The EU and Azerbaijan as Energy Partners: Short-Term Benefits and Long-Term Risks

The EU and Azerbaijan as Energy Partners: Short-Term Benefits and Long-Term Risks

Azerbaijan has strengthened its energy ties with the European Union (EU) since 2022, ramping up natural gas deliveries and articulating ambitions to export renewable energy and green hydrogen to Europe in the future. However, the EU’s shrinking gas demand and Azerbaijan’s lack of a genuine decarbonization strategy cast uncertainty on the long-term prospects of this partnership – all the more so given the EU’s persistent criticism of political repression and human rights violations in the South Caucasus republic.

Energy Cooperation Dynamics

Strategic Importance of the EU-Azerbaijan Energy Relationship
Azerbaijan (population 10.3 million), which is the host of this year’s global climate summit COP29, is the epitome of a country experiencing carbon lock-in. Oil and gas production contributes roughly half of the South Caucasus republic’s GDP and half of all its national budget revenues, as well as more than 90 percent of its export earnings. The largest share of these exports goes to the European Union (EU) and is transported over pipelines running through Georgia and Turkey to Greece, Albania, and Italy. With an annual production total of 48.7 billion cubic meters (bcm) of natural gas and 30.2 million tons of crude oil (2023 figures), Azerbaijan may be a smaller-sized producer in global comparison, but its importance for the EU has been growing. It is now the fourth-largest supplier of piped gas to the EU with a share of 7 percent, behind Norway, Algeria, and Russia. Of the EU’s total gas imports, Azerbaijan’s share stands at 3 percent.

Diversification of Energy Supply Portfolios
The new geopolitical era ushered in by Russia’s full-scale invasion of Ukraine in 2022 has presented opportunities to Azerbaijan. As the EU scrambled to secure non-Russian gas supplies, Azerbaijan was quick to step in. In July 2022, European Commission President Ursula von der Leyen traveled to Baku to sign the EU-Azerbaijan Memorandum of Understanding on a Strategic Partnership in the Field of Energy. As part of the agreement, Azerbaijan pledged to more than double its gas supplies to Europe to 20 bcm annually by 2027. By the end of 2022, Azerbaijan was able to deliver 11.4 bcm to the EU (up from 8.1 bcm in 2021), followed by 11.8 bcm in 2023.

Mutual Economic Interests and Interdependence
Thanks to high gas prices, Azerbaijan’s export earnings from gas surged from USD 5.56 billion in 2021 to USD 14.99 billion in 2022 and USD 13.68 billion in 2023, surpassing revenues from oil exports for the first time in the country’s history. On the EU side, the bloc’s decision to upgrade energy ties with Azerbaijan has been controversial from the very beginning due to the country’s worrying track record of political repression and human rights violations. However, political expediency has so far trumped other concerns as the EU scrambles to secure non-Russian gas supplies.

Risks and Challenges

Geopolitical Tensions and Regional Instability
Delivering on the highly ambitious 20 bcm pledge to the EU will be very challenging for Azerbaijan. The country’s gas production has been growing, but more investment is needed, both in new gas production capacity and in expanding the Southern Gas Corridor. Doing so has become increasingly difficult, as European and international financial institutions are reluctant to finance fossil fuel infrastructure. Moreover, Azerbaijan’s strategic partnership agreement with the EU also includes language on clean energy cooperation, but the country has been a laggard when it comes to the energy transition.

Environmental Concerns and Sustainability
In the 2023 update of its Nationally Determined Contribution (NDC) under the Paris Agreement, Azerbaijan set the target of a mere 40 percent reduction in emissions by 2050, conditional on receiving international support. Far from planning a fossil fuel phaseout, Azerbaijan, if anything, is intent on monetizing its hydrocarbon resources, especially gas. By 2033, it is expected to increase its gas production by a third, reaching 49 bcm. This raises concerns about the long-term sustainability of the EU-Azerbaijan energy partnership, especially in light of the bloc’s stringent climate goals, including the 2050 net zero target and the currently discussed 90 percent greenhouse gas reduction target by 2040.

Governance and Transparency Issues
The EU’s persistent criticism of political repression and human rights violations in Azerbaijan also casts a shadow over the energy partnership. The European Parliament has passed a highly critical (although non-binding) resolution calling on the EU to end its reliance on gas exports from the country and suspend the 2022 Memorandum. Concerns over the rule of law and transparency in Azerbaijan’s energy sector further undermine the long-term viability of the partnership.

Long-Term Outlook

Transitioning towards Renewable Energy
Looking ahead, Azerbaijan is envisioning itself as a key node in the future green energy corridor(s) connecting the South Caucasus, Central Asia, and Europe. To this end, it has been stepping up engagement with its regional neighbors and interested EU member states. In December 2022, Azerbaijan, Georgia, Hungary, and Romania signed an agreement on constructing a high-voltage Black Sea submarine transmission cable to bring renewable electricity from Azerbaijan’s (yet to be built) Caspian wind farms to Romania and Hungary. Azerbaijan is also the only country in the region to actively consider offshore wind development, with plans to deploy up to 7.2 GW of offshore wind capacity by 2040.

Strengthening Institutional and Legal Frameworks
However, these renewable energy plans are not yet rooted in a comprehensive decarbonization policy, and there are no state support instruments to promote the energy transition in industry or in the transport and residential sectors. Addressing these institutional and legal gaps will be crucial for the long-term sustainability of the EU-Azerbaijan energy partnership.

Fostering Sustainable Development Initiatives
Beyond the energy sector, Azerbaijan has also been positioning itself as a potential hub for green hydrogen production for export to the EU. Tackling methane emissions along the gas value chain is another focus area explicitly mentioned in the 2022 EU-Azerbaijan Memorandum of Understanding. Aligning these initiatives with a broader strategy for sustainable development and just transition will be key to unlocking the long-term benefits of the partnership for both sides.

Bilateral Collaboration Opportunities

Infrastructure Investments and Modernization
The EU and Azerbaijan could explore opportunities to jointly invest in upgrading and expanding the region’s energy infrastructure, including gas pipelines, power transmission grids, and renewable energy plants. Such investments would not only enhance the security and reliability of energy supplies but also support the transition towards a more sustainable energy system.

Research and Innovation in Energy Technologies
Collaboration in research, development, and deployment of innovative energy technologies, such as carbon capture and storage, green hydrogen production, and advanced biofuels, could further strengthen the EU-Azerbaijan partnership and contribute to the global fight against climate change.

Capacity Building and Knowledge Exchange
The partners could also engage in capacity-building initiatives and knowledge exchange programs to support Azerbaijan’s efforts in areas like energy efficiency, renewable energy integration, and smart grid development. This would help the country build the necessary technical and institutional capacities to accelerate its energy transition.

In conclusion, the EU-Azerbaijan energy partnership has yielded short-term benefits for both sides, particularly in the context of the Ukraine crisis and the EU’s search for non-Russian gas supplies. However, the long-term prospects of this relationship remain uncertain due to a range of political, environmental, and governance-related challenges. By aligning their energy cooperation with the shared goal of sustainable development and a just energy transition, the EU and Azerbaijan could unlock the long-term potential of this partnership and contribute to a more secure and climate-resilient future for the region.

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