After the price surge in the previous week, oil prices have dropped last week. The previous week, the prices went briefly above $59 and settling just below. This week brent continues its decline to $56. Accordingly, Azeri light oil, which is consistently more expensive, compared to Brent, settled right above $57 this week.
Meanwhile, oil forecast experts are blaming the US Energy Information Agency for being far too optimistic in American production levels. Domestic Energy Producers Alliance (DEPA) warns that such an approach is part of the reason why the price difference between Brent and WTI is so large - around $6 currently - since there is an ongoing expectation for a crude surplus in the United States due to generous production forecasts. For current American production, EIA estimates 9.69M bpd by the end of the year while DEPA estimates it around 9.35M bpd, more than 300K bpd lower.
Azerbaijan: Energy Investments & Conflicts
Along with the extension of the contract of the century, the biggest oilfield cluster of the country, Azerbaijan has been taking part in additional energy sector investments, particularly in the Southern Gas Corridor (SGC). In the first nine months of the year, Azerbaijan has invested $7.6 billion or 62 percent of the total of $12.3 (total funding needs in 2014-2020) required for the financing of its participating interests.
Such market growth aligns with European preferences for energy from Azerbaijan that is shipped through the (SGC), thereby attempting to diversify from the Russian monopoly on energy there. Pipelines like the South Caucasus Pipeline (SCP), have been instrumental in securing Azerbaijan’s economic independence as well as diversifying Turkish and later European energy sources.
Azerbaijan also partakes in production cut deal developed by OPEC members and a few non-OPEC ones with decreasing its production by 35K bpd. The overall production cut by non-OPEC countries amounts to 558K bpd overall. Baku will also host Argus Azerbaijan International Petroleum Summit 2017 in October. Being one of the most important events in the Caspian, the summit will bring together the senior executives of major oil companies.
While receiving substantive international support from development banks, there will be another $800M investment for TAP, only in Albania, by the TAP consortium. Another $1M will be invested in Master’s education in energy fields in FYROM. According to SOCAR, 57 percent of the pipeline is already completed while over 80 percent of TANAP is completed. Recently pipe laying for the 19km sea-section of TANAP also started.
Meanwhile, during the recent UN meeting, Azerbaijan asked the UN to enforce their decisions and to not turn a blind eye when Armenia doesn’t uphold with international norms and values. Following the meeting, Armenian armed forces violated the ceasefire along the line of contact between Azerbaijan and Armenian troops 139 times according to the Azerbaijani Defense Ministry. Continued aggression by Armenia is an ongoing concern of Azerbaijan and the problems persist when the international community does not follow up with the initial resolutions.
Caspian Transportation Networks
Recently, there have also been developments in regional transportation networks other than the Baku-Tbilisi-Kars Railway. Construction on the Qazvin-Rasht-Astara Railway System is one such current event. As a major component of the North-South Transport Corridor, the railway will serve to integrate Azerbaijani, Russian and Iranian transport lines. Upon expansion, the corridor could stand to transport over 10 million tons of cargo between Northern-Europe and Southeast-Asia. Kheirollah Khademi, the Iranian Deputy Minister of Roads and Urban Development said: “Apart from connecting Azerbaijan's and Iran's railway systems, this railway will increase both countries' import and export operations and trade turnover.” This project is mutually appealing to both countries and assists Iran in realizing their aspirations of increased transport throughout the western border of the Caspian.
Shymkent-Jizzak: A New Pipeline Between Uzbekistan and Kazakhstan
Kazakhstan and Uzbekistan have agreed to the construction and commissioning of the Shymkent-Jizzak main pipeline with the annual capacity of 5 million tons by 2021. The 95km pipeline project, intended to reach the Jizzakh refinery near the Kazakh border, will connect to the existing oil pipeline Omsk-Pavlodar-Shymkent for the supply of imported oil from Russia and Kazakhstan. The amount of oil will start with 200K tons in 2017 with an extension of up to 1M tons by the end of the decade.
The 5M ton design capacity of the refinery will produce 3.7M tons of motor fuel, more than 700K tons of jet fuel, and 300K tons of other petroleum products. This project is a component of Uzbekistan’s (2017–2021) Action Strategy plan, which aims to achieve, “National fuel-energy independence” while increasing the exports from the country. Since the decline in oil prices within the past few years, Caspian states have been making moves in diversifying their exports away from crude oil dependence. Recently, both Uzbekistan and Turkmenistan announced new refinery projects while Azerbaijan is completing another refinery in Turkey.
To the Uzbek refinery, Kazakhstan will supply 2M tons of Kazakh oil annually. A further negotiation shows that a yearly delivery of 1M tons of Russian produced oil, transported from the Shagyr oil loading point, in Kazakhstan, to Uzbekistan. Arguably, one of the most prominent hurdles facing Kazakh oil is the lack of export routes to tangible markets. The Shymkent-Jizzak oil pipeline will allow Kazakh petroleum products to be transported to Uzbekistan, as well as marketed to surrounding countries.
Azerbaijan: Gas Output From Umid Field Resumes
Meanwhile, SOCAR decided to resume gas output from Umid field, the second largest natural gas field in Azerbaijan, located in the southern sector of the Caspian Sea. Following its inauguration, back in 2012, daily production from Umid used to reach a plateau of 1.5MCM, however, since then, it has fallen by half as investment gradually reduced. According to SOCAR, production has now been restored at 1.2-1.3BCM/d with a further increase predicted for 2018-2019, when drilling of two additional wells, each with a capacity of 1.2BCM/d, is scheduled to take place. Drilling of a further one well will start at a later stage, while by 2022, a new platform is planned to have been installed in the field. An overall daily output from Umid’s five wells and two platforms is expected to reach 5BMC. In April, SOCAR first vice president, Khoshbakht Yusifzadeh, revealed the company’s intention to significantly increase gas output in the years to come through the development of several new gas fields, including Absheron, Umid, Babek and Bulla Deniz.
Turkmenistan: EU Still Committed to the Realization of TCP Project
The EU has not given up negotiations with Azerbaijan and Turkmenistan over a Trans-Caspian energy link that would help transport Turkmen gas to the European market via the existing pipeline infrastructure of the Southern Gas Corridor, EU spokesperson for Energy Union projects said. “The EU’s objective has not changed. To diversify the EU’s supplies, the Southern Gas Corridor aims to expand infrastructure that can bring gas to the EU from the Caspian Basin, Central Asia including Iran, the Middle East, and the Eastern Mediterranean Basin”, according to Anca Paduraru. Furthermore, Ms. Paduraru underlined the importance of the Southern Gas Corridor for the European strategy of diversification of energy suppliers and routes, by characterizing Azerbaijan as ‘’enabler’’ of this large-scale initiative.
The idea of a subsea natural gas pipeline between Turkmenbashi and Baku, possibly extended to Kazakhstan’s Tengiz field as well, dates back to 1996 when it was actively promoted by the US. In 1999, preliminary feasibility studies, conducted by the American energy companies Enron and Unocal and financed by the US government, were approved by the Turkmen state. However, the project was quickly abandoned because of the failure of Azeri and Turkmen negotiators to demarcate their Caspian Sea border. In February 2015, Maros Sefcovic, the European Commission’s vice president in charge of the Energy Union, declared that the Bloc intends to find a technical and legal basis for the Turkmen gas supply via Azerbaijan since the TCP is considered a project of common European interest. However, opposition from Russia and Iran, who insist that the legal status of the Caspian should be settled prior to the start of construction works, in combination with a series of questions concerning the pipeline’s commercial viability, have impeded progress on the TCP line to this day.
In the aftermath of a two-day visit by the Turkmen President Gurbanguly Berdimuhamedow to neighboring Azerbaijan, in August, the realization of the Trans Caspian pipeline project has once again returned to the forefront. That is because Ashgabat now more than ever realizes its one-sided export dependence on China, especially since Gazprom ceased importing Turkmen gas from 2016 onwards. In addition, the slow implementation of TAPI (Turkmenistan-Afghanistan-Pakistan-India) natural gas pipeline project has delayed Turkmenistan’s energy diversification eastward. Therefore, the three pipelines of Southern Gas Corridor that are going to be commissioned by 2020 constitute a rather beneficial alternative for Turkmen export ambitions.
Referendum at Northern Iraq: Energy Challenges at Stake
Results of a referendum held in Iraq’s semi-autonomous northern Kurdish region indicated vehement support for independence from Baghdad (93%, with a turnout of 72%). The polls have caused a general uproar within Premier Haider al-Abadi’s government and its close ally, Iran’s Shia regime, for they both fear potential border destabilization. The outcome of last Monday’s ballot also gives neighboring Turkey a cause for concern, as it seeks to assuage the restive minority in its largely Kurdish southeast. In an attempt to avert the escalation of tensions in a country still healing open wounds from the three-year-long expansionism of the so-called ‘Islamic State’ group, US deemed the plebiscite illegitimate, according to Secretary of State Rex Tillerson. However, it was Russia’s reaction to the vote that proved to be the most highly anticipated, given recent efforts to boost its presence in the energy market of the hydrocarbon-rich Iraqi Kurdistan, where American, Turkish and European firms have already consolidated their positions, licensed either by the Ministry of Oil in Baghdad, or by the Kurdish Ministry of Natural Resources in Erbil.
Even though Moscow officially expressed respect for Kurdish national ambitions, it maintained that Iraq’s territorial integrity must be preserved. Such a stance, notably divergent from the one adopted towards the 2014 referendum on Crimea’s secession from Ukraine, is justified by some of the biggest Russian energy companies’ indisputable economic interests in that politically turbulent part of the Middle East. Within this scope, the impact of the Kurdish referendum became expeditiously evident.
On Thursday, Gazprom Neft Middle East, a subsidiary of Gazprom Neft, announced it is abandoning development of Halabja oil field, located in a mountainous area close to the border with Iran. Gazprom Neft owns an 80% stake in the field while remaining 20% is held by Kurdistan Regional Government. The existence of planted landmines, as a result of the ongoing regional conflict, on top of the lack of the necessary infrastructure, hinder access to the oil block creating high risks that the company is not prepared to take, director Sergey Petrov admitted. Gazprom Neft runs three projects in Northern Iraq, the other two being Shakal (Gazprom Neft: 80% - KRG: 20%) and Garmian (Gazprom Neft: 40% - WesternZagros Resources Ltd: 40% - KRG: 20%), whose total geological reserves are estimated at 1.3bn tonnes of oil. At the moment, Garmian is the only commercially exploited field, with production reaching 9.6bnbbl/d in 2017. Despite quitting from Halabja, the company doesn’t seem overawed by the current geopolitical circumstances. As stated by Petrov, Gazprom Neft has come to terms with local authorities to explore additional blocks, intending to drill one new well per year until 2022.
But it is the large-scale plans of another key energy player that the independence referendum is thought to be putting at stake. Russia’s state-owned oil giant Rosneft has lately emerged as the major energy investor in Iraqi Kurdistan, having placed around $4bn in the region’s oil and gas sector. Following an earlier pre-finance accord on the sale of Kurdish crude to Rosneft from 2017 to 2019, PM Nechirvan Barzani and Rosneft CEO Igor Sechin reaffirmed mutual trust in the course of June’s St. Petersburg International Economic Forum. In accordance with the fresh 20-year agreement, Rosneft gains access to the regional oil transportation system, which has a throughput capacity of 700.000bbl/d. The company eyes to increase the system’s output up to 1Mbbl/d by the end of 2017. Furthermore, oil purchased by Rosneft will be refined in Germany, a country who has been arming and training Kurdish Peshmerga soldiers in the fight against ISIS for the past two and a half years. As part of the same long-term deal, a series of PSAs were also inked for the exploration and development of five oil sites said to be situated in the disputed Kirkuk province, a fact that, if confirmed, might reignite rivalry with the Baghdad-based central government.
The latest piece in the Russian foreign energy policy puzzle in Northern Iraq was added in September, as soon as Rosneft disclosed plans to finance a gas pipeline project with the initial export capacity of 30BCM/y towards Turkey, and from that point onto the EU market via the existing infrastructure of the Southern Gas Corridor. The construction of the $1bn pipeline is set to begin in 2019, with exports due from 2020 onwards. Nevertheless, this venture could be as well put into danger if Ankara opts for direct military confrontation with Erbil over the independence referendum. Thus far, President Erdogan has threatened to disrupt flows from the Kirkuk-Ceyhan oil link, but that might not prove an easy task given the 970 km-long pipeline has the ability to operate at an average capacity of 300.000-500.000bbl/d, or else at about a quarter of Iraq’s overall exports. Taking into account that the energy factor has been shaping bilateral relations between Iraqi Kurdistan and Turkey since the commissioning of the Kirkuk-Ceyhan line, back in the 1970s, a scenario where the Turkish President might simply ignore the referendum results and continue negotiating with his Kurdish counterpart, Massoud Barzani, recognizing him as the leader of a region constitutionally guaranteed by a specific quasi-autonomous status, cannot be ruled out. Moreover, as shown by the rather prompt Turkish-Russian energy rapprochement through the Turkish Stream project agreement, in the aftermath of the downing of a Russian warplane on Syrian border and the assassination of ambassador Karlov in Ankara, Turkey is unlikely to block another Russian-led pipeline route, especially since projected to cross the country’s energy-thirsty territory.
In the meantime, expansion of Rosneft’s investment portfolio to high-risk natural gas projects comes as no surprise. As of 2016, the company has evolved into the largest independent natural gas producer in Russia and, by 2020, it aims to conquer a 20% share of the domestic gas market. Its promising entry onto the Kurdish energy sector, at this stage, can be interpreted as a direct challenge to Gazprom’s established monopoly in the southern export corridor to Europe. It is already known that Gazprom will seek to use the TAP line to carry either Turkish Stream or ITGI supplies to the EU, as soon as the pipeline’s capacity increases up to a further 10BCM, in 2020. Providing the proposed gas pipeline from Northern Iraq achieves the desirable export capacity by that year, Rosneft would be equally eligible to put in a bid for TAP’s open season. Hence, two Russian companies will find themselves facing the opportunity to use EU regulations, originally intended to curb monopolistic practices, to their own advantage.
Finally, subsequent implementation of the pipeline deal achieved by Rosneft and KRG automatically augments the number of competing suppliers for the SOCAR-operated TANAP, whose capacity is expected to reach 23-31BCM/y by 2023-2026. Presently, interest for the utilization of the intermediate branch of the Southern Gas Corridor between Asia and Europe has been declared by Turkmenistan and Kazakhstan (via the proposed Trans-Caspian Pipeline project), Iran (either via a half-finished LNG plant or a planned $6bn pipeline from South Pars field to the Turkish border) and Israel (via a politically difficult, regarding its realization, undersea pipeline from Leviathan field). Whether Rosneft will, in the end, contrive to get Kurdish gas flowing together with Shah Deniz reserves in TANAP still remains to be seen. However, what can be deduced with certainty, as for now, is that what started out as a project of energy cooperation primarily between the EU and Caspian littoral states, namely the Southern Gas Corridor initiative, has gradually managed to attract a wider spectrum of willing regional supplier states.