Oil Prices Tested $70 Levels

After testing $70 levels twice in January, oil prices continued to decline last week. Currently, Brent trades around $67 and WTI is below $64. On Tuesday, despite the drop in prices, Azeri Light managed to float just above $70. Hedge fund managers also starting cutting down their bullish positions because of stalling oil prices. The oil industry is subjected to boom and bust cycles but it is unclear when these cycles start and finish, which adds to already existing uncertainty. Recent OPEC meetings show how the cartel has a goal of returning inventories to a five-year average level. One of the problems with this approach is the failure to define the benchmark for the averages. In addition, inventory levels don’t make for a good measure to base output policy on because they are backward looking. Although, focusing on inventories instead of a set price has its advantages, the inventory approach is also problematic. Inventories are usually responding to seasonal demand changes along with the price of oil. Still, Khalid Al-Falih of Saudi Arabia and Alexander Novak of Russia agree that output curbs need to continue. Currently, some analysts argue that oil market has already balanced but OPEC/non-OPEC alliance is pushing for the inventories to balance as well. The critics of the alliance call for caution for the possibility of a stronger and prolonged backwardation if the cutbacks continue like this. Finally, as an interesting historical mark, in 2017, China surpassed the United States as the largest crude oil importer in the world. Coupled with increased crude output in the US thanks to shale improvements and China’s dramatic rise as a major oil consumer, the trend in the past 15 years led to China finally surpassing the US. One of the major reasons for such Chinese import success is, of course, the shale boom and the fact that American crude production to reach its highest levels since 1970.  

Russia, China, Kazakhstan: CEFC Receives First Oil Shipments as Rosneft Aims to Further Increase Oil Pipeline Exports to China via Kazakhstan

On January 29, Russia’s majority state-owned oil company Rosneft announced it has initiated crude seaborne exports to CEFC China Energy, under a five-year deal for the supply of almost 61 (60.8) million tonnes of Russian crude oil to the private vertically integrated Chinese conglomerate. According to the long-term contract, signed by the two partners along with a strategic cooperation agreement in September 2017 during the ninth BRICS summit, and approved by Rosneft’s Board in November of the same year, CEFC will mainly purchase ESPO blend from the Russian Pacific port of Kozmino. Supplementary deliveries of Urals crude, from the Black Sea Novorossiysk port, and of Sakhalin Sokol crude, via De-Kastri oil terminal in the Russian Far East, have also been laid out in the document. In 2018, Rosneft seaborne volumes for CEFC are projected to reach 10 million tonnes. The Chinese firm, who has acquiesced to the launch of collaborative projects with Rosneft regarding oil exploration and production in Western and Eastern Siberia, refining, petrochemistry, oil and oil products trade, as well as construction of a petrochemical complex in China’s Haiman island province, aspires to buy a $9bn-worth 14.16% stake in Rosneft from a consortium of Glencore and the Qatar Investment Authority, possibly through a $5bn loan issued by Russia’s VTB Bank. The five-year supply contract will help serve CEFC’s plans to make available cheaply transported ESPO oil quantities to China’s privately-owned “teapot” refineries. Furthermore, it could lead the Chinese corporation to outdo the multinational commodity trading company Trafigura in becoming Rosneft’s principal oil trading partner in the huge, investor-friendly Asian market. In a parallel development, Rosneft CEO Igor Sechin stated that the company is considering an increase in oil supplies to China via Kazakhstan, with Transneft’s official representative Igor Demin later confirming that Rosneft had actually turned to Russia’s pipeline monopoly, in order for the oil transit to China via the Kazakh route to rise from 10 to 13 million tonnes per annum. Rosneft’s ambitious export strategy concerning the Chinese market involves expansion of those supplies up to 18 million tonnes per annum (360,000bbl/d) at a later stage. Such a move would result in the curb of European imports of Russian Urals oil, flowing by pipeline to Central Europe and by tanker to Northwest Europe from Primorsk, on the Baltic Sea, and to Southern Europe from Novorossiysk. Rosneft’s oil supplies to China are mainly delivered via the Transneft-operated Eastern Siberia-Pacific Ocean (ESPO) oil pipeline and its extra spur towards the Chinese city of Daqing. Furthermore, in 2016, China bought over two-thirds of Russian ESPO cargoes transshipped from the eastern port of Kozmino. Secondly, the Atasu-Alashankou overland oil pipeline, as well as the railway option through Kazakhstan, serve as additional export routes for Russian crude deliveries eastward. Around 3 million tonnes of the pipeline’s overall upgraded capacity of 20 million tonnes is used for Kazakhstan’s own oil exports to China. In January 2017, Rosneft and China’s National Petroleum Corporation (CNPC) co-signed a complementary agreement on the increase of oil volumes headed to China through Kazakhstan and on the extension of a bilateral contract, concluded in 2013, up to December 31^st, 2023. An overall of 70 million tonnes of oil is scheduled to have been delivered to China by that time. Since past decade, Rosneft has been systematically cultivating petroleum relations with China, in an attempt to fulfill the Russian government’s strategic goal to strengthen energy cooperation with Asia-Pacific countries. The company’s continuous interaction with CNCP and Sinopec, both in the Russian upstream and abroad, the acquisition of $500M worth of shares by CNPC in the oil giant, the gradual consolidation of Rosneft’s position in the Chinese downstream and, lastly, the recent interest of multiple suppliers in China, both via Kazakhstan and via the implementation of the relevant accords with CEFC and CNPC, all signify a remarkable progress in the Sino-Russian energy dialogue. At the same time, Kazakhstan also eyes the Chinese market as a viable export alternative for its oil reserves. The Kazakhstan-China oil pipeline came on stream in 2006, while China’s oil imports from Kazakhstan are said to have increased almost tenfold between 2005 and 2008. As crude prices modestly crept up following OPEC/non-OPEC output cuts policy, piped crude oil imports from Kazakhstan to China hit a record high (12.3 million tons) in 2017, the Kazakhstan-China pipeline operator company has said. Therefore, it becomes evident that regional competition has substantially changed from a situation where China and Russia were struggling for a share in Caspian resources to a newly established reality, in which Russia and Caspian Sea littoral states are striving to exert greater influence over the energy-thirsty Chinese market. Furthermore, despite CNCP forecasts about a boost in domestic natural gas production by between 6% to 8% per year through 2020, a fact that, in combination with growing imports of piped gas and LNG (up by 46.4% in 2017, at 38.13 million tons), is of crucial importance for the country’s fight against air polluting emissions, China doesn’t appear willing to envision its future away from oil any time soon. This is shown by both the solid alliances with Kazakhstan and Russia, who has retained the crown from Saudi Arabia as China’s top crude oil supplier for the second year in a row in 2017, and the seemingly emerging Sino-Arab partnership, since Petro China and Sinopec are reportedly interested in buying the whole 5% of Saudi Aramco, opened up in the state oil behemoth’s IPO.  

Russia, Iran: Gazprom to Submit Development Offers for Iranian Gas Fields by Late March

On January 28, Iran’s Oil Minister Bijan Namdar Zangeneh said that Russia’s state-owned gas firm Gazprom is ready to submit concrete proposals regarding the development of four gas fields located in the Iranian sector of the Persian Gulf. A few months ago, Mr. Zangeneh confirmed that Iran had inked separate initial agreements with Gazprom for the launch of studies on the development stages of Farzad-A, Farzad-B, North Pars and Kish gas fields. According to the Iranian side, results of these studies will have been provided by Gazprom by the end of March. Farzad-B, with an estimated 12.5tcf of recoverable gas reserves, has been discovered by Oil and Natural Gas Corporation (ONGC), however India’s decision to cut oil imports from Iran in 2017-2018 by a fifth, because of Tehran’s delay in granting the Indian firm development rights, soon led to the pact between Gazprom and the National Iranian Oil Company (NIOC). In September 2017, Royal Dutch Shell presented to NIOC its own development plan for Kish field and is so far considered one of the most serious candidates for the project. All fields will be offered on tender based on the new generation upstream oil and gas contracts, known as Iranian Petroleum Contract (IPC), which are believed to be more favorable to international investors and major oil companies, compared to the former buy-back framework. In spite of their diverging positions regarding the settlement of the Caspian legal status (median line principle vs equal division of the sea into five even sectors), Russia and Iran have been systematically nurturing their energy ties. In November 2017, Gazprom and NIOC signed a series of MoUs on cooperation in the sphere of natural gas. About one month later, a series of documents were signed on the implementation of integrated projects along the entire gas value chain, including infrastructure projects related to the production and transmission of hydrocarbons extracted within Iran’s exclusive economic zone and a proposed $4bn LNG venture, among other aspects of collaboration.  

Southern Gas Corridor and Investments in Azerbaijan

EIB Vice President Andrew McDowell from the European Investment Bank on Tuesday announced 1.5bln Euro loan for the Trans-Adriatic Pipeline. The overall cost of the pipeline is estimated to be around 4.5bln Euros and the EIB is hoping to increase funding opportunities for TAP. The pipeline will help alleviate European dependence on Russian natural gas. Diversification attempts for gas supplies have been at the heart of discussion for EU politics within the past few years and TAP will be a cornerstone of these attempts. The pipeline will bring 16bcm gas to European gas markets in 2020. Still, the significance of this project will expand if the European countries could bring additional gas from Turkmenistan through the TCP into the SGC. Given the fact that the EBRD already approved a $500M loan for TANAP last year, the SGC is receiving significant European support in recent years. Although the SGC will be a dent for European energy supplies, for individual countries, it has much larger implications. For instance, the pipeline will have the capacity to satisfy 40 percent of Bulgarian natural gas demands as well as one-third of Greece, and 12 percent of Italy. These countries are not the only recipients of gas from the SGC. The interest of Malta was reported a few weeks back and several Balkan and Central European countries showed interest as well. Montenegro is one of the newer candidates for Azerbaijani natural gas. The country is planning to receive between 500 and 700 mcm of gas through the Ionian-Adriatic Pipeline (IAP). Ministry of Economy of Montenegro Nikola Vujovic will visit Azerbaijan to discuss the details for a future agreement. Overall, the cost of SGC can go up to $40bln and the support of European banks has been paramount for the project. Still, in order to contribute to energy diversification attempts in the EU, as part of projects of common interest, the investments and the funding opportunities should continue to grow in the near future.  

New Investments in Oil Producing Countries

With the concerns about the prices continue, countries are trying to diversify their energy resources. This week, in Saudi Arabia, ACWA Power was tapped by Riyadh to build a solar farm that would generate enough electricity to power up to 200,000 homes. The project will cost $300 million. Saudi Arabia aims to invest up to $7 billion by the end of 2018 to develop seven new solar plants and a wind farm. At this point, Saudi Arabia eyes to produce at least 10 percent of its power by renewables in five years. Iran’s deputy oil minister for trade and international affairs Amir-Hossein Zamaninia announced Iran’s hopes to attract investment in the oil sector. The country is currently negotiating around 28 contracts with foreign companies, including the ones from Japan, China, Russian and Europe. The investments are currently delayed due to the uncertainty in Iran’s oil sector and rising concerns about further US sanctions; yet, the country is pushing to complete them soon.