Oil & Gas

Azerbaijan is strategically capitalizing on Kazakhstan's shift away from Russian oil transit by expanding its own oil exports through the Baku-Tbilisi-Ceyhan pipeline and potentially reviving the Baku-Supsa pipeline route. Plans are also in progress to increase natural gas transit, potentially making Azerbaijan a key link for Turkmen gas exports to Turkey via swap deals and the possibility of a Trans-Caspian Pipeline. In addition to these efforts, Azerbaijan is exploring renewable energy development, including wind and solar power projects, and seeking European investment to boost its green energy sector. Despite the potential benefits of these initiatives, uncertain investment and financing prospects, as well as questions about production capacity, are currently hindering Azerbaijan's progress.

Before the conflict in Ukraine, Kazakhstan heavily relied on Russia to transit the majority of its oil exports to global markets. However, growing concerns about over-dependence on Moscow and the safety of commercial shipping in the Black Sea have prompted Kazakhstan to seek alternative export routes. Kazakhstan's state oil producer KazMunayGas and Azerbaijan's state oil company SOCAR recently agreed to expand their deal for transiting Kazakh crude via Azerbaijan's main oil export route, the Baku-Tbilisi-Ceyhan (BTC) pipeline. This agreement increases the annual volume from 1.5 million tons to 2.2 million tons and also includes discussions on transiting further volumes of Kazakh crude to the Black Sea via the Baku-Supsa pipeline through Georgia, which has been inactive for over a year due to safety concerns.

Azerbaijan's potential role in natural gas transit is also growing, with a preliminary agreement between Turkmenistan and Turkey allowing for Turkmen gas to be sent to Turkey either via a swap deal with Iran or more complex swaps involving Iran and Azerbaijan. Turkish interest in Turkmen gas is primarily aimed at diversifying its gas imports, especially with contracts with Russia expiring in 2025. There are discussions about a longer-term plan for a dedicated Trans-Caspian Pipeline to transit Turkmen gas via Azerbaijan and Georgia to Turkey and potentially on to Europe, a project that already has US support.

Azerbaijan's efforts in renewable energy are gaining momentum, especially as it prepares to host the COP29 climate conference in late 2024. Despite only 8 percent of its power generation coming from renewable sources in February, Azerbaijan is actively promoting ambitious renewable energy plans. These plans include developing wind, solar, and hydro power capacity to free up more natural gas for export. Azerbaijan is relying on international investors for these projects, such as Saudi Arabia's ACWA and UAE's Masdar.

The EU is also showing interest in Azerbaijan's renewable energy sector, with a recent memorandum of understanding signed on wind energy cooperation. This agreement aims to facilitate European investment in Azerbaijan's wind power potential and contribute to the clean energy transition in the region. Overall, Azerbaijan's energy strategy is evolving to capitalize on emerging opportunities while navigating challenges in the energy sector.