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Akbar Novruz

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The era of high oil price volatility linked to last year's global recession has ended. Since March 2024, there has been a clear shift towards increased demand for energy commodities. Spot prices and exchange quotations for futures are on the rise due to escalating tensions in the Middle East, the ongoing Russian-Ukrainian conflict, which has resulted in reduced production in Russia, a decline in oil and fuel reserves in the US, and the policy of OPEC+ states aimed at refusing to increase production this year. Additionally, stock markets are witnessing an upsurge in the demand for commodities, including gold, base metals, and oil, resulting in a notable increase in prices. But how will Azerbaijan withstand these new trends?

Expanding the "Contract of the Century"

The ACG fields are a cornerstone of Azerbaijan’s energy industry, initially developed under the historic "Contract of the Century" signed in 1994. On September 20, Azerbaijan signed a new gas agreement, marking a pivotal moment in the nation's energy industry. This agreement is centered on the exploration of previously untapped natural gas reserves located beneath the Azeri, Chirag, and Guneshli (ACG) oil fields. While these fields have traditionally been associated with oil production, this new contract underscores Azerbaijan's strategic shift towards diversifying its energy exports and harnessing the full potential of its established energy infrastructure. The new gas contract builds on the 2017 extension of this original oil deal, introducing a new layer of energy potential by targeting the free gas reserves beneath the oil fields. The discovery of these reserves is significant because they were not included in the original agreement. The new contract, focusing on tapping the deep gas layers of these fields, aligns with increasing global energy demands, as forecasted by OPEC’s 2023 annual report. With energy consumption projected to rise by 24% by 2050, the importance of securing natural gas resources has become a geopolitical necessity. In particular according to the data, by 2050, OPEC expects a 29.7% increase in gas demand, placing Azerbaijan in a strong position to contribute to this surge. With the estimated 112 billion cubic meters of gas from the ACG fields, Azerbaijan can support its gas exports, which reached 26 billion cubic meters in 2023.

Strategic importance of existing infrastructure

Though this figure is modest compared to Azerbaijan’s major gas fields, the value of the reserves, estimated at around $46-47 billion, is substantial. The synergy between the ACG oil and gas operations ensures that Azerbaijan can optimize resource extraction while reducing overall operational costs. With energy prices fluctuating and Europe seeking to reduce its dependency on Russian gas, Azerbaijan’s position as a reliable energy supplier is further solidified. Current European gas prices of approximately $415 per thousand cubic meters enhance the profitability of this project. Taking into consideration that, with established platforms like the West Chirag already in place, the cost of extracting natural gas will be significantly lower compared to new projects. So overall, one of the key advantages of the new agreement is indeed the presence of ready-made infrastructure in the ACG fields.

Possible Risks of Oil Price Volatility

Though Azerbaijan is boosting its gas production, the country might face risks related to oil price volatility, which could significantly impact its fiscal policies. The decision to set the oil price at $70 per barrel in the 2025 budget introduces risk, especially in the face of potential geopolitical instability. But even though by leveraging its gas resources, Azerbaijan can create a buffer against oil price fluctuations, diversifying its energy portfolio while maintaining its role as a vital supplier to Europe.

Overall, Azerbaijan’s signing of this new contract for gas development within the ACG fields is a forward-looking strategy that aligns with the country’s broader geopolitical and economic goals. With global energy demand on the rise, this agreement strengthens Azerbaijan's role in the gas market while also offering economic benefits due to existing infrastructure. This new contract represents a calculated step into the future—one that balances immediate economic gains with long-term energy resilience.

This agreement solidifies Azerbaijan's position as a dependable energy provider and strengthens its geopolitical influence, particularly regarding Europe’s energy requirements.

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Akbar Novruz is AzerNews’ staff journalist, follow him on Twitter: @ykwiua

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