Caspian Energy Insight: December 6, 2017
With a deal reached at the OPEC/non-OPEC meeting last week on November 30th, Brent oil traded just below $63 whereas US light traded just below $58. Azeri light prices continue to trade for more than $64 this week. There were no surprises at the end of a three-day ministerial meeting in Vienna and a deal to extend the cuts was finally reached. The oil producing countries will continue to cut 1.8M bpd by 2018.
The previous production cut agreement was supposed to end in March 2018. With prolonging extension till the end of 2018, the oil-producing countries showed their commitment to further balance the market in the year ahead. There will be an interim review in June, just to make sure that oil prices do not rise drastically, risking a shale expansion among the US shale oil producers.
Expecting the production cut agreement’s extension ahead of the meeting, hedge funds also raised their investments on oil futures for both Brent and WTI last week. This deal will also strengthen the hands of the crown family ahead of the IPO of Saudi Aramco as well as the internal political struggles.
Within the past year, oil producers have already experienced gains thanks to rising oil prices and a 50 percent decline in OECD oil stocks (from 280M barrels to 140M) and the decision to extend the cuts only seems logical.
Among the oil producers, only exceptions were made for Libya and Nigeria. The two countries will be exempt from the production with soft targets based on their 2017 production levels. Currently, Libya and Nigeria roughly produce about 1M bpd and 1.8M bpd, respectively.
Israel to Supply Natural Gas to Europe
A memorandum of understanding is signed on Tuesday between Israel, Cyprus, Italy, and Greece for the laying of an underwater gas pipeline from Israel to Europe. If realized, this could be the world’s largest underwater pipeline and would allow Israel to export gas to European nations. The pipeline will be 2,100 kilometers long and has a tentative completion date of 2025. The pipeline will be able to transport 12-16 bcm of gas annually, and the initial estimate of the cost of building the pipeline is above $7 billion.
Following a similar understanding with Russian underwater pipelines through the Baltics and the Black Sea, the countries claim that the underwater pipeline to be more secure and reliable with respect to a land pipeline. However, these pipelines are also more expensive with having more technical problems faced underwater.
Although experts speculate to increase the size of the pipeline to 30 bcm if larger fields can be explored in Israel or Cyprus, there are multiple economic and political challenges for such a pipeline. First, the problem of Cyprus should be resolved with Turkey and Turkish objections should be satisfied for the realization of the pipeline. Second, with current lowering prices in Europe, coupled with the cost of laying the pipeline, the profitability of the pipeline is doubtful.
Caspian Nations Can Start Exporting More Natural Gas to Europe
In recent news, Turkmenistan announced their readiness to use the East-West internal gas pipeline. The domestic natural gas pipeline in Turkmenistan has significance for the region and beyond. Since most of the Turkmen gas is in the eastern parts of the country, the transportation of it to the Caspian and beyond was doubtful. With the completion of the pipeline, if Trans Caspian Pipeline can be completed, Turkmenistan can start selling natural gas to the European Union through the Southern Gas Corridor (SGC). To that end, last week, Georgian and Turkmen Foreign ministers met in Ashgabat. Both sides expressed their commitment to furthering the development of cooperation between the two countries, specifically regarding energy transport in the regions of the Caspian and the Black Sea.
The SGC is currently in full swing with Azerbaijan getting ready to export natural gas to Turkey through TANAP and up to Italy through TAP. This week, the European Commission also sent a letter to the European Investment Bank (EIB) to give loans for completion of TANAP and TAP. EIB is currently considering above $2 bln in loans to support two sections of the SGC. The EU already includes the SGC as an integral part of European energy supply security and considers it under projects of common interest (PCI).
On December 4th, the five Caspian Sea states, Iran, Russia, Kazakhstan, Azerbaijan, and Turkmenistan convened in a two-day ministerial meeting in Moscow on Monday to discuss the details of a draft convention on the legal status of the sea ahead of the at the Caspian summit. They met for the seventh time to focus on the Caspian Sea’s legal status. The ministers discussed documents regulating cooperation among the five countries in various economic, transport and naval sectors and on curbing contraband smuggling and illegal fishing and ensuring maritime security.
After the meeting, Russian Foreign Minister Sergei Lavrov announced agreement among the five Caspian states on “all the outstanding key issues” regarding the legal status of the Caspian Sea. At the same time, Azerbaijani Foreign Minister Elmar Mammadyarov called for efforts to reach a consensus on the remaining issues until the Caspian Summit in Kazakhstan next year.
The current de-facto situation of Caspian’s legal status is not sustainable although the status is under discussion since 1991 when Azerbaijan, Turkmenistan, and Kazakhstan gained their independence. Being the largest inland body of water in the world, the Caspian Sea is endowed with natural resources, forming the lifelines of these post-Soviet republics.
Iran, Russia: Moscow Receives First Iranian Oil Tanker Under Swap Deal
The first delivery of 1Mbbl of Iranian crude has reached Russia in mid-November with hopes of accessing the world markets via ‘’Promsyryeimport’’ foreign trade organization, under an oil-for-goods barter agreement, Iranian Oil Minister, Bijan Namdar Zangeneh, said last week. According to the swap deal officially concluded in late May 2017, Iran aims at selling around 100,000bbl/d through this authorized, Russian-owned industrial feedstock importer, amounting to a total of $2bn/y at present prices. As stated by Mr. Zangeneh earlier this year, Russia is going to pay for 50% of the Iranian oil consignments in euros, while remaining 50% is going to be used to finance imports of $45bn worth of Russian goods.
The recently signed contract forms part of a scheme between the two countries dating back to 2014, when Tehran aspired to send up to 500,000bbl/d to Moscow in exchange for Russian goods and equipment, in order to minimize the impact of Western sanctions imposed over its nuclear program. Within the agreement, the two parties have made clear their mutual purpose to lessen dependence on the US dollar. Furthermore, the oil-for-goods program plans to help alleviate pressure on Iran’s long-isolated energy sector by gradually restoring the country’s ability to approach international oil customers and develop its resilience, despite the pessimism that has been sweeping the oil markets throughout the last three years.
It should be borne in mind that Russia has offered to oversee the particular oil barter deal amid the newly worsening US-Iranian ties, following current administration’s decision to decertify the Joint Comprehensive Plan of Action on Tehran’s nuclear program, adopted in 2015 by Iran, the P5+1 member-countries and the European Union. It is said that, through the program, Iran will manage to cover domestic needs as far as industrial and agricultural equipment and electrical power supply are concerned. The country also considers the possibility of developing its national oil deposits by taking advantage of the Russian energy firms’ technical know-how, although no such accord has been worked out yet.
For the time being, LUKOIL has declared its readiness to enter Iran’s oil and gas industry, as long as promised investment-friendly legislation amendments are introduced by the government. Moreover, future swap operations between the National Iranian Oil Company (NIOC) and Rosneft might solve the latter’s problem regarding crude deliveries to an oil refinery in India’s Vadinar, acquired by the Russian oil major from the Indian refiner Essar Oil in August. For this reason, Rosneft has already agreed on oil purchases from Northern Iraq’s Kurdistan Regional Government up until 2019, however, the Iranian alternative appears far less politically risky at this point.
Finalization of the Russian-Iranian initiative coincided with Tehran’s decision to resume oil swap with Caspian neighbors, halted during former President Mahmoud Ahmadinejad’s tenure because profits were deemed inadequate. The resumption of this sort of operations has been marked as a priority by the Oil Ministry since 2013, after election win of the moderate President Hassan Rouhani.
Iran has concluded and implemented several oil-swap deals with Azerbaijan, Kazakhstan, and Turkmenistan since about the late nineties and has also constructed a 272km-long oil pipeline that links its Caspian port of Neka with refineries in Tehran and Tabriz. The daily swap from 1997 to 2009 averaged at 90,000bbl/d, allotting Iran some $880M from transit fees, and it was planned to rise up to 500,000bbl/d by 2015. At the time, Azerbaijani, Turkmen and Kazakh deliveries used to reach the Neka oil terminal and from there on Iranian Oil Terminal Co. was responsible for transferring them to the Tehran and Tabriz refineries. Afterward, Iran would supply the Caspian littoral states with equivalent oil volumes from its ports on the Persian Gulf.
Iran is, therefore, equally interested in restarting oil swaps at a capacity of 500,000bbl/d with the rest of fellow Caspian countries, providing there will be enough crude, in order for the cost of oil deliveries to refineries in the country’s North to be decreased, as at the moment those refineries are mostly supplied with oil from its southern fields in the Persian Gulf.
Southern Gas Corridor: European Commission Asks EIB, EBRD to Finance the TANAP and TAP Projects
The Vice-President of the European Commission, in charge of Energy Union, Maros Sefcovic, and the European Commissioner for Climate Action and Energy, Miguel Arias Canete, have co-signed a letter addressed to the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), urging them to allocate loans to the TANAP and TAP pipeline projects.
According to the letter sent on July 13, the Southern Gas Corridor is described as ‘’vital and irreplaceable’’ for the diversification of EU gas sources and security of supply. ‘’Europe’s commitment must therefore not wane,’’ the Commissioners wrote, expressing their hopes that the two financial institutions would financially back the aforementioned pipeline projects ‘’thereby to exemplify that European Union patronage over the Southern Gas Corridor continues.’’
At the moment, EIB is reportedly mulling loans of $1bn and $2bn for TANAP and TAP, respectively. Furthermore, the EBRD Board approved a $500M loan for TANAP in October, issued for an 18-year period. Both pipeline projects have been included in the list of Projects of Common Interest, released by the Commission, on November 26, a fact that boosts their chances of receiving additional EU funds. Nevertheless, PCI status does not imply immediate financial support, but allows for the selected projects, except for the oil-related ones, to apply for funding under the Connecting Europe Facility (CEF) framework at a subsequent stage.
TANAP and TAP, the last two segments of the Southern Gas Corridor, are scheduled to become operational by 2018 and 2020 apiece, earmarking up to 10BCM of Shah Deniz gas supplies for the European markets.