Oil Prices Continue to Stay Stable 

Last week, oil prices have increased slightly. Brent currently trades around $65 while WTI is around $61. Meanwhile, Azeri Light is trading just shy of $66 this week. Following the price increases in January and dips in prices in early February, oil prices have been stable this past two weeks with slight increases. In recent weeks, despite Trump administration’s pressures on Iran and a potential for the deal to collapse, oil prices did not increase significantly. Adding to that, Venezuela is also losing its pace of oil supply in recent years. Since January 2016, the Latin American nation contracted its supply by 700K bpd. As of 2018, oil consumption is increasing and inventories are shrinking. However, despite all those threats against oil supply along with the OPEC/non-OPEC deal to cut supply by an additional 1.8M bpd, the expectation for supply is also an additional 2M bpd for 2018. The OPEC/non-OPEC deal has already showed its impact on the market and potential threats for Iranian and Venezuelan supply are not registering as an upward push for oil prices for now. Furthermore, US oil supply is increasing steadily, especially when prices increase above $70. Therefore, a contraction in oil supply is not likely to register significantly higher since it will enable shale producers to pump more oil to the world markets. This kind of thinking is also showing its effects on the behavior of oil traders. The traders hit the record bullish positions in January of this year and they are currently liquidating their positions in recent weeks. With the expectation of rising supply to cover increasing oil demand, 2018 is not showing promises for significant jumps in oil prices.  

Kazakhstan: Kashagan Set to Reach the First Phase of the Target Growth

Kazakhstan’s offshore Kashagan oilfield is steadily pumping 300,000bbl/d, the country’s Deputy Prime Minister Mahambet Dosmukhambetov said on the sidelines of the CERAWeek Conference. The next step is now for the project to attain a plateau output rate of 370,000bbl/d, Mr. Dosmukhamedov added. It should be reminded that the achievement of full design capacity, in the context of Kashagan’s first development phase, had been previously delayed until 2018. This setback for the Northern Caspian Sea deposit, whose recoverable crude oil reserves are estimated at 10bnbbl, had to do with gas injection issues. The presently deployed reinjection of sour gas into Kashagan’s high-pressure and high-temperature reservoir serves as a secondary oil recovery method facilitating production ramp-up. Under a planned $2bn-worth expansion project of gas reinjection, the North Caspian Operating Company (NCOC), made up of Eni, KazMunayGas, Shell, Total, ExxonMobil (each holding a 16.81% stake), CNPC (8.4%) and Inpex (7.56%), aim to take production of the field’s notably sulphurous oil up to 450,000bbl/d. For the time being, the pipeline systems of the Caspian Pipeline Consortium (CPC) and of KazTransOil, Kazakhstan’s largest oil transporter, carry out oil export from Kashagan. As soon as Phase 2 is launched, the territory of Azerbaijan will emerge as an additional export corridor for Kashagan’s oil via the Baku-Tbilisi-Ceyhan pipeline. However, decision-making on this second stage of the Kazakh project has slipped to 2019, as a result of the protracted plunge in oil prices. Asked whether Kazakhstan will be able to comply with its 20,000bbl/d output cut quota, imposed to the country following a 2016 pact between OPEC and non-OPEC producers to trim a global oil glut and push prices up, against the backdrop of US shale surge and a strengthening dollar, the Kazakh Deputy PM simply answered that ‘’we cannot stop (growth from) Kashagan’’. Overall production from the field in 2017 (8.35Mt of oil and 5.1BCM of gas) is said to have surpassed expectations by 66%, according to Energy Ministry data. Moreover, Kazakhstan’s total oil output rose by 10,5% to 86.2Mt in 2017, while in November and December of that same year, the republic was pumping 130kbbl/d over its target, managing to take Iraq’s place as OPEC’s first biggest over-producer. Even though Kazakhstan’s tenacious macroeconomic challenges have brought OPEC restraint commitments into sharper focus, its cooperation with OPEC and allies has often been put to the test because of its resoluteness in observing contractual obligations to investors in large oil and gas projects. The fact that Kazakhstan seeks to benefit from OPEC’s slight laxity in price and production discipline, when it comes to major ventures such as Kashagan, Tengizchevroil and Karachaganak, has led to Kazakhstan getting repeatedly told off by the cartel for willfully deviating from its cut pledge, along with Iraq, Iran, the UAE and Malaysia. However, a revision of the symbolic, as deemed by Kazakhstan if compared to more generous cut engagements taken up by Russia or Saudi Arabia, 20,000bbl/d curb is currently off the table, Mr. Dosmukhambetov explained in Houston. Nevertheless, the actual government and individual NCOC partners’ views concerning ambitious increases at Kashagan appear somewhat divergent. Kazakhstan’s Energy Minister Kanat Bozumbayev recently specified that some 10.8Mt of oil and 6.8BCM of gas are to be released from the field in 2018. Furthermore, both Mr. Bozumbayev and NCOC managing director Bruno Jardin have declared their intention to soon enough reach the 370,000bbl/d goal. But fresh statements by Shell and Total high-ranking representatives show that international energy companies cautiously appraise future development of Kashagan, in light of oil prices hovering at roughly half their 2014 levels and of technical predicaments getting in the way. They, thus, prefer to derive valuable knowledge from the subsurface of the biggest single oilfield discovered in the world since 1968, instead of hastily moving forward with large-scale investments. With oil and gas sector revenues as the main drivers of the country’s GDP growth, one should normally expect Kazakhstan to set the stakes high in relation to the progress of its offshore business, despite the cut promises made to OPEC/non-OPEC allies. Latest amendments introduced to the national subsoil legislation, which simplify the process of obtaining the subsoil use right and the issuance of the prerequisite permits, indicate the country’s willingness to create even more favorable investment conditions for foreign companies. On the other hand, it seems evident that already active international firms, like NCOC stakeholders, as well as entrants to yet unexplored areas, like Eni in the case of Isatay block, are more inclined to take modest, albeit non-negligible, investing steps amid the new low-price oil environment.  

EIB Approves 932 Mln Euro Loan for the TANAP Gas Pipeline

The European Investment Bank approved 932 million euros ($1.15 billion) in financing on Thursday for the Trans-Anatolian Natural Gas Pipeline (TANAP), the largest part of $40 billion projects, to bring new gas supplies to Europe. The Southern Gas Corridor is expected to bring around 16 billion cubic meters per year to Europe by 2020 from the Shah Deniz 2 field in Azerbaijan via TANAP through Turkey, the South Caucasus pipeline extension through Georgia and the Trans-Adriatic Pipeline (TAP) to Greece, Albania and Italy. Shah Deniz 2 is one of the world’s largest gas fields and is developed by a BP-led consortium. Financing for the construction of the TANAP pipeline has already been approved by the European Bank for Reconstruction and Development (EBRD), the World Bank and Asian Infrastructure and Investment Bank (AIIB).  

Russia, Iran, Turkmenistan: Energy Dimensions of a Regional Rapprochement

After the inauguration of a full-scale partnership between Gazprom and National Iranian Oil Company (NIOC) along the entire gas value chain, including possible collaboration on the $4bn Iran LNG Project, energy issues were also at the epicenter of the 14^th meeting of the Permanent Russian-Iranian Joint Trade and Economic Commission. Following conclusion of the session, which was held on March 6 and was co-chaired by Russia’s Energy Minister Alexander Novak and Iran’s Finance Minister Masoud Karbasian, implications for bilateral trade, in the event of the Islamic republic joining the Russian-led, but regulatorily and institutionally flaccid, Eurasian Economic Union (EAEU) by May, immediately made the headlines. However, the news that three agreements based on Iran's new model of oil contracts (Iranian Petroleum Contract -IPC), that has already replaced the old-type buyback contract, will have been signed by March 21, i.e. by the end of the current Iranian calendar year, should be given equal, if not grander, importance, in the context of the Russian-Iranian energy cooperation. That is because Russian companies’ interest has been kept fervent in a certain number of onshore oil and gas fields that ended up in NIOC’s investment list. For instance, Lukoil has submitted a proposal for developing Ab-Teymar and Mansouri oilfields in western Iran, while Gazprom Neft has presented its own plan on Azar and Changuleh oilfields on the border with Iraq. To top it all off, Gazprom inked in January 2018 separate memoranda of understanding with Iran in order to be able to carry out technical studies for three offshore gas fields in the Persian Gulf, namely North Pars, Kish and Farzad-B, which was to be developed by its initial discoverer, an OVL-led consortium, prior to an impasse in negotiations with Tehran that forced Indian state refiners to halt Iranian oil imports in 2017-18. According to Minister Novak, Russian firms are going to invest over $20bn in Iran’s oil and gas sector and are eager to partner with international energy players on future projects. Moreover, it was in the course of the Joint Trade and Economic Commission’s meeting that a special working group, formed out of the two countries’ Energy Ministry representatives, convened for the first time on Russia’s potential participation in the implementation of Iran-Pakistan-India gas pipeline, running from South Pars gas field to Karachi. NIOC chief Ali Kardor has since late 2017 revealed that the company is considering joint realization with Gazprom of both the abovementioned line, as well as of a second deep-water connection to India passing through Oman, but bypassing Delhi’s neighbor and arch-foe Pakistan. Finally, another memorandum of understanding allowing for geological exploration activities regarding the hydrocarbon prospects of the Iranian sector of the Caspian Basin by Rosgeologiya and Iran’s Geology and Mineral Resources Organization was also signed at the outcome of the Commission’s meeting. It should be noted that Russian and Iranian positions differ from each other as for the preferred delimitation of the Caspian Sea, following adoption of the median line sectoral division by Tehran, but both states oppose to pipeline laying operations being carried out before the definitive settlement of the Sea’s legal status, this way impeding implementation of the Turkmen-Azerbaijani Trans Caspian Gas Pipeline (TCGP). One day ahead of the Russian-Iranian Commission’s session in Moscow, the High-Level Group on Trade and Investment Support, operating under the aegis of the Intergovernmental Turkmen-Russian Commission for Economic Cooperation, gathered in Ashgabat. Energy relations between the two countries are far from ideal, as a result of Gazprom’s 2016 decision to stop buying Turkmen gas, leaving the Central Asia-Center pipeline network practically empty and prompting a sharp decline in the country’s hard currency revenue. Now both countries are focused on China’s gas export option. Turkmenistan has agreed to up its gas exports to Beijing to over 60BCM by 2020 (from today’s 30BCM), as soon as Line D of the Central Asia-China gas pipeline network is commissioned. However, the price for this gas has still not been made public and Turkmenistan will have to compensate China for financing the pipeline building, a fact that raises a question mark over the exact profit margins for Ashgabat. For its part, Russia is preparing to send gas from the Irkutsk and Yakutia gas production centers to China via the Power of Siberia gas transmission system. Besides the particular regional antagonism over the Chinese clientele, Turkmen President Gurbanguly Berdimukhamedov has never ceased to seek restoration of broken energy ties with Russia, as was proved by his suggestion that Moscow should contribute to the materialization of Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, another eastward export gas project, made during a phone conversation with Russian President Vladimir Putin in December 2017 and still remained unanswered. Of course, Ashgabat can always rely on EU and its financial institutions’ support of the TCGP, through which one more supplier-state will be added to the Southern Gas Corridor pipe network, however, chronic delays in this project have resulted in Turkmenistan searching for additional energy alliances within the strictly limited Eurasian and Southeast Asian space. Around 80 sector projects have been so far incorporated in the intergovernmental Russian-Turkmen program of economic cooperation from 2017 to 2019, with the addition of energy-related ones. Overall, two distinct conclusions can be drawn out of these recent initiatives of regional rapprochement between Iran and Russia and Turkmenistan and Russia, in the mantle of economic and trade cooperation. With respect to Iran, Russia clearly wishes to put into effect a containment strategy of its neighbor in the post-nuclear-pact era through the steady set-up of energy bonds, ranging from subsoil exploration and pipeline diplomacy to thermoelectric power stations and railway electrification. The new wave of US sanctions against Iran that could further choke off the foreign investment the country needs to rehabilitate aging energy assets and boost oil and gas production, as well as EU’s relative idleness on the formulation of a cohesive partnership plan for Iran, in lack of a more decisive American ally, are two things Russia takes advantage for this purpose. Lastly, Russia’s stance pertaining to Turkmenistan is based on the usual sphere-of-influence thinking that it applies to the whole former CIS area. Witnessing Gazprom restoring gas flows from Turkmenistan at some point in 2018 will be part of this theoretical conception and will mean Russia will have previously secured important Turkmen concessions in return.  

Uzbekistan Continues to Expand into the World Market

With President Shavkat Mirziyoyev, Uzbekistan has changed its view on international trade in recent years. Once a quite closed economy, the country is looking for international investments, opening its borders for trade, increasing the ease of business, and diversifying its economy. Despite being a rare double-landlocked country in which a trader needs to go through two countries to reach a seaport, Uzbekistan is taking its major place as a regional trade center. The current five-year plan includes significant economic transformation for the country. Growth is quite steady with 8 percent per year (one of the highest in the region), while the country is also in cooperation with IMF for engaging the rest of the world and modernizing its banking structure. By increasing its crude oil and natural gas output, the country is also trying to boost its petrochemicals industry while decreasing its dependence on other oil-producing countries for domestic consumption.