Solidarity Ring: a step towards increasing Azerbaijani gas supplies to Central Europe

On 25 April, the Azerbaijani oil and gas company SOCAR and operators of gas transmission networks from Bulgaria, Romania, Hungary and Slovakia signed a memorandum of understanding in Sofia concerning the implementation of the Solidarity Ring (STRING) gas corridor project. It envisages the upgrade and development of cross-border transmission infrastructure in order to increase gas supplies from Azerbaijan to the EU. The intention is to expand the capacity of the route running from Bulgaria through Romania (the Negru Vodă 1 and 2 – Kardam and Ruse-Giurgiu border points) to Hungary (Csanádpalota point) and Slovakia (Balasagyarmat-Veľké Zlievce point) to 5–9.5 bcm annually. It is estimated that the investment will cost €730 million and will be completed by the end of 2026. As emphasised in the announcements of the transmission network operators, the project is supported by the European Commission and is an effect of work carried out in recent months by the CESEC (Central and South Eastern Europe energy connectivity) regional cooperation platform. The operators will first conduct a non-binding market survey right after the annual EU capacity auction in July this year. They will then start work on an alternative mechanism for allocating additional capacity, which must be approved by the regulatory authorities. Existing capacities will be offered according to the general rules.

The meeting in Sofia was attended by the ministers of energy or foreign affairs of the countries concerned and the CEOs of the transmission network operators: Azerbaijan’s SOCAR, Bulgaria’s Bulgartransgaz, Romania’s Transgaz, Hungary’s FGSZ and Slovakia’s Eustream, as well as representatives of the European Commission. President Rumen Radev of Bulgaria and President Ilham Aliyev of Azerbaijan were present during the signing of the memorandum. They also participated in the opening of the SOCAR office in Sofia.

Commentary

• Azerbaijan has gained importance as an alternative source of gas for EU countries as a consequence of the Russian aggression against Ukraine and the EU’s policy of phasing out its dependency on Russian gas. In 2022, Azerbaijan increased gas production by almost 44% y-o-y, to around 46.7 bcm, and its exports to 22.3 bcm, half of which (11.4 bcm) was sent to EU countries. In 2023, Baku plans to further increase gas exports by 2.2 bcm, but of that only 0.6 bcm more will be sent to the EU. Azerbaijan has declared it is prepared to increase gas exports to the EU by another 8 bcm, to reach the level of 20 bcm annually, over the next five years.
• Given the current volume of Azerbaijani gas exports, and its possible increase, supplies from this country will not play a major role in the EU as a whole. However, they may be a game changer for those Balkan and Central European markets where gas consumption is relatively low. This is particularly important because some countries in the region still rely substantially on imports of oil and gas from Russia and have no access to sufficient alternative infrastructure. Azerbaijan has been exporting gas to the Balkan countries (Bulgaria and Romania) for some time now and is set to make the first small supplies to Hungary and Slovakia by the end of this year. The planned development of Azerbaijan’s export capacity in the coming years could therefore enable a further diversification of supply sources and increase energy security in the region. If the Solidarity Ring project is successful and exports from Azerbaijan grow, Moldova and Ukraine could also benefit from Azerbaijani gas supplies. However, it is of key importance for all countries in the region to secure supplies for the next two winter seasons. Meanwhile, the prospects for an increase in exports from Azerbaijan within this time frame are very limited, and a clear increase can only be expected in a few years. In addition, Azerbaijan’s resumption of gas imports from Russia in 2022 has raised concerns. Although the Azerbaijani-Russian agreement is temporary and concerns limited volumes to satisfy domestic consumption, there are questions as to whether Baku will not want to re-export Russian gas in the future.
• Solidarity Ring is stems from the previous infrastructure projects in the region, including Nabucco, Eastring and BRUA, but its ambitions are definitely more modest. It is planned that the existing infrastructure will be used (both historical, such as sections of the Trans-Balkan gas pipeline in Bulgaria, and new interconnectors), and only relatively small investments to increase the capacity and patency of individual elements are envisaged. It seems that Hungary will need the largest investments and expansion of the country’s infrastructure along the North-South axis. In addition, in order to launch this route, apart from ensuring supplies from Azerbaijan, cooperation with Turkey and the Turkish operator will be necessary, including the signing of an interconnection agreement between Bulgargaz and BOTAŞ at the Strandzha-Malkoclar border point. The cooperation of operators and companies from all countries involved will be decisive when it comes to Solidarity Ring’s success, as will be a sufficiently high market demand for new capacities and supplies.
• It seems necessary to ensure that the new route will be used for supplies – primarily or even exclusively – of non-Russian gas, at least in the first few years of its operation. That would be in line with the EU’s strategy of decoupling from Russian energy resources, and with the ultimate purpose of support for the project from the European Commission, and the project would also fit in the broader framework of the EU-Azerbaijan strategic energy cooperation. If the project is successful, it might trigger further development of regional infrastructure and cooperation and thus become a driving force for other regional projects. In consequence, by ensuring the existence of operating infrastructure, inter-operator agreements and by lowering transmission costs it could facilitate, for example, exports of Romanian gas from the Black Sea shelf within the next few years.
• Bulgaria and Romania see Solidarity Ring as an opportunity to increase their transit role and strengthen their position on the regional gas market. The project is important for Bulgaria primarily because by making use of the already existing transmission infrastructure it may increase its transit revenues. Sofia is one of the main supporters of the initiative, whose framework was presented last October. It has been promoted especially eagerly by President Radev, Rosen Hristov (who has served as the Minister of Energy in the successive interim governments) and Vladimir Malinov (the CEO of Bulgartransgaz). These politicians had earlier advocated for the construction of the TurkStream gas pipeline, which was to make Bulgaria an important transit country for Russian gas. However, given the new circumstances, they also support the supply of Caspian gas through its territory. Solidarity Ring would also trigger closer energy cooperation with Azerbaijan and Turkey. Bulgaria is already bound by a 25-year contract with Azerbaijan for the supply of 1 bcm of gas annually, which started to be implemented in 2021. Additional volumes of Azerbaijani gas would also increase transmission via Turkey and the use of Turkish infrastructure. Earlier this year Bulgaria signed an agreement enabling the import of LNG through Turkish terminals (see ‘Bulgaria steps up its gas cooperation with Turkey’). As part of the Solidarity Ring project, Bulgaria plans to use the Strandzha-Malkoclar border point, which has been inactive for several years (after Russia stopped using the Trans-Balkan gas pipeline), where test flows of over 55 mcm of gas from the LNG infrastructure of Turkey’s BOTAŞ began in April this year. Bulgaria argues that the Solidarity Ring initiative along with increased imports of Azerbaijani gas to Central European countries will reduce transmission costs, and thus gas prices across the region. Consequently, the price of gas sold from its facility in Chiren may also fall.
• Romania, which is able to satisfy around 70–80% of its gas demand on its own, sees the Solidarity Ring project, similarly to Bulgaria, primarily as an opportunity to gain the status of a regional gas hub and an important exporter. In 2022, the country began exploring the Black Sea deposits under its control. Currently, the annual output is about 1 bcm, but in 2026–7 this is expected to rise to 10–11 bcm. Implementation of Solidarity Ring in Romania could make use primarily of the existing transmission infrastructure. Furthermore, it could become a trigger and a source of financing for the construction of new infrastructure projects. Gas would be transported from Bulgaria to Hungary via the BRUA gas pipeline, stage one of which was completed in 2020. However, its annual capacity of only 1.75 bcm is low. Originally, there were plans to increase its to 4.4 bcm as part of the second and third stages of the BRUA gas pipeline, but the project was eventually suspended. Romania also wants to become an important source of gas for Moldova, which is under the threat of Russian blackmail, and Ukraine.
• The memorandum signed in Sofia is another recent demonstration of Bucharest stepping up its energy cooperation with other countries of the region and with Azerbaijan. Earlier, in October 2022, the Romanian state-owned gas producer Romgaz signed a memorandum of understanding with the Azerbaijani state-owned company SOCAR to explore the possibility of implementing a joint LNG project in the Black Sea. On 16 December 2022, Romgaz announced the conclusion of the first individual short-term contract with SOCAR for the import of gas from Azerbaijan (according to media reports, it envisaged sending up to 300 mcm of gas to Romania between 1 January and 1 April 2023). Finally, the president of Azerbaijan, as well as the prime ministers of Georgia, Hungary and Romania signed a strategic partnership agreement on 17 December in Bucharest. It provides for construction of a 1 GW offshore power line connecting the South Caucasus with Europe via the Black Sea.
• Hungary and Slovakia pin special hopes on the project as a way to diversify the sources of gas supplies. Hungary is making some effort to diversify its gas sources and seems to be focusing primarily on gas from Azerbaijan, which could cover around 20% of annual domestic consumption (2 bcm). The memorandum signed at the end of April in Sofia is in line with Hungarian Minister of Foreign Affairs Péter Szijjártó’s declarations; he announced a plan to explore the technical possibilities of receiving natural gas from Azerbaijan during the Budapest LNG Summit in April. On this occasion, he also announced that 100 mcm of Caspian gas would be supplied to Hungary later this year. Although the supplies of Azerbaijani gas are planned via the existing Southern European transmission infrastructure, the statements made by Hungarian politicians make the entire initiative dependent on the EU partners expanding the interconnectors, as well as the European Commission financing it (primarily the interconnector with Romania). However, despite its interest in obtaining access to alternative sources of gas, Hungary does not intend to cancel its 15-year contract with Gazprom signed in 2021 under which it receives 4.5 bcm of gas annually. No contract for the supply of Azerbaijani gas to Hungary has been signed to date.
• Slovakia sees the creation of a new corridor as an element of its supply diversification strategy, but also as an opportunity to strengthen its weakened transit position. Bratislava managed to reduce its dependence on gas imports from Russia from 85% in 2021 to around 65% last year. The government, together with the state-owned gas company SPP, has already concluded contracts that may cover 70% of supplies by 2024 from non-Russian sources (contracts with BP, ExxonMobil, Shell, RWE and Eni; talks are underway on access to LNG terminals in Germany, Italy, Poland and possibly Lithuania). However, ensuring a more permanent diversification of gas sources is still a challenge, and potential supplies from Azerbaijan could be of importance here. While diversification issues have been emphasised in the communiqué by the Ministry of the Economy (which is in charge of energy issues), the transmission network operator Eustream (51% state-controlled, with a 49% stake and management control belonging to the Czech Republic’s EPH) emphasises the potential to strengthen the transmission position. According to Rastislav Ňukovič, General Director of the company, the gas supplied from Azerbaijan to Slovakia could be transferred further “to any EU member state”, given the significant capacity of connections “with all neighbouring markets, including Ukraine”. This is all the more important for the company as its profits have plummeted due to a two-thirds decrease in gas transmission via Slovakia since March 2022 compared to the years before Russia’s invasion of Ukraine. Furthermore, it is a way of reviving the old Eastring project, which at that time, despite Slovakia’s efforts, was not whole-heartedly supported by operators from countries which almost entirely overlap with those that are signatories of the Solidarity Ring memorandum. Possible EU funds for this project could be used to modernise existing connections, although it is not clear which sections would be prioritised.
  
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