Caspian Energy Insight: November 1, 2017
The price of oil within the past week has increased. After reaching the highest levels at around $59 in September, Brent oil stagnated within the first three weeks of October. However, within the past week oil prices passed the threshold of $60 once again. With this jump in prices, only in October 2017, oil prices have increased 9 percent. This is also the first time Brent prices went over $60 since mid-2015. This is all impressive and good news for oil producing countries and the trades coming up to the November meeting of oil producing countries. In a similar fashion, Azeri light oil, which is consistently more expensive, compared to Brent, is trading around $61.5 this week.
Despite the increases in oil prices, Hedge funds continued to invest in oil futures, showing their belief that oil prices will still go higher instead of falling back to $50 range which was the case within the past year. This indicates a shift in perception for oil prices to be stuck in $50 range. The new price range could be well above $60.
Meanwhile, as much as the crown prince is pushing for higher valuation of Saudi Aramco amid the company’s IPO, around $2bln and on Saudi Arabia’s terms, the institutional constraints of London and NY Stock Exchanges are preventing the negotiations to proceed. There are potential threats of 9/11 lawsuits against Aramco in New York while London has its own listing complexities, yet the Saudi side is not backing down from its aims of valuation.
It is odd to see so many uncertainties about the IPO and Riyadh’s decisions. Currently, the reports speculate all potential outcomes: not listing, listing with valuation between $500M and $1.5bln, and even possibly a Chinese purchase. Finally, the recent IMF report on MENA countries and their economic outlook is out. The report strikingly shows how Saudi Arabia needs $70+ oil for a balanced budget.
From the US perspective, there are two significant issues that relate directly to the oil markets. The first one is the reports concerning shale producers’ productivity and financial returns for the investors which have a positive effect on oil prices. On the other hand, on the political side, Secretary of State Rex Tillerson asked Iranian-backed militias and their Iranian advisers to leave Iraq and “go home”. Last week’s report included the concerns of the US regarding Iran’s compliance with the sanctions agreement and American concerns regarding Iran’s commitment to peace in the Middle East. Coupled with Tillerson’s comment regarding Iranian military advisers in Iraq, US pressure over Iran is increasing.
Natural Gas, Europe, Russia and Ukraine
The recent news continue to show that Germany is willing to approach towards Russia and establish the second line of Nordstream despite EU’s legal objections and future potential complications in EU framework. Last week, German President Frank-Walter Steinmeier visited Russia while Ukraine continues to court Eastern European EU members to get their support against Turkish Stream and Nordstream II. Establishment of these two pipelines might mean the loss of billions of dollars as transit fees as well as a more bullish Russia in its Ukraine-policy.
Meanwhile, Ukrainian natural gas company Naftogaz already stopped buying natural gas from Russia within the last two years, only transiting to European customers. The company also blames Russia to violate its terms for pipeline pressures at the Ukraine-Russia border. Ukraine, transported over 70bcm so far during the January-September term. Although Russia shows its intentions to decrease natural gas transit through Ukraine, the volume has increased more than 20 percent within the past year.
Turkish Stream and Iran as a Potential Partner
Continuing investments to decrease their dependence on Ukrainian transit, in an interview with Turkish national news agency AA, Russian Energy Minister Alexander Novak pointed out Hungary, Bulgaria and Serbia as potential recipients of natural gas through the Turkish Stream pipeline. The minister also noted Italy as a new destination through Poseidon pipeline. These announcements come at a time when recent reports show increasing natural gas prices as well as exports from Russia in Europe, giving Russia an upper hand in financing opportunities as well as increasing domestic funds for new projects.
In a recent news article TASS news agency of Russia also reported Iran’s interest in being a partner in Turkish Stream. Iran wants to be included in the pipeline while Turkey is considering the offer. There are puzzled reactions from Russia. While some analysts are rejecting the possibility of Iran’s inclusion completely some others are calling Iran to lack both investments and natural gas to fill the pipeline. Iran currently has 33.5 trillion cubic meters of proven natural gas reserves, a figure that comprises nearly 18% of global gas reserves.
Despite Russian resistance it looks like Turkey will continue to encourage Iran to be part of the pipeline to balance Russia’s dominance in Turkish natural gas market while also increasing its leverage during the negotiation process. Nonetheless, it is unlikely for the construction of the pipeline to be halted; only potentially new stakeholders may emerge during the negotiation process. From the Turkish perspective, a nation which is desperate to diversify its natural gas market, inclusion of non-Russian natural gas suppliers will only increase its security of supply.
Azerbaijan: Total Takes on Pioneering Role in the Next Azeri Gas Boom
On 26 October 2017, the newly-appointed Azerbaijani Energy Minister, Parviz Shahbazov, met in Baku with the Vice President of Europe and Caspian region at Total SA, Bernard Clement. Talks focused on the prospective launch of the second phase of the development of Absheron gas and condensate field in the Caspian Sea, expected to unfold between 2020 and 2023. The French energy giant’s potential participation in the development of the geologically challenging, albeit promising, offshore Umid-Babek block was also discussed. Both projects will serve to create the so-called ‘’next wave’’ of Azeri gas, intended to satisfy both domestic demand as well as strategic export goals, following the upcoming completion of the BP-operated Shah Deniz Stage 2 project.
Mr. Shahbazov estimated that the use of a ‘’modern drilling rig’’, in combination with the application of ‘’Total’s experience in exploration and drilling’’, will help initiate production ‘’on schedule’’ (i.e. by late 2020). In his turn, Mr. Clement said that Absheron’s annual gas volumes are set to triple up to 5BCM during the second stage of the field’s development. Gas output at Absheron’s first phase, the final investment decision (FID) on which is awaited in December 2017, will not surpass 1.5BCM/a. SOCAR geologists calculate Absheron reserves at 350BCM of gas and 45MMT of condensate. Total and SOCAR hold a 50% interest each in the Joint Operating Company Absheron Petroleum, since the French Engie decided to sell its 20% stake, earlier this year. In November 2016, the two companies inked a framework agreement establishing contractual and commercial terms for the first phase of production for the field, while drilling process is planned to begin in January 2018.
According to the announcement issued by Azerbaijan’s Energy Ministry, Total might also be invited to participate in the development of an offshore block consisting of Umid gas field and Babek structure. Discovered back in 2010 by SOCAR, Umid field, situated 40km offshore and 75km from Baku, has been referred to as the second largest natural gas field in the country after Shah Deniz. Since inauguration in 2012, daily output from Umid was kept at 1.4BCM/a, an amount close to its plateau output level of 1.5BCM/a, and 220TMT/a of condensate, but was gradually reduced as perspective foreign investors, like Statoil and Total, with whom SOCAR was conducting discussions at the time, were discouraged from signing production sharing agreements because of the dramatic decline in oil prices of 2014. SOCAR has now resumed production from this Caspian Sea field close to the 2012 levels.
The Babek prospective structure is located to the east of Umid and is believed to contain up to twice as much natural gas and condensate. It is considered a geologically complex continuation of Umid field. In April, the first Vice President of SOCAR, 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.
In 2007, SOCAR had disclosed plans to independently explore the Umid-Babek block. Nevertheless, complicated geological conditions made Azerbaijan’s state-owned oil and gas firm turn to international partners in search of technical expertise and financial assistance. Having reported on Friday the highest profits from pumping oil and gas in more than two years of oil rout, as a result of lately increased crude prices and deep cost cuts, Total finds itself in a favorable position to drive the new Azeri gas boom.
Russia: Lukoil Moves on with Phase 2 of V. Filanovsky Field
Russian oil producer Lukoil has completed drilling of an eighth horizontal producing oil well at Vladimir Filanovsky field, located in the north-central portion of Russia’s Caspian Sea sector, close to the agreed-on maritime border between Russia and Kazakhstan. The length of the well’s horizontal section is 1560m and its flow reaches 2.8TT/d. Subsequently, annual oil output from Vladimir Filanovsky rose to 6MT, upping overall production from the Caspian Sea.
In the 2000s, Lukoil announced discovery of six fields for development in the Caspian Sea, the largest and geologically most significant of which proved to be Vladimir Filanovsky. The company reported completing the first stage of site development in December 2013. Vladimir Filanovsky field is much larger in terms of probable reserves, estimated to include 153.1MT of oil and 32.2BCM of gas. Commercial production at the Caspian Sea field was launched in 2016. Within the ongoing second phase of Vladimir Filanovsky, six producing wells and two water injectors, also producing oil, are currently in operation at the field.
Following the recent renewal of the contract for Azerbaijan’s ACG field clusters, as well as the steady efforts made by Kazakhstan to increase output at the Kashagan oilfield, Russia now, too, accelerates drilling and production procedures in order to take advantage of hydrocarbon resources in its own sector of the Caspian.
Southern Gas Corridor: First Commercial Gas to Be Pumped into TANAP by Mid-2018 – General Manger
Phase O of the Trans Anatolian Pipeline (TANAP), extending from the Turkish-Georgian border up to Eskisehir province, has been completed to 80%, the project’s general manager, Saltuk Duzyol, confirmed in an interview with AZERTAC. As for the second segment of the pipeline, reaching from Eskisehir to the Turkish-Greek border, where it is going to be connected to the Trans Adriatic Pipeline (TAP), it is so far 45% complete, Mr. Duzyol said. Finally, TANAP’s general manager also stated that the 17.6km-long sea part of the project, which will cross the Dardanelles strait and is currently constructed by the Malaysian Sapura Energy, will have been laid down by early 2018.
Mr. Duzyol explained that, after delivery of the first test gas at the start of next year, the first quantities of commercial gas will be pumped into the pipeline by June 2018, in order for flows into TAP to begin on schedule by the summer of 2019. Regarding the cost of the project, estimated at $8.5bn, he argued that ‘’the slump in global oil prices and low commodity prices give the TANAP project an opportunity to shrink its budget and save up to $3.2 billion. Initially, the investment budget for TANAP was estimated at $11.7 billion’’. TANAP wishes to attract a further $1.3bn of funding from the European Investment Bank (EIB). On October 18, the European Bank for Reconstruction and Development (EBRD) approved a $500M loan for the project. On October 30, Turkish President Recep Tayyip Erdogan underlined TANAP’s strategic importance for Europe’s energy security and expressed confidence that all sides will cooperate on the commissioning of the pipeline in the near future, in an interview with Trend, AZERTAC and APA.
TANAP pipeline constitutes the intermediate branch of the Southern Gas Corridor, aiming to open up a new and competitive route for Europe to import natural gas from the Caspian, situated between the South Caucasus Pipeline and the Trans Adriatic Pipeline. TANAP’s initial capacity will be 16BCM/a, 6BCM of which will cover Turkish domestic gas needs, whereas the remaining 10BCM will be delivered to the European markets. TANAP capacity is expected to increase up to 23-31BCM/a by 2023-2026 with hopes of receiving Turkmen, Kazakh, Iranian or Iraqi gas at some point in the future. TANAP shareholders include SOCAR (58%), BOTAS (30%) and BP (12%).