approximately 10 billion cubic meters of natural gas to Europe. It is anticipated that the Southern Gas Corridor will supply a maximum capacity of roughly 10.5 billion cubic meters of gas. 

The European Union is taking a series of actions to support the mega project by upholding the infrastructure projects necessary for the Corridor under the fourth list of EU's Projects of Common Interest. These are undertakings which may profit from a streamlined licensing procedure, acquire preferential regulatory treatment, and are qualified to apply for EU grants from the Connecting Europe Facility. Furthermore, the European Union is subsidizing the construction of the Trans Anatolian Natural Gas Pipeline (TANAP) and the Trans-Adriatic-Pipeline (TAP) to transport natural gas from Azerbaijan to Italy via Georgia, Turkey, Greece, Albania and the Adriatic Sea respectively. Lastly, there are initiatives in order to boost cooperation with transit nations, while simultaneously facilitating closer collaboration with gas suppliers in the area.

 

EU – AZERBAIJAN GAS DEAL

In July 2022, the European Commission signed a memorandum of agreement with Azerbaijan in order to increase natural gas imports to at least 20 billion cubic meters a year by 2027 from the Azeri gas fields, in order to significantly diminish European reliance on Russian resources and sustain the development of a pipeline to do this. Europe acquires Azeri natural gas since December 2020 via the Trans-Adriatic pipeline, which as has been mentioned is part of the Southern Gas Corridor, and is transporting gas to Europe from the Shah Deniz II offshore field in the Caspian Sea. Linking with the Trans Anatolian Pipeline at the Greek-Turkish border, TAP traverses Northern Greece, Albania and the Adriatic Sea and it is finally coming ashore in Italy.

The way TAP is constructed, it can facilitate gas supply to various South Eastern European countries, such as Bulgaria, which has already linked with the pipeline through Interconnector Greece-Bulgaria, and it will provide almost one-third of its yearly consumption. At this point, it is worth mentioning that until recently Sofia was relying on almost 100% of its gas imports from Russia.

On the other hand, this deal stands in complete defiance of the EU's human rights standards and climate goals and will also indirectly support the authoritarian regime of Baku, infamous for uncontrolled corruption and the repression of all opposition in the petro-state. Furthermore, what has been neglected is the fact that the necessary infrastructure required to extract and transport the gas from the Caspian Sea to Europe is co-owned by Lukoil, a Russian oil and gas colossus closely related to Putin’s government and a company that is on the United States sanctions list.

It is also supported that this agreement is unable to help address the EU's potential gas deficiencies at the moment, given the fact that it is technically inconceivable to implement gas production and transportation needed in less than five years, while the EU must already commence shortening its gas demand greatly in order to achieve its own climate goals by 2030 and 2050.

 

THE ARMENIA/AZERBAIJAN CONFLICT

Earlier this year, the de facto regime of the breakaway ethnic-Armenian territory of Nagorno-Karabakh, noted that the Azerbaijani military had battered the region, while the latter claimed “an anti-terrorist operation against illegal Armenian armed groups in the territory of Azerbaijan”, which resulted in military mobilization.

The escalation came just a few weeks after European Commission President von der Leyen visited Azerbaijan and signed a bilateral deal seeking to more than double European Union imports of Azerbaijani natural gas since Baku poses at the core of measures to halt Europe’s Russian energy dependency. Furthermore, the outbreak of conflict in the 2020 Armenian-Azerbaijani war over Nagorno-Karabakh is one more indication that the West’s policy towards Azerbaijan is failing. Europe’s negligence to take relations with Azerbaijan carefully jeopardizes strengthening the bloc's energy crisis, worsening the security crisis in the Caucasus, and strengthening Moscow. That being said, Azeri President Aliyev, while adopting the role of Europe’s energy rescuer, has also pursued accommodation with Russia, only a day after Putin's recognition of puppet states, the former signed a declaration on allied cooperation with the latter.

In late October 2022, the leaders of Azerbaijan and Armenia announced a halt to hostilities and adherence to previously-agreed accords that aimed to terminate fighting between the two Caucasian neighbors that left over 200 people dead. The states agreed to abstain from the use of military means and to examine and settle all challenging queries exclusively on the basis of joint recognition of sovereignty, territorial integrity and the inviolability of borders. Despite the fact of the aforementioned resolutions, recently, energy behemoths have been aiming to divest from Azerbaijan, since the American Chevron sold out in 2020 and ExxonMobil is contemplating a similar scenario, while the British BP noted that the company would forfeit its remaining stake after failing to uncover commercial gas resources.

 

THE EU MUST LEARN FROM ITS MISTAKES MOVING FORWARD

In conclusion, it is of utmost importance that the leaders of the European Union start learning from past mistakes related to energy diversification and energy security concerning deals struck with authoritarian governments. In that way, those agreements only benefit to eternalize Europe’s fossil fuels desire, precisely when it most desperately ought to terminate. On the other hand, if Azerbaijan is indeed going to become a replacement for energy provision for Europe, immediate and well-calculated work needs to be done in order to accommodate investment in its energy sector. That will also contain the EU agreement’s renewable energy commitments, which are essential to free up more Azerbaijani natural gas for export.



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