Azerbaijan, Turkey Deadlocked Over Gas Sales

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Questions surround the fate of the gas sales contract sales to Turkey from Azerbaijan's Shah Deniz 1 that expired in mid-April, which has led to an approximate 50% reduction in overall flows to Turkey. BP, which operates the field, and Azeri state company Socar are in negotiations with Turkey on renewing the contract, but so far signs of a breakthrough are elusive (NC Apr.8'21). Shah Deniz 1 production, which kicked off in 2007, typically ran at around 9 billion cubic meters per year, of which 6.6 Bcm/yr went to Turkey under a take-or-pay contract with state importer Botas. Around 800 million cubic meters were shipped to Georgia in payment for transit fees, with some of the balance meeting Azeri internal demand. Gas from Phase 2, which started in June 2018, will supply 6 Bcm/yr of gas for Botas, delivered via the Trans Anatolian Natural Gas Pipeline to the northwestern hub of Eskisehir over a 25-year period, and 10 Bcm/yr to Europe via the Trans Adriatic Pipeline. The first question facing the Shah Deniz consortium is whether Turkey needs to lock itself into a new long-term contract -- using either oil indexation and take-or-pay provisions -- at a time when it has much greater flexibility around its gas imports. Turkish industry sources say Botas, which remains Turkey’s dominant buyer, is leaning toward hiking imports of LNG -- both term and spot -- and reducing its dependence on pipeline gas from Russia and Iran, as well as Azerbaijan. Another factor is that Turkey has claimed a giant gas discovery in its sector of the Black Sea, and Ankara is claiming it could come on stream in 2023 (NC Jun.24'21). Political considerations may ultimately determine whether or not Turkey agrees to extend the Shah Deniz Phase 1 contract. During a visit earlier this month to Shusha, which Azeri forces captured from Armenia at the end of last year, Turkish President Recep Tayyip Erdogan stressed the vital role that economic ties play in the relationship. The loss of the Shah Deniz Phase 1 volumes will make a big dent in Azerbaijan’s overall exports, which have never been higher (NC Jul.16'20). According to figures provided by Azerbaijan's energy ministry, deliveries in January-May rose 32% year on year to 7.4 Bcm, including 4.2 Bcm that went to Turkey, 2.1 Bcm to Europe, and 1.1 Bcm to Georgia. Of the Turkish volumes, 2.2 Bcm was Phase 2 gas and the rest from Phase 1. According to a new report by the Oxford Institute for Energy Studies, there are three options for the Shah Deniz 1 gas output: marketing some gas in Europe, along with volumes from Shah Deniz 2, which is ramping up; putting the gas into storage; and selling domestically. "It is likely that a combination of these will be found," writes the report's author, Simon Pirani. Responsibility for the solution lies with Azerbaijan Gas Sales Co., operated by Socar. Industry sources in Baku say another issue weighing on the minds of BP and its partners is how to settle the huge arrears owed to the consortium by the government. These are said to have accumulated from the diversion of extra volumes of gas to meet rising demand in the domestic market. The sources say there is an understanding on both sides that the matter will eventually be resolved and it is not a basis for a falling out. Consortium sources declined to comment on "commercially sensitive information." Another potential headache for the consortium is what to do with Phase 1 gas condensate, which is exported via the Baku-Tbilisi-Ceyhan pipeline and has long underpinned the project's economics. In the first quarter of 2021, condensate production from Phase 1 and 2 of the offshore field was running at nearly 85,000 barrels per day. BP says around the same level of production and exports is continuing. Azerbaijan's state oil fund, which receives the government's share of profits from Shah Deniz, said it received $62.12 million in Shah Deniz revenues in January-May, of which $57 million came from condensate sales. Paul Sampson and Michael Ritchie, London

Gas Demand, Gas Supply, Gas Prices, Offshore Oil and Gas
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