The Southern Corridor and Azerbaijan’s Energy Policy Day 2 Gulmira... · The Southern Corridor and Azerbaijan’s Energy Policy ... Connecting the Caspian Region with Europe ! ...

The Southern Corridor and Azerbaijan’s Energy Policy

European Gas Conference, Vienna 31 January, 2013

Gulmira Rzayeva Leading Research Fellow

Center for Strategic Studies of Azerbaijan

Outlines

n  Key objectives of Azerbaijan’s gas strategy

n  Connecting the Caspian Region with Europe

n  Gas production potential in Azerbaijan

n  Gas market transformation in Europe: implications for SD2 gas

n  European increasing competition with global LNG markets

n  South Stream and Nabucco West: market share or volume substitution?

n  Conclusion

The benefits of diversification were already seen a long time ago …

“Safety and certainty in oil lie in variety, and variety alone“

Sir Winston Churchill

(British Statesman, 1874 - 1965)

Key objectives of Azerbaijan’s gas strategy n  Azerbaijan remains key to the realization of the Southern Gas Corridor and

thus to the opening up of the Caspian Region

n  Azerbaijan is enabling the Southern Gas Corridor

n  Azerbaijan aims to have a significant presence in the European gas market beyond 2018 once Shah Deniz Phase 2 volumes start coming on stream

n  Azerbaijan needs to have access to multiple buyers/consumers, multiple pipelines, and multiple transportation routes

n  Azerbaijan is committed to establishing a presence throughout the gas value chain upstream, midstream, and downstream to end users

Opening the Caspian Region to Europe for gas export will involve the development of 3 gas pipelines with overall investment volume of up to $40bln

SCPX n  The aim is for SCP and TANAP to be connected by a dedicated pipeline n  Within the expansion of the SCP there could be a change in share allocation n  The proposed 56” diameter pipeline scheme will be scalable up to 60bcm

TANAP n  Azerbaijan as the owner of gas prefers not to depend on gas consumer

companies’ infrastructure n  Self-financed, self-sufficient and scalable project n  Sizeable, transparent and secure dedicated pipeline serving as the catalyst

Nabucco West or TAP n  The final selection is not expected to be before the end of Q2/2013

Majority of gas production growth comes from SD2. New fields will contribute significantly to production from 2020 on

Source: SOCAR

Field / Structure

Natural gas (bcm)

Condensate (mln t)

Recoverable

Umid 200 40

ACG Deep 300-500 38-85

Babek 400 80

Nakhchyvan 300 38

Absheron 300 45

Zafar-Mashal 300 37

Araz – Alov - Sharg 700 90

Shafag - Asiman 500 65

Total 3000 - 3200 433 - 480

n  The giant Caspian gas and condensate field Shah Deniz – 1.2tcm

n  SOCAR’s current exploration of the Umid field and Babek structure, along with other possible fields such as Absheron, ACG Deep, Nakhchyvan, Shafag-Asiman, and Zafar-Mashal (combining these all, gives an increase of Azerbaijan’s gas potential by nearly 3tcm and resulting in overall scope of slightly above of 5tcm (proven 2.5tcm)

n  At the same time, the volume of gas production in Azerbaijan by 2015 will increase to 20bcm (excluding re-injection) and up to 40-50bcm by 2025

n  It will further enhance the role of Azerbaijan as a key contributor to energy security in the region and the EU

Existing and new field/structure developments: field by field assessment

0  

10  

20  

30  

40  

50  

60  

2010   2014   2016   2018   2020   2022   2024   2026  

bcm/a  

Other  (onshore)   8th  March   Bulla  deniz   Guneshli  Shallow   Oil  Rocks  Garabagh   Oghuz   Zafar-­‐Mashal   Dan-­‐Ulduzu  /  Ashrafi   Inam  Kapaz   Alov-­‐Araz-­‐Sharg   Bahar   Shafag  /  Asiman   Nakhchevan  Absheron   Babek   Umid   ACD  deep  layer   ACG  associated  gas  Sha  Deniz  2   Sha  Deniz  1   SOCAR  esTmate  

n  Shah Deniz is the dominant single contributor to Azeri gas production. SD1 share to date is already ~50%

n  The remainder is from various offshore fields and associated gas from offshore oil production. (E.g. Guneshli Shallow, Bulla Deniz, 8th March, Bahar and ACG).

n  New fields and structures like Umid, Absheron and ACG Deep, Babek, Shafar-Asiman, Nakchyvan have the potential to provide significant gas volumes - but production ramp up will most likely be beyond 2020 due to the development lead times and mainly drilling rigs availability

Source: SAM’s internal analysis

Source: Enerdata

European gas market transformation: Implications for Shah Deniz Phase 2 gas

SUPPLY n  Growing supply of LNG (US to start LNG

exports from 2015) n  Growing share of renewable in power

generation reached 20%

DEMAND n  In power generation gas is strongly competing

with coal n  European gas demand recovers very slowly

after the financial downturn

PRICING n  Spot volumes are increasing very fast

(30-40% p.a.) n  Up to $30bln will be invested in SD2

development n  The estimated total cost of the SGC is

$40bln. SD2 gas will not be cheap! n  The EU is targeting to increase spot price

gas for up to 50% by 2015-16 n  With high oil prices even 10bcm of gas will

provide high revenue

n  The Asian energy market is the most lucrative market as it guarantees high netback margin to the suppliers. The average price for LNG at the European trading hubs is $310-350/1000cm, whereas in Japan, Korea and China the price is $500/1000cm

n  Why U.S. should export LNG to Europe if they can benefit more from the Asian market?

n  It does not pose threats to prospective SD gas markets in longer term

European Competition with Global LNG Markets

Source: Skolkovo Nergy Center

“However beautiful the strategy, you

should occasionally look at the benefits“

Sir Winston Churchill

(British Statesman, 1874 - 1965)

European gas demand

n European gas demand is expected to grow from 520bcm in 2011 to 620bcm in 2035

n Power generation gas demand has fallen 32bcm since 2008 owing to weak power demand and competitive coal. Gas demand is expected to recover in the long term as new capacity replaces old coal and oil generation but will face headwinds from rapidly growing renewable generation and continuing favorable coal economics

n Industrial gas demand has been flat over the past decade, a trend expected to continue in the long term

n Residential and commercial demand grows in some areas, especially Turkey, but stays flat or declines in more mature markets with improving efficiency and limited new grid connections

n Transport sector demand is expected to grow steadily to reach around 6% of total European gas demand in 2035

0

100

200

300

400

500

600

700

2000 2005 2010 2015 2020 2025 2030 2035

BcmEuropean gas demand

Residential/commercial

Industry

Power and heat

Transport

Note:Europe defined as EU27, Balkans, Norway, Switzerland, and Turkey)

bcm

South Stream vs Nabucco West: Market Share or Volume Substitution? Central Europe n  Demand increases from 54bcm in 2011 to 73bcm in 2030, primarily owing to

Polish power generation demand n  Unconventional gas production in Poland reverses the decline in indigenous

supply for the region n  Russia remains the largest import source n  Southern Corridor gas further diversification from the early 2020s South Central Europe n  Demand is stable, decreasing by just 2bcm, from 85bcm in 2011

to 83bcm in 2030 n  Russian share of supply set to increase dramatically to be over

40% of total flow by 2035 n  North African gas loses market share after 2020 as fields decline n  Growth in regasification capacity allows LNG volumes to increase,

but LNG remains a small proportion of total supply South East Europe n  Demand in the region grows rapidly from 56bcm in 2011 to 91bcm in 2030 n  Turkish residential grid expansion and growth in power generation is the

primary driver n  Russia remains the largest supplier in the region n  Caspian supply grows with gas from Shah Deniz Phase 2 available from 2018 n  New regas capacity in Croatia provides diversity to the Balkans from 2017

* Europe

South Central Europe

Southeast Europe

-­‐1

1

12

1

10

5

10

3

-­‐2 -­‐1

3 4

Domestic Industry Power generation Transport

Conclusion

n  The gas demand expected to recover very slowly. However markets beyond Baumgarten (e.g. Germany and France; BeNeLux and Switzerland, Italy, and even to reach fully liberalized UK market), where new gas could be absorbed are also attractive for the gas from Azerbaijan

n  U.S. LNG will not pose significant threat to the SD gas in particular markets and will not greatly affect the price

n  The European Union, despite rhetorical concerns about Russia's reliability, has yet to implement any meaningful diversification scheme to acquire more piped natural gas from the Caspian region

n  With the Southern Gas Corridor and the development of multiple projects for the

importation of liquefied natural gas the EU has the ingredients of a more secure position

n  This is, defiantly, not to say that the Southeast and Central European markets and Western Balkans that are importing the lion share of their gas from Gazprom will walk away from Russian gas. However they may achieve a greater feeling of post USSR independence

Living in “interesting times”? Thank you for your attention!

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