Azerbaijan Intends to Expand Energy Cooperation with Russia. What Are Prospects?

Last week, the Minister of Energy of Azerbaijan, Parviz Shahbazov, speaking at the international conference “Global Energy and International Political Risks”, announced the preparation of a Memorandum on cooperation in energy with the Russian Federation, but did not specify the details.

“I am sure that the signing of this document will lead to the expansion of cooperation in this area,” the Minister said at an event organized by the Azerbaijani Center for the Analysis of International Relations and the Valdai International Discussion Club (RF).

According to ASTNA, the memorandum can be signed before the end of this year at a meeting of the intergovernmental commission on economic cooperation between the Russian Federation and Azerbaijan scheduled for the fourth quarter.

It is noteworthy that the cooperation between Azerbaijan and the Russian Federation on the fuel and energy complex (FEC) - the key one for the economies of both states - was not regulated by any separate intergovernmental agreements, except for the Treaty on the Transit of the Azerbaijan Republic signed on January 18, 1996 oil through the territory of the Russian Federation."

At the same time, there is, of course, cooperation in the fuel and energy complex, but mainly interaction takes place at the level of core companies or joint-stock companies.

Oil and gas cooperation

In reality, only one Russian company takes part in hydrocarbon development in Azerbaijan - LUKOIL (Shah Deniz project), and Rosneft and Gazprom, periodically declaring their interest in Azerbaijan, have not yet found attractive mining projects for themselves.

However, Gazprom has a representative office in Baku (opened in December 2018).

Recall that Gazprom supplied gas to Azerbaijan from 2000 to 2006. Then, deliveries were stopped due to the launch of the Shah Deniz field in Azerbaijan.

In 2015, there were attempts to establish supplies of Russian gas to the Azerbaijan Methanol Plant (AzMeCo), but gas was not purchased for long.

Another attempt was made on November 21, 2017, when a contract was signed between SOCAR and Gazprom Export for 1.6 billion cubic meters of gas.

In 2017, Azerbaijan under this contract bought 349 million cubic meters of gas, in 2018 - 999 million cubic meters, and sharply in the fall of 2018 suspended the implementation of this agreement.

Gazprom is interested in the Southern Gas Corridor, namely, in its second stage, if the route’s capacity is doubled (not earlier than 2028), however, the situation can become clearer only in 2021 with the possible acceptance of binding applications from companies for gas supplies to Europe.

Gazprombank participated in project financing for the creation of two SOCAR Polymer plants in Sumgayit (loan of $ 489 million for a period of 10 years, the enterprises were put into operation in 2018-19 in stages), but the further desire of this largest Russian bank to credit construction in the Garadagh district Baku's gas processing petrochemical complex SOCAR GPC has not yet found a response from the Azerbaijani side.

Oil transit from Baku through the Russian Federation

In 2020, for the first time, Azerbaijan did not use the Baku-Novorossiysk oil pipeline to deliver its oil to the world market, while the previous 22 years since the launch of this Northern route (November 1997), SOCAR regularly provided oil volumes to this pipeline, although it reduced their year from of the year.

“We are not going to use the Baku-Novorossiysk oil pipeline this year. This route can be used by us only in case of force majeure. Our decision not to transport oil through the Russian Federation in 2020 is based only on a pragmatic approach. It’s more profitable for us to pump oil through the Baku-Tbilisi-Ceyhan (BTC) pipeline and still use the Baku-Supsa pipeline for oil from the Chirag field,” a source in SOCAR told ASTNA.

He recalled that BTC from the Russian Federation has been successfully transporting LUKOIL oil for several years from the Korchagin field (in particular, in January-May 2020 - 990 thousand tons) from the Russian sector of the Caspian.

Over the 5 months of this year, SOCAR exported 33,000 tons of petrochemical products to Russia, and acquired 53,000 tons of other petrochemical products, and such supplies have become regular.

Since 2013, SOCAR Russia LLC has been operating in the Russian Federation, which sells energy carriers (45 groups of goods), provides freight forwarding services for transactions, participates in Russian exchange trading in oil, oil products and gas, and implements over 700 direct trade contracts.

SOCAR’s subsidiary, SOCAR Energoresurs LLC, as part of a joint venture with Sberbank, owns 80% of the shares of Antipinsk Oil Refinery, the largest private refinery in the Russian Federation, and also has exclusive rights to supply oil to this oil refinery (from June 2019) and sell final oil products.

SOCAR is the operator of the terminal for light petroleum products in Ust-Luga – Sibur-Portenergo.

Power industry

Azerbaijan and the Russian Federation have been exchanging electricity for many decades, and this helped Azerbaijan in July 2018, when due to an accident at the key Azerbaijan Thermal Power Station, half the country was without electricity, but the Russian Federation increased the flow of electricity from its network, which allowed Azerbaijan to reduce damage from blackout.

The parties are currently planning the creation of a new 330-kilovolt power transmission line (PTL) Absheron-Yashma-Derbent to improve energy exchange between Azerbaijan and Russia.

The draft intergovernmental agreement “On the correct calculation of customs duties, taxes and other charges levied on the import or export of electricity, as well as on the customs control of goods transported through power lines and pipelines” is aimed at this. This document was prepared back in 2016, but is still not being implemented.

Expert opinion

“The upcoming Memorandum on energy cooperation can also reflect the intensification of negotiations between the Russian Federation, Azerbaijan and Iran on energy exchange. In October 2018, the first meeting of the working groups on the issue of unification of the electric networks of the three countries was held in Moscow, and work in this direction does not stop, ”said ASTNA leading analyst of the Russian Agency for Political and Economic Communications Mikhail Neizhmakov.

In his opinion, the Memorandum may also reflect the promotion of significant international initiatives.

“For example, the head of the Ministry of Energy of Azerbaijan, Parviz Shahbazov, has previously raised the issue of either expanding the membership of the OPEC + agreement, or of using other mechanisms to motivate other oil producing countries that have not officially supported this agreement, to assume similar obligations. It is likely that such a thesis, as a reference to the task that Moscow and Baku will jointly solve under the new OPEC + deal, could also be included in the memorandum of cooperation in the energy sector,” said Neizhmakov.

Commenting on Shahbazov’s message “about new plans for SOCAR’s cooperation with Rosneft and Gazprom,” the Russian analyst believes that “so far such ideas have been discussed in the most general terms.”

“Nevertheless, such a statement can be a signal, for example, for large Western corporations participating in joint projects with Baku, that their Russian competitors are also quite interested in working in Azerbaijan. This may contribute to further strengthening of the negotiating positions of Baku in the course of dialogue with such Western corporations,” Neyzhmakov noted.

Azerbaijani economist, UNEC professor Elshad Mammadov believes that energy cooperation between Azerbaijan and the Russian Federation can get a “second wind” against the backdrop of the global economic crisis that is developing due to the coronavirus pandemic.

“Such a crisis stimulates the creation of regional production chains, in particular, in the energy sector. The Russian Federation and Azerbaijan have every reason to be called key players in the region from the point of view of energy policy and understand the need for interaction. Between these countries, it should not only be about the simple export of raw materials, the operation of pipelines. It is necessary to deepen cooperation in the processing sector, as well as on those energy projects that may be related to the high-tech component,” Mammadov said to ASTNA.

Thus, with the parties showing flexibility and pragmatism, energy cooperation between Azerbaijan and the Russian Federation can open new horizons.