CPC - Caspian Policy Center


caspian energy insight: january 3, 2018

Caspian Energy Insight: January 3, 2018

Author:Caspian Policy Center

Jan 3, 2018


Through the last month of 2017 oil prices have increased from $62 to $66.5 per barrel. Especially within the past two weeks of 2017, Brent made a distinct jump and oil prices finished the past year on a high note. US light traded just above $60 and Azeri light oil trades above $68 right at the start of the year 2018. These numbers are strongest since January 2014, before the major oil crash by the mid-year, partly due to the Iranian protests. In November 2017, OPEC’s oil production decreased once again by about 133.5K bpd compared to October values and 273K bpd compared to September. The oil cartel is committed to keep prices higher and this shows itself with the production controls imposed by each member. Only Nigeria increased its oil production but the civil war-ridden country was already exempt from the production quotas since it already experienced a dip in its production due to the issues at extraction areas. Hedge funds also increased their long positions and are bullish although there is some dissatisfaction with the fact that oil prices have been stagnant despite the agreement between the OPEC and non-OPEC oil producing nations. Currently, there is much uncertainty about the future of oil and the timeline for balancing. While OPEC is much more optimistic in believing the balancing to happen during 2018, IEA forecasts are much more different. Clearing the oil glut from the market is a long-term process and OPEC and Russia were able to clean the most of it in 2017. However, the IEA does not foresee balancing in the second half of 2018. IEA has some truth in their expectations about the strength of shale producers in the United States since several reports showed how shale producers improved their financing with increasing oil prices. Given chance, the shale producers can singlehandedly supply the needs of the world oil demand expansion, especially with increasing financial opportunities.  

Will Russian Energy Projects Feel The Effect Of The Western Sanctions?

European Council President Donald Tusk announced that the EU is going to extend the economic sanctions on Russia by another six months. With this extension, the sanctions are scheduled to expire in mid-2018. This move was already expected with the current extension of sanctions by the US and the EU on Russia, especially in the energy sector. Still, Tusk’s announcement came at a time when Russian officials had to make multiple explanations on how they were going to go through with their natural gas pipeline projects in the region. The announcement also showed Europe’s commitment to stay united despite the Russian efforts to make agreements with individual countries of the union. Currently, Greece, Hungary, and Bulgaria are reluctant to support the sanctions since these countries are courted by Russia for the upcoming Turkish Stream pipeline which will bypass Ukraine completely in order to provide natural gas to such countries. Russian Deputy Energy Minister Anatoly Yanovsky had to make an explanation how the construction process of both Turkish Stream and the second phase of the Nordstream pipeline were going to continue as planned. According to the schedule, the first phase of Turkish Stream will commence on March 2018 while the legally problematic second phase of the pipeline will commence in 2019. At least the first phase of the pipeline will be welcomed by Turkey at a time when Gazprom increased its exports to the Turkish market by almost 20 percent within the past year. Although Turkish energy supply security is at risk with extreme dependence on Russian natural gas, with further expansion through Turkish Stream and Akkuyu nuclear station projects, the country will have the option to receive natural gas from Russia without any need for a transit country on the way. By December 15th, Russia exported about 27.6 bcm of natural gas to Turkey in 2017, 18.8% higher compared to previous year. Turkey is not the only destination where Russian exports have increased. Exports to Greece, Bulgaria, Hungary, and Serbia are also up around 5-to-24 percent in 2017. Still, the western sanctions and the legal objections to new Russian natural gas projects in the EU will make it harder for Russia to supply these Southern European EU members with new natural gas pipelines.  

CNPC To Replace TOTAL In Iran

Since the removal of the sanctions within the first three months of 2016, French oil giant TOTAL has been exploring ways to invest in Iran. There were reports showing how TOTAL was testing the banking sector in Iran, especially since the country’s banking sector was in dire need of modernization. TOTAL also faces hardships about the nature of the US sanctions since they could be reinstated with the current US administration. With these developments and TOTAL’s inability to find a way to make it work in Iran, CNPC of China can step in to take control of TOTAL’s stakes in South Pars reserves.  

The Chinese-Kazakh Cooperation Improving

With China’s $1 trillion One Belt One Road (OBOR) initiative, the Chinese companies have been investing in transportation networks from Central Asia to South-East Europe. One of the biggest links on the road is Kazakhstan and the two countries have been building on their relationship since the beginning of 21st Century. Once a sealed border during the Cold War years, the two countries are now trying to minimize the time a train waits at the border in order to ship Chinese goods to the Western markets as fast as possible. There are currently other sea and land routes towards Europe but the new Silk Road offers a potential for a solid, cheaper, and faster alternative in the future. Amid the Chinese expansion through the route, the initiative is also affecting the regional political dynamics as traditionally Russia perceives Central Asia and the Caucasus, an essential part of OBOR projects, within its sphere of influence. From the Kazakh perspective, although the nation is currently playing Russians and Chinese with each other to balance their foreign policy, they should also be careful in dealing with two regional hegemons at the same time.  

Iran, Russia: Despite Competitive Interests, Gazprom and NIOC Inaugurate Full-Scale Energy Partnership

On December 13, Gazprom CEO Alexey Miller paid a working visit to Tehran, as a result of which a number of documents were signed by the Russian state-owned firm and National Iranian Oil Company (NIOC) on the implementation of integrated projects along the entire gas value chain. In particular, Iran’s Deputy Oil Minister and NIOC Managing Director, Ali Kardor, agreed with Mr. Miller to launch a roadmap on the initiation of a proof-of-concept study with the aim of realizing infrastructure projects related to production and transmission of hydrocarbons extracted within Iran’s Exclusive Economic Zone (EEZ), as well as on the processing and monetization of the obtained natural gas through petrochemical use. Moreover, A. Miller, A. Kardor and Nasrat Rahimi, Chairman of the Board of Directors of Iran’s Oil Industry Pension, Saving and Stuff Welfare Fund co-signed a memorandum of understanding on prospective collaboration in a $4bn liquefied natural gas (LNG) project. Finally, Gazprom chief also held a meeting with Iran’s Oil Minister, Bijan Zangeneh, where the two sides confirmed their interest in ensuring a stable development of bilateral cooperation. As one of the key negotiators in the 2015 landmark nuclear deal with Iran, Russia was consciously helping to reawaken a potent competitor for gas exports. Even though Hamidreza Araqi, Managing Director of the National Iranian Gas Company (NIGC), has said that Iran does not plan to undermine Russia’s position in the European gas market, it is no secret that Tehran aspires to add its gas to the Southern Gas Corridor pipe network via the Trans Anatolian Pipeline (TANAP), especially after the introduction of a new contract model, mainly designed to attract Western companies’ know-how to the development of the aging or too difficult Iranian fields in the post-sanctions era, as notably happened with France’s Total in the case of the giant South Pars field. On the contrary, Russia is already advancing on its own southern gas supply route under the Black Sea via the ongoing Turk Stream pipeline project and the revival of Poseidon project, conjointly with the Greek Public Gas Corporation (DEPA) and Italian utility Edison. Furthermore, the decision of traditional purchasers of Urals crude, like Poland and Belarus, to either receive or engage in talks to receive Iranian oil, has given Moscow a first taste of what potential co-existence with Tehran in the European space would actually mean. Therefore, this recent attempt by Gazprom to acquire a stake in the Iranian gas sector and partially control Iranian gas streams could be interpreted as a means of preventing Iranian competition with Russian gas in Europe. In addition, the fact that Iran is resuming previously abandoned LNG activities in parallel with the development of Russian LNG projects in Europe gives yet another reason for the two parties’ competition on the European energy market to be strengthened. This is why, now that Novatek’s Yamal LNG has sold its first cargo to Petronas, and that Gazprom and Shell are fully involved in the expansion of Sakhalin II project and Russia also claims a role in Iran’s path to becoming an LNG exporter by offering to cooperate in NIOC LNG, a liquefaction plant under construction at Tombak Port. The first phase of the project, that froze back in 2012 as sanctions imposition rendered impossible the imports of necessary German equipment, includes two LNG trains, each with a capacity of 5.25MT/a. The second phase could see the plant being expanded to 21MT/a with the addition of two extra trains. Until suspension of construction works, $2.3bn had been invested into the project, that had been completed by more than 50%. Russia and Iran, whose positions distinctly diverge from one another when it comes to the preferred delimitation of the Caspian Sea, following adoption of the median line sectoral division by the former, have been cultivating their energy ties since the beginning of the present year. A few months ago, Iranian Oil Minister Bijan Zanganeh confirmed the signing of an initial agreement with Gazprom on the development of Farzad A, Farzad B, North Pars and Kish fields, in the Persian Gulf. The 12.5TCF Farzad B was first discovered by Oil and Natural Gas Corporation (ONGC), however, India’s decision to cut oil imports from Iran by a fifth in 2017-2018 because of Tehran’s delay in granting the Indian firm development rights soon led to the Gazprom-NIOC pact. Response to the rising energy needs of India and Pakistan projected to expand by a further 50% until 2030, is pursued by several Caspian Sea littoral states, including Turkmenistan, who hopes to launch at some point the slowly progressing Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project. A memorandum of understanding between the Russian Energy Ministry and the Iranian Petroleum Ministry, signed earlier in 2017, provides for the conduct of a feasibility study for the design, construction and operation of another major project, the Iran-Pakistan-India pipeline, proves that Gazprom is equally determined to have a say concerning Iran’s both westward and eastward export ambitions.  

Kazakhstan: Eni Granted 50% Stake in Isatay Block

On December 21, the Kazakh Energy Ministry, Kazakhstan’s state-run oil and gas firm KazMunayGas and the Italian energy major Eni SpA agreed to allocate to the latter 50% of the subsoil use rights in Isatay offshore oil block, located some 40km north of the Buzachi peninsula, in the Kazakhstan sector of the Caspian Sea. Finalization of the deal included the official launch of Isatay Operating Company, a 50-50 joint venture between Eni and KazMunayGas, which is going to serve as operator of the block. Total perspective oil resources of Isatay are estimated at 468 million tons of category C3, and, according to Eni, they are considered ‘’geologically not complex and technologically developable in a short time’’. Isatay is deemed to be particularly sensitive regarding the ecological aspect of extraction, a fact that renders Eni’s established technologies and multiannual experience of prime importance for the block’s exploration. The Italian majority private-owned giant is no newcomer to the Caspian state of energy affairs. Eni has a proven record of committed participation in hydrocarbon production in Kazakhstan since about the country’s declaration of independence, in the early nineties. In 1997, it was numbered among the consortium of Western companies that had concluded a deal with the Kazakh government to explore and develop the northern Caspian, resulting in the discovery of the immense Kashagan field, three years later. Eni also jointly operates with Royal Dutch Shell the Karachaganak oil and gas condensate field in northwest Kazakhstan, each holding a 29.25% of the project. As for Isatay, it was first covered by a Memorandum of Understanding inked by Eni and KazMunayGas back in 2009. In 2014 the two partners agreed on the principal terms of cooperation for the block’s joint development, while in 2015 they set out the commercial terms of the transfer of 50% of the subsoil use rights to Eni. Final documents were after all signed in June 2017. Eni’s newly officialized involvement in the Kazakh hydrocarbon exploration comes amid the recent revival of the long debatable Eurasia Project, targeting deep-water oil reserves in the Caspian Depression, for the purpose of which KazMunayGas, Rosneft, CNPC, SOCAR, NEOS GeoSolutions and Eni itself decided to team up in the summer. Furthermore, this development was followed by the adoption of Kazakhstan’s code ‘’On Subsoil and Subsoil Use’’, signed by the Kazakh President Nursultan Nazarbayev on December 27. The document stipulates the lifting of barriers to the subsoil user’s activity intending to encourage direct foreign investments in the sector. Introducing a simplified process of granting rights to subsoil use based on the ‘’first come, first served’’ model, the Code also promises stability guarantees for already existing contracts and provides for open access to geological information in digital format, as well as for the revision of the list of widespread mineral resources. After the first oil from Tengiz field passed into the Caspian Pipeline Consortium, in 2001, Kazakhstan for the first time succeeded in getting integrated into the global oil industry. The country has ever since sought to draw attention to its subsoil business. However, the downward oscillation of oil prices during the past two years might minimize the margin of profit recovery for any leading oil company interested in supporting new Kazakh discoveries, thus making any future investment less viable. In the midst of a persisting, but always likely to be dashed, bullish sentiment in oil prices and rising environmental awareness that has left oil majors seriously pondering upon a shift from combustibles to renewables, Kazakhstan seems firmly determined to dig deep into its unexploited geological layers despite the evidently unfavorable international context.

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