Is Azerbaijan ready for a difficult period of increased competition in a global gas market which expects a decrease in gas demands and an increased supply?
In the next five years, an increase is expected in liquefied natural gas production and supply, reported the International Energy Agency (IEA) on June 8th.
From 2015 to 2021, liquefied natural gas production will grow by 45%, mainly due to US and Australian production, say agency experts.
“Recent events and developments point to a period of over-saturation in the market. Over the next five years, the global gas trade will have taken a new form completely.” commend IEA director Fatih Birol in an annual assessment of medium – term gas market perspectives.
New product – Liquefied natural gas
In the last 5-10 years, interest in liquefied natural gas has highly increased. This has been explained by the comparable and sometimes even cheaper price of liquefied gas to its more traditional form. It has also a number of other advantages.
When there was such a thing as a “gas war”, an important advantage of LNG suppliers was their ability not only to promptly respond to the market, but also to the political situation. Arming themselves with LNG technology and diversifying their businesses, suppliers were able to pick up on additional sales in the market and to effectively transfer the necessary volumes of gas in a liquefied state. This allowed suppliers to replace costly pipelines with cheaper and more effective methods of delivery, in addition to the ability to react to fluctuations in demand for economic and political reasons, asserted RadioAzadliq.
Benefit in risk reduction
Such flexibility significantly reduces the risks associated with the deterioration of the relationship between supplier and transit countries and consumers: pipeline gas supplies can only be effective in compliance with long-term agreements between all members of a gas supply chain, the difficulties and downsides of which were clearly demonstrated by the gas wars.
The most striking example of a gas conflict between former partners and recent rivals is Russia and the Ukraine, whose conflict has at numerous times effect gas supply and even caused its cessation to some European countries.
The Trans Anatolian Gas Pipeline Project
Even during such a complicated time, Azerbaijan still plans to invest 10 billion dollars into the TANAP project over the next 3 – 4 years. It is expected that at least 7-8 billion dollars from these funds will be received from foreign loans. And by the way: this amount is the sum of the entire external debt of Azerbaijan at the moment. However, the main question is how will Azerbaijan compensate for its oil revenue – loss with gas exports over the next 10 – 15 years?
Meydan TV turned to well – known economics expert Rovshan Aghayev for more information:
“The Azerbaijani government, during times of peak oil prices and production hit a maximum profit of 16 billion dollars. Currently, after a fall in prices and the reduced production volume, this amount is about 7 billion a year.
Even if oil prices remain stable, how low can Azerbaijan’s annual income sink as a result of the impending decrease in oil production? Aghayev puts this number in between 3 – 4 billion dollars – that is, a fourth of peak oil prices.
And if the prices goes even lower? Will Azerbaijan be able to compensate its losses in oil with gas dollars?
“Azerbaijan’s gas revenue at current prices and predicted volumes might be in the range of 2 – 2.5 billion dollars”, stated the expert.
Would it not be more logical to conclude, then, that Azerbaijan will in all likelihood be unable to compensate for the revenue decrease in oil with revenue from gas production.
“It is a time of very tough competition.”
International experts predict that the two largest purchasers of LNG – Korea and Japan – will lower their fuel consumption, which in turn means that the supply of LNG on the market will be far beyond its demand.
“We are entering into a period of very tough competition on the gas market. On one hand, as a result of the use of gas from alternative sources by large consumers, we can notice a reduction in the demand for gas. To make matters more difficult, gas production is increasing almost twofold. All of this naturally leads to a significant increase in the excess of suply over demand. The price will fall, that is for sure.”
Similar events have been observed in the past two years with the appearance of shale oil, the expert noted.
Poland recently announced its intention to refuse the extension of a long-term contract with Russia’s “Gazprom”. The reason is simple: a liquefied natural gas terminal has been constructed which will allow Warsaw to import up to 5 billion cubic meters of fuel per year.
By 2021, Australia will be able to compete with Qatar for the first place in the list of the largest exporters of LNG. The United States is also entering into direct competition with these countries, reports Lenta.ru.
Is Azerbaijan ready for these major changes? Azerbaijan’s traditional method of gas export might not be able to compete.
If Europe transfer to liquefied gas, this expensive project could become obsolete before the end of its construction. Is it worth it to invest in such a large project and to take such large loans in order to complete it?
The Azerbaijan – Georgia – Romania Inter-connector project: no longer a priority.
The Azerbaijani government started projects in connection with liquefied natural gas a rather long time ago. A memorandum of understanding on the AGRI project was signed in 2010, reports Trend.az.
Since that time, it has been discussed a number of times, but an agreement has not been reached. In 2015, the Energy Minister of Azerbaijan, Natiq Aliyev, stated that the project is no longer a priority for Azerbaijan.
“Currently, the main question is as of yet unsolved: who will invest in the infrastructure of the AGRI project and who will build the liquid gas terminals in Georgia and Romania. Despite the fact that SOCAR is willing and does invest abroad, the capabilities of the company are not limitless,” said Aliyev.
He also added that Romania will be unable to cope with the implementation of the project on its own territory.
“Currently, there is no guiding force for the realization of the AGRI project, and I do not believe that it is currently a priority for the country. Nonetheless, the situation may change in the future,” emphasized Aliyev.
Apparently, significant changes for the better in this case will not be soon in the coming. But what of the development of the non – oil sector, by which the Azerbaijani government hopes to compensate for its decrease in oil revenues.
“In fact, but not in words.”
“The Azerbaijani government has repeatedly made statements about economic diversification and the development of the non – oil sector. Unfortunately, these claims have not been implemented. The economic strategy of the country remains based on the oil and gas sector.”
Of course, the development of hydrocarbon projects are necessary – that’s not under discussion. However, Aghayev believes that the government should have proved in deed and not only in words that the development of the non – oil sector is indeed a priority
“Governments, as a rule, show their dedication to development not with announcements, but rather with investments in the non – oil sector and other reforms.”
Unfortunately, the current situation is such that the development of the non – oil sector is purely theoretical at this point, and all the real attention is focussed on oil.
“Real reforms have, unfortunately, not been a part of the government’s plan for developing and stimulating the economy. Fundamental institutional reforms in the court system and in local executive offices of power have yet to be implemented or even seriously discussed.”
This article reflects the opinion of the author and as such may not reflect that of Meydan TV.