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caspian energy insight: april 12, 2018

Caspian Energy Insight: April 12, 2018

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Apr 12, 2018

Oil Price Passed $70 

Since the beginning of 2018, oil prices have consistently tested $70 levels but they were not able to hold at those price ranges. The increases were only within the day tests of these levels and they were only short lived. The tests happened both within the first month of the year and the week before. However, this week, finally, the prices went above $70 and stayed there despite slight declines. Currently, Brent is around $72 per barrel with a price rally that is continuing since the beginning of the week. In a similar trend, WTI is also around $67 today. Azeri light, on the other hand, is also just above $72 with the week progressing. With the market in an upward trend, the market is extremely bullish and the investors are increasing their long positions in trading. With the prices in an upward trend recently, Saudi Arabia increasing their hopes for a more expensive oil. The kingdom can definitely benefit more if the prices increase, especially with the upcoming IPO of Saudi Aramco. Still, OPEC+ partnership does not necessarily put a price target for oil but Saudi Crown Prince Mohammed bin Salman makes it clear that the production cut agreement is going to continue. Saudi Oil Minister Khalid Al-Falih wants even more tightening. However, Russia, maybe the biggest reason for OPEC+ partnership’s success in holding the production cut agreement together, is not as willing as the Saudi ministers. With Russia not being completely sold on continued production cuts, the unmentioned target of $80 oil for Saudi Arabia might not receive support that they are hoping. Part of the reason for pushing for even more expensive oil is to balance the books. Especially the Middle Eastern oil producers need a more expensive oil price to balance their public spending. Saudi Arabia, for instance, needs at least $83 per barrel to balance public spending. At the same time, the oil-producing countries should also careful not to push the prices too high which will trigger significant shale rig investments as well as new infrastructure projects in the Permian basin.  

Azerbaijan’s Regional Projects and Their International Impact

Azerbaijan is increasing their international activity with billion-dollar infrastructure projects, investments in oil and gas extraction and transportation, potential membership to OPEC, and completion of TANAP most recently. As an essential player in the Turkish market, Azerbaijan’s TANAP will not only bring gas to Turkish provinces and benefit Azerbaijan’s economy, it will also bring investments on its route in Turkey. Indeed, the gas transportation company will have at least $17M available for projects in 11 provinces. With the European stage of the SGC, TAP will do the same for the countries on its rote. Recently, Azerbaijan announced its intentions to develop Bulgaria’s gas distribution network. With SOCAR gaining know-how with SGC’s construction and distribution network process, the Azerbaijani company arrived to a point of doing new projects elsewhere. Building Bulgaria’s network is a step in the right direction. Instead of only extracting and selling natural resources, the company is expanding its horizons in investing Balkan countries for their network. Bulgarian infrastructure will have two kinds of benefits for Azerbaijan. First, this project will demonstrate the ability of the company for future contracts in the region and elsewhere. Just like the Turkish construction sector’s investments in the Balkans and Russia, Azerbaijan’s oil company can receive additional contracts regionally. These will also have additional positive repercussions as a second point. With gasification of Bulgaria’s regions, the country will want to buy natural gas from suppliers. This could include both Azerbaijan and Russia at this case. However, with the SGC being among the projects of common interest in the EU, the suppliers for SGC can have a better chance of securing supply contracts in the Balkans. As announced by Bulgaria’s Energy Minister Temenuzhka Petkova, the country is already completing its steps towards the completion of Interconnector Greece-Bulgaria (IGB) project which will enable Bulgaria to buy natural gas from the SGC through Greece. The IGB project will be completed by 2020, right around the time to buy gas through the completed TAP. The pipeline will have 3bcm per year capacity and will be able to buy natural gas from Azerbaijan or other potential new suppliers to the SGC.  

Russia: Cumulative Oil Production at Lukoil’s North Caspian Fields Hits the 15-Million-Tons Milestone

Lukoil has since 2010 extracted 15 million tons of oil from the Yuri Korchagin and Vladimir Filanovsky fields, situated within the north-central portion of the Russian sector of the Caspian Sea, close to the agreed-on maritime border between Russia and Kazakhstan. Russia’s largest privately-owned oil producer had in June 2017 reached the previously set mark of 10 million tons in terms of oil production at the two fields, which have currently entered their second development phases. According to the company’s announcement, further implementation of Vladimir Filanovsky’s drilling program will allow for the stabilization of output at the designed plateau of 6 million tons on an annual basis. With regard to Yuri Korchagin, the second drilling stage involves the development of the field’s eastern part. The news on a production ramp-up resulting from Lukoil’s exploration activities off Astrakhan, a sea area estimated to contain some 4.7bnBOE, were followed by a statement from Kazakhstan’s Energy Minister Kanat Bozumbayev about the company’s interest in the acquisition of stakes in I-P-2 and Zhenis blocks, with the latter’s recoverable oil reserves estimated at 179 million tons, on the southern Kazakh shelf of the Caspian Sea. Back in 2012, the French energy major Total had officially refused to participate in those two projects amid a wave of several Western investors’ imminent withdrawals from Kazakhstan, including the likes of Eni and ConocoPhillips, due to excessive government regulation of the oil sector, a lack of long-term guarantees and multiple delays in the launch of new ventures. It was in that same year that KazMunaiGas inked a memorandum of understanding with Lukoil on the technical and economic parameters of I-P-2 and Zhenis. Given that the commercial evaluation of both projects at the time proved to be cost-ineffective, the two sides started working towards the preparation of proposals for amendments to Kazakhstan’s tax legislation. In February 2018, Lukoil CEO Vagit Alekperov reiterated his firm’s commitment to the geological exploration of the two sea blocks, pointing to the New Subsoil Code, signed by President Nazarbayev in late 2017, that is believed to be setting the conditions for better rates of return on complex oilfield investments, as it blurs the tax boundaries between exploration and production contracts. In line with the simplified Code, contractors maintain the right to either sell information stemming from a geological study to other interested parties or use it for their own investment purposes, while, during the subsoil exploration stage, their obligations to socially invest at the regional level are going to be decreased. Lukoil, and consequently Russia, is no stranger to Kazakhstan’s oil and gas business. Tsentralnoye field, discovered in 2008 and jointly held by KazMunaiGas and Lukoil (Lukoil: 25%, Gazprom Neft: 25%), as well as Khvalynskoye field, discovered in 2002 and 50% owned by Lukoil, are both located not very far from I-P-2 and Zhenis the multinational energy corporation eyes at the moment. Finally, Lukoil participates with a 13.5% stake in the development and exploitation project of Karachaganak oilfield. Aside from the Russian and the Kazakh sectors of the Caspian Sea, Lukoil’s wholly owned subsidiary, Lukoil-Engineering, has in October 2017 agreed with the National Iranian Oil Company to jointly carry out modeling and analysis of the petroleum systems of northwest areas of the Persian Gulf, the Abadan plateau and the South Caspian basin. This MoU marks the debut of the Russian-Iranian energy cooperation in the Caspian, despite the fact that the legal status of the Sea has yet to be settled. It should be reminded that Azerbaijan, Kazakhstan, and Russia have all accepted the median line principle as for the division of the Caspian, whereas Iran claims the Caspian is a lake and demands that it be equally divided among the littoral states (which would increase its current share of the sea from 14% to 20%). Turkmenistan has a rather unconventional approach to delineating the median line, which enables the country to assert a claim to a large part of Azerbaijan’s Azeri-Chirag-Guneshli (ACG) oilfield cluster. Russia’s initially shifting position over the preferred resolution of the Caspian legal status emanated from a dispute between private oil companies and the Foreign Ministry, that customarily opposed to their presence in the particular region. Lukoil’s inclusion in the AIOC consortium, formed following ratification of the 1994 ‘’Contract of the Century’’ by the Azerbaijani parliament, revived the discussion on the issue. Two years later, the Ministry decided to grant national sovereignty over the mineral resources within 45 miles of each littoral state’s coast, with the middle area left for joint development, thus surrendering to the will of the country’s oil majors. Nevertheless, its diverging views with the Russian Ministry of Natural Resources stood out in August 1997, as soon as the latter awarded a tender to Lukoil to develop a field in the northern Caspian, stretching beyond the 45-mile zone. Oil exploration by Lukoil led to a conflict between Russia and Kazakhstan in late 1997, with Astana saying that the field encroaches on Kazakh territorial waters. A 1998 deal between Presidents Yeltsin and Nazarbayev over division of the seabed in the northern Caspian, as well as an additional protocol on joint production arrangements for three disputed gas fields in the area (Kurmangazy, Tsentralnoye and Khvalynskoye), ensued from the subsequent bilateral negotiations. Up until the early 2000s, when it scored its first successes with the discovery of the Yuri Korchagin field (2002) and Vladimir Filanovsky (2005), thought to be the largest oil reserve found in Russia in the last 20-25 years, Lukoil was the only prestigious Russian producer operating in what was deemed as a low-profit geographical space. The 15-million-tons milestone achieved in Yuri Korchagin and Vladimir Filanovsky fields signifies Russia’s keenness to accelerate drilling and production from hydrocarbon deposits in its own sector of the Caspian. Meanwhile, Lukoil’s engagement in upstream projects in the Kazakh and Iranian portions of the Caspian Basin indicate Moscow’s decisiveness in exerting a form of soft power in the area playing the card of energy diplomacy. Whether these developments portend more propitious steps towards the determination of the Caspian Sea legal status later in 2018, as was the case after the Russian-Kazakh struggle of 1997, remains to be seen.  

Central Asian Trade Activity Continues to Grow

United States Agency for International Development is establishing a horticulture trade mission in the Baltics this week. Among other countries, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan will be present to find business connections in the region and beyond. With Uzbekistan’s opening towards the region and TAPI’s increased potential, the Central Asian nations are doing better in opening up their borders for international trade. Meanwhile, with the meeting between the presidents of the two countries, Iran and Turkmenistan finally began their gas swap agreement once again. The two presidents perceive each other as strategic partners and look for improvements in relations. Meanwhile, Turkmenistan also continues to sell natural gas to China. With the harsh winter conditions scaling back, China started to pump gas to underground storage facilities in which these storage capabilities can satisfy 5 percent of overall consumption in the country. Although the capacity is not enough for critical conditions, the Chinese are looking to expand this capacity eventually.

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