The showdown between Moscow and Brussels has led to the virtual withdrawal of Russia from Europe. In this environment, Europe began to look for a (long-term) alternative (as a gas supplier) and signed an agreement with Azerbaijan.

European gas markets are in turmoil as Russia is on the verge of cutting off gas supplies to Europe. There are scenarios that the winter could have a devastating impact on Europe this year, but especially next year. It is at this point that Brussels has been quick to look for alternatives to ensure that Russia's pullback does not cause severe volatility within the European Union (EU). The United States, Norway (capacity expansion), Algeria and Qatar were the first addresses which were considered. On July 11, a new supplier was added to this search for alternatives with the visit of EU Commission President Ursula von der Leyen to Azerbaijan.

But does Azerbaijan offer an alternative to Russia? What do Baku's production and export data say about that? If Azerbaijan increases its gas production, will it be able to transfer that gas to Europe? What does the EU expect from Azerbaijan and what does this step mean for Azerbaijan? In this analysis we will try to find answers to these questions.

QUESTION OF AZERBAIJAN'S PRODUCTION CAPACITY AND A POSSIBLE SCENARIO

According to the International Energy Agency (IEA), Azerbaijan has 1.3 trillion cubic meters of natural gas. However, the production data is comparatively modest. According to the IEA report, Baku produced about 44 billion cubic meters (bcm) of gas in 2021. Of this production, 18.9 bcm was exported (8.5 bcm to Turkey and 8.2 bcm to Europe). The remaining 2.2 bcm of gas was sold to Georgia and Bulgaria, according to a statement made by Azerbaijani President Ilham Aliyev in February this year.

The data on Azerbaijan and Russia's reserves, production, and exports should provide some insight into the situation. Russia has the largest natural gas reserves in the world, which amount to about 37.4 trillion cubic meters, according to Statista. Although the amount of reserves provides a forecast for the future, the amount of production is equally important. For example, while Iran has the second largest reserves in the world, it lags far behind in terms of production. Russia, the second largest producer after the U.S., produced 762 bcm last year. Of this, it exported 210 bcm via pipelines. If 40 bcm of liquefied natural gas (LNG) is taken into account, total exports amount to around 250 bcm.

Europe was Russia's most important export market. According to 2021 data, a total of 165 bcm of gas went from Russia to Europe, of which 155 bcm went directly to the EU. However, the war in Ukraine and the standoff between Moscow and Brussels led to Russia's almost complete withdrawal from Europe. In this situation, Europe started looking for an alternative and signed an agreement with Azerbaijan in July. But can Azerbaijan be an alternative at this point?

First of all, the EU does not ignore the fact that Azerbaijani production accounts for a quarter of Russian exports to Europe. Azerbaijan has already made a statement regarding its capacities. In other words, Azerbaijan does not claim to be the new Russia of Europe, but it can help alleviate the bottleneck in Europe. Unlike last year, Azerbaijani authorities plan to deliver 1.5 bcm more gas to Europe this year, bringing exports to 10 bcm.

However, by 2027, Azerbaijan intends to increase its gas exports to Europe to 20 bcm, taking into account the dynamics of its own consumption. To achieve this goal, Baku's production will have to increase to about 60-70 bcm. If Baku achieves this level of production, it will not only double its market share, but will also attract foreign investors and further urge the EU to increase the production capacity. In this regard, the next five years will need to be closely monitored.

THE WAY THE GAS IS TRANSFERRED: THE FRONT OF THE PIPELINES

In addition to production capacity, there is another factor that limits gas transit between Europe and Azerbaijan: pipeline capacity. In this context, it is worth considering first the stages of gas transit from Azerbaijan to Europe (Greece, Italy, Bulgaria). Azerbaijani gas enters the EU through a southern corridor that consists of three stages. First, the gas enters Turkey via the South Caucasus pipeline. From there, it is transported through the Trans-Anatolian Pipeline (TANAP) to the Trans-Adriatic Pipeline (TAP). This is the main route currently used, and this is where the capacity increase comes in.

The gas is first piped to TANAP after being diverted from Azerbaijan. The capacity of TANAP is 16 bcm. There is talk about increasing this capacity to reach 31 bcm. However, TANAP alone is not enough; the capacity of TAP, another interconnector to Europe, should also be increased accordingly. Statements indicate that the TAP capacity is to be doubled from 10 bcm to 20 bcm. However, it should be borne in mind that these two capacity increases will not be realized in the short term, but in the long term. The reason for the long-term planning is that the EU's needs are based on a stable demand and not on a short-term bottleneck. The agreement reached during the visit of EU Commission President Ursula von der Leyen to Baku on July 11 confirmed that the strategy to double gas purchases from Azerbaijan will not be realized before 2027.

The reason for such an agreement is to support and enable Azerbaijan to increase its production capacity and that TANAP and TAP would be ready for such an increase. It is not known whether a new pipeline is being considered. However, energy officials believe that the EU's decision of not considering a new pipeline is due to the risk that the production increase will not reach the desired level.

Therefore, contrary to popular belief, the EU does not think that Azerbaijan can replace Russia as a supplier. A simple calculation reveals that Azerbaijan's annual production does not exceed a quarter of what Russia exports to the EU. Azerbaijan, as an alternative to Russia, represents 12 bcm more gas reaching Europe in 2027 than at present. This move should be considered as a supplement to the efforts of the United States, Algeria and Norway to increase gas supply capacity to the EU.

However, Azerbaijan is also cautious. For example, Baku says it can increase the amount of gas it will supply to the EU by 1-1.5 bcm this year and that it needs financial and technological support to increase production. In this context, both Europe and Turkey will watch Azerbaijan's production and export capacity increase over time. Overall, the EU may have to pay more to Azerbaijan than to Russia, but this is an additional price that can be easily afforded, not only in terms of energy policy but also in terms of the EU's future, if the country can show that it can overcome the supply shortage. For Azerbaijan, the new agreement will provide an opportunity to receive long-awaited investments, expand its production and export capacities, increase its economic returns, and improve its presence in the global natural gas market.