Caspian Energy Insight: January 25, 2018
Following the brief test of $70 level last week for the first time since 2014, this week oil prices came close to $70 mark once again. WTI is around $64.5, and Azeri Light is trading just shy of $71 as of Tuesday, the 23rd. As reported last week, $70 levels are here for the first time since December 2014. Hedge funds also continue their eagerness to invest in petroleum, a situation largely unchanged since December 2016.
Russia-Saudi Arabia Cooperation Continues in 2018
Although restart of some Libyan oil fields put the prices downward pressure last week, this week oil jumped back on track. Despite a high performing market, OPEC and non-OPEC agreement appear to be intact through the end of the first month of 2018. Saudi Arabia’s energy minister Khalid al-Falih called for the further continuation of cooperation between the participating countries, potentially even beyond 2018. This was a first by the Saudis. Noting a potential increase of shale oil supply from the US, the ministerial meeting called for a unified front.
Such calls are largely directed towards Russia, as the largest oil producer in the world provided support for balancing of the market last year. However, recent explanations from the Russian ministers and oil companies show less willingness for production cut continuation. Russian involvement in OPEC deal making is essential since several OPEC members tend to cheat in their production levels while many others (Iran, Iraq, Libya, Nigeria) claim the exemption at times in order to reach their previous production levels. Although Russia did not rule out their support for the deal’s extension, there was no clear inclination for continuation in 2019.
Since November 2016, Saudi Arabia and Russia could participate production cut deals and are looking to extend their level of cooperation in 2018. The two countries will meet in February, as announced by Russian Energy Minister Novak, for implementation of further joint projects. These will include the sale of solar panels to Saudi Arabia as the Middle Eastern nation is looking to expand its renewable capacity.
The level of cooperation with Saudi Arabia can go even beyond renewables with Russia’s interest in purchasing shares of Saudi Aramco. Last year, there was interest from China’s CNPC and recently head of Russia’s Direct Investment Fund, Kirill Dmitriev, announced Russian pension funds’ interest in purchasing the stakes. Saudi Aramco could be valued up to $2 trillion, raising $100 billion for Saudi Arabia. Dmitriev says oil producers have already made additional $600 billion in revenues due to the oil cuts and this helped producers to continue to invest in the sector. It is not clear whether the level investment expected from Russian companies but if Saudi Arabia dismisses NY and London stock exchanges, Russia could join China for investment.
Azerbaijan: Bulgaria Eyes Azeri Gas Supplies via the SGC Along with Investments in GTS
Having taken over the six-month rotating presidency of the Council of the EU for the first time since its accession to the Bloc, back in 2007, Bulgaria now shoulders the weight of political mediation in favor of a real European perspective for the geopolitically turbulent Western Balkan region. In the background of extremist infiltration in Bosnia and Kosovo, bad governance and corruption phenomena in Albania and the latest upheaval in Greece-FYROM relations, as ongoing negotiations on the name dispute resolution are put into risk because of widespread opposition by the peoples and certain political groups in the two countries, Bulgaria wants to set an example to its neighbors through the implementation of the acquis communautaire to the benefit of domestic policy in different sectors. Energy is numbered among those key fields since the Balkans’ disconnection from Central Europe’s energy network has created the need for the construction of new infrastructure and pipeline routes. In order to ensure energy security and supply diversification, Bulgaria relies to a great extent on bilateral cooperation with Azerbaijan.
On the occasion of his visit to Baku on January 15, Bulgarian Prime Minister Boyko Borissov expressed his country’s profound interest in buying Azerbaijani gas. Out of the 10BCM/a of gas from the Shah Deniz II that will be delivered to Europe, as soon as the Southern Gas Corridor pipe network is commissioned, Bulgaria is going to receive 1BCM/a via the 182km-long Interconnector Greece-Bulgaria (IGB). The Komotini-Stara Zagora line, developed since 2011 by Bulgaria Energy Holding and IGI Poseidon (a 50-50 joint venture of the Greek DEPA and the Italian Edison), is designated as a European Project of Common Interest (PCI). Its construction is scheduled to begin in June 2018. Once completed, it will be able to carry up to 3-5BCM/a with reverse flow capacity, practically covering Bulgaria’s entire annual energy consumption.
At present, Bulgaria remains heavily dependent on Russian imports for its primary energy resources -coal, natural gas, nuclear and oil. With Bulgarian territory gasified at about 3%, the country has set itself an ambitious goal of replacing wood and coal with the more ecologically sound natural gas for heating purposes, Mr. Borissov said. Lignite combustion provides 50-90% of domestic electricity generation in countries of the Balkan peninsula (Serbia, Kosovo, Bosnia and Herzegovina, Montenegro, FYROM, Greece, Bulgaria, Romania, Slovenia), making South Eastern Europe the largest consumer of lignite in Europe. Mr. Aliyev pointed to Azerbaijan’s successful investments in Georgia’s social gas sector, thus affirming his country’s eagerness to help Bulgarian households to phase out coal, in line with the EU’s commitments under the Paris Agreement.
And as progress on the Southern Gas Corridor has encouraged almost all SEE states to envisage themselves as potential gas and/or electricity hubs, Mr. Borissov could not avoid but bring up the issue of future Azerbaijani investment in Bulgaria’s gas transmission system. Following its failure to acquire a 66% stake in the Greek gas grid operator DESFA, SOCAR kept searching for viable investment opportunities in the region. In 2017, the Azeri state energy company co-signed a Memorandum of Understanding with the Bulgarian gas transmission system operator Bulgartransgaz, in order to examine additional gas supply routes towards Bulgaria and through Bulgaria to other countries in the South-Eastern Europe axis, including through the building of the so-called ‘’Balkan’’ gas hub.
Classified as a PCI, and EU-financed by 50%, the ‘’Balkan’’ gas hub has to do with the concept of transferring significant gas quantities from various sources to enter a physical point in the Bulgarian port city of Varna for further transportation and trade towards multiple geographical directions across Europe. In December 2017, Bulgaria’s EMG consulting and the Swiss-based AF consulting were awarded a $1.4M contract to carry out a feasibility study on the project. After South Stream’s 2014 cancellation, the decision on the deviation of Turk Stream to Bulgaria, instead of Greece, would further strengthen the ‘’Balkan’’ gas hub, as one of the pipeline’s two branches could reach Varna. Finally, the onshore Interconnection Turkey-Bulgaria (ITB), under realization by Bulgartransgaz and BOTAS, will give Bulgaria access to all current and future entry points and sources of Turkey (including Azeri gas and LNG spot supplies from existing Turkish terminals), further enhancing Bulgaria’s position as a reliable transit country.
Kazakhstan: Kashagan Is Back Online Following Power Outage
Oil output from Kazakhstan’s immense Kashagan field has gradually picked up following power disruptions at its onshore portion and the subsequent halt to an offshore plant two days later, the country’s Energy Ministry stated. According to a report released by the International Energy Agency (IEA) on January 19, Kashagan’s ongoing ramp-up could achieve an envisaged plateau of 370kbbl/d in 2018 from the 250kbbl/d produced by the end of 2017. Such an increase, attained providing that the presently deployed gas reinjection goes well, would more than double Kazakhstan’s present liquids output of approximately 1,7MMbbl/d. After completion of an expansion project, Phase One production capacity is set to extend at a target level of 450kbbl/d. As for the decision-making on the project’s second phase, this one has slid to 2019 in hopes of a much-anticipated oil price recovery. Up until November 2017, production at Kashagan had reached 7,3 million tons, exceeding the annual plan by 46%. Overall production from the field in 2017 is said to have surpassed expectations by 66%, the Kazakh Energy Ministry estimates.
Kashagan, located some 50 miles offshore in the northeast of the Caspian Sea, is the largest single oilfield discovered in the world since 1968. With its first vertical well drilled back in 2000, the field is being developed by a group of companies including Eni, KazMunayGas, Shell, Total, ExxonMobil (each holding a 16.81% stake), CNPC (8.4%) and Inpex (7.56%). It took about 16 years and around $55bn of investments in order for the field to start commercial output. Growth from Kashagan constitutes the main reason why Kazakhstan has often ended up in the list of the non-compliant petrostates, along with the UAE, Malaysia and Iraq, despite its pledge to cut domestic output by 20kbbl/d under the OPEC+ Declaration of Cooperation. In fact, Kazakhstan’s total oil production in 2017 has reportedly risen by 10.5% to 86,2 million tons, Economy Minister Timur Suleimenov said on January 11, although the Ministry of Energy initially projected an increase of 85,5 million tons for the same year. Moreover, in November and December 2017, Kazakhstan was pumping 130kbbl/d over its target, managing to take Iraq’s place as OPEC’s first biggest over-producer. The latter overran its production quota by 100kbbl/d during the same period. However, Kazakhstan’s overall production fell by almost 300kbbl/d as of January 2018, the country’s Energy Ministry announced.
The issue of Kazakhstan’s conformity with the voluntary adjustments in oil production, dictated by the recently prolonged OPEC/non-OPEC pact, has spurred intensified discussion. Serving as an example of how overreliance on revenues from the oil sector reveals the commodity producer’s vulnerability to external commodity price fluctuations, Kazakhstan’s protracted fiscal challenges have brought OPEC restraint commitments into sharper focus for the national economy. Nevertheless, Kazakhstan has chosen to view its 20kbbl/d production cut goal more as a symbolic move, in comparison with promises made -and in many instances not kept- by oil leaders like Russia and Saudi Arabia. In the words of the Astana-based Energy Ministry, Kazakhstan is determined to keep up cooperation with OPEC and its associates, while at the same time trying not to infringe ‘’contractual obligations to partners-investors working at large oil and gas developments.’’
Kashagan is, of course, considered such a large-scale project, and one that also attracts significant US investment interest. During his last week’s meeting with the US Secretary of Energy Rick Perry in Washington, the Kazakh President Nursultan Nazarbayev expressed satisfaction regarding bilateral collaboration in Kazakhstan’s oil and gas industry, underlying the need for further coordination among investors towards crude oil processing. It is true that key projects of American interest in Kazakhstan have to do with oil. Except for Kashagan, Tengiz reservoir is deemed by Chevron to be its second most important investment behind the company’s Permian wells. Production from the Tengizchevroil project is planned to rise by a further 260kbbl/d within 2018. Chevron likewise participates in the Karachaganak Petroleum Operating with an 18% stake, behind Eni and Shell, who hold a 29.25% each. An output boost at Karachaganak field is equally scheduled to be activated after a nearly 2% reduction observed in 2016, once a dispute between the consortium and the Kazakh government over profit sharing in the project is settled, casting extra doubts on Kazakhstan’s ability to continue with OPEC cuts on the same terms.
Still, it is worth mentioning a discerned investment fatigue on the part of most private oil majors (with the addition of those from the US) in relation to new subsoil discoveries in Kazakhstan. This is shown by their notable absence from the newly formed consortium targeting deep-water oil reserves in the Caspian Depression. The revival of the so-called Eurasian Project is going to be put into effect mostly by state-controlled firms (Rosneft, CNPC, KazMunayGas, SOCAR), with the exception of the majority private-owned Eni. This sort of tendency can be associated with the general dearth of capital investments in upstream projects because of the volatile oil prices, as well as with a decision of the sector’s giants to look towards renewables seeking survival in the transition to a low-carbon world. In spite of the particular drift by its primary investors, Kazakhstan in December 2017 adopted a new piece of legislation, which lifts previously existing barriers to the subsoil user’s activity. In addition, the country in no way withdraws the permanent request for OPEC’s leniency on projects like Kashagan, remaining resolute in its efforts to keep its offshore oil business alive and thriving.
Turkmenistan: Working Commission on TAPI Set Up, as Project Secures More Funding from Saudi Fund for Development
Turkmenistan’s President Gurbanguly Berdimukhamedov has signed a decree on the formation of a working commission responsible for supervising the implementation of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, as well as of the transport corridors and energy bridges along the Turkmenistan-Afghanistan-Pakistan route, the Turkmen state news agency reported on January 15. Evidently, the holder of the world’s fourth-largest gas reserves exudes cautiously confident optimism about the future of the repeatedly frozen project, intended to diversify its eastward export routes away from China, who is expected to double annual imports of Turkmen gas up to over 60BCM/a by 2020. This goal gains further importance against the backdrop of Gazprom’s 2016 decision to stop purchasing gas from Turkmenistan, prompting a sharp decline in the country’s hard currency revenue.
The 1.814km TAPI will cover 214km, starting from the giant Galkynysh onshore gas deposit, before reaching the Turkmen-Afghan border. In Afghanistan, it will traverse 774km through the provinces of Herat, Farah, Helmand, Nimroz and Kandahar. The 826km-long route within Pakistan will pass near Quetta, the provincial capital of Baluchistan, and Multan in the province of Punjab, finally reaching India at Fazilka. The pipeline’s groundbreaking was performed in December 2015. Its cost and capacity are estimated at $10bn and 33BCM, respectively. Pipeline laying operations in Afghanistan are scheduled to begin in February, simultaneously with the laying of a fiber-optic communication line along the same route and the Turkmenistan-Afghanistan-Pakistan power transmission line.
The project’s timely completion dominated last week’s meeting in Islamabad between the Pakistani Prime Minister, Shahid Khaqan Abbasi, and Turkmenistan’s Foreign Minister, Rashid Meredov. Mr. Meredov called upon Pakistani companies to take part in the tenders announced by Turkmenistan for TAPI, while Mr. Abbasi applauded the progress made on the project to this day. Even though pipeline construction is likely to suffer delays on Afghan territory due to falling natural gas prices and security issues, TAPI represents a tailor-made opportunity for Ashgabat to escape its long-lasting isolation and establish itself as a reliable supplier for states like Pakistan and India, where natural gas demand is predicted to rise by 50% until 2030. Mr. Abbasi’s agreeable stance to the project, in the course of deliberations with Mr. Meredov, was taken as a result of the acknowledgment of TAPI’s positive impact explained above. However, renegotiation of the gas pricing formula for TAPI under the sales and purchase agreement with Turkmengaz, in order for the cheaper rates, at which Pakistan has so far concluded two LNG contracts, to be matched, is still an issue of concern for the country.
As already happens with the majority of contracts in the Asia-Pacific region, the agreement links gas prices to Japan crude cocktail at 64% of its value. But according to a clause, if Pakistan ever managed to secure less expensive gas imports, TAPI prices would have to be brought down to those levels. In 2016, Pakistan and Qatar inked a 15-year multi-billion LNG deal, with the price for each cargo set at 13.37% of the preceding three-month average of a barrel of Brent crude. Soon after, Pakistan LNG Company awarded a long-term LNG supply contract to Eni after gaining a discount offer from the Italian firm for a price at 11.99% of crude oil rate.
Apart from Pakistan’s demand for a pricing revision, financing also plays a key role in order for the project to come on stream as per the current schedule. Ashgabat has for the time being sought to rope in the European Bank for Reconstruction and Development, Asian Development Bank and the Japanese government as partners in TAPI. Furthermore, in the midst of the unfolding domestic tumult, topped by the latest purge of royal family ‘’rivals’’ by the Crown Prince Mohammed bin Salman, Saudi Arabia appears equally interested in investing in TAPI. Following approval of a $700M loan from the Islamic Development Bank, Ashgabat officially thanked on January 19 the Kingdom for the extra funds granted to TAPI by the Saudi Fund for Development, under bilateral accords reached in May 2016.
Mr. Berdimukhamedov said that the SFD investments are a sign of the high appreciation of TAPI’s “potential, profitability and payback.” Nevertheless, behind the zesty Saudi investment plans for the provision of pipeline material for TAPI and for additional oil and gas development activities in Turkmenistan, one can read the growing geopolitical competition between KSA and its regional heavyweight in the Middle East, Iran. The latter is at the moment attempting to settle an open-ended debt row with Turkmenistan in International Arbitration so that its poorly supplied northeastern regions are not left in the cold until foreign investments in Iranian gas sector render unnecessary future gas imports from the neighboring energy-rich Caspian state.
Kazakh Non-Oil Sector Investments to Increase in 2018
Minister of Energy Kanat Bozumbayev announced this week that Kazakhstan will engage with polypropylene production project and upon completion, the plant will be able to produce 500K tons per year. The cost of plant will be about $2.6 billion. In addition to that, polyethylene production feasibility studies are complete and the plant will have a cost of $6.5 billion with 1.2M ton production capacity. The country is also investing in domestic electricity networks in 2018.
In order to increase national funding opportunities for these projects as well as oil sector investments, Kazakhstan will engage in the privatization of state assets. Through privatization, the state is eyeing to raise around $5.5 billion as announced by the Deputy Minister of National Economy Serik Zhumangarin. The potential companies for IPO include Kazatomprom- the national atomic company, Temir Zholy-the national railway company, KazMunayGas – the national oil and gas company of Kazakhstan, Samruk-Energy, Air Astana- the airline company, Kazpost -the national postal service company, and Tau-Ken Samruk.
Azerbaijan’s Investments in Southern Gas Corridor Continue
Azerbaijan will continue to invest in regional energy projects in 2018, including $1.3 billion for Azerbaijan’s share in the SGC. Director General of the CJSC Afgan Isayev announced the details of the financial decision as $232 million on the Shah Deniz project (including Shah Deniz 1), $144 million on the South Caucasus pipeline expansion, $728 million on TANAP, and finally $182 million on TAP projects.
The SGC is considered a project of common interest (POC) by the European Union and the Union continues to support these projects politically, legally, and financially. 2017 had been the year when multiple external funding opportunities emerged for the SGC and there will be additional available funding from outside sources in 2018. Recent reports show that EBRD’s additional $500M allocation for TAP can arrive as early as the end of 2018.
The gas will start flowing to Turkey towards the end of the calendar year while European consumers will have access by 2019. Turkish Energy and Natural Resources Minister Berat Albayrak also announced 80 percent completion rate for TANAP where Turkey will receive 6bcm yearly supply from the pipeline. Similarly, 65 percent of TAP was also completed as of 2017, just on track. These projects could get even more exciting for the EU and their hopes for supply diversification with any Turkmen participation in the future, which would partly decrease dependence on Russian gas.