Azerbaijan could assign disused Black Sea pipeline to Kazakh oil exports: source

Azerbaijan is unlikely to resume shipping its flagship crude grade Azeri Light via the disused Baku-Supsa pipeline to the Black Sea, and could assign the route for Kazakh crude, supporting a Kazakh push to diversify export routes, a senior industry source told S&P Global Commodity Insights.

Speaking during Baku Energy Week in June, the source, familiar with the situation, said Azerbaijan saw no economic advantage in using the Baku-Supsa pipeline to Georgia's Black Sea coast for shipping Azeri Light, a light sweet grade produced in the Caspian Sea and favored for producing light products such as jet fuel and diesel. The overwhelming advantage for Azerbaijan lies in exporting the grade via the Baku-Tbilisi-Ceyhan pipeline to Turkey's Mediterranean coast, the source said.

In operation since 1999, the 830 km Baku-Supsa pipeline was largely superseded when the 1,800 km BTC route began operating a decade later, creating direct access to the Mediterranean without the bottleneck of the Bosporus.

Azerbaijan maintained some exports via Supsa, with slight differences in quality between Azeri Light loaded at Ceyhan and that loaded at Supsa, and the route remains a back-up in case of BTC stoppages, as when earthquakes struck Turkey in February 2023. Both routes were affected by Russia's invasion of Georgia in 2008, with an explosion hitting the BTC line in Turkey days ahead of the invasion. But Supsa shipments have ground to a halt since Russia's full-scale invasion of Ukraine in 2022.

"There is sufficient capacity in BTC, and the more we ship through BTC, the better the rate for Azerbaijan -- and of course the Black Sea adds an additional complexity," the source said, speaking on condition of anonymity.

The invasion of Ukraine brought a threat of sea mines and naval hostilities in the Black Sea, sending insurance costs surging. Russian plans for a new naval base in the occupied Georgian region of Abkhazia have added to regional tensions.

However, the decision not to resume Supsa exports is economic rather than war-related, and reflects a lack of demand in the Black Sea, the industry source said. Ukraine used to be among Black Sea countries that used Azeri Light, but its main refinery, Kremenchuk, has suffered severe war damage. Instead of selling to countries such as Romania and Bulgaria, "we would rather sell our crude to the consumers appreciating the premium nature of Azeri Light," the source said.

Kazakh diversification

Azerbaijan has been accommodating increased shipments of Kazakh crude through the BTC pipeline, driven by Kazakhstan's push to reduce reliance on its main export route, the CPC pipeline. The CPC route, which runs some 1,500 km through southern Russia to Novorossiisk, handles the bulk of Kazakh exports and is the largest single crude stream in the region, with loadings around 1.5 million b/d. Loadings dipped to 1.3 million b/d in May, according to S&P Global Commodities at Sea, likely reflecting maintenance at Kazakhstan's highest-producing field, Tengiz.

Industry figures have expressed alarm at this dependence on Russian infrastructure, and President Kassym-Jomart Tokayev has ordered officials to develop alternative routes.

Tanker deliveries of Tengiz crude across the Caspian to the BTC pipeline amounted to 232,000 mt in January-February 2024, equal to just 31,000 b/d, according to data from state-owned KazTransOil. Trans-Caspian volumes could be increased, but mingling more Kazakh crude into the Azeri Light blend could compromise the quality of the latter, the source said.

"We have a completely unutilized pipeline going to Georgia, which can on its own accommodate up to 5 million mt/year (110,000 b/d) if I'm not mistaken, so the next 5 million mt [of Kazakh crude] are not going to go into BTC, they're going to go to Supsa," the source said. "If the Kazakhs come and say we want to bring you more oil, we will probably tell them go [via] Supsa, because that pipeline is empty right now."

Platts, part of S&P Global Commodity Insights, assessed Azeri Light at a discount of just 33 cents/b compared with Dated Brent on June 10, while CPC Blend was assessed at a $3/b discount.

Kazakhstan's energy ministry as well as Azeri state-owned company Socar and BP, the operator of BTC, were approached for comment, but did not respond. Tengizchevroil, which operates Kazakhstan's Tengiz field, declined to comment.

The source acknowledged Azerbaijan faces a difficult balance between using the BTC route for its own crude and providing transit to countries such as Kazakhstan and Turkmenistan, as production is declining at Azerbaijan's main crude complex, Azeri-Chirag-Gunashli (ACG).

Production from the BP-operated ACG complex fell 12% on the year in Q1 2024 to 339,000 b/d, far from peak levels achieved more than a decade ago, although the startup of a new platform in April 2024, dubbed Azeri Central East, has raised recovery hopes.

Also boosting Azeri Light volumes has been increased gas condensate, mainly from the BP-operated Shah Deniz gas field. Azeri Light loadings at Ceyhan rose 1% on the year in Q1 2024 to 54 million barrels, with Shah Deniz producing 99,000 b/d of condensate in the quarter, according to BP. The Absheron gas condensate field, which came on stream in 2023 and has been producing 13,000 b/d of condensate, is another potential contributor.

The issue of maintaining Azeri Light crude quality is a "very sensitive," with transit tariffs and volumes both having an influence, the source said, implying, however, flexibility. "As of now, we would rather send other crudes to Supsa, not to co-mingle them with Azeri Light," the source said, noting that for Kazakhstan the decision to send crude via Azerbaijan is "strategic" rather than having a cost advantage.

"There is a point, an equilibrium -- if you hurt the quality of your oil by transiting too much, but if that transit brings you more money -- it's just a model, a financial model -- you can afford doing that," the source said. State oil company Socar "and the authorities here are... watching it very carefully, and at this point no change in the quality is expected," the source added.