Azerbaijan and Russia: Prospects for energy cooperation

Azerbaijan and Russia: Prospects for energy cooperation

By Emil Ismailov

A new stage of relations

 

Signing of a number of documents between SOCAR (The State Oil Company of Azerbaijan) and the Russian oil company Rosneft is a confirmation of the balanced petroleum policy pursued by Azerbaijan.

 

Yesterday, SOCAR and Rosneft signed a cooperation agreement as well as the "General conditions for the supply of oil between the two parties". The documents were signed by the head of the State Oil Company of Azerbaijan Rovnag Abdullayev and the Chairman of the Board of the open joint stock company, Rosneft Oil, Igor Sechin.

 

The parties agreed to cooperate in the framework of projects for the exploration and production of oil and gas in various countries, including Russia and Azerbaijan. There are also plans to set up a joint venture on a parity basis. It is assumed that it will be engaged in joint exploration and development of fields on the territory of Russia and Azerbaijan. In addition, it is expected that the joint venture will be engaged in marketing products and share the infrastructure ensuring the supply of oil and petroleum products.

 

According to the head of Rosneft, Igor Sechin, the companies plan to develop mutual oil supplies, swap operations as well as joint use of existing infrastructure. Strengthening the work in the trader's direction is also possible in the future.

 

The agreement reached between the parties will allow the companies to expand the area of their activities, gain access to new markets and resources and optimise the delivery of oil and oil products through the joint use of existing infrastructure.

 

This collaboration will advance the relations between the parties to a qualitatively new stage - the stage of same-level partners.

 

On the way to commercial relations

 

It should be noted that the agreement and plans for the implementation of joint projects between the Azerbaijani and Russian companies are very symbolic at this stage.

 

The cooperation of Azerbaijani and Russian sides in the oil sector after the attainment of independence of Azerbaijan can be associated with the supply of Azerbaijani oil via the Baku-Novorossiysk pipeline. SOCAR carries transhipment of oil from its own fields through Novorossiysk as well as transfers oil of joint ventures and companies operating onshore in Azerbaijan. In 2012, SOCAR exported 2.06 million tons of oil via the northern Baku-Novorossiysk pipeline compared to 1.99 million tons in 2011.

 

However, in spring, Russian Prime Minister Dmitry Medvedev signed a decree on the termination of an intergovernmental agreement with Azerbaijan on the transit of Azerbaijani oil via the Baku-Novorossiysk pipeline. SOCAR and Transneft are currently negotiating on shifting cooperation in this field to a commercial basis. The negotiations mainly concern the increase of volume of oil pumping through the pipeline [the Russian side] as well as ensuring the quality of Azerbaijani oil, which is mixed with the oil of lower quality in Russia, and thus shipped from the port of Novorossiysk not as Azeri Light, but as Urals. Also, the sides discuss transportation of the oil of third parties through the pipeline.

 

By the year's end, Azerbaijani oil will be transported via the Baku-Novorossiysk pipeline in accordance with the intergovernmental agreement. As previously stated by the head of SOCAR Rovnag Abdullayev, a decision will be made on the transit of Azeri oil through the territory of Russia that will be cost effective for both the Azerbaijani and Russian sides.

 

Through the lens of Europe's energy security

 

SOCAR is currently formed as a major international company, which has stepped up its efforts to reach a global market. In particular, the State Oil Company has a number of assets in Ukraine, Romania and Switzerland, has won the tender for the privatization of Greek DESFA, and actively develops the Turkish direction. An important event in the history of the oil and gas sector in Azerbaijan was that in June of this year, shareholders of the Azerbaijani Shah Deniz gas condensate field development chose the Trans-Adriatic Pipeline as the route of gas supplies to Europe.

 

This selection marks the launch of the Southern Gas Corridor - a project that will allow Europe to diversify its sources of supply (to reduce dependence on Russian gas) and increase energy security, and to Azerbaijan - to acquire a new market in the face of Europe. The Southern Gas Corridor is a major project designed to meet the European gas needs for decades to come.

 

TAP is designed to transport gas from the Caspian region via Greece and Albania and across the Adriatic Sea to southern Italy and then to Western Europe.

 

One of the Shah Deniz project participants is the Russian company Lukoil with a 10 percent stake in the project equity. In addition, the gas from Shah Deniz constitutes only a portion of the gas that goes from Azerbaijan to Europe, considering plans for the development of other fields, and in particular the Absheron gas field. The latter is one of the projects that Rosneft might join.

 

The field's potential reserves amount to 350 billion cubic meters of gas and 45 million tons of condensate. Participants of the Absheron project are SOCAR (State Oil Company of Azerbaijan) - 40 per cent, French companies Total - 40 per cent and Gaz De France Suez - 20 per cent.

 

The first gas from this field is planned for as early as 2020, and the volumes during the first phase of the development are expected at three to five billion cubic meters of gas per year.

 

Active actions of the Russian side are explained through commercial interests and the lack of intention to reduce its position as a major supplier of gas to Europe, which is a traditional market for Russian gas.

 

The economic feasibility

 

Formation of new relationships, development of cooperation between the parties, desire to participate in new and collaborative projects is a prerequisite for the economic feasibility of large companies, in particular those working in the energy sector. Competitive conditions have always been and will be a condition for the progressive development of both companies both individually and on the market.

 

The oil and gas sector of Azerbaijan, which faced the decline after gaining independence, is currently being developed at a fast pace. SOCAR participates in major projects abroad. there are prospects for the discovery of new large deposits in the country, which further strengthens the position of Azerbaijan as a major producing country with great prospects. This explains the growing interest in the country among large companies, including investments in projects with greater perspectives, and create an opportunity to obtain high level of income.

 

Speaking of SOCAR's intentions to develop partnerships with Rosneft, it must be emphasized that the company has repeatedly pointed out that all the actions and intentions of SOCAR in various projects are justified by economic expediency. The development of the Russian direction is well-founded, since the development of relations with the northern neighbor is a necessity in order to strengthen the position of SOCAR in the regional market.

 

The cooperation agreement signed between SOCAR and Rosneft as well as a number of agreements will contribute to the expansion of cooperation between Azerbaijan and Russia in the energy sector, and raise the economic relationship to an already high level.

 

 

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06.09.2013

 

 

 
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