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caspian energy insight: march 1, 2018

Caspian Energy Insight: March 1, 2018

Author:Caspian Policy Center

Mar 1, 2018

Oil Prices Continue Their Recovery

After taking a dip in the prices in early February, the past two weeks, oil prices have continued their recovery. Brent currently trades above $66 while WTI is above $62.5. Meanwhile, Azeri light is trading around $69, getting closer to $70 threshold once again following January 2018. Hedge funds are also cutting their long positions within the past two weeks. Saudi Arabia’s oil minister Khalid al-Falih finally said OPEC and allies could ease the current production cut agreement going into 2019. Currently, the agreement is there for cutting 1.2M bpd. Part of the reason may come from the fact that global oil inventories are tightening thanks to rising oil prices and diminishing production among the deal-making countries. A recent OPEC report is showing the signs of reaching the goal. The five-year averages of oil stocks in OECD countries were having a surplus of 340M barrels last year in January whereas currently, they are only 74M barrels above. The final goal is to reach back to the average levels. Finally, BP published its yearly energy outlook. They note improvements in efficiency, the rise of competition among new energy sources, and achieving more with fewer sources. While there are improvements in renewables, providing 14 percent of primary energy sources, oil and gas still make up for half the world’s energy.  

Azerbaijan: Gas Extraction from Absheron’s First Well is on Schedule for Early 2020 

Gas extraction from the first well of Absheron gas field, located some 100km south of Baku in the Azerbaijani sector of the Caspian Sea, will start in early 2020, French energy company Total, one of the operators of the field’s development, announced on February 20 during public hearings on the Environmental Impact Report of the project. Extraction volumes at the first stage of development, whose cost is appraised at $1bn, will amount to 4.3BCM of gas and 12,000bbl of condensate. The annual output of this first stage is expected to reach 1.5BCM of gas, a quantity that will be processed onshore and then will flow into Azerbaijan’s local area network for domestic consumption, along with some condensate. Remaining condensate will be exported through the South Caucasus Pipeline (SCP). According to Total, drilling of the ABD-001 well, in a depth of 450m., is going to take place between March 2018 and March 2019 with the use of the ‘’Heydar Aliyev’’ semisubmersible drilling rig, which was dispatched from the offshore supply and logistics base of the Caspian Drilling Company (CDC) on February 23. Apparently, the target date for the beginning of gas extraction at Absheron, previously set by the French oil and gas major towards the end of 2019, has slipped a couple of months, owing to CDC’s need for an extra few weeks before launching ‘’Heydar Aliyev’’ into the sea. In the course of that same presentation carried out last week in Baku, Total also divulged that construction of requisite infrastructure at the field, i.e. an export pipeline and a fixed platform, bridge-linked with SOCAR’s Oil Rocks facility, is going to be conducted from mid-2018 until late 2019. Total E&P Azerbaijan will deal with the pipeline execution and the Azneft Production Union of SOCAR will be responsible for building the platform and connecting it to Oil Rocks. In November 2017, a joint venture of SOCAR and the US KBR Engineering Company, the SOCAR-KBR Limited Liability Company (SK LLC), was awarded a front-end engineering design (FEED) contract to provide topsides for the platform, as part of Absheron’s first development phase. Covered by a Production Sharing Agreement (PSA) between the Azerbaijani government and a consortium of Total (40%), SOCAR (40%) and GDF Suez (now Engie), who at a subsequent time acquired a 20% stake from Total, the Absheron discovery was made by Total back in 2011 with the drilling of the X2 well by Maersk Drilling’s ‘’Heydar Aliyev’’ drilling rig, recently renamed back to its original name, ‘’Maersk Explorer’’. The field’s gas reserves are estimated at 350BCM of gas and 45Mt of gas condensate. After Engie quit, in May 2017, its interest was equally split between the other two partners. Consequently, Total and SOCAR have come to terms regarding establishment on a parity basis of the Joint Operation Company for Absheron Petroleum (JOCAP), the project’s future operator, that will have been finalized in the second quarter of 2018. Contractual and commercial terms for the first phase of production are set out in a deal inked by SOCAR and Total in 2016, while the final investment decision (FID) is foreseen within 2018, following the postponement of deadlines for its adoption at the end of 2017. Asheron is incorporated into a cluster of projects touching the planned or proposed development of several Azerbaijani fields, along with Umid/Babek, which, once onstream, are hoped to fill additional capacity in both the Trans Anatolian and the Trans Adriatic Pipelines (23-31BCM/a in TANAP and 20BCM/a in TAP by 2023-2026). A contribution of Absheron’s projected plateau production of 5BCM/a by 2025, ensuing from the timely implementation of its second development stage in 2022-2023, would most assuredly please the SGC stakeholders, since it would give them access to another yet supply source, apart from Shah Deniz. However, further unscheduled delays in investment associated with low oil prices, to the constraints of which offshore production often finds it difficult to adapt, as well as European gas hub prices at some point reducing the viability of Azeri exports, could essentially weaken the aforementioned hypothesis.  

Turkmenistan, Afghanistan: Regional Leaders Mark the Start of Work on the Afghan Portion of TAPI

On February 23, almost two years after its groundbreaking in Turkmenistan, Turkmen President Gurbanguly Berdimukhamedov, Afghan President Ashraf Ghani, Pakistani Prime Minister Shahid Khaqan Abbasi and Indian Minister of State for External Affairs M. J. Akbar launched construction work on the Afghan section of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline project in Herat. ‘’TAPI will lead from a gas pipeline into an energy and communication corridor, underpinning development of road, rail and communication networks’’, Mr. Abbasi said. Interconnectivity of regional economies and support of their growth were highlighted as prime goals of the US in the message of the State Department’s spokesperson Heather Nauert, who congratulated the four states on the occasion of the ceremony. Indeed, the pipeline is hoped to boost regional trade and cooperation, as well as regional peace in a particularly unstable geographic and political corner of the globe, without mentioning its impact on long-term energy security and economic benefits for the countries involved, in the form of gas sale revenues (Turkmenistan) and transit fees (Afghanistan, Pakistan). The 1.814km TAPI will cover 214km, starting from the giant Galkynysh onshore gas deposit, before reaching the Turkmen-Afghan border. In Afghanistan, it will traverse 774km through the provinces of Herat, Farah, Helmand, Nimroz, and Kandahar. The 826km-long route within Pakistan will pass near Quetta, the provincial capital of Baluchistan, and Multan in the province of Punjab, finally reaching India at Fazilka. Its cost and capacity are estimated at $10bn and 33BCM, respectively. Under a 30-year sales and purchase agreement, Turkmengaz is going to allot 5BCM/a of natural gas to Afghanistan. Pakistan and India, where natural gas demand is predicted to rise by 50% until 2030, are going to receive 14BCM/a each. Even though the Taliban issued a statement on the day TAPI officially entered Afghan territory, assuring that ‘’there will be no delay in this important national project’’, Afghanistan’s deteriorating internal security situation remains of particular concern with regard to possible impediment of the pipeline progress, given its biggest portion will cross southwestern Afghanistan, a major Taliban bastion. It should be noted that the Taliban was the very first negotiators with American Unocal on the building of a pipeline across Afghanistan back in the late nineties (talks finally failed). But today it is certain hardline commanders of the group, controlling several areas through which the pipeline runs, like the Kandahar-Herat highway, that oppose the project and appear capable of attacking construction sites, in defiance of the more positive stance towards TAPI maintained by the central leadership, who eyes a share in the up to $1bn of annual transit duties, promised by the Turkmen MFA in November. Despite US administration’s pledge for increased military assistance to Afghan forces, readiness of the Western-backed government in Kabul to fight the continuously fragmented Taliban and other insurgent factions in the country’s western and southern provinces (both accused of liaisons with Tehran) is still called into question, a fact that could cause serious setbacks to TAPI realization. Economic inducements have lately given new impetus to the project, mainly driven by Turkmenistan and Pakistan. The holder of the world’s fourth-largest gas reserves has greatly invested into TAPI in order to diversify its eastward export routes away from China, who is expected to double annual imports of Turkmen gas up to over 60BCM/a by 2020. This goal gains further importance against the backdrop of Gazprom’s 2016 decision to stop purchasing gas from Turkmenistan, prompting a sharp decline in the country’s hard currency revenue. Still, it is rather improbable for Turkmenistan to overcome its critical economic predicament, even in case of an on-schedule commissioning of the pipeline by 2020. As for Pakistan, it welcomes any new interstate project, with the aim of finding a solution to its major energy shortage problem, and appears willing for relevant cooperation even with the neighbor and arch-foe India. Incremental Pakistani demand for gas is also covered by cheaper LNG contracts, so far signed with Qatar LNG and Eni. Those cheaper rates have prompted the country to request from Turkmengaz a review of the gas pricing formula for TAPI, pursuant to which gas prices are linked with Japan crude cocktail at 64% of its value. As natural gas obtains a firmer foothold in Southeastern Asia, principally impelled by industrial demand growth (led by fertilizers) in countries like India, Pakistan and Bangladesh, TAPI pipeline will not lose allure for partners, who wish to reach financial close this year. However, notwithstanding loan and technical advice offered by various development banks, with the most recent funding granted by the Saudi Fund for Development (SFD), it seems unlikely that adequate financing for the construction cost of the whole project has been ensured to date, creating cause for further adjournment of pipeline laying operations outside of Turkmenistan.  

Kazakhstan Increases Oil and Gas Production

Declared by Kazakhstan’s Energy Minister Kanat Bozumbayev, the Caspian republic is aiming to increase its oil and gas production in 2018. This year, the country is aiming to increase its crude output in Kashagan by 29 percent and gas output by 33 percent. Although it is already producing 300K bpd, the country will eventually reach 370K bpd of crude oil this year. Overall, last year, there were already signs of improvement, with increasing the crude output by 10.5 and gas output by 14 percent compared to 2016. This year, the expectation is to increase overall production slightly although, the investments to Kashagan will keep pouring in. Not expecting the oil prices to increase in 2018, Kazakhstan will have to continue with its steady oil and gas production for continued cash flow while going forward with its privatization measures.  

Uzbekistan is Increasing its International  Potential in 2018

While Kazakhstan is focusing more on its domestic resources, engaging in privatization, and increasing its oil and gas production, Uzbekistan is aiming to increase not only its domestic potential but also international linkages with Tajikistan and Afghanistan while also selling government bonds with New York’s Citigroup. Holding an expo in Dushanbe, Tajikistan, Uzbekistan is trying to increase the trade potential between the two countries in the recent years. Compared to 2016, trade between the two countries increased by 22 percent in 2017. This year, Uzbek banks are considering to increase the credit lines for Tajik companies if they buy the Uzbek goods and services. Allying with Citigroup, Uzbekistan is also planning to sell $200M-$300M worth government bonds as per the announcement by Finance Minister Djamshid Kuchkarov. Ending a long period of isolation, Uzbekistan recently liberalized its currency by losing only a mere 1.5 percent of its value since then.  

Implications for Global Power Politics: Russian Affection with Saudi Arabia

Although some analysts in the past questioned the reliability of the oil producers’ adherence to the production cut deal, the current results are clearly showing the positive effect of the deal-making. This can have troubling signals politically as well, especially for the United States, since the participation of Russia made OPEC, which was once touted useless, much more capable of enforcing its production cuts. With the success of Russia and Saudi Arabia alliance, the two countries are looking for further cooperation in multiple areas in the future. Despite all the improvements in relations with Russia, the United States will not want to lose its Saudi alliance. One attempt has been the recent US willingness to build the nuclear energy reactors in Saudi Arabia. The initial two major candidates were China and Russia, former being a major oil customer for Saudi oil while the latter being a new partner in oil price setting. The US, with Energy Secretary Rick Perry pairing up with Westinghouse Electric Co., now wants to join in. Although it is fearing from further nuclear proliferation in the Middle East, the US also does not want to be left out of an already happening expansion in Saudi Arabia. Beyond, nuclear proliferation, the main issue for the US is not losing its one of the longest and most loyal ally in the region. With the pending IPO of Saudi Aramco, the US, Russia, and China will continue to make moves in increasing their partnership with the kingdom. Russia’s expansions are not restricted with the Middle East. In more than ten years, Venezuela-Russia relationship has been improving. Especially since the economic downturn started at the Latin American nation, Russia expanded its sphere of influence through economic ties. A recent CSIS report how Russia’s Rosneft provided $17bln in credits to Venezuela within the past ten years and not necessarily for only economic relations. Despite the oil prices gaining ground, the economy keeps shrinking and this will mean further Russian influence in the region.  

ExxonMobil Acquires 2.5 Percent of Stake in the Baku-Tbilisi-Ceyhan Oil Pipeline

US oil major ExxonMobil bought a 2.5 percent stake in the 1,768-long Baku-Tbilisi-Ceyhan (BTC) pipeline from CIECO, an Itochu subsidiary, a company representative said on February 19. Financial details of the transaction, believed to have been agreed upon at the end of 2017, were not disclosed. According to BP’s report on the results of activities in Azerbaijan in 2017, shareholding of BTC Co. is divided as follows: BP (30.1%), AzBTC (25%), Chevron (8.9%), Statoil (8.71%), ТРАО (6.53%), Eni (5%), Total (5%), Itochu (3.4%), Inpex (2.5%), ExxonMobil (2.5%) and ONGC (2.36%). The 1,768 BTC, which was being built from 2003 until 2005, transports oil stemming from the Azeri-Chirag-Guneshli oilfield cluster in the Caspian Sea towards Turkey via Georgia. The pipeline’s pumping capacity is 1.2Mbbl/d. Its biggest part crosses Turkey, at around 1,076km. The addition of another yet American shareholder in BTC Co., following Chevron, ConocoPhillips and Hess Corporation, comes as no surprise, given that the specific pipeline has always represented the fulfillment of US regional vision and strategic goals in the Caspian and its completion was accomplished as a result of the consistent American foreign energy policy of the nineties. Oil transportation through BTC, that still provides a large amount of foreign currency to the Azerbaijani economy and symbolizes one of the two key projects of regional cooperation with Turkey, along with TANAP, slightly rose to 2.9Mt of oil in January 2018, compared to 2.84Mt in January 2017. Having been exporting Azeri light from Chirag and Central Azeri fields to Western markets via Georgia’s Black Sea port of Batumi since 2005, it seems that now was the right time for ExxonMobil to start working with co-ventures for the success of one more vital crude export route from Azerbaijan.

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