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Apr 28, 2022
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Baku – Moscow: “Friendship is friendship, but we will not pay for gas in rubles”

Baku - Moscow: “Friendship is friendship, but we will not pay for gas in rubles”

Photo: Dmitry Feoktistov / TASS

SOCAR, the State Oil Company of Azerbaijan, denied information about Baku’s plans to pay for Russian gas in rubles. April 25 Director of the Fourth Department of the CIS countries of the Russian Ministry of Foreign Affairs Denis Gonchar said that Russia is actively switching to settlements in national currencies with Armenia and Azerbaijan. According to him, about 30% of trade with Baku is in rubles. True, he did not say that Baku would pay for gas in rubles, it was only about Yerevan.

In the media on Monday [25 апреля] information was disseminated that the Republic of Azerbaijan would pay in rubles the cost of gas imported from Russia. This information does not reflect reality,” SOCAR told Interfax-Azerbaijan.

In July 2021, Gazprom and Azerkontrakt signed an agreement on the seasonal exchange of natural gas. The agreement is valid until 2023. It provides for the supply of gas from Azerbaijan to Russia in the summer season and similar volumes of gas from Russia to Azerbaijan in the winter. The volume of deliveries depends on the level of gas production and consumption in Azerbaijan in summer. The technical implementation of the agreement in terms of receiving and sending gas from the Azerbaijani side is carried out by SOCAR.

Initially, most European countries announced that they did not intend to pay for gas in rubles. According to the French President Emmanuel Macronthis requirement violates contracts. The same was said by the German chancellor. Olaf Scholz. But on April 23, the European Commission allowed the possibility of paying for gas in rubles, stating that the decree of the President of Russia could still be applied by European business, since countries would continue to pay in euros, and already in Gazprombank the funds would be transferred into rubles.

However, the requirement to switch to ruble settlements, in principle, does not apply to Baku, since in the decree Vladimir Putin it only talks about non-unfriendly countries, and Azerbaijan does not belong to them. However, the same Armenia, which is also not included in this list, started paying for Russian gas in rubles on April 15. Hungary also expressed its consent.

It should be noted that Azerbaijan itself is one of the suppliers of natural gas to Europe. In March, the Minister of Energy of the country Parviz Shahbazov announced his intention to significantly increase the supply of Azerbaijani gas to Europe.

However, as SP explained leading analyst of the National Energy Security Fund, expert of the Financial University under the Government of the Russian Federation Igor YushkovBaku simply does not have such a technical capability now. As for Russian gas, Azerbaijan’s dependence on it is also not critical, so it may not be in a hurry to convert payments into rubles.

– Today, Azerbaijan practically does not buy Russian gas, since they increased production at the Shah Deniz-2 field. More active purchases of gas were carried out in 2016-2018, when production at old fields was falling, while new ones had not yet increased.

They increased production at Shah Deniz-2 before the launch of gas pipelines to Europe, namely the TAP-TANAP system. This gas pipeline runs through Georgia to Turkey, where 6 billion cubic meters of gas remain. Further, one billion cubic meters goes to Bulgaria and Greece, and then in transit through Albania to Italy, where another 8 billion cubic meters arrive. The total is 16 billion cubic meters. The gas pipeline began to fully operate in 2020-2021, when it reached Italy.

SOCAR’s contract with Gazprom is designed so that if the Azerbaijani company suddenly does not have enough gas to fulfill its obligations, the Russian partners will supply it. Apparently, the Azerbaijani gas industry is working at its limit, and they do not have much potential to increase production. Just in case, they signed such an agreement with Gazprom.

For example, if it gets very cold in winter and their consumption increases significantly, they may not have enough daily volumes of their own gas both for deliveries to the domestic market and for export. In this case, they will import gas from Gazprom. And in the summer, they will transfer back the same volumes that they consumed, because in the summer they will have a surplus.

“SP”: – That is, this contract does not provide for cash payment at all?

We do not know all the parameters of this agreement. But it must be emphasized that even if Azerbaijan buys gas in this format, it does not have to pay for it in rubles. Simply because it is not an unfriendly country. The decree to transfer all contracts to ruble settlements applies only to unfriendly countries. Therefore, when Serbia, Armenia or Azerbaijan start talking about this, it is rather strange, because no one demands anything from them anyway.

So if Azerbaijan wants to pay in dollars and euros for Russian gas, no one bothers it to do so. As it does not interfere with paying in rubles, if they have such a desire. I think Gazprom is ready to sign such a contract. But I repeat, the last few years the winters were quite mild, and Azerbaijan had enough of its own production. Although they do have problems in old fields, they are depleted, and it is not yet clear whether new ones will be able to compensate for these volumes and for how long.

“SP”: – Can such a position on payment be at least partly due to the fact that Azerbaijan wants to replace Russian gas on the European market and does not want to “play along” with competitors?

– Azerbaijan began to produce oil and gas a long time ago, back in the days of the Russian Empire, so many deposits have already been developed. I think that all the talk that Baku will increase supplies to Europe is not justified. Production is at its limit, and in order to increase it, large investments are needed. Development of new projects will take years. But the question arises, will prices be the same high in five years and will they return the invested funds?

This is the same dilemma as many other hydrocarbon producing countries. They do not know how long the current crisis will last. Price fluctuations tend to be undulating, and if they are invested now at the peak of this wave, then by the time they are put into operation, there may be an oversupply and falling prices. And Azerbaijan’s projects are already quite expensive. Investments can return either with a long period of high prices, or with high demand for hydrocarbons.

But the Europeans are sending the opposite message. They continue to say that the current crisis caused by the energy shortage, which they themselves provoked when they frightened companies with their decarbonization and energy transition, will be overcome by the forced development of alternative energy. The same Germany, which is in a very difficult position due to its dependence on Russian hydrocarbons and the lack of its own LNG terminals, does not abandon plans to close the remaining nuclear power plants by the end of this year.

Inertia in energy policy remains. The European authorities are convinced that in the long term this is the right policy and will continue to continue decarbonization, and no one will need oil and gas. So what is the point for them to invest in gas production in other countries, in the same Azerbaijan, when they basically want to switch to renewable energy sources instead of gas?

For Azerbaijan, this is a serious problem. If they now invest billions of dollars in increasing production, in new infrastructure, in expanding the TAP-TANAP system, then no one guarantees that in five years, when gas is available, they will be told in Europe that they do not need this volume at all, and prices collapse.

Now there are no technical possibilities to increase production and delivery of gas to Europe from Azerbaijan. The entire infrastructure is designed for a total of 16 billion cubic meters, and it is full. To increase the volume, it is necessary to build a new gas pipeline.

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