Energy security

Azerbaijan is rich in oil and natural gas resources. According to the June 2021 BP Statistical Review of World Energy, at the end of 2020 its oil reserves of 7 billion barrels (1 Mt) accounted for 0.4% of global reserves. Oil is produced both onshore and offshore in the Caspian Sea, with offshore production accounting for about one-quarter of the total.

The Azeri-Chirag-Deepwater Gunashli (ACG) field, located about 100 km east of Baku, is the largest oilfield in the Azerbaijan sector of the Caspian Basin. Discovered in the early 1970s when Azerbaijan was part of the Soviet Union, it comprises a series of individual reservoir horizons located 2 000 to 3 500 metres beneath the Caspian seabed. The Government of Azerbaijan and a consortium of 11 foreign oil companies signed a PSA in Baku in September 1994.

Azerbaijan has an estimated 2.5 trillion cubic metres of proven natural gas reserves, according to the BP Statistical Review of World Energy 2021. While Azerbaijan is not as prominent in global gas as it is in oil, gas extraction is expected to continue contributing significantly to the economy in upcoming decades.

Energy security and diversification

The country’s energy mix is heavily concentrated in fossil fuels, with oil and gas accounting for more than 98% of total supply. While supply security is not a concern, heavy reliance on fossil fuels elevates GHG emissions and exposes the country to fuel price fluctuation risks. In addition, although ageing natural gas networks have been significantly modernised with new compressor stations and ancillary infrastructure, distribution system losses and gas supply quality remain concerns.

Electricity generation is dominated by natural gas (90%), while large hydropower plants generate 4%. Electricity supply security improved over the 2007 to 2017 decade with modernisation of the generation system and strengthening of the west-east transmission network; additional gas-fired generation capacity has reduced the frequency of electricity shortages, and hydropower projects have also made shortages less common. As resource-related income has boosted growth of the middle class, demand for electricity has increased, making further capacity additions necessary.

Azerbaijan’s renewable energy potential promises multiple advantages for the country. Relying more on renewable energy would help Azerbaijan save natural gas for exports and for use in the petrochemical industry; reduce the country’s GHG emissions to meet its 2030 Paris Agreement commitment; and improve electricity security by diversifying generation. As part of its planned energy market reforms, the government has drafted a renewable electricity law and aims for renewable energy to provide 30% of electricity generating capacity by 2030 – almost twice the 2018 share of 16%.

Furthermore, the country adopted a Law on Using Renewable Energy Sources in Electricity Production in May 2021, providing a legal basis to develop renewable energy projects. The law envisages the introduction of auctions and tenders as support mechanisms, and it includes other draft legislative documents such as a PPA and a connection agreement.

Emergency response

Established in 2005, the Ministry of Emergency Situations is responsible for emergency response mechanisms in all sectors of the economy. Its mandate includes natural and human-caused disasters and fire, as well as emergency situations involving power system incidents, utility systems, hydropower facilities, oil and gas production and processing facilities and main pipelines. It provides policy measures in the fields of civil defence, rescue and restoration work.

As a net exporter of oil and gas with domestic refining and storage capacity, Azerbaijan has not developed emergency storage or stock monitoring systems. However, the country has mitigated the risk of supply or demand shocks by diversifying its export routes and its oil product import sources.

Fuel switching

Over the last 20 years, Azerbaijan has invested heavily in modernising its energy infrastructure, including for electricity generation. A 2002 presidential decree was adopted for the energy sector, setting the goal of eventually switching all thermal power plants to natural gas, and in the following years old generation plants were all modernised and switched. More than 90% of electricity is now generated from natural gas, but the system is designed to switch back to heavy oil in emergencies. 

Oil and gas

Azerbaijan is rich in oil and natural gas resources. According to the June 2018 BP Statistical Review of World Energy, the country’s remaining commercial liquid reserves (crude and condensate) are typically indicated to be 7.0 billion barrels (bbl), accounting for 0.4% of global reserves. Oil is produced both onshore and offshore in the Caspian Sea, with offshore production making up about one-quarter of the total.

The ACG field, situated about 100 km east of Baku, is the largest oilfield in the Azerbaijan sector of the Caspian Basin. Discovered in the early 1970s when Azerbaijan was part of the Soviet Union, it comprises a series of individual reservoir horizons 2 000 to 3 500 metres beneath the Caspian seabed. The Government of Azerbaijan and a consortium of 11 foreign oil companies signed a PSA for its exploitation at Baku in September 1994.

Azerbaijan has an estimated 1.3 trillion cubic metres of proven natural gas reserves, and according to the operator (BP), the Shah Deniz gas field is one of the world’s largest at more than 1 000 bcm. While Azerbaijan is not as large a figure in global gas as it is in oil, gas extraction is expected to continue contributing significantly to the economy in the coming decades.

SOCAR was created in September 1992 with the merger of Azerbaijan's two state oil companies, Azerineft State Concern and Azerneftkimiya Production Association. It is involved in exploring oil and gas fields; producing, processing and transporting oil, gas and gas condensate; marketing petroleum and petrochemical products in domestic and international markets; and supplying natural gas to industry and the public in Azerbaijan. Three production divisions, one oil refinery and one gas processing plant, a deepwater platform fabrication yard, two trusts, one institution, and 23 subdivisions operate as corporate entities under SOCAR.

Third-party access to pipelines is not permitted under existing legislation, and changes to the current market structure are not envisaged.

Oil pipelines connect Azerbaijan with its neighbours, as well as with European and world markets. Three major pipelines run through the country, owned by either BP or SOCAR.

About 80% of the country’s oil is exported through the Baku-Tbilisi-Ceyhan (BTC) pipeline, which began operations in 2006 and has a capacity of 1.2 million barrels per day. It transports crude oil produced at the ACG field as well as condensate produced at Shah Deniz from the Sangachal terminal near Baku through Georgia to the Mediterranean port of Ceyhan in Türkiye, and from there the oil is shipped by tanker to world markets. The BTC pipeline is 1 768 km long, with 443 km in Azerbaijan, 249 km in Georgia and 1 076 km in Türkiye. As it has ample free capacity, it also transports some Turkmen and Kazak oil.

The Baku-Novorossiysk pipeline runs from the Sangachal terminal on the Caspian Sea to the Novorossiysk terminal on the Black Sea in Russia. It is 1 330 km long with a capacity of 105 000 barrels per day (b/d) and has been operating since 1996; SOCAR operates the Azerbaijani section and Transneft operates the Russian section. Despite proposals to increase the pipeline’s capacity, which would be a key transportation addition as production expands in the Caspian Sea, operation of the pipeline was halted in 2014 and resumed in 2015 at lower loading levels.

The SOCAR-owned, BP-operated Baku-Supsa pipeline, whose route parallels that of the BTC via Azerbaijan and Georgia, transports crude oil from offshore oilfields in the Caspian Sea to Supsa, Georgia, on the Black Sea where it continues to European markets via tankers. It is 833 km long with a capacity of 145 000 b/d and has been in operation since 1999.

SOCAR’s Azerigaz Production Union was established with the facilities and equipment of the Azerigaz Closed Joint-Stock Company, in accordance with Decree No. 366 Concerning Improvements in Petroleum Industry Management Systems of July 2009. Six production divisions and organisations are consolidated within Azerigaz.

The company transmits, distributes and markets natural gas in Azerbaijan, and it also transports SOCAR gas to Georgia, Iran and Russia. Total gas transported annually by the company within and outside the country is 12.6 bcm. By supplying natural gas to all the country's fossil fuel power plants, Azerigaz plays a significant role in developing the country's electrical power industry.

The company can reach up to 1.3 million consumers in different parts of Azerbaijan. Its system for managing the gas supply network consists of eight trunk gas pipeline sections, seven compressor stations, 67 gas service areas, 79 automatic gas distribution stations, 77 gas distribution stations, 35 gas distribution points, a total 44 372 km of pipelines, and many other units.

Residential natural gas prices are set at AZN 120/1 000 m3 (~USD 70/1 000 m3) for consumers whose annual consumption is less than 1 200 m3, and at AZN 200/1 000 m3 (~USD 117/1 000 m3) for those who consume 1 200 to 2 500 m3. Consumption over 2 500 m3 is billed at AZN 250 (USD 147). The price for electricity producers (if monthly consumption is over 10 million m3) is fixed at AZN 160/1 000 m3 and for industrial consumers at AZN 200/1 000 m3.

Azerbaijan became a net exporter of natural gas in 2007 with the start-up of the huge Shah Deniz natural gas and condensate field. Before then it imported gas from Russia.

The country has two main gas export pipelines. The largest is the South Caucasus Pipeline (SCP) that transports gas from the Shah Deniz field through Georgia to Türkiye parallel to the BTC crude oil pipeline. The SCP is 693 km long (443 km in Azerbaijan and 250 km in Georgia) and has a capacity of 7 bcm.

The second export pipeline is the Hajigabul-Mozdok, which transported natural gas from Russia to Azerbaijan until 2007 when an agreement between SOCAR and Gazprom allowed the pipeline’s flow to be reversed, and gas exports to Russia began in 2010. The pipeline’s annual capacity is 10 bcm, and 200 km of its total 680 km are in Azerbaijan. SOCAR and Gazprom (Russia) operate this pipeline.

While Shah Deniz I produces around 9 bcm/year, Shah Deniz II began producing in mid-2018 and its volume is expected to eventually plateau at 16 bcm per year.

Shah Deniz II and the SCP pipeline are key parts of the Southern Gas Corridor infrastructure project to deliver Caspian gas to the European Union. The other parts are the Trans-Anatolian Pipeline (TANAP) crossing Türkiye to Greece, and the Trans-Adriatic Pipeline (TAP) that leads from Greece via Albania to Italy. TANAP was officially brought online in Türkiye in June 2018 and TAP was commissioned in late 2020.

TANAP has the potential to expand from 24 to 31 bcm/year, while TAP’s initial capacity is 10 bcm per year. The Southern Gas Corridor is a joint project of several major international companies, including SOCAR.

Azerbaijan also has two underground gas storage facilities: Kalmaz and Garadag, both located at Garadag. Gas is supplied by the Gazi-Mammad-Baku pipeline, and total storage capacity is around 3.5 bcm (Kalmaz 1.5 bcm; Garadag 2 bcm). There are plans to expand the capacity of underground gas storage facilities to 5 bcm.

Oil and gas interconnections in Azerbaijan, 2022

Oil And Gas Interconnections In Azerbaijan 2022

Source: State Oil Company of the Republic of Azerbaijan (2022).

Electricity generation

Along with the oil and gas sector, the electricity sector plays a leading role in Azerbaijan’s social and economic development. Large investments in power generation and transmission since 2009 have resulted in remarkable improvements in the quality of power supply. Electricity generation is now sufficient to cover domestic demand, and the power system is capable of supplying electricity of acceptable quality to almost the entire population.

Azerbaijan’s gross electricity generation reached 26.1 terawatt hours (TWh) in 2019, up 20% from 2008. Natural gas is the main generation resource, at 92% in 2019 (ten-year average 88%), while hydropower accounted for 6% (ten year average 9%) and other renewable sources (solar, wind and waste) for 1% of total generation. Co-generation plants produced 7.5 TWh of electricity, or 31% of the total in 2019.

In 2021, electricity generation reached 27.8 TWh, up 7.9% from 2020. Of this, approximately 95% came from thermal power plants and 5% from other sources, mainly hydropower plants.

Azerbaijan has a total installed capacity of over 7.5 gigawatts (GW): 6.5 GW of oil- and gas-fired generation and 1.1 GW of hydro. In addition, the country has a small amount of wind, solar and other renewable energy generation.

Azerbaijan’s high-voltage network totals around 7 800 km: 1 505 km at 220 kV; 31 km at 230 kV; 1 542 km at 330 kV; and 477 km at 500 kV. The network has 93 high-voltage substations.

Although the distribution system’s voltage is generally below 110 kV, in some cases both the transmission system operator (TSO) and the distribution system operator (DSO) operate at the 110 kV level. The total installed capacity of the substations operated by the DSO Azerishiq exceeds 10 000 megavolt amperes (MVA).

Efforts to reduce network losses are delivering results. From 2015 to 2019, the percentage of transmission losses in total electricity supply fell from 2.1% to 1.5%, and distribution losses from 9.6% to 7.5%. Azerishiq is carrying out a programme to rehabilitate distribution network substations and lines, replace low-quality customer service lines and install smart meters across the country. The programme, designed to run from 2016 to 2022, is backed by a USD 750 million loan from the Asian Development Bank (ADB). As a result of the programme, the efficiency and reliability of the power distribution networks, including distribution lines and substations, improved. Substations were rehabilitated, augmented, and became functional. Customer service lines were rehabilitated and smart meters were installed. Institutional capacity improved and corporate reforms were achieved. The average level of non-supplied electricity fell from 7% in 2014 to less than 1% in 2021. The company also constructed multiple 110/35 kV substations and connected them to the grid.

Azerbaijan has been exporting electricity since 2007. In 2021, it exported around 1.6 TWh to Georgia, Russia and Türkiye. Transmission capacity with Russia is around 350 MW.

With Georgia, Azerbaijan has two cross-border connections: the 500 kV Samukh-Gardabani line (650 MW of export capacity to Georgia and to Türkiye via transit) and the 330 kV Agstafa-Gardabani line.

With Iran, Azerbaijan has five cross-border connections: the 330 kV Mugan, 230 kV Imishli and 110 kV Astara-Astara lines, owned by Azerenergy Open Joint-Stock Company (OJSC); and the 132 kV Araz-Araz and 132 kV Julfa-Julfa lines, owned by Nakhichevan State Energy Service. Current cross-border capacity is 600 MW. In co‑operation with Iran, two hydropower plants are being constructed: the 200 MW Khudaferin (100 MW for each side) and the 80 MW Maiden Tower (40 MW for each side).

Azerbaijan also has three cross-border connections with Türkiye: the 154 kV Igdir-Nakhchivan 1, the 154 kV Igdir-Nakhchivan 2 and the 34.5 kV Sadarak lines.

The domination of Azerbaijan’s electricity market by state-owned vertically integrated monopolies has eliminated all competition. The government owns and manages the energy sector, and it is committed to sectoral reform with the aim of improving system efficiency, supply reliability and transparency. As a first step to reform, all power distribution assets and functions were entirely separated from the state-owned company Azerenergy (Azerenerji OJSC) and transferred to another state-owned company, Azerishiq OJSC (formerly Bakielektrikshebeke OJSC, i.e. Baku Electric Company), in 2015.

As the largest electricity provider, Azerenergy owns and operates most generation assets including gas-fired, oil-fired and hydro plants, and is the TSO.

Azerishiq OJSC is the one hundred percent state-owned enterprise responsible for electricity distribution, supply and other customer services (connection, metering and billing), except in the Nakhchivan Autonomous Republic, which is directly administered by its own state energy agency. Azerishiq oversees the seven regional distribution networks of Aran, Baku, Canub, Garb, Markazi Aran, Shimal and Shimal Garb.

In the Nakhchivan Autonomous Republic, the Nakhchivan Energy Authority is the state-owned TSO and the DSO, and it carries out dispatch operations. Existing legislation envisages unbundling of the electricity sector, but no implementation measures have been taken.

The Law on the Power Industry (1998) sets out some provisions for third-party access so that Azerenergy can purchase electricity from other producers, and other entities can buy electricity from Azerenergy (or other state companies) and sell it to end consumers. Alternatively, independent generators or industries can supply electricity to consumers on their own grids or through the state transmission system; these arrangements account for around 1% of electricity generation.

The government is considering reforming the electricity market. The 2016 Strategic Roadmap for the Development of Utilities (electricity, heat, water and gas) calls for a gradual transition to a liberal market model based on enhanced competition, unbundling, establishment of a wholesale market and a larger share of renewables.

Taking international experience into consideration, the government has prepared a draft Law on Electricity that envisages gradual market reform by 2025. It plans to allow independent generators to enter the sector and acquire existing power plants or build new ones. Privatisation of strategic assets is not expected to adversely affect energy sustainability and security.

Electricity tariffs are set at AZN 0.08/kWh (~USD 0.04/kWh) for consumers whose monthly consumption is under 200 kWh; AZN 0.09/kWh for 200 to 300 kWh; and AZN 0.13 for consumers using more than 300 kWh per month.

District heating

Azerbaijan uses natural gas for around 99% of its space heating. In the decades since the collapse of the Soviet Union, the government has focused on expanding the natural gas grid to the whole population, and district heating has become less important.

Detailed data on the market shares of individual heating technologies in Azerbaijan are not available, but individual gas boilers cover at least 80% of heating needs, owing to generous subsidies for small-scale gas use. However, district heating continues to be important in some sectors: in 2017, it provided heating services to 26% of hospitals; 9% of preschools; 6% of schools; and 2.6% of residential buildings.

Moreover, there is scope for it to figure more significantly in Azerbaijan’s future energy system. Combined with electricity and cooling generation, and heat pump and waste heat use, modern district heating technologies have the potential to provide economically and environmentally attractive clean energy.