Azerbaijan’s SOCAR eyes expansion as gas to remain important

Aura Sabadus


LONDON (ICIS)–Azerbaijan’s oil and gas incumbent SOCAR is looking to expand operations and offer more flexibility to existing and new markets, the company’s deputy vice president told ICIS in an exclusive interview.

Vitaliy Baylarbayov said the company had clocked up important achievements in recent years, including the launch of the Southern Gas Corridor “on time and below budget”, entering swap or tolling agreements with other companies including Russia’s Gazprom and trading well over 12 million tonnes of LNG since 2017. Recent record gas prices as well as the latest gas supply crunch is motivating SOCAR to develop new supplies and seek to expand operations beyond its existing portfolio, he said.


With the start of the Southern Gas Corridor at the end of last year, Italy, Bulgaria and Greece became the first recipients of Azerbaijani gas from the offshore Shah Deniz II field, a project operated by Britain’s BP and including six partners, of which SOCAR is one.

Under the long-term supply agreements, Italy is expected to off-take eight billion cubic metres (bcm) annually, with the remaining 2bcm/year being equally split between Greece and Bulgaria.

Data by pipeline operator TAP indicates that daily flows to Italy have been hovering around 24 million cubic metres (mcm)/day and even spiking to 27mcm/day on some days in the third quarter of 2021.

This is some 10mcm/day higher than daily contracted volumes, which means that if the current trend continues during peak winter demand, Azerbaijan may be selling more gas to Italy than the contracted 8bcm/year.

The increase may be linked to the recent high gas demand across European markets as well as a price formula calculated as a 3-5% discount to the ICIS Italian PSV front month contract.

Baylarbayov declined to comment on the price but said spot Azerbaijani gas was already trading on the Italian market and stressed that SOCAR was keen to offer flexibility to buyers in line with market conditions.


SOCAR has taken a similar approach to Turkey , one of its key markets, which imported no less than 11.5bcm of Caspian gas in 2020 under two long-term deals with a total contracted volume of 12.6bcm/year.

With the first 6.6bcm/year Shah Deniz contract expiring earlier this April, the Turkish incumbent BOTAS sought to secure an extension.

There were reports at the end of August that the company had agreed with the Azerbaijan Gas Supply Company (AGSC), of which SOCAR is a partner, to conclude a three-year deal for 6bcm/year at a discounted PSV-indexed price.

A month before, BOTAS had also booked import capacity of 19mcm/day on the Turkish-Georgian border with a view to import spot Azerbaijani volumes between August – December 2021.

Baylarbayov declined to comment on the pricing structure or the actual volumes sold into the country.

However, the flexibility granted by Azerbaijan in terms of spot sales as well as the new hub element, which is thought to be included in the mid-term contract are a significant milestone for the Turkish gas market, which had been dominated by long-term, oil-indexed legacy contracts with Russia and Iran.


Ukraine is also a major market which SOCAR targets for expansion. The company has been trading gas volumes since the market started to open up in 2015 but Baylarbayov says plans are to expand the activity based on local [Ukrainian] demand and at least doubling the supply portfolio over the next five-to-10 years.

In Greece, Azerbaijani gas deliveries via the Southern Gas Corridor are now close to 1bcm, the annual contracted volume with the incumbent DEPA.

Supply delivered to Bulgaria, which is also expecting to off-take 1bcm/year are lower because the completion of the Interconnector Greece-Bulgaria (IGB) required to bring the gas to the country has been delayed until July 2022.

This meant the Bulgarian Energy Holding (BEH), which supplies bank guarantees to the incumbent and off-taker Bulgargaz had to negotiate with AGSC the delivery of Azerbaijani gas via a different route, namely the existing Greece-Bulgaria interconnector for the period 1 January – 30 September 2020.

The amendment to the contract reached in December 2020 also reportedly refers to the fact that Azerbaijani supplies would be reduced to an estimated 225mcm.

As the amendment is due to expire this month, BEH is now negotiating with AGSC the extension to the amendment from 1 October 2021 until the end of June 2022, when IGB is expected to come online.

Baylarbayov did not comment to reports but said the Shah Deniz Consortium was working to increase supplies to Bulgaria.

He also pointed out that volume supply increase to Bulgaria as well as to regional markets such as Albania, North Macedonia, Romania and Serbia would be highly dependent on available transport infrastructure as well as market interest.

“I can only say that geographically the interest goes beyond countries you have mentioned [Romania, Serbia, North Macedonia].”


SOCAR has already shown an interest in expanding operations beyond Europe, entering the LNG market in 2017 and trading 12 million tonnes of LNG since then.

“In June 2021, SOCAR Trading submitted its updated LNG infrastructure and supply proposal to the national electricity company of the Ivory Coast, which is the result of several years of research and analysis on optimal technical and commercial solutions for the client.

“While SOCAR Trading is confident that its proposal offers the most competitively priced supply, we understand possibilities of some new domestic gas discoveries are putting the whole process under question.”

He added: “On Sri Lanka, our development efforts are progressing through relevant approval processes albeit with certain slowdown related to the effects of new COVID resurgence in the Indian Subcontinent.”


SOCAR’s expansion plans are supported by progress in the upstream sector.

Earlier in July, BP announced the start of flows at the east south flank of the Shah Deniz field, with production rates expected at 11.3mcm/d in the third quarter of 2021. This should bring the total production at the Shah Deniz II field to 68mcm/day.

“In addition, Absheron, Umid-Babek, Karabakh, Shafag-Asiman [fields] and others are currently at different stages of development. We are developing the plans for these fields based on anticipated market demand,” he said.

The gas fields are thought to contain over 1 trillion cubic metres of gas.

Furthermore, other offshore gas fields, such as the previously disputed Kapaz/Serdar field, recently renamed Dostluk (Friendship) field, which as reported by different sources to contain at least 30bcm of gas as well as commercial oil quantities could be jointly explored by Azerbaijan and neighbouring Turkmenistan.

“I believe it is reasonable to assess that within three-to-five years of the final agreement between the sides [Azerbaijan and Turkmenistan], production will commence.”


There were reports that Azerbaijan could import natural gas from Russia amid fears that falling gas prices could freeze exploration and production projects in Azerbaijan.

Baylarbayov said Azerbaijan was not importing any gas from Russia but added that Azerbaijan was involved in swaps or tolling operations with neighbouring countries, including, but not limited to Russia’s Gazprom.

“In this framework, I confirm that we continue to work on introduction and/or expansion of these operations with all our gas producing neighbours, including Russia,” he said.


SOCAR also has an eye to the future, taking an interest in the development of hydrogen.

“Yes, we do and we are already working on the development of the relevant strategy there. We have established a unit dealing with hydrogen production and usage options, and are actively studying the options to transport hydrogen to the markets via the Southern Gas Corridor or other available pipeline systems. We are already working on hydrogen refuelling on some of our petrol stations in Switzerland and plan to have them operational in 2022,” he added.

He said SOCAR was taking decarbonisation efforts seriously and added that together with BP, it, except for the emergencies, stopped flaring gas on all facilities. It had also introduced a zero discharge policy on all offshore operations.

However, he said that while SOCAR was mindful of the necessity to a green transition, he insisted the upcoming period would be more likely described as a green evolution rather than revolution because gas will continue to remain an important fuel.

“While many US and European policy makers are acting as if an energy transition away from fossil fuels has already taken place, demand trends and prices say something else.” Baylarbayov said.


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