Gulmiraspresentation

Connecting Azerbaijan Gas with New Global Opportunities IGMO Conference Paris, 21st October 2015

G端lmira Rzayeva Senior Research Fellow Center for Strategic Studies of Azerbaijan 1

The Segments of the SGC

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SD -1.2-1.5 tcm of natural gas, Condensate production from the Shah Deniz field is expected to increase to 120,000 barrels p/d, from current levels of about 55,000 barrels p/d Expansion of the existing South Caucasus Pipeline (30+ bcm) through Azerbaijan and Georgia Construction of the Trans Anatolian Natural Gas Pipeline (TANAP) across Turkey (56’-48’ inch) Construction of the Trans Adriatic Pipeline (TAP) across Greece, Albania, and Italy Gas Transmission infrastructure (interconnector) to Bulgaria

The SGC is a strategic highway ■

The SGC infrastructure has growing strategic importance for Europe not only because it will receive some 11 bcm/a but also because in long-run the other potential suppliers such as Turkmenistan, Iran, etc. can use it to penetrate the market.

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Without the projects initiated by Azerbaijan such as: SCPx, SCPfx and TANAP, the EU would have had another major concern as to how to deliver much bigger volumes from those potential sources.

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Further importance is also because of the combination of factors such as: the availability of market and buyers, suitable gas price and infrastructure to transport the gas, affects the timing of the ramp up of production and FID in other fields and blocks in AZE.

3 Source: IHS Energy

„Free“ un-contracted gas volumes for export above SD1 and SD2 §

First 5 bcm of “free” gas will be available already in 2021-2022 from the Absheron field

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Next the Umid field and Babek prospective structure could add some 5-7 bcm/a in 2026-2027*

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Third potential contender is ACG deep layer gas or non-associated gas with ca.4-5bcm by 2027-2028

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By 2030 additional more than 15 bcm to be available for export

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Ramp up of development depends on securing gas sales contracts with suitable gas markets, availability of drilling rigs, commerciality of the projects

Source: Rzayeva, OIES

* The tender for the further development of Umid gas field and exploration of Babek prospective strucutre recently announced. As one of the scenarios to be selected by the winner consortium could be speeding up the development of Umid. Thus, it is possible that Umid to show increase in production already in 2022 (very optimistic scenario).

4 Otherwise, ramp up in 2026.

Market: Turkey may face supply shortage •

After 2016 due to rising demand, before the start-up of deliveries from SD II in 2018;

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After 2021-2022 arising from the expiry of the SD1 (6.6 bcm/a) and the Gazprom Western Line contracts (4 bcm/a);

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The extension of both contracts will depend on liberalization of the market and desire of the suppliers to conclude contracts with the companies other than BOTAŞ;

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The price in the market is competitive BUT it is likely that BOTAŞ will try to renegotiate the prices;

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Private companies have to obtain import licenses from EMRA to import gas from Azerbaijan.

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The EU market: Expiry of existing contracts expected to substitute with pipe gas from new sources ■

Up to the mid-2020s, EU companies are contractually obliged to import at least 115bcm/a of Russian gas, a figure which reduces to around 65 bcm by 2030 (A Gazprom supply contract expires to Slovenia in 2017, to Bulgaria in 2022, to Serbia in 2021, to Slovakia in 2028).

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By 2030 the conventional gas production loss will be around 110bcm. European demand for additional gas imports could be 152 bcm by 2025 and 215 bcm by 2035.

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There is substantial spare capacity at re-gas terminals in Europe (up to 200 bcm/a) of which only 42 bcm/a was utilized in 2013. However, there is much uncertainty over the scale of future LNG supply to Europe.

6 Source: Gazprom Export

U.S. LNG is not a cheap option!

Source: Cheniere

7 Source: Wood Mackenzie, Bloomberg, Gazprom Export estimates

Gas suppliers from new import sources boost construction of cross-border infrastructure, increasing diversification potential

Source:GIE

Source:Plinacro

Concluding remarks § § § ■ ■

Azerbaijan is the only firm non-Russian option for supplies of more than 10 bcm/a from around 2020, given that it has secured all necessary binding agreements.

The current low gas price in Europe will challenge the new projects and delay FIDs. SD 2 has an advantageous position.

European policy-makers are downplaying future role of gas, creating uncertainty for investors From commercial point of view, it seems that domestic market could be better market for the non-SD, uncontracted gas, given the current low prices both in the hubs and LTCs with oil & oil products linkages.

The prices should be recovered in Europe if Europe needs to see more new alternative pipe gas projects for competitive prices as there is a niche there.

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THANK YOU! This presentation is based on: Outlook for Azerbaijani Gas supplies to Europe published at the Oxford Institute for Energy Studies Free to download from: http://www.oxfordenergy.org/author/gulmira-rzayeva/

Gulmira.rzayeva@sam.gov.az

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