Download FORGOTTEN COMPONENT IN THE EUROPEAN GAS SUPPLY

LOCAL MARKETS: FORGOTTEN COMPONENT IN THE EUROPEAN GAS
SUPPLY EQUATION - AZERBAIJAN CASE STUDY
Julian Bowden, BP
1. Introduction
This paper argues that developments in the Azerbaijan gas market form a bridge across two
interlinked themes set against a background context of Europe’s desire for security and diversity of
th
energy supply. While a small market on the global stage, it is (a) at the starting point of 4 Corridor
pipelines to Europe so is a market which needs to be understood, and (b) provides empirical evidence
on how very large former-USSR gas markets might evolve.
The Russia-Ukraine gas dispute of Jan 2006 and its more serious repeat in January 2009 (when
Russian supply to several countries actually stopped temporarily) intensified this search, primarily at
the EU and Governmental policy level but also and less obviously at company levels. European
energy policy on the gas side emphasises encouraging LNG and Caspian & Middle Eastern gas
pipeline flows as well as pushing hard to advance market liberalisation and market transparency.
The first theme of this paper is an observation that any export-oriented gas project must take into
account the demand requirements of the host market and, if relevant, transit markets. Too often in the
past in the planning and political processes for new gas developments, the requirements of local
markets for gas and their own broader developmental aspirations have been downplayed or
overlooked. Many potential exporters to Europe - Egypt, Iraq, Azerbaijan for example – are
themselves growing or are already substantial gas markets in their own right. Their own requirements,
and their willingness to exploit their gas for export, must be brought into the European supply
equations when planning large export schemes.
In the case of Caspian exports to Europe, gas has been flowing since 2007 from Azerbaijan into
Turkey from the offshore Shah Deniz gas condensate field. The second stage of Shah Deniz is
currently being progressed. The key market to understand in the Caspian is Azerbaijan.
The second theme of this paper is that Azerbaijan has demonstrated over the last 2-3 years that it
provides an excellent case study for how former-USSR gas markets could evolve. Azerbaijan itself is
a relatively small gas market in global terms, although one where gas dominates its energy market,
and developments there would not register on the world balance. However, its great importance is
that its experiences, if replicated in the larger 65 bcma gas market of Ukraine and the huge 470 bcma
Russian market, would have far-reaching global supply/demand consequences.
The current global downturn clearly marks a turning point for the gas industry, a paradigm shift as the
gas industry moves from supply/demand tightness to surplus and the market rebalances. When this
work on Azerbaijan started it was possible to place demand developments within a relatively
‘predictable’ fundamentals and regulatory environment and judge Azerbaijan’s real achievements in
managing demand accordingly. This stable world has now been replaced, and almost overnight, by
one of economic discontinuity, plunging GDP growth rates, gas demand decline, possible demand
destruction. Gas demand in the much larger markets of Ukraine and Russia is now plunging fast
(Ukraine down 30% in the first 6 months of 2009, Russia down 7%) and so the distinction between
managed policy action and response to external events has clouded.
2. Methods
The industry’s gas analytical effort tends to be concentrated more on supply side than on demand
side. The main method used here for analysing Azerbaijan gas is to place gas developments in a long
historical energy context and detailed disaggregation of demand into consuming sectors, identifying
and evaluating the separate demand drivers for each sector. Main source materials has been the
national statistical publications of Azerbaijan State Statistical Committee.
3. The Azerbaijan gas market
i) Azerbaijan gas in the Soviet period
th
Azerbaijan has one of the longest hydrocarbon histories in the world. Towards the end of the 19
century it was for a short period the largest oil producer in the world, its crude oil and oil products
(principally kerosene) exported to European markets and beyond. Although gas came much later, in
world terms it was again an early leader in the gasification of an economy. By the 1960s gas was
1
penetrating the economy fast: by 1980 it was producing 14 bcma and consuming 11 bcma .
Azerbaijan had become one of the first truly gas economies in the world, gas accounting for around a
60% share of the total energy consumption of the country. From the laying of an extensive distribution
grid, gas penetrated the residential sector and was a key fuel in the industrial and power sectors. With
no coal consumption, the only other fuel of note in these sectors was heavy fuel oil.
Two important other aspects of gas evolved in this period. The first was trade. Much of this feature
was masked because virtually all this trade was within USSR space, but large diameter pipelines were
built connecting Azerbaijan with Russia and Georgia. Some gas was not an internal transfer,
however. From 1970 the USSR imported gas from Iran and volumes imported built quickly to almost 9
bcma by 1973. Volumes remained at around this level until 1978 when they were terminated
following the Iranian revolution. All this gas entered Azerbaijan and was then distributed widely
throughout the Caucasus region.
At this period leading into the 1980s, continued planned increases in Azeri gas consumption, a decline
in Azeri gas production (it fell from 14 Bcm in 1980 to 9.9 Bcm in 1990) and then Iran imports ceasing
caused a rapid construction of alternative gas pipelines to bring alternative gas supply in from Russia.
By 1990 Azerbaijan was a significant net importer of gas; net imports from Russia accounted for
around 50% of its supply.
Although now in much poorer condition, these pipeline connections still exist. The pipeline in from Iran
has been reversed and has been used from 2006 to export very small volumes to Iran as a swap for
supplying gas into Nakhchivan enclave (separated from Azerbaijan by Armenia). The pipeline from
Russia still exists too.
The second important feature of gas was the interaction with heavy fuel oil. The main thermal power
plants (the 1960s-era Ali Bayramli and the 1980s-era Mingechevir, and both still central to the
country’s electricity system) were designed to be dual-fuel operations, able to use gas and fuel oil.
Relevance of this is two-fold. Firstly, a large proportion of the gas demand increase in the last few
years resulted from substitution of heavy fuel oil. Secondly, this switchability gives a price marker for
gas value in the country in a larger region where gas pricing remains basically set by the State.
Gas demand peaked at 17 Bcm in 1990. At that time, gas was available to over 80% of households.
Demand was split then 4.6 Bcm power (27% of the market), 6.1 Bcm residential and municipal (36%
market share) and 2.6 Bcm industry (15%). The remainder was used for district heating in the winter,
power the pipelines, some small use in agriculture. To manage seasonality, Azerbaijan had
constructed underground storage facilities even before 1980.
1
Most gas and other fuels data used here up to 1990 comes from Toplivo i energetic rossii, Vniiktep, Moscow
1992. See also Julian Bowden ‘Azerbaijan: from gas importer to exporter’ in Russian & CIS Gas Markets and
their impact on Europe, Simon Pirani ed, Oxford Institute for Energy Studies, OUP, 2009.
Azerbaijan Gas Supply/Demand Balance (Bcm)
25.0
Exports (total)
20.0
Other dem and
Pow er plants
15.0
Im ports
Production
10.0
5.0
0.0
1990
2000
2001
2002
2003
2004
2005
2006
2007
2008
Source: Azerbaijan Statistical Yearbook, various years, Azeri Statistical Committee. Yearbook 2008 edition page
396 has the gas balance. Yearbooks also contain electricity & fuel oil balances and foreign trade statistics.
ii) Azerbaijan gas 1990-2000
Like all former USSR economies, the Azeri economy went into deep recession immediately after the
USSR dissolution at the end of 10991. Between 1990 and 1995 the economy contracted by a huge
2
60%. It remained flat until 2000 when growth resumed as foreign investment in the country’s oil and
gas began to have real impact. In this period 1990-2000 total energy demand fell by 50% from 24
million tonnes of oil equivalent to 12 Mtoe. Gas imports ceased and gas consumption fell to the level
of domestic production – around 6 bcma. Some gas consumption was substituted by heavy fuel oil,
which meant interestingly that electricity demand did not fall at similar levels to GDP – only by 20%
over 1990-95. Basically what was happening was that the residential sector was getting more of its
energy from electricity generated by heavy fuel oil rather than direct supply from gas.
This history is important as it explains part of the dynamics of the recent period and is part of the
forecasting process. Many of the trends of this period are now reversing.
iii) Azerbaijan 2000-2008
At the end of 2000 gas imports from Russia resumed. A 1200mm pipeline had been built in the early
1980s from Russia into Azerbaijan, running down along the Caspian coastline, and was operational by
1985. This line was reactivated and over 2001-2006 delivered around 5 bcma of a mix of Central
Asian and Russian gas to Azerbaijan under an annual contract which dealt with both volume and
3
price. As the graph above shows, gas consumption leapt upward in 2001 to around 9 Bcm due to this
additional imported supply and stayed at this level for the next 3 years. This increase came about not
as a surge in energy demand as the economy revived, but was mostly entirely due to the substitution
of heavy fuel oil in the power sector.
From 2005 gas consumption slowly edged up to today’s level of 10 bcma. The principal feature of
form 2007 was then the termination of Russian imports at the end of 2006. Russia was demanding a
doubling of the gas price from $105 mcm to something in the $230 mcm range, while Azerbaijan’s gas
production was rising from its own output rising. Output by the State company Socar was rising, it was
receiving associated gas from the Azeri-Chirag-Guneshli offshore oil development, and gas production
from the first phase of Shah Deniz was imminent as that field commissioned at the very end of 2006.
How Russia sets the gas price of its exports is a mysterious process, although there are now attempts
to put it onto a ‘netback parity’ basis, especially in the most important flow which is to the Ukraine. But
on whichever basis the $230 mcm above was derived, it was curiously close to the netback value of
heavy fuel oil in Baku.
2
3
15 years of the CIS (1991-2005), Statistical abstract, CIS Stat Moscow, 2006, pp 56, 60
Prices were $51 mcm in 2001, $54 in 2002, $53 in 2005 and $105 mcm in 2006. See Azerbaijan Statistical
Yearbook, various years and also the Azerbaijan Statistical Committee’s annual foreign trade handbook.
The table below catalogues in detail the country’s gas balance over this period. The consumption
split is examined below. On the supply side, the main feature is the strong rise in production from
2007 as the offshore Shah Deniz field was commissioned and the corresponding start of exports to
Turkey.
Azerbaijan - Gas Balance
in Bcm
Opening stocks
Production
Imports
Total supply
1990
1.5
9.9
13.4
24.8
1995
2.0
6.6
0.6
9.2
2000
0.4
5.6
0.3
6.4
2001
0.4
5.5
3.3
9.3
2002
0.3
5.1
3.9
9.4
2003
0.3
5.1
4.1
9.5
2004
0.3
5.0
4.8
10.1
2005
0.4
5.7
4.7
10.9
2006
0.9
6.5
4.4
11.8
2007
1.1
10.8
0.0
11.9
2008
0.9
16.1
0.0
17.0
Consumption
Power gen
Petchems
Residential
Industrial & other
Losses
Exports
Closing stocks
Total distribution
16.9
5.7
1.2
2.5
7.5
0.9
5.4
1.6
24.8
8.2
1.1
0.9
2.5
3.7
0.6
0.0
0.4
9.2
5.5
1.4
0.2
1.7
2.1
0.5
0.0
0.4
6.4
8.3
4.1
0.2
2.0
1.9
0.6
0.0
0.3
9.3
8.5
3.8
0.4
2.4
1.9
0.6
0.0
0.3
9.4
8.7
3.8
0.4
2.7
1.8
0.5
0.0
0.3
9.5
9.2
4.4
0.5
2.7
1.6
0.5
0.0
0.4
10.1
9.5
4.3
0.4
3.0
1.8
0.5
0.0
0.9
10.9
10.0
5.2
0.3
2.8
1.7
0.6
0.1
1.1
11.8
8.6
5.0
0.1
2.5
1.0
0.6
1.8
0.9
11.9
9.9
5.5
0.2
3.1
1.1
0.7
5.3
1.1
17.0
% change
in 2008
48.6%
42.6%
15.1%
10.1%
Source: Azerbaijan Statistical Yearbook, Azerbaijan Statistical Committee, various recent years.
Residential sector
The country’s population is 8.5 million. Household size is around 4.7 people giving around 1.8 million
households. Some 80% of households were connected to the grid before it fell into disrepair in the
1990s and came to serve not much more than the Baku area. It is being restored and about 65% of
households are now connected. Current demand here is just over 3 bcma.
Industry sector
Industry is limited in Azerbaijan to cement, aluminium, petrochemicals and some ferrous metallurgy.
Consumption is around 1 bcma.
Power
This is the single largest consumer, accounting for half of total gas demand. This share means that
the gas and power markets are very strongly linked and need to be analysed together. Hydro capacity
generates around 10% of the country’s power. The remaining is 4.5 GW of thermal operating
capacity, consuming last year 5.5 Bcm. The share of gas in the fuel mix to the thermal stations has
risen steadily as gas supply has improved over the last few years and has risen from 70% in 2005 to
90% in 2008. Heavy fuel oil has now practically gone from the system, its use now limited to some
peaking demand in the winter. Some 80% of all kwhs in the country are now derived from gas.
GDP
With the big ACG oil development on stream and production towards 1.0 million b/d and Shah Deniz
Stage 1 ramping up towards its plateau 8.5 bcma, the Azerbaijan economy has seen one of the fastest
growth rates in the world since 2000. GDP was up 26%, 35% and 25% over 2005-7 respectively and
11% in 2008 as oil production began to level off.
Energy efficiency
What has been startling, however, has been the small decline in total energy consumption, led by
electricity where demand has declined in the last 2 years (2007 and 2008) and continues to fall in
2009. The two charts below illustrate these trends. The first plots electricity generation from the
1980s. The decline of the immediate post-Soviet period and then its slow recovery is clear.
Astonishing, however, is that despite the strong economic recovery, generation is now back to its mid1980s levels. The second chart looks at the demand side and emphasises tow things. First is the
pronounced demand seasonality, and second is the decline in consumption.
bn kw h
Azerbaijan Electricity Generation
25.0
20.0
15.0
10.0
Thermal
Hydro
5.0
Total
19
80
19
85
19
90
19
95
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
0.0
Azerbaijan electricity consumption
(mn kwh per day in month)
80.0
2004
70.0
2005
2006
60.0
av '06
2007
50.0
2005
2006
2007
2008
+ 4%
+ 6%
- 15%
- 5%
av '07
2008
2009
40.0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Despite the booming economy (and recognising that much of this growth has been in the oil-sector
and not the non-oil sector), electricity demand fell a huge 15% in 2007, a further 5% in 2008 and is
down again by 9% in 1Q2009.
Reasons for this decline appear to be principally two-fold. Firstly, prices were increased sharply at the
start of 2007. The State sets gas and electricity prices, and in January 2007 it raised electricity prices
dramatically. All sectors were charged 6 cents kwh, and for residential sector (the largest consuming
sector) this meant a three-fold increase. However, there is little point in raising prices without other
controls, as experience shows elsewhere that this simply causes an increase in non-payment levels.
What Azerbaijan has done is back this up with better accounting and in particular, the installation of
meters. Over the last 5 years (2004-8 inclusive) Azerbaijan has imported over 3 million gas, electricity
and water meters at a total cost of $100mn. In a country of 1.8 million households, what this means is
that metering for all main utilities is now very widespread.
Azerbaijan import of gas, water & electricity meters
meters
cost
unit cost
(thousands)
$ million
$
2004
279.9
$3.9
$14
2005
609.5
$9.2
$15
2006
769.9
$18.7
$24
2007
840.9
$32.5
$39
2008
545.9
$35.5
$65
total
3046.0
$99.9
$33
4. Results - the Azerbaijan gas market to 2025
Gas consumption is currently 10 bcma. What is its future size which needs to be satisfied before gas
can be exported and export infrastructure designed? Taking each sector separately:
Residential Key drivers are demographics and efficiency. In most countries household sizes tend to
get smaller over time. Assuming this trend occurs in Azerbaijan and household size falls from 4.5 to
just below 4 people per household and the grid is restored to cover some 80% of households, then
demand grows to around 4 bcma by 2025. This also assumes that the current construction boom
continues and replaces much Soviet-era housing stock but with only a modest increase in per capita
living space.
Industry This is a difficult sector to evaluate. Azerbaijan is handicapped by having a small domestic
market and its inland location means export-oriented industry will always be disadvantaged from
having to move goods over 500 kms to a Black Sea port. Once there, Azeri products will meet strong
competition from other Black Sea countries. Creation of significant value-added industry (large scale
petrochemicals, fertiliser) will probably depend in large part on Government policy. On balance, it is
hard to see gas demand rising outside a 2-3 bcma range from its current 1 bcma.
Power In most economies there is an excellent relationship between economic growth and electricity
demand. This is not the case here; the chart below shows that except for 2003, electricity demand
has lagged far behind GDP and in the last 2 years has move in an entirely opposite (downward)
direction as price rises took effect.
Azerbaijan - GDP / electricity demand growth
40%
30%
GDP
Electricity dem and
20%
10%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
-10%
-20%
The second problem is the quality of the generating stock. Azerbaijan has one operating 400 MW
CCGT unit and another 520 MW CCGT unit built and due to commission imminently. Further CCGT
units are planned. In the last two years, partly because of problems in supplying power to the edges
of the country, Azerbaijan has imported 6 modular power stations totalling 750 MW and running on
gas from the Finnish company Wärtsilä.
The typical heat rate measurement in formerSoviet countries is grams of ‘standard fuel’ per
kwh produced. ‘Standard fuel’ is approximately
coal equivalent and remains the common measure
in this region. The chart opposite shows that
average fuel consumption in the thermal plants
has fallen 10% in the last 3 years from 376 grams
to 342 grams. This reflects the commissioning of
the 400 MW CCGT above and the new modular
stations.
Azerbaijan - generation efficiency
Thermal output (bn kwh)
Fuel consumed (mtes sf)
2005
19.3
7.3
2006
21.4
7.7
2007
19.1
6.6
2008
18.6
6.4
Fuel consumed
grams sf per kwh
376
361
349
342
The least efficient plant in Azerbaijan is the 860 MW Ali Bayramli power station, built in the 1960s. Its
heat rate is around 450 grams, compared with 250 grams in a CCGT. Thus, without any increase in
electricity demand, replacing this 1960s plant with the soon-to-be commissioned second CCGT would
result in an immediate gas saving approaching 0.5 bcma.
GDP & Electricity Consumption in OECD Europe
$24,000
GDP per capita
(in $ year 2000, ppp)
2000
2005
$20,000
Azerbaijan projected here in 2025
2
1990
R = 0.9918
1980
$16,000
Over 1980-05 in OECD Europe:
- GDP per capita up 1.7% pa
- Electricity dem and per cap up 1.65%
$12,000
Azerbaijan here in 2008
$8,000
2000
3000
4000
5000
6000
7000
Electricty dem and per capita kw h
The chart above shows the excellent relationship between electricity demand and GDP in the OECD
Europe region between 1980-2005. The question this provokes is whether this relationship is
applicable to this region. The answer, at least on current evidence, is no, as electricity demand is
falling. However, once efficiencies have been removed, a growth pattern should reassert itself as the
country becomes wealthier. Azerbaijan today is an $8000 per capita economy and continued
economic growth averaging around 5% per annum would take it to around $18,000 and per capita
electricity consumption of around 4000 kwh by 2025.
Translating this into gas consumption is not a mechanical exercise. The main unit in the country, the
2400 MW Mingechevir, is dual fuelled, and retaining this capability is part of the energy security
policy of the country. In the event of a gas supply outage, the plant can switch to heavy fuel oil
produced in the 2 domestic refineries. Retaining this plant, despite its relative inefficiency compared
with a CCGT unit, and then building 2-3 more CCGTs, gas consumption would be in the order of 8.5
bcma by 2025.
These are the main consuming sectors. In addition, there is a small and growing commercial sector,
agriculture and gas required for running pipeline compressors. Aggregating these, then a 2025
consumption of around 17 bcma is plausible. A volume significantly higher than that would entail more
rapid electricity demand growth and substantial investment in export-oriented industry. In other words,
Azerbaijan can return to a gas consumption level seen at its 1990 peak, although the structure of
consumption will be very different and more efficient.
5. Moving the Azeri experience to other gas markets
The big gas consumers in the former USSR are Russia, Ukraine and Uzbekistan. In 2008 their
consumption was 470 Bcm, 65 Bcm and 54 Bcm respectively. In the European context the first two
are the main markets to understand.
The mainstream view on Russia until the recession started biting late in 2008 was that of a long-term
and structurally tight gas balance. Gazprom had a wonderful inheritance in 3 Soviet-era supergiant
fields and these had, almost literally, kept the lights on in Moscow in the 1990s and supported a major
revenue stream from exports to Europe. Three quarters of Gazprom’s production went into the
domestic market, which provide just one quarter of its revenues. Exports to Europe kept the ship
afloat; basically they subsidised cheap gas for the Russian consumer and cheap gas exports to the
CIS, in particular Ukraine and Belarus. Russian policymakers were acutely aware of this subsidy, but
were handicapped by domestic macro economic considerations (with gas supplying 55% of Russian
domestic energy, raising prices would have immediate and profound macro economic consequences)
and, externally, the need to ensure transit across Ukraine (70-80% of Russia’s exports to Europe
transit Ukraine).
Russia was increasingly anxious about Ukraine transit reliability and therefore earmarked investment
relatively into new pipeline routings, (particularly the Nord Stream pipeline project through the Baltic,
providing a direct connection to Germany and due to commission in 2011) rather than upstream
renewal of the West Siberian production inheritance. The supergiant Urengoi was coming off plateau
fast, output declining 6% pa. Meanwhile, exports to Europe were growing and domestic demand was
believed to be on a moderate upward trajectory of between 1% - 2% pa, at least through the mediumterm as the economy grew. Longer term demand would still grow, but at slower rates. Russia was gas
short, therefore, and required imports from Central Asia (mainly Turkmenistan, but also Kazakhstan
and Uzbekistan) to achieve supply/demand balance. There was little question about the size of the
Russian resource base; the issue was the investment required and the timing for bringing on new
resources in Yamal and this looked like being slow; hence the call on Central Asia.
One challenge to this view, which did not get much traction, was around domestic gas demand and
the assumption that Russian demand would continue to grow. Analysts supporting this view pointed
to recent history. Demand had fallen in the 1990s but the economy had recovered strongly since 2000
and GDP growth averaged 7% pa underpinned by growing oil and gas revenues. Russian domestic
gas demand increased 2.1% pa over 2000-2008 from 403 to 475 bcm. With gas being the dominant
fuel in the economy, accounting for around 55% of the domestic energy mix, continued economic
growth would continue to require more gas.
Or so the argument went. There was a suspicion, however, that this part of the mainstream view
lacked a sufficiently detailed regional and sectoral disaggregation of Russia’s vast gas demand and
identification of its principal drivers. For instance, the power sector, which alone accounts for about
one-third of Russia’s demand, was basically comprised of Soviet-era open cycle technology and most
capacity was reaching the end of its service life. Replacement with CCGTs would result in an instant
30% plus energy saving or 50 bcma if this could be done overnight (not possible, but that is an
indication of the size of the potential prize).
Russian policymakers had recognised Russian energy consumption inefficiency for decades. Main
policy thrust, however, had been to try to achieve efficiency through technology improvements and
modernisation of the capital stock rather than pulling the classical lever of price. Russia’s gas prices
are set by the State Federal Tariff Service (FTS). Overall goal has been to mandate annual increases
to prices and to achieve ‘European netback parity’ with a target timing of 2011-2.
This goal looks to be slipping. Current FTS prices for 1Q 2009 are $54 mcm in the Moscow area
(1880 roubles, industrial price delivered). The FTS also calculates what prices would look like at
netback parity today and estimates that this corresponding price would be over 3 times higher at 5940
4
roubles mcm ($170 mcm).
The chart below is an attempt to measure the size of the potential prize from tackling energy
inefficiency. It shows the amount of energy required to produce $1000 GDP. OECD Europe on
average in 2006 required 0.15 tonnes of oil equivalent to produce $1000 of GDP, and the amount of
energy required has been steadily falling – by 1.3% pa over 1990-2006 in OECDE. Compared with
this region, Russia and Ukraine are profligate consumers, both requiring 0.45 tonnes.
OECD Europe may not be a fair comparison and Canada might be a more appropriate benchmark
because of its climate, expansive geography and high share of extractive industries in its economy.
But even using Canada would still place Russia and Ukraine at a two-fold disadvantage. If both
Russia and Ukraine moved to Canadian levels of consumption, then the energy saving would be of the
order of 280 and 56 mtoe respectively, or 40% of their current total energy demand. Assuming a
current fuel mix split, this would translate into a total of approximately 200 bcma of gas.
4
See FTS website, http://www.fstrf.ru/dep/gas/doc/249/Optovye_tceny.xls
Russia & Ukraine energy efficiency
0.80
tonnes energy consumed per $1000 GDP (ppp basis)
tonnes oil equiv
0.70
0.60
Russia
0.50
Ukraine
Canada
0.40
OECD Europe
0.30
Russia & Ukraine gap with Canada
worth 280 & 56 million tonnes oil
equiv respectively, or approx
40% of current demand in each case
{
0.20
0.10
1990
1995
2000
2004
2005
2006
source; IEA, Energy Balances of OECD Countries & non-OECD Countries, 2008 editions
Current gas demand in both countries is now falling sharply, but not because of an efficiency drive.
Ukraine gas demand was down an extraordinary 30% in the first six months of 2009 as the economy
was hurt by the global contraction and a rise in gas import prices from Russia, both of which have
squeezed its industrial output and competitiveness. Russian gas demand is also down, by 7% over
the first 4 months. The global downturn might accelerate capturing efficiency potential by forcing
industrial restructuring but it alone will not capture the full prize available.
6. Conclusions
Azerbaijan is a gas market in recovery. It has a long heritage as a gas-based economy and most
electricity is produced in gas-fired plant. Recent history shows that despite very strong economic
growth, electricity consumption has fallen in the last two years. This indicates that prices rises and
extensive metering can have a rapid effect. Prices for gas and electricity were unchanged since
January 2007, but in July 2009 the residential gas price was doubled to the same level as the
industrial price – 100 Azeri manats per mcm or $125 mcm, roughly double the current Russian
domestic industrial price. Azeri authorities appear to be willing to take bold pricing decisions. This
economy will continue to be gas-based, and with continued sustained economic growth and energy
inefficiency already being addressed, there will be gas demand growth. Sectoral analysis suggests a
level of 17 bcma by 2025 is a reasonable base case assumption which will need to be taken into
account by future gas export schemes.
One question now is whether the Azeri experience can offer any guidance to energy and gas
consumption patterns in much larger gas consumers such as Ukraine and Russia. The answer
appears to be that if the policy intent is there, then change can be very quick and very material.