On 19 October, SOCAR and Romanian gas producer Romgaz signed an MoU to jointly develop LNG projects in the Black Sea. Unlike their previous LNG agreements, SOCAR’s current partnership with Romgaz appears serious and holds important implications for the industry. Underscoring the magnitude of the deal, Energy Minister Pyarviz Shkhbazov and SOCAR Supervisory Board Chairman Mikayil Jabbarov attended the MoU signing ceremony in Bucharest.
The two sides agreed to conduct a feasibility study before breaking ground on two major facilities located on opposite sides of the Black Sea: a liquefaction plant and an LNG regasification plant. The JV also contemplates the construction of additional infrastructure to process and transport gas from the Caspian region to Romania and regional markets, eyeing distribution across central and southeastern Europe. The study will identify these routes’ technical, financial, and commercial feasibility as well as potential markets.
Notably, the two companies had previously collaborated on the AGRI (Azerbaijan-Georgia-Romania-Hungary Gas Interconnector) LNG project, along with partners from Georgia and Hungary. However, that project did not proceed beyond the feasibility study. After signing an MoU in 2010, UK consultant Penspen was hired to conduct the feasibility research between 2012 and 2014. Over €1mn was spent on the study, which concluded that the required LNG infrastructure would cost between €1.2bn and €4.5bn, depending on the scale of LNG trade (estimated in the range of 2-8 bcma). The construction of such infrastructure could have taken up to nine years to complete. Subsequently, in 2019, AGRI’s Georgian participant suggested the project be postponed until after 2025. In 2021, Shakhbazov announced an immediate and indefinite freezing of the project.
The SOCAR-Romgaz project has a comparatively better outlook and shorter timeline. First, Russia’s partial ally Hungary has been excluded from the JV. Second, elements of AGRI’s feasibility findings will likely be applied to the new study, speeding up the planning process. Third, and most importantly, Russia’s invasion of Ukraine and the subsequent gas crunch in Europe – especially in Moldova, Romania’s key ally – has galvanized unity among Romania, the EU and across the Black Sea region in the rush to ditch dependence on Russian gas. Finally, prospects for LNG trade have significantly increased throughout Europe due to higher prices and the development of expanded LNG capacity by Bulgaria and Greece.
Romania had achieved near self-sufficiency in gas production, but the gas crunch has changed the country’s calculations. Besides feeling the pressure itself, Bucharest wants to help its gas-deprived ally, Moldova, through expanded LNG production that would displace Russian gas. It is critical to recall that over the past decade, Russia and LUKoil have wielded their considerable influence to slow the development of the Romanian Black Sea offshore zone to a crawl. For example, LUKoil has two gas-rich concessions in Romania’s section of the Black Sea but has dragged its feet in developing them, and Russian naval activity near other offshore fields further out in Romania’s Exclusive Economic Zone has long deterred investors. In 2020, LUKoil announced its intention to sell its majority stake in the Trident Block in Romania’s Black Sea but evidently has not done so as of yet.
Over the last two years, though, Bucharest has actively worked to reduce Russia and LUKoil’s pernicious influence, including through easing regulations and attracting new international investors. As a result, Bucharest has invited Western companies, such as Black Sea Oil & Gas – controlled by private equity firm Carlyle Group – to initiate E&P activities. Additionally, in August, Romgaz bought out ExxonMobil’s stake in the offshore Neptun Deep project. These moves, along with the SOCAR-Romgaz JV, promise to elevate Romania’s gas output and exports. Bucharest seeks to expedite cooperation with SOCAR and is keen to become a significant regional gas player.
The stakes for SOCAR are also high. The company has gained considerable LNG trading experience over the last five years but does not operate an LNG facility. It has successfully expanded its gas production, exports and pipeline capacity and hopes to drive further growth. SOCAR’s ambitions also include a plan to develop an LNG base in Georgia and export to Romania, as well as potentially to Bulgaria. The company does plan to export to Bulgaria and central and eastern Europe through the Trans-Anatolian Pipeline (TANAP), whose capacity will be expanded to 20 bcma, but boosting LNG output simultaneously will allow SOCAR to mitigate the risks of its reliance on Turkey as a transit country.
In our view, SOCAR’s efforts to develop LNG production capacity and its collaboration with Romgaz run against Gazprom’s interests, countering Moscow’s economic and political influence in the region. Moreover, SOCAR’s piped gas capacity and promising LNG initiative could provide Romania with the capabilities to assist Moldova and its pro-European government (which the Kremlin despises). It is no surprise that Chisinau officials have met with their counterparts in Baku over the last month, confirming their country’s interest in securing larger gas supplies. Meanwhile, the EU and regional powers, including Bulgaria, Romania, Hungary and Slovakia, have publicly proposed expanding shipments of Azerbaijani gas to further reduce dependence on Russia.
personality of the week
Ambassador to Russia. Born in 1945 in Baku, Bulbuloglu is a Soviet-era Azerbaijani singer, actor, politician and diplomat. In 1976, he managed the stage ensemble of the Azerbaijan Soviet Socialist Republic (SSR) and Azerbaijan National Philharmonic Orchestras. In 1988, he changed course, leaving his artistic work for politics, becoming Azerbaijan SSR’s culture minister.
In 1995, he joined the National Assembly of Azerbaijan. In 2006, Bulbuloglu left his ministerial position and moved to Moscow as Baku’s ambassador. In 2017, he campaigned to head UNESCO but dropped out of the race due to a lack of support.
On 24 October, Bulbuloglu communicated the administration’s dismay to the Russian Foreign Affairs Ministry, protesting a prominent Russian television program’s questioning of Azerbaijani sovereignty over areas of the Karabakh region. He also objected to the Russian program’s suggestion that Moscow should play a more significant role in brokering the terms of a peace agreement between Azerbaijan and Armenia. After enjoying many years of predictable bilateral relations as ambassador, Bulbuloglu’s job has become increasingly tense.