Azeri Rescue To Energy Blues

BMI View : Azeri interest to invest in Ukraine's oil and gas sector could help relieve the latter's energy reliance on Russia, while Azerbaijan would also benefit from securing another market for its oil and gas while reducing Russian influence in the region. Although plans to enhance energy cooperation are still in their early stages, the actualisation of these plans could see Russia emerge as the biggest loser.

Talks between Ukraine's energy minister Eduard Stavitskiy and his Azeri counterpart Natig Aliyev during a summit in Kiev promise to increase energy cooperation between Ukraine and Azerbaijan. If realised, they could significantly ease Ukraine's existing energy supply problems that have arose from tense relations between it and its main energy provider Russia.

Areas in which the two countries could further cooperation in include:

  • Downstream : Azeri national oil company (NOC) SOCAR could invest in a newbuild refinery, which is to be located along the Ukranian Black Sea coast. This plant will be supplied with Caspian oil - and most likely Azeri crude ;

  • Transport and freight : SOCAR plans to increase the number of service stations it operates in Ukraine from 34 to 100 by the end of 2013. SOCAR could also provide services for the refuelling of Ukrainian vessels;

  • Gas supply : Delivery of Azeri gas to Ukraine either via pipeline or in the form of liquefied natural gas (LNG) imports;

  • Gas infrastructure: Discussions for Azeri involvement in a proposed LNG import terminal. On Ukraine's part, it could join the planned Azerbaijan-Georgia-Romania gas interconnector project or offer its existing gas transmission system to transport Azeri gas to Europe via deliveries from the Trans-Anatolian pipeline (TANAP) that ends in Turkey.

Azeri Boost To Energy Woes

If these talks do produce concrete results, Azeri involvement in the Ukrainian oil and gas sector could significant ly boost its energy security. Russian attempts to squeeze Ukraine into acceding to its political demands - most prominently that of Ukrainian involvement in a Customs Union - have seen the latter face large oil and gas bills beyond what its troubled coffers and generous energy subsidies can afford. Ukraine is still embroiled in an outstanding gas dispute with Russia over what it perceives as unreasonably high gas prices, and continues to cut its import of Russian gas to pare down losses. In the downstream segment, i ts refinery utilisation rate had languished as high Russian crude feedstock prices, combined with an influx of cheaper Russian fuel products, have squeezed margins and p ut refinery operations on hold, thereby reinforcing i ts dependence on fuel imports.

Seeking New Sources For Supply Needs
Ukraine's Net Oil (RHS, '000b/d) & Gas (LHS, bcm) Exports*, 2005-2017

Therefore, Azeri oil and gas supplies, if priced at an acceptable level, could help Ukraine in its efforts to diversify its energy sources away from Russia and break hold of the latter's grasp over it. Investment into Ukraine's oil and gas infrastructure would also help facilitate these efforts. Azeri contribution to a LNG import terminal would be particularly welcomed, as the government continues to find investors in a EUR856mn, 5bn cubic metres (bcm) per year facility with both offshore and onshore sections.

Azeri Expansion

Azerbaijan has not committed itself to any of these projects. However, these proposals are in line with recent efforts by SOCAR to expand its international presence through downstream involvement in particular. These include:

  • Turkey : Investment in a 214,000 barrels per day (b/d) STAR refinery ( see 'Star Brightens Outlook For All', May 21 );

  • Indonesia: Talks with OSO Group for a 600,000b/d mega-refinery in Batam;

  • Kyrgyzstan: Agreed to build a 2mn tonnes per annum (tpa) - or 40,000b/d - refinery in the city of Tokmak.

These efforts have been made for a variety of reasons: to secure markets for Azeri crude exports, and to promote Azerbaijan's political agenda. The latter appears to be the motivating factor in the case of Kyrgyzstan, as the lack of commercial viability of Azeri crude supplies to the planned refinery has led SOCAR to conduct talks with Kazakhstan and possibly Russia for crude feedstock.

Investment in Ukraine could serve both functions. Improving relations to support each other would certainly help both countries weaken Russian influence in the region. For Azerbaijan, it also ensures continued crude exports to the Eastern European market. This is particularly important in the aftermath of Russia's decision in May 2013to terminate a crude transit contract via the 1,300km Baku-Novorossiysk pipeline, threatening Azeri access to the western market via Russia's Baltic Sea port ( see 'Dim Outlook For Pipeline Reflects Rising Southern Corridor', May 16). Securing a gas route through Ukraine - which is also the transit country for many Russian gas supplies flowing into Europe - would complement existing plans to transport gas from the Caspian Sea west via Europe's Southern Corridor project, thereby boosting market access to the European market.

The biggest loser from growing Azeri-Ukrainian energy cooperation will be Russia. With Central Asia increasingly emerging as a gas supply competitor to Russia, greater flows of Central Asian gas west will encroach into Russia's traditional domain. While these proposals for energy cooperation remain on the drawing board and will take time to materialise, their actualisation will further shift energy politics in Central and Eastern Europe and further force Russia to rethink its energy market strategy.

This article is tagged to:
Sector: Country Risk, Infrastructure, Oil & Gas
Geography: Ukraine, Ukraine, Azerbaijan, Indonesia, Kyrgyzstan, Russia, Turkey

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