Power Diplomacy – Southern Fuel Hall (SGC)

Whereas leaning on the earlier Institute’s evaluation, this work will notably study Azerbaijan’s Southern Fuel Hall (SGC) as a strategic pathway for each the EU and Azerbaijan amidst the continued vitality transition. The SGC serves as an infrastructure mission, aiming to move pure fuel from the Caspian area to Europe. The strategic positioning of Azerbaijan, established infrastructure, and dedication to align with international local weather wants are the sturdy options complimenting the SGC. By capitalizing on its pure sources and embracing progressive options comparable to CCS and hydrogen manufacturing, Azerbaijan can place itself as a dependable associate within the international pursuit of local weather resilience. Addressing societal skepticism and fostering business readiness are the following step for the SGC. Because the world strikes in the direction of a extra sustainable vitality future, the SGC will proceed to play a significant position in shaping the vitality panorama of the Caspian area and Europe. In essence, the SGC embodies a paradigm shift in the direction of collaborative vitality governance, the place mutual pursuits converge to forge a path towards a extra sustainable future.

The Position of Oil and Fuel Corporations within the World Power Transition:

Local weather change has shifted from a distant concern to an imminent disaster demanding instant motion throughout all sectors of society. On the forefront of this international problem are oil and fuel corporations, longstanding pillars of the world’s vitality panorama. As the first contributors to greenhouse fuel emissions, these corporations wield appreciable affect in shaping the course of local weather change and bear vital duty for mitigating its impacts. The urgency for change is underscored by the existential menace posed to grease and fuel corporations within the face of speedy international vitality transformation. In accordance with the report from the Atlantic Council, within the S&P 500, the vitality sector has skilled a dramatic lower of 48 p.c within the final 10 years (Krauskopf, 2019).

Nationwide oil corporations (NOCs), specifically, emerge as key gamers on this panorama. Absolutely or majority-owned by nationwide governments, these corporations have vital affect, accounting for half of world oil manufacturing and holding a considerable share of world oil reserves (Belle and Mulhovo, 2024). Oil revenue serves as a significant income supply for governments, underpinning important companies and societal well-being. Regardless of their centrality to nationwide economies and income technology, NOCs face mounting stress to take part within the vitality transition and assist the decarbonization of the vitality system.

Current international local weather conferences, comparable to COP28 hosted by the United Arab Emirates (UNFCCC, 2023) and the upcoming COP29 scheduled in Azerbaijan (UNFCCC, 2024), spotlight the lively involvement of petrostates and oil and fuel corporations on this pivotal transition. Furthermore, IRENA evaluation highlighted the hyperlink between the markets, governance constructions, institutional options, and the vitality transition in NOCs (IRENA, 2021), and within the face of those challenges and alternatives, oil and fuel corporations should navigate a multifaceted panorama characterised by coverage, investor, and societal pressures. The sector’s utilization of interconnected applied sciences presents nice avenues for decarbonization. From geological experience to the event of carbon seize and storage (CCS) and hydrogen manufacturing, the business holds present experience that may be harnessed to facilitate the vitality transition.

Azerbaijan’s Strategic Positioning in Inexperienced Power and the Position of SGC:

There are quite a few alternatives open for nations like Azerbaijan, which because of their proximity to Europe and well-established oil and fuel infrastructure, can make the most of the already present experience and infrastructure to spend money on hydrogen initiatives (Belle and Mulhovo, 2024). It has the potential to decarbonize the vitality sector. Moreover, CCS applied sciences, which may seize emitted CO2, maintain vital promise. Notably, in keeping with the IEA report, a considerable portion of large-scale CCS initiatives, roughly 80% (2020), are built-in with oil and fuel operations. Scaling up CCS is a pivotal facet of world decarbonization efforts, aligning with initiatives such because the EU’s Web Zero Trade Act and Nationally Decided Contributions beneath the Paris Settlement (IEA, 2023).

By changing into the host nation for the following COP29, Azerbaijan has instantly drawn consideration to its vitality sector. Contemplating present geopolitical modifications in Eurasia, Azerbaijan is in a positive place to increase its affect each eastward into Central Asia and westward into the Balkans and additional within the EU. The deliberate enhance in vitality provide to Europe and the development of important connectivity initiatives such because the Center Hall and SGC are positioning Azerbaijan to use an lively position within the area, rising as a significant hub for important vitality sources. In the meantime, being a petrostate and with the oil and fuel sector being the cornerstone of the nation’s economic system, Azerbaijan, contemplating the inexperienced transition, does take part within the course of by way of its diversification efforts. Furthermore, having renewable vitality potential as hydro, photo voltaic, wind, and geothermal sources (IEA, 2023) is a chance for future progress. Because it was said throughout the Inexperienced Power Advisory Council assembly in Baku, contemplating the position of the oil and fuel sector within the inexperienced vitality transition, SGC goes to be the platform for enhanced vitality partnership between Azerbaijan and the EU (President AZ, 2024).

In the meantime, there’s a altering position of the oil and fuel corporations in vitality, this evaluation will primarily study the strategic significance of Azerbaijan’s SGC for each the EU and Azerbaijan amidst the continued vitality transition. The SGC serves as an important vitality infrastructure mission, aiming to move pure fuel from the Caspian area to Europe.

The SGC won’t solely impression the vitality transition however may also want and create modifications in different areas comparable to coverage, society, and business. The political match refers back to the want for the insurance policies and rules governing vitality manufacturing and consumption to align with the objectives of decarbonization and sustainability. In the meantime, society’s rising consciousness and concern about local weather change and environmental degradation play a major position in shaping vitality insurance policies and practices. Lastly, for the SGC, understanding the business’s readiness to grab CCS and hydrogen manufacturing alternatives is essential for figuring out the mission’s success and its contribution to the vitality transition. Subsequently, this examine will delve into varied facets, together with coverage alignment, societal calls for for decarbonization, and business modifications, notably regarding CCS know-how and blue hydrogen manufacturing.

Evolving Power Alliances: Azerbaijan’s Position Amidst Political Shifts in Europe:

“The Russian conflict with the west over Ukraine has prompted vital political modifications in Eurasia, resulting in a reconsideration of vitality alliances and a better examination of everybody’s position” – as guru of the upper training in Africa and the Swiss MP, prof. Djawed Sangdel identified. Caucasus is definitely an necessary vitality transiting and producing associate. Nations in Southeast Europe and Central Europe, together with present prospects like Greece, Bulgaria, and Italy, in addition to potential new prospects comparable to Hungary, Croatia, Serbia, North Macedonia, Bosnia and Herzegovina, Romania, Slovenia, and Albania (Bowden, 2022), have expressed curiosity in rising their imports of Azerbaijani fuel.

Determine 1: Pipeline Fuel Flows From the Russian Federation to the EU (2021-2023)

Supply: ENTSOG
These nations, collectively forming the Southeast Europe and Central European area, are in search of to diversify their vitality sources away from reliance on Russian provides. Moreover, main producers within the area, together with Serbia, Greece, Bosnia and Herzegovina, Bulgaria, and Romania, are aligning their vitality insurance policies with the EU’s decarbonization aims. They’re aiming to scale back coal manufacturing and consumption, substituting it with pure fuel and renewable vitality sources. Because the Prime Minister of Albania, Edi Rama stated because the proportion of Russian fuel within the EU is declining from 40% to zero and with the push for inexperienced initiatives the utilization of Azerbaijani fuel sources and the Caspian area turns into more and more important for the mutual way forward for the areas (President AZ, 2024). On December 31, 2020, the preliminary transmission of Azerbaijani fuel to the EU has began. In accordance with Azerbaijan’s Power Ministry, inside three years, the SGC facilitated the supply of over 31 billion cubic meters (bcm) of pure fuel to Europe.

In July 2022, European Fee President Ursula von der Leyen and Power Commissioner Kadri Simson visited Baku to discuss with President Aliyev and formally endorsed a Memorandum of Understanding concerning the exportation of accelerating by 4 bcm of fuel from Azerbaijan to Europe, beginning in 2022 (European Fee, 2022). This settlement additional underscored Azerbaijan’s standing as a reputable vitality ally. At this second, fuel provides to Europe from the Hall have elevated by 46% in comparison with 2021. The RePowerEU coverage by the European Fee (2022) goals for a major and instant discount within the EU’s reliance on Russian fuel, aspiring to eradicate dependence on imported Russian fossil fuels, together with oil, fuel, and coal, nicely earlier than 2030. This plan entails diversifying fuel imports from different sources such because the MENA area, LNG, and fuel from Azerbaijan, amongst different methods.

Coverage Dynamics within the SGC:
European corporations working inside the SGC are present process vital coverage modifications as nicely, specifically, of their strategy to renewable vitality and the broader electrical energy provide chain (IRENA, 2021). One group of corporations, together with Eni, Shell, and Complete, just isn’t solely diversifying their portfolios to incorporate renewable vitality but additionally investing extensively throughout the electrical energy provide chain, from manufacturing to technology and provide. Shell and Complete, for instance, have expanded their presence by way of the acquisition of corporations concerned in varied facets of electrical energy technology, battery storage, home energy, and extra, on a world scale (IRENA, 2021). These shifts in operational group mirror European corporations’ recognition of the necessity to align with Europe’s transition to a lower-carbon economic system, pushed by each coverage mandates and monetary pressures. As these corporations more and more spend money on renewable vitality and transition towards changing into electrical energy suppliers, there could possibly be shifts within the demand for pure fuel and the position of the hall in supplying Europe’s vitality wants. The SGC serves as an important vitality infrastructure mission, offering European nations with a substitute for Russian fuel and supporting decarbonization aims, in the meantime increasing the vitality marketplace for Azerbaijan.

Contemplating different political suits within the framework of the Southern Fuel Hall, the SGC operates inside the framework of European competitors laws, which prohibits joint gross sales and advertising by way of a single vendor because it breaches Article 81(1) EC and Article 53 of the European Financial Space Settlement. Nevertheless, when long-term fuel provide contracts had been signed with European fuel patrons in 2013, the advertising arm of the Shah Deniz consortium, Azerbaijan Fuel Provide Firm (AGSC), a single vendor, was exempted from joint gross sales restrictions. This exemption was granted as a result of though AGSC is a single consortium, it has seven shareholders, the Shah Deniz Fuel Entitlement Holders, and every sells its fuel by way of AGSC in proportion to its entitlement.

Society and Inexperienced Transition:
Skepticism from society concerning Azerbaijan’s capability to contribute to the inexperienced transition and function an vitality ally for Europe as a result of its reliance on fossil fuels is a sound concern. Given Azerbaijan’s vital oil and fuel reserves and its historic dependence on these sources, there could also be doubts concerning the nation’s dedication to sustainability and its capability to transition to cleaner vitality sources. Addressing these considerations requires clear communication and concrete actions from Azerbaijan to show its dedication to inexperienced initiatives and its willingness to embrace renewable vitality applied sciences.

Azerbaijan’s initiative to host COP29 highlights its dedication to main discussions on international local weather motion, regardless of its ample fossil gas sources. This represents the dedication to exploring methods for a sustainable and environment friendly inexperienced vitality transition on a world scale, and most significantly, economies closely depending on the oil and fuel sector.

The assembly in Baku had two necessary subjects: advancing the bilateral clear vitality agenda between Azerbaijan and the EU and the operational facets of the SGC. Hydrogen was a focus of the dialogue because it has the potential in the long term to intersect each areas (President AZ, 2024). The nation has a number of alternatives for renewable vitality, comparable to wind and photo voltaic, which may additional be used to provide hydrogen and electrical energy that may be exported and additional substitute fossil fuels. They’ve set nationwide targets to scale back greenhouse fuel emissions by 40% by 2050 in comparison with the degrees from the Nineteen Nineties (Abnett, 2024). On this context, having discussions on blue and inexperienced hydrogens inside the framework of the SGC is of great significance. Oil corporations working within the nation are additionally taking their half within the inexperienced vitality initiatives. For example, BP is planning to start out building of a solar energy station with a capability of 240 MW (Azernews, 2024) in the summertime of 2024.

The SGC is an initiative within the transition of oil and gas-dependent Azerbaijan in the direction of inexperienced vitality, proving the purpose that they meet societal calls for on decarbonization. The EU has built-in clear vitality as a elementary facet of its bilateral relations with Azerbaijan (European Fee, 2022). These additionally align with the EU initiatives comparable to REPowerEU, which is a chance for Azerbaijan to deepen its engagement with the EU on renewable vitality and speed up its transition in the direction of a cleaner and extra sustainable vitality future. The current signing of a Memorandum of Understanding with EU wind corporations signifies a stride ahead. The export of inexperienced vitality is poised to maintain Azerbaijan’s relevance as an vitality exporter past 2040 when present long-term fuel provide contracts are set to run out.

Furthermore, since because the a part of decarbonization plan, the nationwide oil and fuel corporations are planning to make use of CCS, like every other know-how or choice, they want authorities assist and political dedication not less than till the know-how develops not solely within the sense of quite a few industrial modifications or agreements but additionally to foster societal assist. Each due to public skepticism and the business’s failure to successfully talk its decarbonization plans, there’s a enormous backlash for the oil and fuel sector (Berns et al, 2019). In addition to many are skeptical about CCS as a local weather mitigation software, basing their arguments on excessive prices and uncertainties concerning the security of carbon storage. As Fattouh et al. say critics argue that CCS may perpetuate reliance on fossil fuels and hinder the adoption of cleaner applied sciences (2021). Some go additional and advocate for prioritizing pure carbon sinks over CCS applied sciences.

Adjustments in Trade:
The EU’s continued demand for fuel, each for energy technology and industrial functions, underscores the relevance of the SGC as an important supply of vitality provide. Azerbaijan has substantial fuel reserves in addition to the prevailing infrastructure for fuel transportation to the EU. Nevertheless, in gentle of world actions to transition in the direction of cleaner vitality sources, Azerbaijan additionally faces the crucial to undertake extra sustainable practices. Within the context of the SGC, the combination of CCS know-how and the manufacturing of blue and inexperienced hydrogen current vital alternatives for aligning with the evolving vitality panorama and addressing sustainability considerations.

First, regarding useful resource availability, Shah Deniz Deep, Absheron Stage 1 and a couple of, ACG Deep, and Ümid are a part of manufacturing portfolios managed by worldwide consortia, with Ümid being developed by SOCAR.

Determine 2: Fuel Remaining for the Home Market vs. Fuel Consumption

Supply: Rzayeva (2023)
In the meantime, the SGC has the next capability, which is barely deliberate to extend.

Determine 3: The Enlargement of the SGC segments,
Supply: Rzayeva (2023)
CCS:
In accordance with the Ministry of Power of Azerbaijan, aligning with the societal and political calls for for vitality exports, Azerbaijan has began closely investing in renewables comparable to wind and photo voltaic, attracting hundreds of thousands of overseas investments. In addition to the technical potential for renewable vitality, offshore particularly is 157 GW, amongst which wind and photo voltaic vitality take the main positions. Azerbaijan’s potential for implementing CCS know-how inside the oil and fuel sector is a important facet of this transition. The nation’s involvement in worldwide consortia, such because the Shah Deniz Deep and Absheron initiatives, presents alternatives for integrating CCS into fuel manufacturing processes (Rzayeva, 2023). CCS know-how, by capturing and storing carbon dioxide emissions from pure fuel combustion (IEA, 2024), can considerably scale back greenhouse fuel emissions, aligning with each EU and international sustainability objectives.

Azerbaijan’s oil and fuel sector presents the chance for CCS implementation. The nation has substantial hydrocarbon reserves, that are anticipated to proceed enjoying a major position in its vitality combine for the foreseeable future. In the meantime, to mitigate its environmental impression CCS deployment is a lovely choice. For the reason that authorities has proven its dedication to sustainability, by leveraging these strengths, Azerbaijan can successfully implement CCS know-how to seize and retailer carbon emissions from its oil and fuel operations, thereby decreasing its carbon footprint and contributing to international local weather objectives. The financial feasibility of CCS depends on varied elements, which embody capital prices, operational bills, and market demand. Whereas CCS applied sciences have superior in recent times, they nonetheless require substantial upfront investments and operational prices.

Hydrogen Manufacturing:
Equally, hydrogen manufacturing requires vital funding in infrastructure and should face competitors from standard fossil fuels. Nevertheless, as international efforts to decarbonize enhance and demand for clear vitality rises, the hydrogen market (particularly for Azerbaijan) is predicted to develop. Azerbaijan can leverage its ample pure fuel reserves to provide blue hydrogen. The offshore experience collected over a number of many years by the oil and fuel industries is the important thing to supporting the offshore wind business. Repurposing present offshore infrastructure can facilitate the environment friendly transition to offshore renewable vitality applied sciences.

Blue hydrogen manufacturing, which entails utilizing pure fuel as a feedstock and capturing the ensuing CO2 emissions by way of CCS (IRENA, 2021), presents a promising pathway in the direction of decarburization within the SGC to adapt to altering market dynamics. As a serious fuel producer within the area, Azerbaijan can vastly profit from the event of blue hydrogen as a substitute vitality provider. By utilizing CCS with hydrogen manufacturing, it will probably produce clear hydrogen whereas reducing emissions from fuel operations on the similar time. Furthermore, blue hydrogen manufacturing presents new financial alternatives, together with export potential and diversification of the vitality portfolio, additional reinforcing Azerbaijan’s position as a key participant within the international vitality market.

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Zhuldyz Ramazanova
IFIMES, Data Officer (Transport and Power Corridors In-house specialist)