London — War between Azerbaijan and Armenia threatens to spill over and impact regional oil and gas export infrastructure.
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The conflict centers on Nagorno-Karabakh, an Armenian-controlled territory inside Azerbaijan, and has involved some of the fiercest fighting since the early 1990s. The conflict zone lies just 30-40km from the Baku-Tbilisi-Ceyhan (BTC) crude pipeline, Azerbaijan's main oil artery to world markets, and the South Caucasus gas pipeline (SCP), linked to Turkey and Europe.
On the latter route, S&P Global Platts Analytics said: "While our base case remains for normal flows, a sustained conflict would increase the risk that the pipeline is damaged or shut down."
Azeri Light prices were well-supported until this year's COVID-19 price crash, which has left demand for distillate-rich crude particularly weak in Europe, intensifying competition from elsewhere. Azerbaijan is a party to OPEC+ production cuts led by Russia and Saudi Arabia since 2016 with the goal of managing the oil market and supporting prices.
**Platts assessed Azeri Light as trading at a discount to Dated Brent of 17.5 cents/b on Sept. 29, a low not seen in more than a decade outside the period around April 2020, with no arbitrage to Asia available.
**Turkey has two contracts for 12.6 Bcm/year of Azeri gas, the older of which, amounting to 6.6 Bcm/year, expires in April 2021, while the remaining 6 Bcm/year is for volumes through Turkey's section of the Southern Gas Corridor, known as TANAP, which reached full capacity in June 2020.
**The SCP is expected to supply 36 million cu m/d to Turkey this coming winter and 11 million cu m/d to Italy from November onward, according to S&P Global Platts Analytics.
Azerbaijan relies on a network of pipelines via Georgia, Russia and Turkey that help it supply world markets and particularly Europe, in turn under-pinning Turkey's status as an energy hub.
**Key to these are BTC, operated by BP, and SCP, operated by state-owned Socar. BTC carries around 600,000 b/d of oil, and with ample spare capacity accommodates modest volumes from other Caspian producers such as Kazakhstan. SCP forms the eastern section of the Southern Gas Corridor, extending across Turkey to Italy, with up to 25 Bcm/year of capacity.
**Both pipelines skirt around sensitive break-away regions of Georgia and Azerbaijan, with the BTC link buried for its entire length. The $40 billion Southern Gas Corridor project is backed by the EU and US as a way to diversify European supplies away from Russia.
**BTC is jointly owned by BP (30.1%), Azerbaijan's AzBTC (25%), Hungary's Mol (8.9%), Norway's Equinor (8.71%), Turkey's TPAO (6.53%), Total (5%), Italy's Eni (5%), Japan's Itochu (3.4%) and Inpex (2.5%), ExxonMobil (2.5%) and India's ONGC (2.36%).
**SCP is jointly owned by BP (28.8%), TPAO (19%), Azerbaijan's Socar (10%) and SGC Midstream (6.7%), Malaysia's Petronas (15.5%), Russia's Lukoil (10%) and Iran's NICO (10%).
**Total Azeri oil production amounted to 780,000 b/d last year, according to the BP Statistical Review, 80% of this being from the BP-operated Azeri-Chirag-Deepwater Gunashli (ACG) complex.
**Azeri Light crude is a distillate-rich grade particularly sought-after in winter as European gasoil demand for heating increases, although demand for such crudes has weakened significantly in recent weeks.
**ACG production has declined in the last decade, but Azeri Light is being replenished, and there are hopes of a boost from the 400 million barrel-Karabagh field, tentatively planned to come on stream in the next few years.
**Azerbaijan's gas production amounted to 24.3 Bcm last year.
**The SCP gas link has been expanded to underpin supplies to Europe, with first deliveries to Italy expected later this year through the TAP pipeline from the Turkish border with Greece, via Albania. During 2019, average throughput was 29 million cu m/d -- some 10.6 Bcm on an annualized basis.
**The expansion is made possible by BP's 2018 startup of phase 2 of the Shah Deniz gas field, which will allow an additional 16 Bcm/year of shipments, expected to comprise 6 Bcm/year to Turkey, 8 Bcm/year to Italy and 1 Bcm/year each to Greece and Bulgaria.
BP's construction of the BTC route, which came on line in 2006, opened up access to world markets for Azerbaijan, and until recently prices for Azeri Light were supported by shipments to Asia.
**Azeri Light has struggled with the collapse in European demand, and faces likely competition from Libya as that country's troubled industry tries to revive exports.
**On the gas front, the country is building up its export capacity to Europe at a time of growing supply options for the continent, particularly from LNG, as well as demand weakness.