Caspian Energy Insight: February 14, 2018
Oil Prices Declined Significantly
Last week oil prices have continued to decline significantly. Brent Crude oil is at $62.61 per barrel and WTI is at $58.66. The decline in Brent prices was the worst of the last two years, writing around 8.5 percent in the loss. Azeri light is trading around $65. Currently, hedge funds are liquidating their bullish positions in crude and refined fuels, investors taking profits, and the U.S. shale production is showing signs of surging. USD is rebounding and the stock market is in a downturn, both of which cause the downward restoration of oil prices.
Several analysts were concerned about the tightening in the market when the oil prices tested $70 levels twice in January. In the last two weeks, the oil market started to experience the results of such tightening. This month, the backfire in OPEC’s elongated strategy of production cuts showed its first signs. Although both OPEC and non-OPEC participants of the deal benefited from the production cuts, the indecisiveness of decision makers about when to stop the cuts is increasing the risks in the oil market.
The demand growth estimates of IEA for 2017 are around 1.6M bpd. The petroleum reserves also declined significantly from 264mb above the average levels to 52mb. Recent estimates also show that the US crude oil production will average around 10.6M bpd in 2018, a significant increase from 2017 numbers (9.3M bpd). This amount may satisfy both increasing global demand for crude and the cuts by the OPEC/non-OPEC deal depending on the oil prices in the year ahead.
The oil market will continue to experience the effect of the cold war between the American shale producers and the cartel+. Russian energy minister Alexander Novak showed Russia’s willingness to increase its alliance with Saudi Arabia and OPEC just this past week. The alliance already successfully extracted 1.8M bpd from the world markets after the production cut deal and they will continue to cooperate beyond the existing deal. In 2017, Russia and Saudi Arabia jointly invested in energy projects in excess of $1bln and the two countries are looking to increase these numbers in 2018.
Russia Sees Progress in the Turkish Stream and Nord Stream Pipelines
This year, Gazprom has increased the estimated budget from $6 billion to $7 billion. It was announced by London Deputy Chairman Andrei Kruglov of the company at an investment meeting. The increase in the budget will initially be funded by Gazprom’s own budget but will eventually be refinanced through project bonds. Back in May 2017, the company started construction of Turkish Stream’s offshore sections in the Black Sea and Turkey granted the necessary authorizations for the company to do so for the second line in January 2018. By last month the company laid almost 800km of the pipeline.
The first string of the Turkish Stream will feed into Turkish customers whereas the second line will go to Europe despite the current EU level objections to the pipeline. The pipelines will have 15.75 bcm/y capacity each and the company is eventually intending to establish the third and fourth lines as well.
Along with the Turkish Stream, there are also developments for Nord Stream pipeline. The European Commission is planning to revise the EU Gas Directive. The proposal went through in November of 2017 and the EC wants to ensure that all new major pipelines intending to do business in the EU to comply with the existing framework. The Third Energy Package is already posing problems for Russia’s two new major pipeline projects, Turkish Stream and Nordstream II, and Russia is trying to convince the EU for exemptions.
The new directive proposals by the EC include essential principles on transparency and goals to include further competition in the gas market as well as increasing energy supply security of the EU. Pending these changes, the Nord Stream 2 AG is planning to ask for damage compensation although Poland and Ukraine are both on their toes since they risk losing revenue and leverage over Russia if new pipelines bypass these countries.
New Energy Developments in Central Asia: Uzbekistan and Kazakhstan
Early 2018, Uzbekistan increased its natural gas production as per the directives from President Shavkat Mirziyoyev. Compared to last January, the production increased by 7.1 percent and is above 5.09 bcm now. Last year, Uzbekistan produced around 56.4 bcm natural gas and is looking to increase these numbers to address the existing shortage.
Existing fields in both gas and oil sectors are plummeting in Uzbekistan and the country should increase its rigging efforts. Recently, Uzbekneftegaz announced exploration of new gas fields in Ustyurt Plateau and this is a positive step in the right direction. The 25 Years of Independence field has even further potential. The field is located in the southern Surkhandarya region of the country and potentially holds around 100 bcm natural gas.
Feeling the effects of oil price increase in 2017, Kazakhstan is also ramping up its economy. Reported by Committee on Statistics of the Kazakh National Economy Ministry, industrial production, compared to January 2017, increased by 5.2 percent in January 2018. Looking at the reports of oil companies. Tengizchevroil Oil Company recently increased its oil production in 2017 to 28.7M tons. This is a 4.1 percent increase in company’s books. The company also increased its trade volume and production levels in natural gas and petrochemicals.
Finally, Kazakhstan is working on controlling greenhouse gas emissions and planning on reductions by 2030 World Bank Country Manager for Kazakhstan Ato Brown said. This emission trading system is novel and forward-looking for Central Asia.
Russia, Iran: Agreement on Gazprom’s Participation in the Iranian LNG Export to Be Concluded within the First Half of 2018
On February 7, Iran’s ambassador to Russia Mahdi Sanaei expressed hope that a pertinent accord with Gazprom regarding the participation of the Russian state-owned gas monopoly in a partly-built $4.35bn LNG export facility at the port of Tombak will have been finalized within the first half of 2018. In December 2017, Gazprom, the National Iranian Oil Company (NIOC) and Iran’s Oil Industry Pension, Saving and Staff Welfare Fund had inked a Memorandum of Understanding in order to jointly explore perspectives for cooperation in the context of Iran LNG project. In its first phase, Iran LNG is designed to have two lines of 5.25 million tonnes of annual capacity each, while the second phase provides for an increase in production of up to 21 million tonnes on a yearly basis with the construction of two additional lines. Currently, the National Iranian Gas Export Company (NIGEC), a NIOC affiliate, holds a 49% stake in the project along with Iran Oil Pension Fund, which holds the remaining 51%.
Since the late nineties, Iran has been seriously attempting to establish itself as an LNG exporter. However, international energy majors gradually relinquished their interest in strenuous projects, like Pars LNG (Total: 50%, NIOC: 40%, Petronas: 10%) and Persian LNG (Shell: 25%, Repsol: 25%, NIOC: 50%), as a result of the sanctions imposed by the P5+1 group in response to Tehran’s refusal to suspend its uranium enrichment program. Amongst these projects, Iran LNG withstood the test of time, but hurdles have often hampered its progress to this day. The project’s feasibility study was completed by the German contractor Linde, together with GES and Oil Industries Engineering and Construction (OIEC) Group, in August 1996 and by Daewoo and the Japanese JGC corporations in March 1997. The FEED study was carried out by JGC and Technip in 2004. Work on the plant was halted in 2012 when Iran was unable to keep importing Linde’s specialist liquefaction equipment for the second train due to the sanctions’ regime. Up until suspension of construction, some $2.3bn had already been invested into the project, that was declared finished by more than 50%.
In an effort to revamp its oil and gas business in the post-sanctions era, the Iranian government has put LNG shipments back on the country’s energy agenda. Such a decision may be justified by a series of intertwined factors. Firstly, Iran benefits from open-sea access to both Europe and Asia (India plus the Asian Pacific region). Furthermore, the South Pars/North Dome natural gas condensate field, the world’s largest natural gas field, located in the Persian Gulf and shared between Iran and Qatar, offers a reliable and low-cost supply source for Iran LNG.
Developments after the nuclear pact adoption unveil new stimulus for Iran’s placement on the global LNG map. In July 2017, NIOC and Total signed a 20-year contract for the development and production from Phase 11 of the South Pars. Apart from Gazprom, the French energy company has also been in talks to acquire a multi-billion-dollar stake in Iran LNG. Earlier in that same year, Iran and Oman agreed to alter the route of a proposed offshore/onshore export gas pipeline, so that it bypasses waters controlled by the UAE. Even though pricing still remains a matter of contention between the two states, if the pipeline reaches the point of implementation, Iran would be able to connect its vast gas reserves with the Omani clientele, as well as with the Omani LNG plants from where the gas would be re-exported. According to the Iranian Deputy Petroleum Minister and NIOC’s managing director Ali Kardor, the country is interested in Gazprom also taking part in the construction of the Iran-Oman gas line. Finally, in October 2017, NIOC awarded a contract to a joint venture of Norway’s Hemla Vantage and Iran’s Kharg Petrochemical Company, named IFLNG, in order to deploy a 500,000-tonne FLNG barge for the purposes of liquefaction, storage and transfer of Iranian gas over a period of 20 years. The floating facility will be installed on a vessel belonging to the Belgian Exmar, that is going to be chartered by IFLNG. Except for the gas burnt at South Pars wells, the facility can equally process flared gas with high methane content from nearby offshore projects in the Persian Gulf, thanks to its aptness in being installed contingently upon the availability of new gas supply locations. This project, too, will help Iran gain much-needed experience in LNG trading and marketing.
Therefore, it is blatant that the previously almost neglected Iranian LNG strategy has gradually started being put into effect despite the unavoidable obstacles along its way. Being the first Western energy firm to get involved into a major deal with Tehran since the easing of international sanctions in 2015, it is no wonder why Total now urges the US administration to stick with the terms of the Joint Comprehensive Plan of Action and to not further sanction Iran, through its CEO Patrick Pouyanne. Meanwhile, Russia likewise seeks to have a say on Iran’s energy plans, as was made clear by the full-scale energy partnership inaugurated between NIOC and Gazprom in late 2017. That is because both Iran’s intention to add its gas to the Southern Gas Corridor via the Trans Anatolian Pipeline (TANAP) and its LNG ambitions might create competition for the respective Russian-led projects, namely Gazprom’s Turkish Stream and Novatek’s Yamal LNG, in the European and Asian markets.
Southern Gas Corridor: Over 80 Percent of Pipes along the TAP’s Route in Greece and Albania are Welded
Over 80 percent of the pipes along the route of the Trans Adriatic Pipeline (TAP) project in Greece and Albania (equaling to 615km out of the 765km of pipes) have been welded so far, the consortium said on February 12 via Twitter. “TAP pipes are welded above ground. All welds are subject to automatic testing, in order to ensure that they meet national and international standards,” the company explained. Last week it was announced that over 65% of the pipes along the planned route in Albania and Greece had been lowered into the ground, in a sign that the progress of the pipeline has not been significantly impeded on both the Greek and Albanian territories following its 2016 inauguration, despite minor protests in northern Greece.
Out of the $4.5bn of the project’s overall cost, the consortium will reportedly invest around $472M/a in the Albanian section in 2017 and 2018. Last week, the European Investment Bank, EU’s lending arm, approved a $1.3bn loan for the pipeline, that envisages to transport 10BCM/a of the Azerbaijani gas from the Shah Deniz 2 to the European markets as part of the Southern Gas Corridor. TAP’s shareholders are the British BP (20%), the Azerbaijani SOCAR (20%), the Italian Snam (20%), Belgium’s Fluxys (19%), Spain’s Enagás (16%) and the Swiss-based Axpo (5%).