Azerbaijan: EU must reassess its approach to fossil fuels if it wants to continue importing gas

Europe still faces the question of how to ensure reliable natural gas supplies in the medium term. A number of gas suppliers to Europe are pushing for long-term contracts, which they need to ensure returns on their extraction and infrastructure projects. Europe, by contrast, is targeting a gradual decarbonisation that is not entirely compatible with long-term commitments to buy fossil fuels. Azerbaijan is now also increasing pressure on Europe, warning that otherwise it could start looking for alternative buyers for its gas.

The European Union and its member states continue to face pressure from gas suppliers, who are entirely justified in seeking guarantees in the form of long-term contracts. Otherwise, there is a risk that their investments in new gas fields, pipelines or liquefied natural gas export terminals could become loss-making in the worst case. The EU’s decarbonisation plans create considerable uncertainty for them, as they entail a decline in the use of fossil fuels, including natural gas.

This week, Azerbaijani President Ilham Aliyev said that the EU must reassess its position on fossil fuels. According to Reuters, he referred to the bloc’s approach to financing projects, including the European Investment Bank’s ban on financing fossil fuel projects, and to long-term contracts. Otherwise, the country could start looking at other markets for its exports.

"The EU market is premium in terms of legislation, rules and prices, but we should not look only to the west. We can also look east, and south. This is important for the future of Azerbaijan’s gas industry and for Europe’s energy security," said Aliyev at a political forum in Baku.

Gas supplies from Azerbaijan are key for Europe, particularly in the context of replacing the shortfall in Russian supplies. While around 8 billion cubic metres of gas flowed from the country to Europe in 2021, last year the figure was nearly 13 billion cubic metres. Exports are expected to rise to at least 16 billion cubic metres by 2027.

The Azerbaijani president’s latest statement nevertheless shows that achieving these plans is uncertain. To increase exports, the country would have to invest substantial sums in gas infrastructure, while financing and securing buyers remain uncertain.

"All our major energy projects—oil or gas—have been financed using a model of 70% loans and 30% corporate financing. European institutions must now return to this approach," said Aliyev.