Increasing vitality ties
Azerbaijan (inhabitants 10.3 million), which is the host of this 12 months’s international local weather summit COP29, is the epitome of a rustic experiencing carbon lock-in. Oil and fuel manufacturing contributes roughly half of the South Caucasus republic’s GDP and half of all its nationwide funds revenues, in addition to greater than 90 % of its export earnings. The most important share of those exports goes to the European Union (EU) and is transported over pipelines operating by Georgia and Turkey to Greece, Albania and Italy (Azerbaijan doesn’t produce liquefied pure fuel, LNG). With an annual manufacturing whole of 48.7 billion cubic meters (bcm) of pure fuel and 30.2 million tons of crude oil (2023 figures), Azerbaijan could also be a smaller-sized producer in international comparability, however its significance for the EU has been rising. It’s now the fourth-largest provider of piped fuel to the EU with a share of seven %, behind Norway, Algeria and Russia. Of the EU’s whole fuel imports, Azerbaijan’s share stands at 3 %.
The brand new geopolitical period ushered in by Russia’s full-scale invasion of Ukraine in 2022 has introduced alternatives to Azerbaijan. Because the EU scrambled to safe non-Russian fuel provides, Azerbaijan was fast to step in. In July 2022, European Fee President Ursula von der Leyen traveled to Baku to signal the EU-Azerbaijan Memorandum of Understanding on a Strategic Partnership within the Area of Power. As a part of the settlement, Azerbaijan pledged to greater than double its fuel provides to Europe to twenty bcm yearly by 2027. The EU’s resolution to improve these ties has been controversial from the very starting because of Azerbaijan’s worrying monitor file of political repression and human rights violations. In October 2024, the European Parliament handed a extremely essential (though non-binding) decision calling on the EU to finish its “fuel reliance” on the nation and droop the 2022 Memorandum.
Up to now, nonetheless, political expediency has trumped different issues. By the top of 2022, Azerbaijan was capable of ship 11.4 bcm to the EU (up from 8.1 bcm in 2021), adopted by 11.8 bcm in 2023. Because of excessive fuel costs, Azerbaijan’s export earnings from fuel surged from USD 5.56 billion in 2021 to USD 14.99 billion in 2022 and USD 13.68 billion in 2023, surpassing revenues from oil exports for the primary time within the nation’s historical past. Azerbaijan has additionally expanded the geography of its exports to Europe. Romania started importing Azeri fuel in 2023, adopted by Hungary, Slovenia and Croatia in 2024, becoming a member of Italy (the most important importer), Bulgaria and Greece. Slovakia has expressed its curiosity in Azeri fuel deliveries as effectively, whereas Hungary’s state-owned energy firm MVM Group acquired a 5 % stake in Azerbaijan’s main Shah Deniz fuel area growth challenge and a 4 % stake within the South Caucasus Pipeline Firm in August 2024.
Nonetheless, delivering on the extremely formidable 20 bcm pledge to the EU will likely be very difficult. On the one hand, Azerbaijan’s fuel manufacturing has been rising: TotalEnergies and Azerbaijan’s state-owned oil and fuel firm SOCAR introduced on stream the brand new Absheron fuel area in 2023, whereas a BP-led consortium is creating newly found giant fuel reserves. Alternatively, rather more funding is required, each in new fuel manufacturing capability and in increasing the Southern Gasoline Hall. Doing so has develop into more and more tough, as European and worldwide monetary establishments are reluctant to finance fossil gasoline infrastructure. As well as, home demand has been rising quick as effectively. Different choices to spice up deliveries to the EU thus give attention to releasing up fuel from different sources. This will embody shifting a share of exports away from giant non-EU customers (akin to Turkey), decreasing home fuel consumption (e.g., by deploying extra renewables within the gas-dominated power-generation sector) or overlaying a portion of home demand by importing cheaper fuel from elsewhere. In reality, Azerbaijan did considerably enhance imports of Russian (and Turkmen) fuel in 2023 – thus not directly undermining the rationale behind the EU’s ambition to section out its dependence on Russia.
The three key pipelines of the Southern Gasoline Hall. Credit: Bankwatch.
Lastly, Azerbaijan can be prone to play an essential position in deciding the destiny of the so-called Ukrainian transit, that’s, the persevering with move of Russian fuel (ca. 15 bcm in 2023) by Ukraine to the EU. The transit is ruled by the phrases of Gazprom’s contract, which expires on the finish of 2024, with Ukraine’s nationwide oil and fuel firm, Naftogaz. Though the EU might in precept change these volumes by importing extra LNG, Hungary, Slovakia and Austria are involved in preserving the flows. One of the vital possible choices can be to have Azerbaijan buy Russian fuel and ship it to Europe as legally relabeled “Azeri” fuel. But, the small print of any future association stay extremely contested.
Azerbaijan’s increasing fuel commerce with the EU could also be profitable nevertheless it carries dangers. Not solely does it expose the nation to important worth volatility however, extra basically, it additionally lacks a transparent future perspective. The EU’s pure fuel demand has been declining since 2022 because of a mix of the drop in industrial consumption, effectivity good points and the quicker deployment of renewables. The bloc’s stringent local weather targets – together with the 2050 internet zero goal and the at the moment mentioned 90 % greenhouse fuel discount goal by 2040 – imply that Europe is predicted to devour a lot much less fossil fuel sooner or later. As well as, EU legislation stipulates that new contracts for fossil gasoline deliveries can’t prolong past 2049. European firms have been reluctant to enter into long-term fuel provide agreements with Azerbaijan, making it tough to draw ample non-public funding into new fuel manufacturing capability. Lastly, the EU is anticipating new LNG provides from 2026 onward, primarily from Qatar, and it’s removed from sure how a lot fuel Europe will really want from Azerbaijan by the top of the last decade.
Sluggish vitality transition
Azerbaijan’s strategic partnership settlement with the EU, whereas primarily specializing in pure fuel, additionally consists of language on clear vitality cooperation. In relation to the vitality transition, nonetheless, COP29’s host nation has been a laggard. Azerbaijan’s local weather coverage could be very unambitious: Within the 2023 replace of its Nationally Decided Contribution (NDC) below the Paris Settlement, Azerbaijan set the goal of a mere 40 % discount in emissions by 2050, conditional on receiving worldwide help. (In contrast, its hydrocarbon-rich friends Kazakhstan, Uzbekistan and Russia have all adopted internet zero targets.) Azerbaijan was additionally late in launching photo voltaic and wind growth. In 2022, pure fuel held a 93 % share of whole electrical energy technology, whereas renewable vitality – represented virtually completely by hydropower – solely offered 6 %. Removed from planning a fossil gasoline phaseout, Azerbaijan, if something, is intent on monetizing its hydrocarbon sources, particularly fuel. By 2033, it’s anticipated to extend its fuel manufacturing by a 3rd, reaching 49 bcm (up from 37 bcm in 2024). Azerbaijan’s oil manufacturing, against this, has been steadily declining since 2010.
Nonetheless, Azerbaijan has put effort into burnishing its inexperienced credentials in three main methods: working to draw international funding into large-scale renewable vitality growth, together with offshore wind; becoming a member of worldwide efforts to fight methane emissions; and positioning itself as a key element of the longer term inexperienced Caspian hub, with ambitions to export inexperienced electrical energy and inexperienced hydrogen to Europe. Whereas commendable, these initiatives should not but rooted in a complete decarbonization coverage, and there aren’t any state help devices to advertise the vitality transition in trade or within the transport and residential sectors.
Within the power-generation sector, Azerbaijan is aiming at a 30 % share of renewable vitality within the whole put in power-generation capability by 2030 – a goal that seems to be inside attain. (This isn’t to be confused with having 30 % of electrical energy generated from renewable vitality sources, which might be more difficult.) Except for local weather advantages, renewables might assist release extra volumes of pure fuel for export, which might generate a lot larger revenues than within the home market. In 2023, Azerbaijan’s whole put in power-generation capability stood at 8.32 gigawatts (GW); this included 1.7 GW in renewable vitality capability (principally represented by hydropower), thus already amounting to ca. 20 %. On wind and photo voltaic, Azerbaijan has been carefully cooperating with the main Gulf firms, akin to Masdar of the United Arab Emirates (UAE) and Saudi Arabia’s ACWA Energy, which have been actively increasing their presence in Central Asia and the Caucasus in recent times. In October 2023, Masdar launched a 230 MW photo voltaic farm in Garadagh close to Baku, the most important within the Caspian area. The UAE-based firm has additionally inked a take care of Azerbaijan’s SOCAR to assemble three extra large-scale wind and photo voltaic services with a mixed put in capability of 1 GW: two large photo voltaic farms in Bilasuvar (445 megawatts, MW) and Neftchala (315 MW), in addition to a 240 MW Absheron-Garadagh wind farm. Saudi Arabia’s ACWA Energy is answerable for setting up a 230 MW wind farm in Khizi on the Absheron peninsula. These tasks alone, if accomplished on time, would put Azerbaijan effectively on monitor towards reaching the 30 % goal. Azerbaijan can be the one nation within the area to actively take into account offshore wind growth. The federal government’s 2022 Offshore Wind Roadmap, developed with the help of the Worldwide Finance Company (IFC), outlines two situations envisioning the deployment of 1.5 GW to 7.2 GW of offshore wind capability by 2040.
A particular place in Azerbaijan’s vitality transition plans is reserved for the territories recaptured from Armenian management because of two large-scale navy offensives in 2020 and 2023. Azerbaijan’s navy takeover has led to the flight of virtually your complete ethnic Armenian inhabitants and spelled the top of the breakaway Nagorno-Karabakh Republic (Artsakh), which existed between 1991 and 2023 however remained unrecognized by the worldwide group. In its 2023 NDC replace, Azerbaijan introduced intentions to make the territories (now formally known as the Karabakh and East Zangezur Financial Areas) a “internet zero emission zone” by 2050 as a part of the foremost reconstruction effort, with hydropower taking part in the main position. Though the repopulation has proceeded very slowly, Azerbaijan has already launched the development of a number of of the 28 deliberate hydropower vegetation in each areas. There are additionally plans for photo voltaic and wind energy vegetation, together with a 240 MW photo voltaic farm to be constructed by BP within the Jabrayil district (East Zangezur Area). The ability will assist decarbonize the operations of BP’s Sangachal oil terminal on the Caspian Sea. There are even tentative plans for renewable hydrogen manufacturing for export to the EU.
Tackling methane emissions alongside the fuel worth chain is one other focus space explicitly talked about within the 2022 EU-Azerbaijan Memorandum of Understanding. The EU, the most important purchaser of Azeri fuel, has launched rather more stringent necessities as a part of its newly adopted methane regulation. From 2025 onwards, European importers of fuel will likely be required to report on the related annual methane emissions, and beginning in 2028, importers of fuel must show their compliance with a predetermined emissions threshold. In March 2024, Azerbaijan introduced it will be part of the International Methane Pledge, a US-led initiative during which taking part nations voluntarily commit to scale back their methane emissions by 30 % by 2030. Though Azerbaijan will not be one of the vital infamous emitters (akin to Turkmenistan), its methane emissions have grown by 11 % since 2018 as a result of growth of fuel manufacturing in recent times. Which means that adapting to the brand new necessities will necessitate severe efforts, but no nationwide methane technique has been developed on the time of writing.
An vitality bridge connecting the South Caucasus and the Caspian area with Europe
As a consequence of its strategic location, Azerbaijan can play a task in transiting vitality (whether or not fossil or inexperienced) from Central Asia to Europe. Kazakh oil is a working example. A lion’s share of Kazakhstan’s oil exports is transported through the Caspian Pipeline Consortium (CPC) pipeline by Russian territory to the Black Sea port of Novorossiysk. As a consequence of repeated disruptions, Kazakhstan has been on the lookout for methods to diversify its oil export routes. In 2022, Azerbaijan’s SOCAR and Kazakhstan’s nationwide oil and fuel firm, KazMunayGas, signed an settlement on the annual transit of 1.5 million tons of Kazakh oil by Azeri pipelines; this was expanded to 2.2 million tons in a follow-up settlement in March 2024.
Azerbaijan has additionally been touted as a possible transit nation for Turkmen fuel deliveries to Europe. The proposed subsea Trans-Caspian Pipeline has been below dialogue because the Nineteen Nineties, with little progress achieved. Nonetheless, the concept has acquired a brand new impetus currently, given the EU’s intent to section out imports of Russian fuel, Turkmenistan’s curiosity in diversifying export routes past Russia and China, and Turkey’s plans to develop into a fuel hub for Europe. In Might 2024, Azerbaijan and Turkey signed a cooperation settlement on bringing Central Asian fuel to Europe through Azerbaijan. Nonetheless, the impediments to those plans are nonetheless in place: Securing financing for a fossil fuel pipeline can be sophisticated, and, extra basically, the EU’s demand for fuel is predicted to shrink.
It’s not all about oil and fuel, nonetheless. Trying forward, Azerbaijan is envisioning itself as a key node sooner or later inexperienced vitality hall(s) connecting the South Caucasus, Central Asia and Europe. To this finish, it has been stepping up engagement with its regional neighbors and EU member states. In December 2022, Azerbaijan, Georgia, Hungary and Romania signed an settlement on setting up a high-voltage Black Sea submarine transmission cable to deliver renewable electrical energy from Azerbaijan’s (but to be constructed) Caspian wind farms – in addition to from Georgia, which has been taking part in an more and more outstanding position within the initiative – to Romania and Hungary. The challenge has acquired reward from the European Fee and a USD 35 million mortgage from the World Financial institution for preparatory actions, with extra financing out there. A feasibility examine was accomplished in summer time 2024 and offered encouraging outcomes. On the similar time, the scope of the problem is big: The proposed 1,200 km cable can be the longest on the planet and, because of its location within the Black Sea, would face severe safety dangers as a result of ongoing armed hostilities between Russia and Ukraine. The financial rationale and the anticipated payback time additionally stay contested.
A associated high-profile challenge for Azerbaijan is making a Caspian inexperienced vitality hub. In Might 2024, Azerbaijan, Kazakhstan and Uzbekistan signed a Memorandum of Understanding on linking their energy grids by a high-voltage transmission line on the Caspian seabed, with a view to enabling renewable electrical energy exports to Europe. An intergovernmental settlement on a tripartite strategic partnership within the space of inexperienced vitality is predicted to be signed at COP29 in Baku. As well as, there was some dialogue in Azerbaijan on the potential of exporting inexperienced or blue hydrogen to Europe, presumably by the retrofitted Southern Gasoline Hall. Given the extremely carbon-intensive nature of the taking part nations’ economies, nonetheless, utilizing inexperienced electrical energy and hydrogen for home decarbonization as a substitute of exports would little question generate the largest local weather advantages.
Conclusion
Previously two years, Azerbaijan has considerably strengthened its vitality ties with the EU, serving to the bloc decrease its dependence on Russian fuel and incomes Azerbaijan windfall revenues within the course of. In absolute phrases, nonetheless, Azerbaijan is a crucial however not at all an indispensable vitality provider for Europe. Whereas Azerbaijan has been investing into increasing fuel manufacturing for export, the shrinking fuel demand in Europe signifies that it runs the chance of being left with stranded property. Azerbaijan has additionally intensified efforts to develop large-scale renewable vitality capability and to place itself as a key node alongside the envisioned inexperienced vitality corridors connecting the South Caucasus and the Caspian area to Europe. Nonetheless, these plans should not rooted in a complete vitality transition coverage domestically, and their financial rationale stays questionable. Lastly, with its alarming human rights monitor file, Azerbaijan has been a controversial associate for the EU politically, and lots of voices – together with within the European Parliament – have known as for a essential reassessment of the connection. Taken collectively, these components forged uncertainty on the long-term prospects of Azerbaijan’s vitality partnership with the EU.
This text was first revealed on eu.boell.org/en.
