Caspian Energy Insight: April 27, 2018
Oil prices are on the rise
Oil prices continue with their boom cycle. Last week, Brent was above $75 and currently trades above $74 when WTI is just above $68 and Azeri light is around $77 levels. The hedge fund managers have been keeping their bullish approach since the beginning of the year, and are set that the prices will continue to increase further.
With a demand on the rise, China is growing faster than expected 6.8%. The production cut agreement between OPEC+ members also being intact, concerns continue about the supply due to Venezuelan output declines as well as Middle East’s rising tensions. Everything is going well for the producers recently.
Crude inventories are also only 30M barrels above their five-year averages. The number decreased from 300M when the production cut agreement was first reached 1.5 years ago. Meanwhile, American crude exports to Europe are about 500K bpd. This number is at a record level, indicating the industry doing well in the United States.
In the end, after every commodity boom cycle, there was a bust. Even if supply does not increase with increasing prices, which usually does, alternative sources of energy will increase in size and demand will be curbed as well. Eventually, the production cutting partners can end up being even a smaller player than before. Still, for now, Saudi Arabian oil minister Khali Al-Falih sees a room for rising prices since demand is not affected by the significant rise since the beginning of the year and the OPEC+ coalition is going strong, and maybe even too strong? Such extreme compliance might bring the slump sooner, rather than later.
In the event of over-tightening, other than demand, extreme supply from non-OPEC+ producers can be an additional problem. Shale production in the United States, tar sands of Canada, offshore fields in Brazil, and Arctic oil reserves can become more meaningful for the investors at higher levels of oil prices.
In addition to pricing strategies, the policymakers should be aware of this fact and should not let go of the disciplined approach to spending and diversification. It was one of the few ways for Uzbekistan to continue with its continuous growth levels despite the collapsing prices, twice, in the last decade. Compared to Uzbekistan, other Central Asian nations had harder times during the global financial crisis and since the oil price collapse in 2014.
SOCAR and BP ink a PSA for the joint exploration and development in Azerbaijan
Azerbaijan’s state oil company SOCAR and BP have signed a new production sharing agreement (PSA) for the joint exploration and development of Block D230 in the North Absheron basin in the Azerbaijan sector of the Caspian Sea, BP Azerbaijan said in a message on April 26.
The PSA was signed by SOCAR President Rovnag Abdullayev and BP’s Group Chief Executive Bob Dudley in the presence of Azerbaijan’s President Ilham Aliyev and UK Prime Minister Theresa May in London.
Abdullayev, addressing the ceremony, said that Azerbaijan has a long tradition of successful cooperation with BP.
“I believe that the synergies between modern upstream technology and unique historical experience, embodied at both companies, create a solid foundation for our continued success. Being based on fair and equal conditions, today’s agreement will become an important milestone in the pursuit of the highest degree of efficiency in the joint development of the hydrocarbon resources of Azerbaijan,” he said.
Dudley, for his part, said that this agreement underpins a new joint effort by SOCAR and BP to explore further Caspian opportunities in support of long-term production in Azerbaijan.
“We have now been operating in the region for more than 25 years and believe there is still significant oil and gas potential there. We look forward to continuing to build on our significant business in Azerbaijan, working closely with SOCAR and others to explore and help secure the Caspian’s future for decades to come,” he said.
Block D230 lies some 135 kilometers (84 miles) north-east of Baku in the Caspian Sea. It covers an area of some 3,200 square kilometers and has not previously been explored. It has water depths of 400-600 meters and anticipated reservoir depths of about 3,500 meters.
Under the PSA, which is for 25 years, BP will be the operator during the exploration phase holding a 50 percent interest, while SOCAR will hold the remaining 50 percent interest.
Southern Gas Corridor: TANAP poised to open on June 30, 2018
The Trans Anatolian Pipeline (TANAP) has been completed by 93.5% and the first Azeri gas is going to start flowing via the second leg of the Southern Gas Corridor (SGC) pipe network on June 30, General Manager Saltuk Duzyol said last week. According to Mr. Duzyol, first test gas was pumped into TANAP on January 23. At peak time of construction works, around 13,000 people were involved in the project implementation, while at the moment some 7,000 workers still remain at the site. The cost of the project was initially estimated at $11.7bn, but successful procurement, project management, and financial management brought the aforementioned figure down to $7.99bn. TANAP was granted $3.75bn in loans by international financial institutions and a total of $10.2M by the EU. An 80% of pipes were produced in Turkey and another 20% in China, Mr. Duzyol concluded.
The 1,850km-long pipeline, owned by the SGC CJSC (51%), BOTAS (30%), BP (12%) and the Turkish subsidiary of SOCAR (7%), and extending from the Georgian-Turkish all the way up to the Turkish-Greek border, where it will connect to the Trans Adriatic Pipeline (TAP), will achieve its 6BCM/a plateau by 2020. At the current primary stage, 2BCM are going to be delivered via the South Caucasus Pipeline Expansion (SCPX) and TANAP, rising to 4BCM in 2019. Both the SCPX and TANAP capacities are expected to increase up to 23-31BCM/a by 2023-2026 with hopes that more sources of gas, beyond the Shah Deniz (SD) Phase 2, will be made available from Azerbaijan, Turkmenistan, Iran, and Iraq. In order for this to happen, investment decisions will have to be taken for the construction of 5 additional compressors, raising their total number to 7, General Manager Duzyol stated. Whether more international financial support for these extra stations will be attracted is yet to be seen. Nevertheless, getting TANAP fully filled will help create a higher netback margin for the consortia engaged in the project, as a result of the short transportation distance through Turkey, who also has to offer a natural gas price environment close to the EU average.
Chinese investments in Central Asia
China’s ambassador to Kazakhstan Zhang Hanhui is showing the Chinese interest in Kazakh market and the Asian giant is boosting their trade relations with Kazakhstan, especially in high tech and green technologies, shifting from natural resources and raw materials. This is good for diversification of Kazakhstan and China both. Such a move will make Kazakhstan less susceptible to boost cycles of oil.
Kazakhstan’s Minister for Investment and Development, Zhenis Kasymbek told that the current projects with China are already at a high level of roughly $28 billion while new projects in 2018 will add almost $400 million more in trade volume. Bilateral trade is around $10.5 billion in 2017, while Kazakhstan has the larger share with 55 percent export levels, or $5.8 billion.
Meanwhile, Kazakhstan is also walking on the tightrope, balancing the interests of Russia, the United States, and China. Just recently, the country abstained from the UNSC resolution that would condemn the airstrikes in Syria by the US coalition.
Chinese company TBEA gained permits to operate a gold mine Tajikistan. The mine is in the northern parts of the country. The permit was given in exchange to the power and heat plant that China built in Dushanbe. The Tajik economy still has room to improve. The country exported goods worth roughly $250 million and imported about $790 million within the first quarter of 2018. Russia, China, and Kazakhstan are the largest partners while Uzbekistan is also trying to improve their trade volume in recent years, especially in energy and petrochemicals sectors.
Uzbekistan I engaging with its neighbors and Russia more to increase the trade volume and activity in an effort to improve business conditions in the country. Russian Lukoil has commissioned a complex at the Kandym field cluster. The plant, which is located in the south west of the country will process natural gas and have a capacity of 8bcm per year. A joint project by Russian Lukoil and Uzbekistan’s national oil firm Uzbekneftegaz, the plant is worth $3.4 billion. The funding for construction mainly comes from ING Bank, UniCredit Bank, and Deutsche Bank.
Uzbek president Shavkat Mirziyoyev also showed the country’s interest in TAPI pipeline project which has funding problems and security concerns of the investors. Uzbek representatives will visit Turkmenistan to assess the project. The project is worth around $10 billion and even with Uzbek contributions, it will be far from completion in the near future.