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caspian energy insight: march 7, 2018

Caspian Energy Insight: March 7, 2018

Author:Caspian Policy Center

Mar 7, 2018

Oil Prices Are Stable

Following significant price increases in January and dips in prices in early February, last week, oil prices have been stable with slight ups and downs. Brent currently trades around $65.5 while WTI is around $62.5 and Azeri Light trading around $67 starting this week. The beginning of 2018 brought another novelty for the oil markets; that is the declining discount between WTI and Brent. While the gap between the two types was around $6-7, increasing significantly especially following the Harvey hurricane that hit the coasts of Texas, with the start of the new year, the WTI started to catch up with Brent, closer to its historical levels. Currently, the gap is just above $3 per barrel, the smallest gap since mid-2017. This week, the petroleum investors also increased their long positions, following a period of profit selling in February. OPEC is also trying to find ways to work with shale producers in the US and met hedge funds, which invest in these firms in Houston. The idea is to find a common ground to work together although anything tangible does not seem possible at this point. At this point, OPEC tried everything to deal with the shale producers, including ignoring and fighting. This time, the cartel is changing their approach with a friendly hand. Now that the oil prices started to increase again, shale producers are feeling the need to pump more oil into the market. While increasing global oil demand can offset part of the production by shale producers, this will only be a short-term solution for a large problem for OPEC.  

Kazakhstan: Astana Gasification Project Will Materialize Next Year

The gasification of Astana and of the central and northern regions of Kazakhstan has to be implemented during the following year and a half, the Kazakh President Nursultan Nazarbayev said on March 5, speaking at the joint session of the Parliament chambers. Mr. Nazarbayev noted that the current level of centralized gas supply in the Kazakh territory stands at around 50%, covering nine regions in the country’s west and south. This leaves central and eastern parts of Kazakhstan without access to natural gas, even though domestic output has risen from 8 to 52BCM/a since independence, a figure projected to grow further in the coming years. Mr. Nazarbayev underlined that the increasing number of vehicles, as well as the fact that both of the city’s thermal power plants are coal-fueled, have resulted in smog scourging Astana. Indeed, in December 2017, pollutants in Astana’s air exceeded permissible levels bringing about the appearance of a heavy shroud of smog that enveloped Kazakhstan’s capital. Getting Astana connected to a gas supply is going to help reduce harmful emissions by six times, or 35 thousand tons on an annual basis, Mr. Nazarbayev stated. In order for Astana and the central and northern Kazakhstan to acquire much-needed gas infrastructure, the Kazakh President pointed to the importance of the soonest possible implementation of the Saryarka gas pipeline by Kazakhstan’s state pipeline monopoly KazTransGas. Realization of the pipeline will be divided into four distinct phases. Firstly, a 1.081km-long pipeline will be built from Karaozek, Kyzylorda region, to Astana, through the cities of Zhezkazgan and Karaganda. At a later stage, two additional pipeline extensions will run from Astana to Kokshetau and from Kokshetau to Petropavlovsk. Finally, the construction of two compressor stations in Zhezkazgan and Temirtau will boost aggregate pipeline capacity to 3BCM/a. According to the technical feasibility study finalized by KazTransGas in May 2017, the overall cost of all four phases will amount to KZT370bn (USD1.2bn). Realization of the project will allow for the switching of 192 private boiler houses, 48 small communal boiler houses, 22,000 private residential houses and Astana’s CHPP-1 and CHPP-3 (hot-water boilers implemented in already existing infrastructure of Central Heat and Power Plants, CHPP) to natural gas, positively affecting the ecological condition in the capital. The Saryarka pipeline will form part of the Beineu-Bozoi-Shymkent main gas pipeline, a joint project of China and Kazakhstan with an approximate length of 1475km, aiming to ensure a stable supply of natural gas to the southern part of the country and to improve Kazakhstan’s gas export prospects to China. Presently, the Kazakh Energy Ministry considers an increase in the Beineu-Shymkent pipeline’s throughput capacity to 15BCM/a from today’s 10BCM/a. However, the ambitious deadline set out by President Nazarbayev with regard to Astana’s gasification plan will only be met provided that the requisite financing will be secured. Kazakh Energy Minister Kanat Bozumbayev has already been engaged in talks with representatives of the European Bank for Reconstruction and Development (EBRD) in search of funds in the form of a loan since the state budget alone will not be able to accommodate such large-scale ventures. In case of a long-term loan approval, the price levels for natural gas supplies to end customers, in comparison with those of fuel oil, diesel fuel, and coal, will determine the payback period of the project. If tariffs prove too high for households and businesses, Minister Bozumbayev has put forward the alternative of liquefied natural gas (LNG), currently shipped from Russia to Kazakhstan by motor transport under a 2016 contract between Gazprom Export and Global Gas Regasification. Around 2,600 tons of Russian LNG was delivered to the abovementioned poorly gasified areas of Kazakhstan in 2017, as specified by Gazprom. From 2014 to 2017, LNG consumption in Kazakhstan is believed to have grown by 65%. Both options (piped gas via Saryarka and LNG) remain high on Kazakhstan’s gasification agenda since natural gas is more affordable than gasoline and has a limited environmental impact. Lastly, according to the US Energy Information Administration (EIA), coal basins lying in the north and center of Kazakhstan could also serve as a source of natural gas supplies for areas of the country that are far from natural gas production and infrastructure.  

Southern Gas Corridor: Despite the Cold Snap, 70 Percent of the Tap Pipes Are Lowered into the Albanian Ground

The recent adverse winter conditions notwithstanding, nearly 70% of pipes of the Trans Adriatic Pipeline (TAP) in Albania have now been lowered in, the pipeline consortium announced last week on Twitter. The particular percentage represents 150km out of the 215km-long Albanian portion of TAP. Regardless of the cold spell that later spread across Europe, pipeline construction activities in the territory of Albania are being carried out as per schedule, the company confirmed. The building of TAP in Albania, the third and final state on its route, has so far been met with petty resistance, strengthening hopes of the timely completion of this last leg of the Southern Gas Corridor until 2020 (SGC). Unlike Italy, where activists have repeatedly attempted to block work on the line in the region of Puglia, or Greece, where small-scale opposition from farmers in the country’s North has spurred a legal battle in the Council of State, Albania has been actively supporting its connection to the SGC through both TAP and the Ionian Adriatic Pipeline (IAP), the pipeline extension of TAP across the Western Balkans. In this context, the Albanian gas grid operator (Albgaz) pursues cooperation not only with European counterparts, like the Greek DESFA, but also with Azerbaijan, currently the only supplier to the SGC pipe network thanks to the second stage of its Shah Deniz field development (SD2). This is shown by the two agreements inked by Albgaz and the Azerbaijani state oil company SOCAR in the course of the Fourth Ministerial Meeting of the SGC Advisory Council, regarding the establishment of a company responsible for the implementation of IAP and a gasification project, set to reduce Tirana’s reliance on the environmentally unsound hydroelectric power. It is hence made apparent that Albania will doggedly seek on the development and sustainable integration of its gas transmission system (GTS) with those of the rest of Europe. Furthermore, it clearly aspires to transform itself into an energy gateway for traditionally ill-supplied markets like Kosovo, Montenegro and Bosnia-Herzegovina. The open-ended dialogue with TAP AG, as well as direct energy partnerships with SOCAR, are thought to be helping in this direction, especially at a time when alignment with the EU energy acquis appears more necessary than ever in view of the Bloc’s prospective Western Balkan enlargement.  

Light Ahead of the Tunnel for the TAPI Pipeline Project

Despite going through multiple rough spots, Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline is scheduled to be completed in 2019. While the Pakistani state announced an additional $2bln investment decision for the pipeline project, Turkmenistan hired Chinese firms for pipe laying and Japanese firms for developing the gas field, Galkynysh, feeding into TAPI. The pipeline will deliver 33 bcm of gas on the route for 25 years, create more than 12 thousand jobs, and will receive at least $25bln investment over the years. The pipeline will be 1800km long, going through multiple areas that have tough security conditions. Once completed, Afghanistan will receive 5 bcm of gas yearly while India and Pakistan will receive 14bcm each. Currently, Asian Development Bank (ADB) was up until recently providing assistance for transaction advising. The ADB will now provide $1bln in funding for the pipeline. In addition to the ADB, Islamic Development Bank (IDB) will contribute another $500M for developing the pipeline. Muhammetmyrat Amanov, CEO of the TAPI Pipeline Company, announced that the company finished the installation process in Turkmenistan and will move on to Afghanistan now. The company and participating countries are wishing for the stabilizing power of the pipeline on the route but it will be a risky and tough job for the stakeholders. The pipeline will go under the ground for security concerns and the plan is to employ at least 7000 NATO trained soldiers to protect the pipeline from potential terrorist attacks. If achieved and functioned properly without any terrorist attacks, TAPI pipeline will have a significant role in regional stability and peace as well as trade connections between the participating countries. The pipeline will also be one of the biggest projects in Afghanistan in recent years while tying the terror-ridden country to India and Pakistan. Further geopolitical implications will be India’s access towards the region through the pipeline. For Turkmenistan as well, this will finally bring a sigh of breath for export dependency on single consumers since their independence. Throughout the 1990s and part of the 2000s, Turkmenistan was dependent on Russia to buy its natural gas through the existing Soviet-era pipeline network. Around the time Russia stopped buying Turkmen natural gas, China started to buy its supply. With TAPI pipeline, Turkmenistan will have the ability to sell its vast natural gas resources to multiple large consumers which will include the two most populous countries in the world.  

New Financial Options for the SGC

After the announcement of the European Bank for Reconstruction and Development plans to allocate loans worth up to 1.2 billion euros for TAP, German Ministry of Finance will also provide 1.2 billion for the SGC. While the funds will be used to refinance the Shah Deniz and TANAP of Closed Joint Stock Company Southern Gas Corridor (SJCC), another 500M euro might be provided for TAP as well. The EBRD is also providing 60M Euros to Romanian Transgaz for a pipeline connector which enable the country to connect to the SGC. The pipeline will stretch from Romania and Bulgaria to Hungary and Austria with a price tag of roughly 500M euros. While these new financial opportunities rain on the SGC, the first phase of the corridor will be commenced in July 2018. The corridor will be in fully operational by 2020. Once it becomes functional, the SGC can receive multiple other suppliers from other regions including Turkmenistan, Iran, and Eastern Mediterranean suppliers.

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