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caspian energy insight: october 19, 2017

Caspian Energy Insight: October 19, 2017

Author:Caspian Policy Center

Oct 19, 2017

Oil

The price of oil within the past week has increased. After reaching the highest levels at around $59 in September, Brent oil came close to these levels at around $58. Accordingly, Azeri light oil, which is consistently more expensive, compared to Brent, is trading close to $59 this week. Meanwhile, OPEC and non-OPEC producers may not need to extend the production cut deal that was reached a year ago. Compliance seems to be in place and it is helping to balance the oil market the last few months. Still, the final decision for production cut will be made in Vienna on November 30th next month. Another big development in global oil markets was China’s offer to Saudi Arabia last week. The Chinese state-owned oil companies PetroChina and Sinopec offered to buy 5 percent of Saudi Aramco directly instead of listing the company on stock exchanges which would require sharing extra information about the reserves of the country. China has extensive trade surpluses every year and been investing outside the country through its sovereign wealth fund (SWF) and such an acquisition would secure Chinese oil supply for the long term. At the same time, this could ease the pressure over Saudi economy with lowering oil prices, help Saudi Arabia to diversify its economy over oil, and give the Saudis extra options while they are eyeing towards 2018 for the IPO. Finally, with American crude exports to the world markets increasing, last week alone, over 2M bpd were sold overseas. EIA currently estimates growing oil production in the US. In the second half of 2017, the agency estimates 340K bpd more production compared to the first half of the year alone. The estimates for 2018 is also showing a possibility of averaging 9.9M bpd, which will be the record level of production for the country.  

Azerbaijan: Energy Investments

Meanwhile, the Italian constitutional court confirmed the validity of TAP’s construction in Italy, rejecting the claims against the pipeline. Upon completion, the pipeline will be connected to TANAP in Greece and be part of European energy supply security in the years ahead while generating extra FDI for the countries on the route; Albania, Greece, and Italy. Among the countries, both Greece and Albania are eyeing to become natural gas hubs in the Balkans as there is no major gas hub in South East Europe. SGC’s total estimated cost is around $41.5 billion according to the recent estimates, head of the Southern Gas Corridor CJSC Afgan Isayev said. Of this total cost, $11.8 billion is being financed by Azerbaijan.  

Russia: Rosneft, Gazprom

In a recent change of strategy, Rosneft has been attempting to break the monopoly of Gazprom in natural gas trade. Although current export market in Russia is dominated by Gazprom, Rosneft is trying to open maneuvering area for itself. Currently, the company produces about 34.2 bcm natural gas per year, mostly in its Siberian fields. This is a 20 bcm improvement since 2012 and the current outlook is to produce as much as 100bcm by 2020. These figures are still miniscule compared to sector giants Gazprom’s 2017 projections around 450bcm. Although the Russian market is largely controlled by Gazprom, Rosneft is entering in new deals with other energy companies, like BP, while also investing in reserves in other countries; like the recent deal in Northern Iraq. Meanwhile, new customers for Turkish Stream are popping across the Balkans. Just like Bulgaria, Serbia also showed interest in buying gas through the Turkish Stream. Meeting last week with the Turkish President in Belgrade last week, Serbian officials announced their willingness to increase their trade potential with Turkey, while also propping gas consumption through the new pipeline. Although installation of Turkish Stream does not make economic sense from the perspective of Ukraine, Russia is going to invest about $10 billion into the pipeline while transit fees to Ukraine do not exceed $2billion. Still, from the Russian perspective this investment is not purely economic but it also has a long term political ambitions embedded. These ambitions are not only about Ukraine, but also about Turkey, the Balkans, and Southern Europe.  

Turkmenistan: Petrochemical Production

In recent weeks, there are news about the attempts of Turkmenistan to diversify its crude oil and natural gas dependent economy through petrochemical production. The country is trying to get the economy back on track while also removing subsidies in several areas, including, water, electricity, and gas. The recent decision to remove water subsidies are also part of this larger vision. The decision will increase the water prices by 25 times. However, this sharp decision may not bring efficiency to the economy directly. Most of the country is comprised of deserts and cotton industry –which requires a lot of water- is the single biggest area after energy businesses. The cut of subsidies will bring cash for Ashgabat for future investments for export diversification, yet, such sharp removal of subsidies may not create the intended effect. Currently, like many other oil producing countries, Turkmenistan is also experiencing economic slow-down due to low oil prices and has been looking for alternative ways to increase national income through economic diversification.  

Russia, China, Kazakhstan: Rosneft Set to Boost Oil Supplies to China via Kazakhstan

Russia’s state-owned oil firm Rosneft intends to up oil exports to China through the Kazakh route to 18Mt/a (360.000 bbl/d) from around 10Mt in 2017. The company wishes to initially increase its supplies to China to 13Mt/a, expanding them up to 18Mt/a at a later stage. No government decision has yet been made and no specific timeframe set in relation to the possible implementation of Rosneft’s plans, while Kazakhstan’s Oil Ministry said it has not received any official application by the company demanding an increase in transit volumes to China via the Atasu-Alashankou pipeline. However, if confirmed, such a move would significantly curb European imports of Russian Urals blend, flowing by pipeline to Central Europe and by tanker to Northwest Europe from Primorsk, on the Baltic Sea, and to Southern Europe from Novorossiysk. Moreover, Rosneft’s overly ambitious export strategy for the Chinese market has been made public amid efforts pursued by OPEC and allied non-OPEC countries to cut global oil output, in order for prices to stabilize. Rosneft’s oil supplies to China are mainly delivered via the Transneft-operated Eastern Siberia-Pacific Ocean (ESPO) oil pipeline and its extra spur towards the Chinese city of Daqing. Furthermore, in 2016, China bought over two thirds of Russian ESPO cargoes from the eastern port of Kozmino. Finally, Atasu-Alashankou pipeline, as well as the railway option through Kazakhstan, serve as additional export routes for Russian crude deliveries eastward. Around 3Mt of the pipeline’s overall upgraded capacity of 20Mt are used for Kazakhstan’s own oil exports to China. Since the past decade, Rosneft has been systematically cultivating petroleum relations with China, in an attempt to fulfill the Russian government’s strategic goal to strengthen energy cooperation with Asia-Pacific countries. The company’s continuous interaction with CNCP and Sinopec, both in the Russian upstream and abroad, the acquisition of $500M worth of shares by CNPC in the oil giant, the gradual consolidation of Rosneft’s position in the Chinese downstream and, lastly, the recent expression of interest to multiply supplies to China all signify a remarkable progress in the Sino-Russian energy dialogue. At the same time, Kazakhstan also eyes the Chinese market as a viable export alternative for its oil reserves. The Kazakhstan-China oil pipeline came on stream in 2006, while China’s oil imports from Kazakhstan are said to have increased almost tenfold between 2005 and 2008. Under these circumstances, it becomes evident that regional competition has substantially changed from a situation where China and Russia appeared to be struggling for a share in Caspian resources to a newly established reality where Russia and Caspian Sea littoral states are striving to exert greater influence over the energy-thirsty Chinese market.  

Turkmenistan: Government Lays Out $46bn Investment Plan for Oil and Gas Sector to 2025

Turkmen President Gurbanguly Berdimuhamedow has decided to put an end to the free supply of gas to households. The decree, signed on October 10 during Berdimuhamedow’s speech at a Council of Elders meeting, provides for the regulation of tariffs for natural gas, electricity, water and table salt, among other utilities that the government used to make available to citizens for free since the country’s declaration of independence, back in 1991. ‘’This social services system has fulfilled its role. That’s why a new scale of charges should be imposed encouraging a more rational use of resources, reduction of excessive expenditures and preservation of the country’s national wealth’’, the President was quoted as saying. The gradual limitation of state subsidies might be viewed as a means to improve national economic indicators, especially since it has been followed by the announcement of a 7-year strategy for the country’s socio-economic development, entailing a separate $46bn energy investment plan. Priority objectives until 2025 include the construction of a gas and chemical complex in the village of Kiyanly, at the Caspian shores, designed to process up to 5BCM of natural gas, as well as the build-up of an ammonia and urea plant in Garabogaz, which will be sourced from the country’s abundant natural gas reserves. Finally, action in the sphere of oil refinery involves construction of a factory for Ai-92 petrol production with a capacity of 600TPA, expected to start working by 2024. Natural gas will be here, too, used as a raw material. Even though it holds the world’s fourth largest proven natural gas reserves, landlocked and geographically remote Turkmenistan has always had a hard time persuading foreign investors to stay in the country due to a lack of economic, institutional and political reforms, still pending to be adopted. The modernization of existing gas processing facilities and the construction of new ones is believed to allow for the much-needed, macro-oriented economic diversification, in the context of the broader industrialization of the country’s regions.  

Southern Gas Corridor: TAP Completed Pipe Deliveries to Albania, Greece, Italy

The last shipment of steel line-pipes for the construction of the Trans Adriatic Pipeline (TAP) arrived in Thessaloniki, Greece, marking the completion and final delivery of all line-pipes to TAP’s host countries, namely Greece, Albania and Italy, TAP A.G. announced October 16. It took about one year and a half to complete transport of all the 55.000 TAP pipes and bends. The first pipes arrived in Durrës, Albania, in April 2016 and deliveries to Greece started one month later, in May 2016. TAP route comprises 32.000 pipes placed in the Greek ground, 13.000 in Albania, 9.150 offshore and 670 in Italy. According to the data provided by TAP A.G., all pipes weigh around 520.000t, a number approximately equivalent to 71 Eiffel towers. ‘’This is yet another key milestone towards successful realization of the project. The entire logistics delivery process was carried out in line with the project schedule and to the highest safety standards’’, TAP Project director John Hynes said. Mr. Haynes also expressed satisfaction that ‘’this massive operation has been completed without any safety incidents within our host countries.’’ TAP constitutes the third and final branch of the Southern Gas Corridor route, along with South Caucasus Pipeline and Trans Anatolian Pipeline, aiming to link the European Union with new sources of gas in the Middle East and the Caspian Region, in order for the success of the Bloc’s long-discussed energy diversification strategy to be ensured. TAP’s shareholders include BP (20%), SOCAR (20%), Snam S.p.A. (20%), Fluxys (19%), Enagás (16%) and Axpo (5%). The 870-km pipeline won, back in 2013, the bid to transport Shah-Deniz II gas to the European markets. According to the project schedule, TAP will start delivering 10BCM/a of Caspian gas supplies to the EU by 2020, upon completion of construction works, with the prospect of doubling supplies and branching off in the Balkans through additional pipeline routes with the use of its reverse flow capabilities. In that same year, TAP’s exemption from the third-party access principle of the Third Energy Package, which was granted TAP A.G. twice, in 2013 and 2015, is going to be lifted.

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