Oil Prices are Increasing This Week
Compared to the week before, oil markets are performing well. This week, oil prices continued to increase. Currently, Brent trades above $67 while WTI is above $63. Meanwhile, Azeri Light is trading around $67 this week. More importantly, the price volatility in oil markets seems to have cooled down in recent weeks following the sharp increases in January and price dips in early February of this year.
In the trading markets, hedge funds are also more cautious about the price outlook. Liquidation of bullish positions from earlier is continuing. This does not necessarily indicate a clear exit strategy for the investors since earlier in the year, the bullish positions were at a record level. Still, the increase in rig counts in the United States, tensions in the Middle East, EU’s newly proposed sanctions on Iran, the decreases in Venezuelan crude supply, and recent OPEC moves are issues to keep an eye on for the students of crude oil markets.
In the past few weeks, oil markets were concerned about the sharp decline of Venezuelan crude supply as well as the Trump administration’s pressures on Iran. These issues could suppress oil supply in the markets. However, the expectations for the growth of oil supply are positive, even by OPEC’s standards. The organization is expecting the US supply to increase –not far-fetched given the current jump in rig count- and overall non-OPEC production to rise by 260K barrels per day. The good news for the producers, however, is coming from the oil inventories and their 85 percent decline since the beginning of 2017. Recent estimations of OPEC are now more in line with those of IEA.
At the current stages of the oil market, the production cut strategy of OPEC and non-OPEC alliance seems to have paid off with almost 50 percent price rise. At this stage, the prices hit $70 and above slightly and returned back. This could continue to be the price ceiling for the year with shale producers aggressively responding to the oil price increases. As for the price takers, the shale producers will continue to observe price changes in oil and continue to respond accordingly. For now, the traders, the American producers, and the OPEC/non-OPEC production cut alliance seem to be happy with the price levels, as is.
Azerbaijan and OPEC Negotiation Strengthens
Azerbaijan might start discussing an official membership to OPEC soon. Azerbaijan has been on good terms with the oil cartel in recent years, taking part in the production cut agreement since November 2016. The Caspian nation has been complying with the agreement and participating in balancing the oil markets.
Equatorial Guinea from Central Africa is the latest member which joined the organization back in 2017. Although the country only produces about 227K bpd, its membership showed significance with the inclination to increase the size of the organization in recent years. If Azerbaijan joins, it will be the first Post-Soviet nation to be a part of the organization. In recent years, many non-OPEC countries from the region, also including Kazakhstan and Russia, have been allying with OPEC to cut down oil production by 1.8M bpd to balance the market. However, these agreements were not made with these countries becoming official members of the organization. The agreement will run out by the end of this year.
OPEC Secretary General Mohammed Barkindo visited Baku this week. Barkindo met with Azerbaijan’s President Ilham Aliyev and Energy Minister Parviz Shahbazov, discussing new cooperation areas. Shahbazov stressed the importance of the agreement for balancing the oil market and restated Azerbaijan’s inclination to continue with the agreement if need be.
Kazakhstan: Shell Offered Stake in KazMunaiGas Ahead of The Kazakh Firm’s IPO
Kazakhstan’s sovereign welfare fund Samruk-Kazyna has reportedly proposed that the Anglo-Dutch major Shell acquire a minority stake, amounting between 10% and 20%, in the state-controlled oil and gas company KazMunaiGas (KMG). Due to the relative information scarcity surrounding the discussions, as none of the two negotiators has yet gone public with the details, the price of a possible agreement is for the moment not known. Samruk-Kazyna, whose total assets were estimated at $67bn as of 2016, already holds a 90% stake in KMG. In 2015, the year that ended with crude oil prices at their lowest level since 2009 (below $40 per barrel), the National Bank of Kazakhstan became a 10% shareholder of KMG, following a $4bn injection, in order to support the fund in its effort to bail the energy group out. It was then believed that KMG’s accumulated net debt/EBITDA, which normally shouldn’t exceed 3.5, would lead to a breach of its Eurobond covenants. Samruk-Kazyna’s decision to spend $4.7bn for half of KMG’s stake in Kashagan helped the oil producer deconsolidate some $2.2bn of indebtedness stemming from the giant offshore oilfield project in the Northern Caspian and to reduce its debt-to-EBITDA ratio.
Today, Kazakhstan’s oil champion continues work towards lightening its debt burden, through sales of non-core assets, and stabilizing its performance, amidst slightly elevated oil prices, on the road to an initial public offering (IPO), set to take place around 2019-2020. Even though the exact time of realization, as well as the size that Samruk-Kazyna will finally retain in KMG, are still undisclosed, the float was practically enabled resulting from KMG’s recent move to delist its upstream unit KMG Exploration and Production (KMG EP) in London after 12 years. Despite it not completely fitting into the category of the so-called ‘’blue chips’’, KMG is numbered among the most high-value prizes for investors, under a major privatization program launched by the Kazakh government with the aim of trimming State’s participation rate in 65 businesses down to 15% of GDP by 2020, in line with OECD precepts. Therefore, a strategic partnership with Shell at this point, potentially via the granting of the central bank’s stake to the international oil firm, is widely thought to be rendering KMG more appealing ahead of its planned listing.
Shell is, of course, no stranger to Kazakhstan’s offshore oil and gas industry, since it owns a 16.8% stake in Kashagan and a 29.25% in Karachaganak Petroleum Operating (KPO), plus a 7.5% (in a joint venture with Rosneft) in Caspian Pipeline Consortium (CPC), responsible for shipping Kazakh oil to Russia’s Black Sea port of Novorossiysk. Undoubtedly, Shell’s entry into KMG’s shareholder structure might theoretically assist in boosting foreign investors’ interest in the shares offered by the Kazakh company. However, it must also be borne in mind that Shell has to battle an $88bn debt pile of its own, and so it is uncertain whether the obtainment of even a minority stake in KMG would be to its financial detriment or not. In addition, with the value of the rumored accord for the present unconfirmed, the extent to which it could affect the price and outcome of the imminent IPO cannot yet be determined. Hopefully, as soon as the companies themselves either corroborate or refute the transaction, more light will be shed on the future of KMG’s public listing.
Azerbaijan, Turkmenistan: Ashgabat Invites Baku To Participate in the TAPI Pipeline Project
Turkmenistan has extended an invitation to Azerbaijan requesting the participation of its neighboring country in the implementation of Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, a vital infrastructure element in the context of Turkmenistan’s eastward export diversification strategy. The Turkmen interest in Baku’s cooperation regarding TAPI was expressed last Thursday (Mar 15) during a briefing by Turkmenistan’s ambassador to Azerbaijan Mekan Ishangulyev, who noted that the transnational project will promote social and economic development in the region. 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.
For his part, the more Western-oriented Azerbaijan has in the past years been actively involved in the financing and construction of another extensive pipe network, the Southern Gas Corridor (SGC), intended to enduringly enhance gas-supply security of the EU, as most of its gas has by now been contracted by Turkey and European member-states up to 2045. According to a report published last week by Fitch, SGC’s net financing needs for operations and CapEx will be close to $2.2bn in 2018-2019, taking into account proceeds from the operation of Shah Deniz project and South Caucasus Pipeline (SCP). The agency, that affirmed SGC company’s senior unsecured Eurobonds’ long-term rating at BB+, also said it expected the approval of more loans by development institutions for the project segments (South Caucasus Pipeline Expansion: SCPX, Trans Anatolian Pipeline: TANAP, Trans Adriatic Pipeline: TAP).
Meanwhile, with its participation in the SGC via the proposed Trans Caspian Gas Pipeline (TCGP) stuck in perpetual deliberations with EU representatives due to the unsettled legal status of the Caspian Sea, Turkmenistan has concentrated on finding financial sources and allies in the materialization of TAPI amidst security concerns, related to the reception of the project by the Taliban and Islamic State factions in the territory of Afghanistan, as well as objections against the gas tariff rate, principally raised by Pakistan. Following a financing agreement with the Saudi Fund for Development (SFD) for the purchase of gas pipes for the Turkmen section of TAPI, Turkmenistan’s President Gurbanguly Berdimuhamedov has continued the search to attract more Middle Eastern funding for the pipeline. In the course of his official visit to the United Arab Emirates (UAE) last week, he invited local companies and financial entities to support TAPI’s second construction phase in Afghanistan. After all, UAE firms have long been present in the Turkmen energy market. Dragon Oil, one of the largest international investors in Turkmenistan, holds the right to develop oil and gas reserves contained in Block II in the Turkmen section of the Caspian Sea, under a 1999 production sharing agreement (PSA). Furthermore, back in 2013, Petrofac completed a major service project on the development of Galkynysh in Turkmenistan's Mary province.
With all the above in mind, what good would Azerbaijan’s engagement in TAPI have to bring to both countries? In this case, the key lies in Azerbaijan’s relations with ‘’strategic partner’’ Pakistan and ‘’brotherly’’ Afghanistan, Azerbaijan could to a certain extent contribute to the uninterrupted progress of TAPI.
Russian Energy Investments in Iran
A private oil company, Dana Energy, from Iran currently signed a new energy deal with one of Russia’s state-owned energy companies, Zarubezhneft. Zarubezhneft is awarded a contract last week and will receive 5 percent share of the project’s revenues over 20 years. The deal is worth $742M, paid by the Russian company to cover 80 percent of the investment, and aiming to increase Iran’s oil production by 12K bpd near the Iraqi border at the Aban and Paydar fields in Ilam. Over a ten year period, the expectation is to produce around 105M barrels. Iran’s Oil Minister Bijan Namadar Zanganeh indicated his optimism on the oil markets and the potential benefits of the deal. The new agreement is to bring an additional $4bln to Iran over the years.
This is the second IPC in Iranian oil sector following TOTAL and CNPC’s shares in South Pars fields in Iran. Following a French and Chinese initiative, this time a Russian company opted to invest in the oil fields of Iran. Although the size of the deal is small with only $742M investment, this could be an indication of larger Russian state companies to follow the initial investment. Russia and Iran have been in alliance especially after increasing pressures and sanctions by the US. The two countries are also in relatively good terms in the Middle East.
These announcements of IPCs might be an indication of a further alliance between Iran and Russia. National Iranian Oil Company (NIOC) head Ali Kardor also confirmed this by saying how the two countries were doing well in the political alliance but economic relations have been missing from the picture. While Iran has vast untapped natural gas and oil resource, lacking expertise and investment, Russia might just be the answer to provide these two for the Middle Eastern nation that is under pressure by the United States.
NIOC is expecting to announce new IPCs with other companies in the upcoming months. However, Iran is still far from actualizing its potential in oil and natural gas sectors, lacking funding opportunities. The national oil company is eyeing to receive upwards of $100bln in investments but the number is currently far off the mark.
The government will also be awarding $6 bln worth in oil exploration contracts to the local firms. Just at the beginning of this week NIOC and local firm Pasargad Energy Development Company (PEDC) announced the signature of a $2.4bln contract. The arrangement includes the integrated development of the Sepehr and Jofeir oil fields.