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caspian energy insight: november 22, 2017

Caspian Energy Insight: November 22, 2017

Author:Caspian Policy Center

Nov 22, 2017

Oil

After the surge of oil prices within the past few weeks, the oil prices have been stagnant the past two weeks. Currently, Brent is trading above $62. Accordingly, Azeri light also trades above $63 in energy exchanges. Last week the oil traders took some profits home, although only this week, the hedge funds showed some caution by stopping their bullish positions. Among the recent factors that keep oil prices floating at its highest levels in two consecutive weeks is the supply concerns around Venezuela’s oil production. The Latin American country hit its lowest oil production levels since 1989 this year. Only in 2017, Venezuelan supply decreased by 250K bpd. The economically struggling economy is not only having a hard time in restructuring its $60 bln debt but also keeping its supply promises. Currently, other OPEC members are replacing its output to the user countries. Among these, Iraq is increasing its oil supply to India and the United States to replace Venezuelan production decline. Ahead of the oil producers’ meeting at the end of November, there are several issue OPEC and non-OPEC producers need to discuss, the biggest pending issue being the continuation of official production cuts.  

Turkey and Natural Gas

One of the major problems of Turkish natural gas market has always been the supply security and diversification. Among others, one of the alleviating factors for supply risks is storage capacity and keeping enough natural gas in storage. However, Turkey’s natural gas storage capacity is also lower than industry standards and European levels. With the current import of two new Floating Storage Regasification Units (FSRU), the capacity will increase up to 10 bcm, potentially becoming operational by the end of the year. Turkey's Energy and Natural Resources Minister Berat Albayrak also announced the finalization of the North Marmara gas storage expansion by 2020. The expanded storage will have 4.6 bcm capacity. Coupling with the completion of TANAP project next year, Turkey will be taking essential steps towards both gas supply diversification and security at the same time. Meanwhile, Gazprom’s natural gas supplies to Turkey increased by 21.7 percent up to 24.8 bcm compared to last year Alexey Miller, CEO of the Russian energy giant Gazprom announced. Russia is already Turkey’s largest natural gas supplier and the current projects under construction as well as increasing LNG capacity will not change this fact in the upcoming years. From the Russian perspective too, after Germany, Turkey is the second largest natural gas importer from Russia, receiving up to 60 percent of its supply from Russia. The two countries are also deepening their relationship in energy by establishing a new pipeline route, Turkish Stream, and a nuclear plant in Akkuyu. The current plan is commencing the Akkuyu nuclear power plant by 2023 while for Turkish Stream there are conflicting reports. Although Russia wants to complete the pipeline as early as possible, EU objections to its existence as well as the new US sanctions in the energy sector are making things harder for Russia.  

Russia, Kazakhstan and Uzbekistan

Russia is continuing to expand its oil and gas contracts with the Caspian countries in recent months. As we reported earlier this month, Putin paid a visit to Tehran to sign energy deals worth $30 billion dollars as well as discussing natural gas imports from Turkmenistan once again after the stoppage since 2010. Recently this week, Russia also signed a series of agreements with Kazakhstan at last week’s Interregional Cooperation Forum in Chelyabinsk, Russia. The two countries agreed to extract resources from the disputed Caspian Sea reserves together. The use of Kurmangazy reserves of the Caspian is signed between the leaders of the two countries, Vladimir Putin and Nursultan Nazarbayev. The area is already under Kazakh control and recognized by Russia but since 2006 both countries are exploring the region jointly. The estimated reserves in the area are about 6.2 bln tons. Other than signing multiple agreements with Kazakhstan, Russia also started transporting oil to Uzbekistan. With increasing the country’s refinery output in recent years, Uzbekistan has been a net importer of crude oil. At the same time, Uzbeks are also planning to increase the size of the refined products after 2020. Therefore, the recent talks between Russian and the Uzbek sides show demands of 1M tonnes of crude oil from Russia while increasing up to 3M after 2020. In order to do so, the current pipeline capacity, which can only carry about 500K tonnes should be expanded and the financing of that pipeline capacity is unclear currently. While making these agreements with Russia, Uzbeks want to add additional 2M tonnes from Kazakhstan as well since Russia is also supplying 10M tonnes of crude oil to China through the pipeline in Kazakhstan. Therefore, the double-landlocked Central Asian republic needs to diversify its supply of crude, which is a major supply problem for landlocked economies.  

Azerbaijan: Baku Demonstrates Steady Compliance with the OPEC+ Deal

With a further 9-month extension of output cuts around the corner, Azerbaijan stays firm in its commitment to reduce domestic oil production by as much as 35,000bbl/b. Even though the country fell short of meeting its set cutback target in October, having pumped around 801,000bbl/d, numbers published last week by the State Statistical Committee clearly exude some optimism regarding overall compliance with the OPEC pact. According to data issued on November 16, Azerbaijan’s oil output between January and October 2017 amounted to 32,240,600 tonnes, representing a 7,1% decline in comparison with the respective period of 2016. During those ten months, natural gas production decreased by 3.9% (23,637,600,000 cubic meters). The Azerbaijani government has forecast a 40MT drop in oil production for 2017, together with a 29,5BCM rise in gas production. Systematically decreased oil volumes denote Azerbaijan’s eagerness to fulfill its obligations under an agreement reached in December 2016 between OPEC and non-OPEC petrostates, in order to curb global surfeit and push prices up. Being one of the first non-OPEC producers to give its consent to the Organization’s rewritten oil policy, along with Russia, Kazakhstan, Oman and Mexico, Azerbaijan has generally not surpassed the 800,000bbl/d threshold since January 2017. Unlike fellow Caspian states of Kazakhstan, who has been repeatedly told off by OPEC for not adhering to the promised 20,000bbl/d cut, mainly due to growth from Kashagan oilfield, and Iran, who was allowed to slightly lift output, recently achieving a post-sanctions peak, Azerbaijan has elicited praise from OPEC’s Joint Monitoring Committee for effectively complying with its share of the deal. Should a decision to prolong cuts beyond March 2018 is made at an OPEC/non-OPEC ministerial meeting, to be convened in Vienna at the end of the month, Azerbaijan has declared readiness to support it, as announced by Energy Minister Shahbazov in October. Even though Azerbaijan is attempting to diversify its economy by developing the non-oil sector, a prospective rebalance of the oil market is in the interests of the country, given that low commodity prices in conjunction with reduced public investment have been impeding solid economic growth since about 2015.  

Turkmenistan: Afghanistan Will Stick to the TAPI Schedule

First phase construction of Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline in Afghanistan is going to begin in 2018, Turkmen Foreign Minister Rasit Meredow said November 14, during the 7th Regional Economic Cooperation Conference on Afghanistan. Ajmal Ahmadi, an advisor to the President of Afghanistan, asserted the country will stick to the timeframe concerning the building of the Afghan section of the project, being in tight cooperation with Turkmenistan for the settlement of all technical issues. Upon implementation, Afghanistan will receive $1bn in transit fees, while 12 thousand new job opportunities will be created to facilitate completion of TAPI on Afghan territory, Mr. Meredow added. Despite progress made with the Turkmen segment, projected to have been finalized by July 2018, construction works in Afghanistan might suffer delays due to declining natural gas prices, Afghan ambassador to Turkmenistan Mirwais Nab stated in October. Furthermore, security reasons in the laden with extremist currents, volatile and unstable states of both Afghanistan and Pakistan could also stand in the way of the pipeline, remaining at the epicenter of TAPI Steering Committee consultations. Finally, Pakistan’s refusal to grant the project tax reliefs, as well as its intention to renegotiate the pricing formula with Turkmengaz in order to link gas price with Brent crude oil rates also constitute a cause of concern as to when exactly will TAPI manage to become fully functional. The 1.814km TAPI will cover 214km 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, a provincial capital of Baluchistan, and Multan in the province of Punjab, finally reaching India at Fazilka. The pipeline was first launched in December 2015 and is expected to carry 33BCM.

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