Europe is in a tough spot.
For years, the European Union (EU) has relied on Russia to supply the oil and gas it needs to power industries and heat homes. Last year, 40% of the gas that Europeans burned originated from Russia, and the bloc shelled out $108 billion to the Kremlin.
But Russia’s invasion of Ukraine in February forced the EU to radically overhaul its energy strategy to wean itself off Russian oil and gas—in a bid to shake off its dependence on the Kremlin, and deprive it of energy revenues to fund its war. Over the past six months, the bloc began phasing out Russian oil and gas imports, and sought out other suppliers. In December, the EU will ban imports of Russian crude oil, and by next February, it will ban Russian petroleum products (though pipeline products are excluded from the bans). The EU has also vowed to eliminate all Russian gas by the end of the decade.
But all of that Russian oil and gas needs to be replaced in order for industries to keep functioning, and people to continue heating their homes.
Along with several other countries, the EU is now hoping that Azerbaijan, a relatively small country sandwiched between the Caucasus Mountains and the Caspian Sea, will become an important alternative to Russian energy. EU Chancellor Ursula Von der Leyen has billed Azerbaijan as a “reliable, trustworthy… [and] crucial energy partner” that could double its gas exports to the EU in a mere “few years” as Europe tries to swiftly diversify away from Russian energy.
But experts say that there are major problems with betting big on Azerbaijan. The country currently doesn’t have the supply or capacity to fulfill what it said it could deliver. And in an effort to distance itself from one autocratic regime, Europe is running into the arms of another—a strategy that could backfire given the post-Soviet state’s traditionally close ties with Russia.
A new chapter for EU energy
In the search for new sources of fuel, Europe has struck all kinds of arrangements over the past year with suppliers like Norway and Algeria.
Norway is now the EU’s top gas supplier and has pledged to deliver “as much gas as possible” to bloc nations; its gas exports to the EU are up 8% year-on-year. Meanwhile the EU’s Mediterranean countries have courted Algerian gas; the North African country is set to grow its gas exports to Italy for instance, by 20% to 25 bcm this year.
This July, the EU and Azerbaijan inked a new deal, marking what von der Leyen said at the time was a “new chapter in [the EU’s] energy cooperation with Azerbaijan—a key partner in our efforts to move away from Russian fossil fuels.”
Brussels is billing the deal as one that will “contribute significantly to Europe’s security of supply,” according to the EU chancellor. The memorandum of understanding (MoU) pledges to double Azeri gas exports to at least 20 bcm by 2027—which would equate to roughly 6% of the EU’s gas demand—but experts have cast doubt on whether Azerbaijan can even deliver on this promise.
Although its contributions are relatively small, recruiting Azerbaijan as a key energy partner is attractive to the EU for its perceived stability and the potential scalability of Azeri gas projects and pipelines.
Azerbaijan—a country that borders Iran, Turkey, Georgia and Russia—routes its gas to Europe via the Trans-Adriatic Pipeline (TAP), the final leg of the 3,500-kilometre Southern Gas Corridor (SGC) pipeline network, which was announced in 2013 and began operating in late 2020.
The country’s oil and gas production is jointly operated by its state oil company SOCAR and foreign partners, BP being the most notable. The government is unique in that it hasn’t sought to revise the terms of its production sharing agreement with international companies, making it a “pretty reliable” energy partner for the EU, John Roberts, a non-resident senior fellow at the Atlantic Council’s Global Energy Sector and a member of the United Nations’ Economic Commission for Europe’s Group of Experts on Gas, told Fortune. “Its approach has… been that when times are good, toughen up the terms for the next production sharing agreement. [But] when they are hard, ease them,” he said.
Gas flows from Azerbaijan to the EU have surged in the last eight months. By the end of this year, the bloc is expected to import 11.6 bcm of Azeri gas—a 40% growth from 8.2 bcm last year. And Azerbaijan’s TAP is intended to be scalable, meaning it can double its gas transit capacity to the 20 bcm outlined in the deal, Tom Purdie, senior gas analyst and EMEA gas analytics at commodity services firm S&P Global Commodity Insights, told Fortune. Azerbaijan’s gas volumes aren’t enough to replace Russia’s alone—which total 155 bcm annually—but work together with other measures to remove Russian energy from the EU’s energy mix, he noted.
And some optimists believe that the deal could be bigger than just natural gas. Closer cooperation between Brussels and Baku could help convert the post-Soviet state into a “key European partner,” moving it beyond Russia’s sphere of influence, Ilayda Nijhar, a political risk analyst focused on Russia and former Soviet states, wrote for global affairs think tank ODI in August. As Russia grows more isolated, Azerbaijan has become more important to the Kremlin as a trade link to Iran and Asia.
Imperfect partner
Still, Azerbaijan is far from the dependable partner that von der Leyen is promoting—nor does it have the necessary gas, infrastructure or funds to expand its infrastructure to deliver on its deal with the EU, some experts say.
The EU’s deal with Azerbaijan actually offers “zero relief” to EU citizens “this winter or the next… and probably not the one after that either, ” Bowden said. It mostly serves as a move to show EU citizens that policymakers are “doing something,” he said.
He explains that TAP gas comes from two projects at Shah Deniz—Azerbaijan’s biggest natural gas field; operators are now ramping up production to its maximum output.
Meanwhile the country’s two biggest potential sources—a third development at Shah Deniz and another at another deep level underneath the Azeri Chiraq Guneshli oil field—are “technically complex… and when any agreements are reached, will take many years to bring online,” according to Roberts. At the same time, Azerbaijan’s domestic gas consumption is growing. French energy giant Total is planning a new project that will produce 1.5 bcm of gas—but that’s earmarked for domestic consumption.
“There is no immediate prospect of large-scale gas developments… between now and 2027,” Bowden said. Any major gas project—if it happens—won’t occur before 2030, which makes it impossible for the EU and Azerbaijan to fulfill the terms outlined in their July deal, he said.
Azerbaijan also lacks the funds to ramp up production and infrastructure and must “invest heavily” to supply more gas to Europe, Gubad Ibadoghlu, a senior visiting fellow at the London School of Economics (LSE) and senior analyst for social and economic studies at Azerbaijan’s Economic Research Center, told Fortune. And the high cost of delivering Azeri gas to Europe previously inhibited gas flows to the continent.
Azerbaijan could, in theory, buy gas from countries like Turkmenistan, Iran and Russia to satisfy its domestic needs, and in turn sell its own gas to Europe. But it would still need to improve and expand its infrastructure, plus sanctions make it “impossible” to purchase from Russia, he said.
Trading one strongman for another
Aside from arguments about whether or not the Azerbaijan deal is even feasible, critics argue that in an effort to distance itself from Putin’s Russia, Europe has simply traded one authoritarian for another.
The EU’s new energy deal shows that it is further “entrenching itself with [Azerbaijan’s] despot regime” and continuing to ignore the human rights abuses and corruption taking place under Azerbaijani President Ilham Aliyev’s regime, Gligor Radečić, a gas campaigner at CEE Bankwatch, a network of environmental-focused non-governmental organizations, told Fortune.
Aliyev, who has ruled the Caspian country for 19 years, continues to wage a “vicious crackdown on critics and dissenting voices. Independent activism, critical journalism and opposition political activity has been virtually extinguished,” according to advocacy group Human Rights Watch (HRW). Just in September, Armenia accused Azerbaijan of attacking its territory—the recent conflict killed almost 300 soldiers—a claim that Aliyev’s government refuted, but one that the U.S. condemned as “illegal and deadly.”
That dictatorship could also be bad for business. Azerbaijan makes a “poor partner” for the EU in terms of quality and stability, Ibadoghlu said. “In Azerbaijan, the ruling family makes its own decisions. They can back off or postpone [cooperation] at any time due to Russia’s influence,” potentially leaving the EU in a bind, he said.
Philippe Dam, HRW’s Europe and Central Asia director, warns that Europe has missed a major opportunity to place human rights at the top of its agenda with its partnership with Azerbaijan. The EU-Azerbaijan deal benefits the government, yet does not “guarantee… any human rights protection,” Dam told Fortune.
“A country cracking down on its own people… is not sufficiently reliable to engage with the EU,” he said.
The EU has been left with few good options. While the EU’s gas storage sites are now 95% full, the bloc could still face a shortfall of as much as 30 bcm of gas next summer, underlining the urgent need to tap alternate suppliers—or substantially reduce gas consumption, according to new analysis from the International Energy Agency. The bloc’s best bets for gas suppliers are Russia, Azerbaijan, Algeria and Norway—and with the exception of the latter, all are authoritarian states that will use gas exports as a political weapon, Radečić said.
But the bloc’s diversification strategy as a whole—which includes sourcing from the global liquified natural gas (LNG) market—could “replace Russian gas volumes if all goes well,” Bowden said. Azerbaijan isn’t a “one-stop solution” for the EU, but one partner among many, he noted.
Now, it’s up to investors and banks to step up to finance pipeline expansions and exploration of new gas fields in Azerbaijan. As Ibadoghlu put it: “If they do not, Azerbaijan will fail to reach its target of becoming a reliable gas supplier to Europe by 2027.”
Nov 6, 2022: this story has been updated to clarify that the Azeri Chirag Gunashli is an oil field with layers of deep-level gas.
