CPC - Caspian Policy Center


caspian energy insight: may 3, 2018

Caspian Energy Insight: May 3, 2018


May 3, 2018

Oil Prices Are in Balance

Oil prices have been on the rise within the past two and a half months. This week, the prices are balanced, with not much change, yet still staying over $70 levels for the first time in years. Brent currently trades above $73 while WTI is above $67 with a slight increase in the gap between the two benchmark prices this past week. Azeri light oil, on the other hand, trades just shy of $76 this week. Hedge funds started to become slightly cautious on crude but they still continue to be optimistic on refined fuels this past week. The market still buys all the negative factors on supply, including a potential Iranian deal breakdown this year. Such a move could move the prices even higher which will eventually feed into further rising tensions in the Middle East. Any concern regarding the supply, coupled with OPEC+ production cut agreement can translate into rising prices. Another problematic news comes from American oil and gas company Hess. The company reported losses for the 14th time this quarter. This can have two implications; either the shale extractors are still losing money at the highest prices this year or the investments are on the rise. Meanwhile, some bad news for global oil demand comes from China where major oil refineries will each be under maintenance for at least 30 days or more. This roughly translates into 10 percent decline in capacity in Q2. Coupled with port closures, the imports will slow down and might have a negative effect on oil prices. For that particular reason, the refineries are ramped up their imports in April in order to compensate for the port closures. In oil markets, there is another bad news for Venezuela. This week, ConocoPhillips wins a lawsuit against the struggling Latin American oil producer due to the nationalization of its investments in the country. Venezuela is going to pay $2.04 billion. However, the situation could have been worse. ConocoPhillips’s demand was upwards of $17 billion. Still, it is uncertain if Venezuela will make the payment since it refused to do so in the past where they had to pay close to $1 billion to Exxon. A few weeks ago, we reported the new oil futures contracts in Yuan at the Shanghai International Energy Exchange. Last week, EIA made a prediction on how these contracts can become the Asian price benchmark. While the size of the contracts is small in comparison to New York and London exchanges, the contracts can be meaningful at a time when Asia-Pacific demand continues to grow. Currently, North America has West Texas Intermediate (WTI) whereas Europe has Brent as a benchmark. Although Dubai emerged as a major contender for a benchmark in Asia, the traded volume remains low and unrealistic for the benchmark. Finally, OPEC and non-OPEC partners of production cut agreement will have their ministerial meeting on June 23rd in Vienna.  

Russian Energy Market: Coal, Oil and Gas

While Russia applies itself in restricting oil production despite available capacity, the country increased its oil production by more than 6 percent last year compared to 2016. The current production is about 409M tonnes while the estimated amount is around 480M tonnes by 2030. Currently, the country is the sixth largest coal producer, following China, the United States, India, Australia and Indonesia. Exports have been increasing the past five years (by 25 percent) and only in 2017, it increased 15 percent. With the major importers in Asia-Pacific not participating in US-led sanctions over Russia, we can continue to expect stable growth in exports in the near future. Meanwhile, Novatak, the Russian operator of Yamal LNG project reported 39.3 percent drop in their income within the first quarter of 2018. Citing foreign exchange effects as the main reason behind the drop, Novatek started the year with signals of trouble. The company currently reached 20.3 bcm production levels, a sizeable player in the market.  

Tangible Progress in the Southern Gas Corridor Can Meet the Deadlines

Turkish President Recep Tayyip Erdogan announced that The Trans-Anatolian Natural Gas Pipeline (TANAP), a major section of the Southern Gas Corridor (SGC), will be commenced in this coming June. On a side note, the president also gave a date for the opening of STAR oil refinery in September or October of this year. For the operation of TANAP, BOTAS and SOCAR will establish a second company with 50 percent ownership for each side. The SGC is not only an essential project for Turkey and Azerbaijan but also for the EU as being a project of common interest (POC) for the union. Currently, Azerbaijan is the only supplier for the project but there are already speculations for Turkmenistan, Iran and other countries to join. With the inclusion of the earlier two countries, the pipeline can become a meaningful import source for European natural gas needs. The project already attracted about $40 billion according to the President of Azerbaijan, Ilham Aliyev.  

Oil Transit via the Baku-Tbilisi-Ceyhan Pipeline Set to Grow

Crude export volumes from Turkmenistan and Kazakhstan through the Baku-Tbilisi-Ceyhan (BTC) pipeline are going to increase over the following 3-7 years, head of the strategic development and investment projects’ department at the Azerbaijan Caspian Shipping Company, Tariyel Mirzayev, said on April 27 during the ‘’3rd SOCAR International Caspian and Central Asia Downstream Forum on Trading, Logistics, Refining, Petrochemicals’’, held in Baku. The aforementioned rise is expected to be achieved after the addition of a number of new tankers to the Azerbaijan Caspian Shipping Line. The construction of these tankers will have been finalized by the end of 2019. Oil and petroleum products constitute a large portion of the cargo carried by the Azeri fleet, trundling along the Aktau-Baku and the Turkmenbashi-Baku routes, up to Sangachal and Dubendi oil terminals on the Caspian Sea. The 1,768km-long BTC (443km in Azerbaijan, 249km in Georgia and 1,076km in Turkey), with an overall cost of $4bn, links the Azeri-Chirag-Gunashli (ACG) oilfield cluster (Sangachal terminal) to the Ceyhan terminal on the Mediterranean coast of Turkey. The pipeline, that became operational in 2006, has a throughput capacity of 1Mbbl/d (50Mt/a) and facilitates Caspian oil shipments’ arrival predominantly on the Western markets, taking pressure off Turkey’s tanker-clogged Bosporus straits. Successful completion of BTC ensued from a turnaround in the US foreign policy on the Caspian in the aftermath of the landmark ‘’Contract of the Century’’, which signified Azerbaijan’s strong westward oil trade potential, as well as the first Chechen War, which illustrated Russia’s military power in the region. The guarantee of uninterrupted oil flows to its major trading partners and the prospects for economic benefits and political stability for the three involved countries, traditionally plagued by separatist conflicts, were the two goals prioritized by Washington by means of the BTC implementation. Therefore, it is no wonder that ExxonMobil recently acquired a 2.5% stake in the pipeline consortium, following Chevron, ConocoPhillips and Hess Corporation (current BTC Co. shareholding: BP: 30.1%, AzBTC: 25%, Chevron: 8.9%, Statoil: 8.71%, TPAO: 6.53%, Eni: 5%, Total: 5%, Itochu: 3.4%, Inpex: 2.5%, ExxonMobil: 2.5%, ONGC: 2.36%). The pipeline also plays a great part in the strengthening of the trans-Caspian oil ties, at a moment when the natural gas alternative, namely the Trans Caspian Gas Pipeline (TCGP), remains a bone of contention due to the Russian-Iranian objections over its realization prior to the settlement of the Caspian legal status and the long-lasting Azeri-Turkmen dispute over the Kyapaz/Serdar hydrocarbon deposit, lying in the middle of TCGP’s way. In particular, Turkmenistan resumed oil transportation via BTC in 2018 under a new contract signed in October 2017 with SOCAR, providing for the supply of 3-4Mt, equal to 100% of the country’s oil export. As for Kazakhstan, even though, according to Azerbaijan’s Energy Ministry, it has resumed oil exports from the Aktau port via BTC since early 2017 (previously suspended since the second half of 2015), no contract has yet been inked. As was stated by the Kazakh Deputy Energy Minister Magzum Mirzgaliyev in November 2017, the country’s oil-producing companies are still pondering on the economic viability of this route for the transportation of oil from the giant Kashagan field. Finally, Azerbaijan, who lowered pumping via BTC by almost 8% between January and September 2017, compared with the respective period of 2016, has also won itself an important outlet for domestically produced oil thanks to the Turkey pipeline. Clearly, BTC, along with other Azeri oil lines like the Baku-Supsa and Baku-Novorossiysk, can all accommodate extra oil quantities. The news that a rise in oil transit via BTC is due in the years to come points out to the promising future for the further growth of the crude-oil tanker fleet in the Caspian.  

Iran, Russia and Azerbaijan Discuss the North-South Electricity Corridor

Iran, Russia and Azerbaijan inked the final protocol on the connection of their electricity grids and the creation of the North-South energy corridor during a trilateral meeting of the Azeri Deputy Oil Minister Natig Abbasov, the Iranian Deputy Energy Minister Homayoun Haeri and the Russian Deputy Energy Minister Anatoly Yanovsky, Azerbaijan’s Energy Ministry announced on April 26. Mr. Sheri said that there is a high potential for electricity exchange among the three countries, while Mr. Abbasov invoked the equivalent successful example of the East-West energy corridor, initiated by Azerbaijan, through which electricity has been being transferred to Georgia and Turkey for the past three years. Their Russian counterpart commended interstate cooperation regarding electricity interconnection targets. The trilateral agreement on the creation of the corridor is going to be signed at the representatives' June meeting in Moscow. Further consolidating the Eurasian integration, along China’s New Silk Road, a North-South energy corridor on a par with a homonymous transport corridor has been proclaimed by the Azeri Energy Minister and has long been discussed by the three states.  

Trans-Adriatic Pipeline (TAP) Continues with the Social Responsibility Projects

As part of the SGC, TAP is already of significant help to Southern European countries. The pipeline will help diversify the energy needs of the Balkan countries and Italy. The expanding natural gas markets in the region already require further suppliers to satisfy the growing demand and TAP will be meaningful on that end. Despite all the benefits, TAP continues with social responsibility projects in these countries. Recently, announced at the municipality of Alexandroupolis in Greece, TAP will supply hot water to the city. Mayor Evangelos Lambakis, Project Manager for Greece, Katerina Papalexandri, Technical Director of Greece, Peter Francis, and Local Society Manager for Eastern Macedonia and Thrace, Spyros Nakos were present at the announcement. Finally, the pipeline company also completed a reconstruction project in Albania. TAP improved a 13km water network in Mbrostar in Albania costing more than half a million euros. Infrastructure minister, Lindita Sotiri, also embraced the company’s devotion to improving the lives of the villagers at the path of the pipeline. The project lasted for six months.  

Uzbekistan to Participate in the TAPI Pipeline Project

Uzbekistan’s intention to take part in the construction of Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline was discussed between presidents Mirziyayev and Berdimuhamedov during the latter’s official visit to Tashkent on April 24. Mr. Mirziyayev referred to TAPI as a ‘’grandiose’’ project that will help stabilize Afghanistan. The Uzbek president added that his country wants to be a part of this effort and that government representatives will soon head to Ashgabat in order for practical deliberations on the matter to kick off. However, the exact kind of Uzbekistan’s possible contribution to the implementation of TAPI hasn’t yet been clarified by either of the two sides. 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. Financing, 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, have so far prevented TAPI from achieving significant progress. The Turkmen section of the gas link, which has been being built since late 2015, has reportedly been completed, while the start of the Afghan one was launched in February 2018. For its part, Uzbekistan lately lifted a six-year-long gas blockade against neighboring Tajikistan under a contract signed in March by presidents Mirziyayev and Rahmon, providing for the delivery of 126MCM in 2018 via the Muzrabad-Dushanbe main gas pipeline, at an advantageous price of $120/1,000CM, that will meet 30% of the TALCO aluminum plant demands. Furthermore, in 2016 Uzbekistan sent nearly 6BCM/a to Russia (to be reduced to 4BCM/a in 2018 in the context of a new five-year contract with Gazprom), 1.5BCM to Kazakhstan and 4.3BCM to China. The country wants to up exports to Beijing to 10BCM/a by the end of 2020 under a long-term contract with PetroChina. But owing to the high domestic consumption rate, estimated at 51.4BCM in 2016 (including 30BCM for consumer consumption), Uzbekistan’s export potential is currently limited, even though Uzbekneftgaz plans to increase production up to 66BCM in 2018 from last year’s 56.5BCM. Taking all the above into consideration, Uzbekistan has a long way to go before being considered a major gas exporter, so what the country would most probably have to offer for the realization of TAPI is no other than political support and technical help. It is no secret that the two states enjoy cordial diplomatic bonds (following his win in the December 2016 presidential election, Mr. Mirziyayev chose Turkmenistan as his first foreign destination), as well as close trade ties (volume of bilateral turnover increased by 55% in the first quarter of 2018). Uzbekistan and Turkmenistan are also involved in another regionally important pipeline infrastructure project, the so-called Line D which aims to bring 30BCM/a of Turkmen gas to Western China via Uzbekistan, Kyrgyzstan and Tajikistan (the other three existing lines crossing Uzbekistan and Kazakhstan), and which was, interestingly enough, omitted from the agenda of the two presidents’ meeting in Tashkent. Turkmenistan’s exports to China amounted to just 1% of its total exports in 2009, increasing to almost 80% by 2015, a number mostly concerning natural gas exports. Meanwhile, Turkey, Turkmenistan’s second largest trading partner, accounts for only 5% of Turkmenistan’s overall exports. Ashgabat now expects exported gas volumes to China to grow to over 60BCM by 2020 (from today’s 30BCM). Line D was supposed to support this boost. Despite the fact that work on Line D in Uzbekistan has been indefinitely suspended since March 2017 by the decision of CNCP and Uzbekneftgaz, construction of the Tajik portion is said to have begun in December 2017 and Kyrgyzstan has announced that its own part will start being built at the end of 2019. Nevertheless, given the opacity surrounding the price agreed upon between China and Turkmenistan and the former’s de facto firmer bargaining position, it is yet questioned whether Ashgabat will have high earnings to anticipate from its Chinese business. One can assume this is the reason why presidents Mirziyayev and Berdimuhamedov chose to highlight TAPI in their discussions as an export option that will lead Turkmenistan out of its hard currency crisis, spurred by the lack of exports to Russia (Gazprom decided to stop purchasing Turkmen gas in 2016) and the lack of access to neighboring markets, since both the Trans Caspian Gas Pipeline (TCGP) to Azerbaijan and now Line D appear stuck in limbo.

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