One-Day Drop in Oil Prices
Last week, oil prices tested $70 levels for the third time this year. The prices took a slight dip following the price rallies due to similar factors like it happened in January this year. Currently, Brent trades above $68 while WTI is around mid $63. Meanwhile, Azeri Light is trading around $69 this week. While the traders were hopeful with American drilling activity dropping but the expectations did not meet the reality. In trading markets, the investors are still keeping their bullish positions. The traders increased their long positions by 85M barrels. The expectation for oil prices by the traders is upwards despite the sudden dip in prices this week.
Supply is still under control. OPEC+ partnership is strong with its production cut agreement intact, Iranian supply is threatened by American revisiting of the nuclear deal, Venezuelan output is continuing to decline due to unrest, and American output is still shaky with leveling rig count.
Achieving the stabilization of oil market within past year or so, Russia and Saudi Arabia are looking to deepen their relations for the long term. Current production cut agreement will be expiring at the end of the year but current Crown Prince of Saudi Arabia stated that they would like to increase the agreement span from year-to-year to 10-20 year periods. In other words, this could mean the institutionalization of the Russia-Saudi Arabia alliance in the oil sector and may bring further price stability to a market that is extremely volatile.
This willingness by both Russia and Saudi Arabia is an understandable approach since the partnership gave its fruits in a very short time period, going back to November 2016. Without Russian partnership, OPEC was toothless and could not make its member countries comply with its production quotas. However, with Russian inclusion, the picture changed drastically. Member countries and non-member partners of the production cut agreement followed their quotas pretty closely, compliance increased, while Russia and Saudi Arabia engaged in pretty close monitoring of the process.
Despite all these benefits of the production cut agreement, there are also potential issues with this partnership. First, Saudi Arabia is a long lasting ally of the United State and the West and at a time of Russia animosity towards these countries could pose a problem for the partnership. As the crown prince told American media, the alliance between countries is almost a century long and ditching it would not be easy. The prince is on a two-week American tour, met with Donald Trump, giving televised interviews, and trying to attract investors for the kingdom’s $35 billion worth infrastructure investment
Second, Russian oil and gas companies are pushing to increase their production capacity while Vladimir Putin is ordering them to limit their production. Although this could be doable for the short term, in the long term the companies may want to push their limits. Already, Rosneft and Lukoil increased their production in March by 200K barrels per day. Although Russian Energy Minister Alexander Novak claimed the increase was to keep up with demand in domestic market and that compliance was still at 93.4%, in the long term, if these companies continue to increase their production, this could pose a problem for the agreement and the partnership overall.
Azerbaijan Balancing the Foreign Trade
Azerbaijan has a current account surplus of $1.7 billion in 2017 compared to the current account deficit the country had in 2016. Thanks to increasing oil prices last year, the oil sector did significantly better compared to the year before and improved Azerbaijani economy and balanced the trade in the country. Azerbaijan constantly has a trade deficit in non-oil sectors and the country needs diversification of the economy in the long term as well as improving its trade relations with neighboring countries in the region. However, in its current state, the economy is in balance thanks to the surplus flowing from the oil sector.
The oil sector is still going strong in Azerbaijan. The current account surplus was $4.4bln in oil and gas sector the year before. This number increased up to $7.4 billion in 2017. With the completion of TANAP, this year and the export of 6bcm natural gas to Turkey will further improve the current account surplus flow in the sector. The Caspian nation has been investing in multiple infrastructure projects in the past few years and will finally start reaping the benefits of these investments. Currently, the project is 93 percent completed and most of the remaining work is in the western section between Eskisehir and the Greek border.
Finally, U.S. Ambassador to the Republic of Azerbaijan, H.E. Robert F. Cekuta attended a dinner in Baku hosted by the American Chamber of Commerce in Azerbaijan. The ambassador, nearing the end of his three-year tenure in the country pointed out the role Azerbaijan in ensuring energy security and transportation transit potential. The ambassador also pointed out the potential for American technologies to flow into Azerbaijan’s energy sector.
Turkmenistan, Iran: Berdimuhamedov and Rouhani Agree on Gas Swaps, Keep Negotiating on the Gas Debt Settlement
Following an unofficial meeting, rumored to have taken place at the Ashgabat International Airport in between Gurbanguly Berdimuhamedov’s trips to the UAE and Kuwait, Iran’s President Hassan Rouhani visited once again Turkmenistan in late March. As a traditional issue of bilateral interest, energy was one of the central topics of discussion. Mr. Rouhani was quoted as saying that the two countries have been exploring options to increase gas swap transactions and extend the use of existing pipeline infrastructure for the supply of Turkmen natural gas to third countries. It should be reminded that as far oil is concerned, on August 3 the ENOC-owned Dragon Oil shipped an oil cargo from Turkmenistan to the Neka Port, in northern Iran, as part of a crude swap arrangement through the Persian Gulf that had been on hiatus since 2010.
Nevertheless, things are more complicated with regard to natural gas, since the two sides have been embroiled in a long-lasting gas debt tiff. As of early 2017, Ashgabat has decided to shut off gas flows to neighboring Iran accusing it of some $2bn of accumulated debt, dating back more than a decade. In Tehran’s view, Turkmengaz exploited for its own benefit a gas shortfall faced by Iran throughout the notably cold winter of 2007-2008, causing a nine-fold price increase of $360 per 1000BCM, instead of the usual $40 tariff. Furthermore, Iran claims that it had acquired its debt in the course of the sanctions years when banking restrictions had locked the country out of the global financial system and that it has already partially paid back Turkmengaz with goods and engineering services. Unlike the gas-abundant South, northern and northeastern Iranian regions remain heavily reliant on gas imports from Turkmenistan due to their poor interconnection with the national grid. During wintertime, Iran was said to have been importing over 30MCM/d of Turkmen gas, although this figure had dropped by half several months before the 2017 cutoff was put into effect. Of course, this situation is now thought to be changing thanks to the 12.7BCM/a Damghan-Neka Gas Pipeline, that broke ground in July 2017 and from that time onward has been transporting natural gas from the giant South Pars field all the way to Iran’s North.
Mr. Rouhani’s statement on tighter energy cooperation with Ashgabat was made a few months after the National Iranian Gas Company (NIGC) managing director Hamidreza Araqi’s suggestion that the gas debt row could be resolved through dialogue and that Iran was eager to swap Turkmen gas with Azerbaijan and Armenia, but not with Turkey and Iraq. It was the same company that, in unison with Iran’s Oil Minister, later announced that Tehran has no choice but to file a case with the International Court of Arbitration (ICA) over the quality and price of gas it receives from Turkmenistan. Therefore, it can be deduced that it is not unusual for Iran to appear as both a friend and a foe for Ashgabat, which is withering under the impact of a sharp economic crisis largely provoked by its inability to claim competitive remuneration for its immense gas riches. Currently, the holder of the world’s fourth-largest natural gas reserves has been left with China as the sole export route, since Gazprom has ceased purchasing Turkmen gas from late 2016 due to disagreements over pricing, the ambitious Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project has a long way to go before completion and the Trans Caspian Gas Pipeline (TCGP) remains frozen owing to the yet unsettled legal status of the Caspian Sea.
Rouhani’s two visits to Ashgabat comprehensively imply that Tehran wishes to escape confrontation and restore energy relations with Turkmenistan, possibly via the imposition of its own terms in the context of future gas import agreements in exchange for not suing its neighbor in court. On the other hand, Turkmenistan for its part also seeks to work things out with all Caspian littoral states, as this would be to the benefit of the whole region. Gas fight with Iran and the Kyapaz/Serdar dispute with Azerbaijan serve as examples of conflict Turkmenistan will try to eliminate in the near future.
Iran: Azar Output to Double by the End of 2018
Upon completion of newly drilled wells in the onshore Azar oilfield, shared with neighboring Iraq, where it is known as Badra, and situated some 25km from the city of Mehran in Iran’s southwestern Ilam province (Anaran exploration block), current early production of 30,000bbl/d will double to 60,000bbl/d by the end of 2018, manager of the project Kayvan Yar-Ahmadi said. He also added that, as soon as the field’s Central Processing Facilities (CFP) unit becomes fully operational, it shall be able to handle final first phase production of 65,000bbl/d. Crude oil output from Azar started in March 2017 at a rate of 15,000bbl/d. Up to the end of the past Iranian calendar year 1396 (March 21, 2017-March 20, 2018), the field had overall pumped a little over 10Mbbl. Should the 65,000bbl/d be met, after the drilling of totally 17 wells, around 70Mcf of associated petroleum gas (APG) will be produced, 50Mcf of which will be delivered to the Dehloran gas refinery in Ilam. According to recent studies, oil reserves of the geologically challenging tight oil reservoir are now estimated to 4bnbbl, exceeding almost twice the formerly disclosed figure (2.5bnbbl).
Because of those promising oil volumes and geological complexity, largely attributed to the field’s high H2S content, the second phase of Azar, which was declared commercial back in 2008, is going to be developed via a tender within the framework of the new upstream oil and gas fiscal regime, dubbed as Iranian Petroleum Contract (IPC), in partnership with international energy firms. IPC brings several positive amendments to the previously applied buyback model, such as a duration of 20 years (with the potential of extension as the case may be), as well as incentives for the development of higher risk fields and IOR/EOR projects, rendering it more favorable to foreign investors. Following a failed series of talks with the Russian Gazprom Neft and the Malaysian Petronas during the nuclear sanctions era, Iran’s Oil Ministry finally signed a $1.9bn buyback contract with the Oil Industries’ Engineering and Construction (OIEC), a partially state-owned oil contractor, and the Oil Pension Fund Investment Company in order for Azar output to top 65,000bbl/d from 2011 to 2016, a goal that remained unattained throughout those five years.
However, adoption of the Joint Comprehensive Plan of Action by Iran and the P5+1 countries in July 2015, with the aim of redressing the crisis about Iran’s uranium enrichment program, reinvigorated the Azar-related strategy, facilitating the drilling of more than 10 wells from the date of the deal implementation, in January 2016. In addition, the progressive lifting of sanctions against Tehran revived international interest in the project. In July 2017, Gazprom concluded a cooperation agreement with OIEC over the development of Azar and in December of the same year the two partners submitted their joint plan to the National Iranian Oil Company (NIOC). As one of the key negotiators of the landmark nuclear pact, Russia could not avoid but to have a say in the opening-up of Iran’s oil and gas industry to international investment initiatives for two obvious reasons. Firstly, a leverage over the Iranian energy sector would help Moscow maintain its dominant position in the European gas market, since Tehran has not hidden its wish to join the Southern Gas Corridor (SGC) via the Trans Anatolian Pipeline (TANAP), at a time when the Kremlin is working on a rival southern supply corridor towards the EU via Turk Stream, and possibly the Interconnector Turkey-Greece-Italy (ITGI) Poseidon. Secondly, the exertion of greater influence on Iran’s offshore/onshore business and other aspects of energy policy could be seen as an effort to carve out a regional axis amid intensifying geopolitical tensions between Iran and the US. The OIEC-Gazprom deal on Azar wherefore constitutes one more step in an evolving energy rapprochement, along with an ongoing interstate oil-for-goods program and a set of memoranda of understanding between NIOC and Gazprom, providing for the realization of integrated projects along the entire gas value chain.
Kazakhstan: Development of New Oil Fields Expected Near Kashagan
All 40 wells planned during Kashagan’s first production phase have been drilled and hence drilling operations at the field in Kazakhstan’s Atyrau region have for the moment ceased, Managing Director of North Caspian Operating Company (NCOC) Bruno Jardin said last week. Mr. Jardin specified that 8 of the 40 wells were drilled on the artificial man-made offshore Island-a, 12 on island-D and another 20 on EPC 2,3 and 4. Furthermore, he divulged the operator’s intention to start developing a set of new oil fields both within and outside its contract territory, most probably in parallel with the future stages of Kashagan, now that output from the ‘’giant’’ has exceeded 300,000bbl/d, with hopes of yielding up to 370,000bbl/d (i.e. achieving full design capacity) in the course of 2018.
In particular, NCOC mulls further oil and gas activities at Aktote and Kairan fields, lying in the east of Kashagan, closer to the western coast of Kazakhstan. The consortium, comprised of KazMunaiGas, Eni, Shell, ExxonMobil, Total, CNPC, and Inpex, also eyes joint development of the adjacent Kalamkas-sea (operated by NCOC) and Kazhar (operated by Caspi Meruerty Operating Company -CMOC) structures. Referring to the last two deposits, Mr. Jardin made clear that NCOC has identified certain cost-saving options that ensure the economic viability of the project. Under the North Caspian Sea Production Sharing Agreement (NCSPSA), dating back to 1997, NCOC holds rights to 11 offshore blocks, including Kashagan, Aktote, Kairan and Kalamkas fields. Having delivered the concept and pre-FEED for the Kalamkas-Khazar co-development since early 2017, it seems that the company is ready to expand its asset portfolio in Kazakhstan, taking advantage of the fact that two of its shareholders, namely Shell and KazMunaiGas, equally participate in CMOC’s so-called Pearls project, alongside Oman Oil Company. Kazhar forms a substantial part of Pearls project and, although physically located in Kashagan’s contract area, its exploration and production rights have been granted to CMOC (Shell: 55%, KazMunaiGas: 25%, Oman Pearls Company: 20%) under a 2005 production sharing agreement. Despite it primarily inducing Kazakhstan’s ill compliance with the OPEC cuts, new announcements on planned drillings near Kashagan come amid a noticeable rise in oil prices since January 2018, fueled by imminent trade wars, high geopolitical anxiety, and a slightly decreasing US rig count. Therefore, until (and if) the latest crude rally is again put on pause, the upstream business could be thought of as the main contributor to energy majors’ earnings. And NCOC investors are, of course, not an exception.
Uzbekistan to Start Exporting Electricity to Afghanistan
The past year has seen multiple improvements in Uzbekistan’s regional trade activities. The country is opening up its borders to its trade partners, increasing the ease of business and engaging in regional peacekeeping activities. Recently it is also increasing its investments in neighboring countries.
Recently Uzbekistan is starting to the construction of power lines towards Afghanistan in June of this year. This construction will allow the Central Asian nation to increase its electricity exports by 70 percent and the capacity will rise up to 24 million kilowatt hours daily. The rate will also decline to $0.05. The country produced 60 billion kilowatts in 2017.
Uzbekistan is one of those nations in the region which achieved significant economic diversification and no longer depends on oil and gas sector. This enabled the country to achieve constant economic growth in the past 10 years even when the global financial crisis hit the global economy in 2008-2009. When oil prices also started to decline in 2014, Uzbek economy remained unharmed. The country should continue investing in the diversification of its domestic economy which will ensure the continuation of steady growth in the future.