AZERBAIJAN - The Gas Market.

The local market needs more than 15 BCM/year of natural gas. The Baku government has prepared a long-term plan for gas production and domestic use and for the modernisation of the existing gas distribution system. A part of the plan's cost has been covered by a grant of $425,000 received in the autumn of 1999 from the US Trade and Development Agency. This has also covered a study on the construction of new gas processing facilities in the country and on exporting gas by pipeline to Turkey and European markets.

Statoil of Norway, a partner in major E&P ventures in Azerbaijan, is operating Azerbaijan Gas Supply Co. (AGSC). Formed in early 2003, AGSC manages gas sales, contract administration and business development matters. In addition, Statoil will be the commercial operator for business development and administration of the South Caucasus Pipeline Co. (SCPC), which will be operated by BP. BP leads the Shah Deniz consortium and operates development of the offshore Shah Deniz gas/condensate field, the first phase of which will be on stream in the first quarter of 2006.

SCPC will be supplying 1.5 BCF/day of Shah Deniz gas to the domestic market, Georgia and Turkey. The pipeline will be expanded to 3 BCF/day in 2007 (see Gas Market Trends).

Azerbaijan's marketed production of natural gas used to average 14 BCM per annum during the Soviet era. Of this, the country used to consume 11 BCM/year and 3 BCM/year used to be supplied to Armenia. The current development of the Shah Deniz field, together with other gas fields to be developed, would raise the country's marketed production of natural gas to more than 30 BCM/year by 2010/15, with 50-60% of this to be exported to Turkey and other markets.

Only Baku, Sumgait and some other parts of Azerbaijan are consuming gas at present. These areas have often encountered shortages, due to local supply disruptions since the early 1990s. Among new projects to import natural gas for the local market is a relatively short pipeline to be built for Itera from Turkmenistan to the Azeri border which is proposed to pass via Iran.

Before the Khomeini revolution of late 1978/early 1979, Iran used to export natural gas to Azerbaijan through the IGAT-1 pipeline to Astara. Iranian supplies were resumed later and in 1990, but for very short periods. Now IGAT-1 is only being used to supply Iran's domestic market. Gas supplies by pipeline from Turkmenistan to Azerbaijan and Armenia during the Soviet era ended after the war over Nagorno-Karabakh erupted in the late 1980s between the Azeris and the Armenians. Azerbaijan stopped exporting its own gas to Armenia after the war was escalated and the Soviet Union collapsed in late 1991. Azerbaijan declared its independence in 1991. It joined the Russian-led Commonwealth of Independent States (CIS) after President Aliyev assumed power in June 1993.

The existing Azeri gas network, built during the Soviet era, comprises about 4,500 km of high pressure transmission lines, seven compressor stations and more than 31,000 km of medium and low pressure distribution lines. This system is low-tech by Western standards and has been in poor condition, with many commercial and industrial consumers having no gas meters. Meters installed during the Soviet era were not accurate. Metering of household gas use has been non-existent.

To ease the problem of shortages, the state gas utility Azerigaz has been slowly implementing a "gas system rehabilitation project" financed 82% by the International Development Association of the World Bank under a $20.2m loan. The $24.6m project, approved in 1996, was also to improve delivery and boost user efficiency. Azerigaz has provided $4.4m of the funding.

The four components of the project are metering, cathodic protection (CP) system rehabilitation, analytical equipment, and corporatisation support. Restoration of CP systems has reduced the need for spending on pipeline replacement. The CP part of the project has concentrated on the Absheron peninsula, where most of the gas is transported and used. About 2,700 km of pipelines serve the area, which has the highest population density in the country.

The Power Sector: Azerbaijan's total installed capacity for power generation is about 5 gigawatts (GW), consisting of eight thermal plants which supply about 85% of the electricity, and five hydro-electric stations. The thermal plants are based mostly on heavy fuel oil, and natural gas is only used as a secondary source for some plants. But the actual generating capacity now is less than 4.5 GW, because of obsolete facilities and lack of proper maintenance, and more than 30% of the power produced is lost due to a bad transmission system and some theft. If the maintenance system is not improved, the usable capacity would drop further, while domestic demand for power has been rising rapidly since 1996.

There is an exchange of power supplies between Azerbaijan and each of Russia, Georgia, Iran and Turkey. Since 1994, imports from these countries have overtaken exports by far. Azerbaijan still depends heavily on the import of power plant equipment and spare parts from Russia and Ukraine, as a result of full integration with them during the Soviet era.

The efficiency and profitability of the state's power utility, AzerEnerji, have to be improved. The utility is to be partly privatised along with Azerigaz. This is under a plan adopted in 2000, after a series of major power cuts, which called for three basic changes: (1) new incentives and a campaign to attract foreign investment into this sector, (2) creation of an independent power regulator, and (3) privatising the regional power networks.

The power sector has received priority in the country's development plan. Among projects now being implemented in the sector is a gas-based Combined Cycle Power Plant-II being built at Severnaya on the outskirts of Baku. With a capacity of 400 MW, this is the country's first gas-fired CC plant. It will replace Severnaya's 150 MW oil-fired station and is aimed to ensure stable power supply in the metropolitan area, cut air pollution and curb emission of toxic gases. The project has been financed partly by a loan of Y18,332m ($172m) from Japan Bank for International Cooperation  (JBIC), granted at the "most concessionary" interest rate of 0.75% for a 40-year repayment period including a 10-year grace period. The oil-fired plant has been upgraded and mostly rebuilt by Mitsui and Mitsubishi Heavy Industries (MHI) under a contract with AzerEnerji.

The Baku Thermal Power Plant has been revamped and expanded by ABB and Alstom under turnkey contracts signed in early 1999 and late 2000, respectively. This now has two new gas turbine cogeneration units with a combined capacity of 110 MW and 400 tons per hour of steam. Completed in 2001, it supplies heat and power to the Baku refineries, other industrial customers and households in the capital.

Hydro-power generating capacity available in Azerbaijan now is limited to about 500,000 tons/year of oil equivalent, compared to 400,000 t/yoe in 1991-95.

AzerEnerji has received two sovereign loans from the European Bank for Reconstruction and Development (EBRD) worth $60m for two projects: (1) to help complete the Yenikend hydro-power plant on the Kura River, which will enable Baku to raise fuel oil exports and reduce the amount of gas needed for this sector; and (2) to develop the legal and regulatory frameworks for the sector, raise hydro-power generating capacity and improve Azerenerji's management and monitoring systems.

The EBRD loans and aid from other multilateral agencies, including the Islamic Development Bank, were to help Azerenerji acquire computers, modern communications equipment, electric metres and spare parts. They were also to help replace three generators at the Mingechaur hydro-power plant on the Kura River to reduce pollution in that area. Sumitomo Corp. is installing a wind-power plant for Azerenergy on the Absheron Peninsula where supply of wind is abundant.

In addition, EBRD is helping in a programme to privatise Bages, the major power distributor, and the distribution network of the Baku Power Co.

However, both Azerigas and AzerEnergi are heavily indebted to their fuel suppliers including Socar. The two companies are also owed considerable amounts by domestic and industrial customers.

Coal consumption in Azerbaijan between 1987 and 1991 amounted to about 100,000 t/yoe. But coal consumption was stopped completely after the collapse of the Soviet Union at the end of 1991. Unlike several other former Soviet states, including Armenia, Azerbaijan has no nuclear power generating capacity.