Caspian Energy Insight: November 8, 2017
The price of oil within the past week has increased. After a 9 percent increase in oil prices in the month of October, the Brent oil is being traded around $63.5 per barrel this week, even going above $64 per barrel briefly. This is the highest levels of oil prices since mid-2015. Accordingly, Azeri Light price has also increased and is currently being traded over $66 per barrel. Ahead of the big meeting of OPEC at the end of November, the current uptick made producers and traders happy about the way the prices are heading. The decision on the future of the agreement on reducing production by OPEC countries and partners will be made only in early 2018, yet the issue will be discussed at the next meeting of the alliance on November 30.
In a similar vein, hedge funds continue to take bullish positions regarding oil prices, expecting a further increase in oil prices in the months ahead. Last week, the position of the hedge funds was already positive and becoming more aggressive for more expensive oil and this week it did not change significantly.
Still, the biggest news in oil sector this week was the latest purges in Saudi Arabia, instigated by the crown prince. Several arrests have been made over the weekend and for the first time in the kingdom’s history, one branch of the royal family controls every powerful ministry in the state under King Salman and Crown Prince Mohammed bin Salman. The effects of the shake-up in the state structure will be observed as we move forward but for now, it is known that the Saudis prefer $70 oil for a balanced budget and tighter oil policy might follow in the months ahead in OPEC talks.
Natural Gas, Europe, Russia and Ukraine
Russian Foreign Minister Sergei Lavrov at a meeting with members of the Association of European Businesses on October 31 stated that Russia would only start laying the Turkish Stream gas pipeline on the EU territory after obtaining legal guarantees from Brussels. Although Russia has been making country level deals with EU members, there is no official Union approval for the Turkish Stream and any gas that is going to flow through the pipeline.
Unlike Turkish Stream, with the support of Germany, Russia was able to get much support for the second line of Nordstream, but the gloomy situation at the EU level for the European lines of Turkish Stream did not change within the past months. With the pipeline laying process entering the Turkish exclusive economic zone this past week, European objections and Russian explanations on the problems are good news for some Eastern European EU members and Ukraine, but it is still premature for them to celebrate. The pipeline will start delivering gas to Turkey in 2019 but the timeline for European customers is not available at this time.
For Ukraine, the country established its independence from Russian natural gas by stopping to buy within the past two years. This year too, the country is walking into winter with 17 bcm of natural gas stored in its underground storages which will be enough to survive without relying on Russian gas. However, stopping natural gas transit due to a potential Turkish Stream will mean a loss of billions of dollars in transit fees, as well as Russia, becoming more active in its Ukrainian foreign policy. Still, it is impressive for Ukraine to take Russia completely off the picture in terms of its natural gas imports since just a few years ago the country was 100 percent dependent on Russia.
Meanwhile, Russia is not trying to expand its natural gas deals only in Europe, at a natural destination but also to a surprising nation in the Middle East. As part of Iran’s need to supply natural gas to its northern regions, Russian president Vladimir Putin showed his willingness to supply gas to Iran through the existing network through Azerbaijan.
Azerbaijan, TANAP and TAP
Meanwhile, last week President of Azerbaijan Ilham Aliyev has signed the new ACG deal into effect. The new agreement was ratified on October 31st by the Azerbaijani parliament and with Aliyev’s approval, the deal is now finalized. In related news, Azerbaijan revealed the volume of oil output from ACG block. Azerbaijan has produced 438M tons of oil and 138 bcm associated gas from the Azeri-Chirag-Gunashli (ACG) block of oil and gas fields in the Caspian Sea since November 1997. With the increase in oil prices in recent months and the renewal of the ACG contract with more favorable terms for Azerbaijan, the country will continue to benefit from its crude oil and oil products.
Turkish Minister of Energy and Natural Resources, Berat Albayrak said that the first gas will be sent through TANAP to test the pipeline in late 2017. Albayrak added that TANAP is one of the most important projects for Turkey. The gas will be delivered to Turkey in 2018 and after completion of the Trans Adriatic Pipeline’s construction, the gas will be delivered to Europe in early 2020.
TANAP CEO Saltuk Duzyol disclosed the cost of the pipeline as just shy of $8 bln at $7.9 bln saving as much as $3.8 bln in construction process with the pipeline being almost 93 percent complete at the current stage.
Finally, Trans Adriatic Pipeline has awarded a software contract to PSI Software AG as the provider of the Commercial Dispatching Software (CDS) for the operational phase. The PSI software will enable TAP to perform its commercial dispatching activities for the transport of natural gas. Meanwhile, TAP will also invest 1M Euros in Greek agricultural programs as part of its local projects.
Iran, Russia, Azerbaijan: Leaders Agree to Boost Trilateral Energy Partnership
On 1 November 2017, Tehran hosted the second round of a trilateral summit among Iran, Russia and Azerbaijan, with the participation of the Iranian President Hassan Rouhani and his counterparts, Vladimir Putin and Ilham Aliyev. Talks focused on the enhancement of cross-border interconnectivity, in line with the vision for an International North-South Transport Corridor (INSTC). Topics such as the situation in Syria, in the aftermath of the latest round of peace negotiations in Astana (October 29-30), Iran’s nuclear program and the legal status of the Caspian Sea were also on the agenda.
In parallel, the three leaders agreed to step up cooperation in the areas of hydrocarbon production and petrochemicals, including collective exploration and development of oil and natural gas fields, transportation and swap supplies of crude oil and petroleum products, as well as the deepening of interaction in the global energy market. Furthermore, the parties assessed progress towards the planned integration of their electric grids. It shall be reminded that trilateral deliberations commenced in the summer of 2016, in Baku, where a declaration introducing interstate cooperation in the energy sector, among other spheres of common interest, had been adopted by the three states.
In the margins of the presidential meeting, Russian state-owned oil firm Rosneft and the National Iranian Oil Company (NIOC) signed a roadmap for the implementation of joint oil and gas extraction projects, worth up to $30bn and estimated to produce some 55MT of oil per annum. Rosneft is said to have expressed interest in the development of 4 Iranian oil fields (Azadegan, Yaran, Marun and Kupal), even though the company’s CEO, Igor Sechin, didn’t elaborate on specific oil field investments.
Gazprom, in its turn, came to agreement with Iran’s Oil Ministry regarding the expansion of strategic energy collaboration and subsequently signed a Memorandum of Understanding with NIOC, allowing the two firms to proceed to the feasibility study stage for the design, construction and exploitation of the proposed Iran-Pakistan-India (IPI) gas pipeline, also dubbed the ‘’peace pipeline’’, whose completion has repeatedly been hindered due to troubled regional relations and security reasons, unsteady flows of financing, US opposition to the project and persisting disagreements among the involved countries relating to the preferred gas pricing formula. The idea refers to a 2.775km pipeline extending from Iran’s South Pars gas field in the Persian Gulf through the Pakistani city of Khuzdar, with one branch going on to Karachi and the second one to Multan and then on to India. Gazprom’s support of IPI, i.e. of an eastward route for Iranian gas exports, comes amid Iran’s publicly enunciated willingness to add its gas to the Southern Gas Corridor through the Trans Anatolian Pipeline.
The latest attempt of Russian energy companies to make significant inroads into the Iranian market, read together with China’s and India’s intentions to engage with Iran on the realization of projects like the OBOR initiative and the development of Chabahar port, is yet another sign that the regional competitors for partnership with Tehran will strive to take advantage of the recently strained US-Iranian dialogue over the former’s objection to the 2015 nuclear deal.
As for the Azerbaijani-Iranian energy cooperation, SOCAR and Khazar Exploration and Production Company (a subdivision of NIOC) delegations have since late September, during a meeting in Baku, started examining prospects for exchange of technologies in the oil and gas industry, as well as for joint analysis of seismic data for the purposes of deep underwater hydrocarbon resources exploration in the Caspian Sea.
Iran, Turkmenistan: NICG Considers Out-of-Court Settlement of Gas Dispute with Turkmengaz
The National Iranian Gas Company (NICG) seems inclined to resolve through dialogue a quarrel with Ashgabat over the halt of Turkmengaz’ gas supplies to Iran, at the end of 2016, instead of suing the company in the International Court of Arbitration. According to Hamidreza Araqi, NICG managing director, ‘’Iran still has time for taking legal action against Turkmenistan but any issue, in my opinion, can be settled in negotiations.’’
As of January 2017, Ashgabat has limited its 9BCM of annual gas exports to Tehran, until then delivered on the base of a bilateral accord with NICG, because of the latter’s arrears, amounting up to $1.8bn and dating back more than a decade. The Iranian side claims that its debt had been accumulated during the sanctions years when banking restrictions had locked the country out of the global financial system and that it has already partially paid back Turkmengaz with goods and engineering services. Still, in need of Turkmen imports for the satisfaction of domestic demand, Tehran has numerous times accused Turkmengaz of breaching their supply contract, the terms of which do not provide for a unilateral gas cut-off even in case of unpaid deliveries.
Turkmenistan’s decision to shut off gas flows to Tehran follows an announcement made by Gazprom, in early 2016, that it would cease buying Turkmen gas. These consecutive developments, topped by the excruciatingly tentative execution of the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline and the dilatory progress of the Trans Caspian Pipeline towards the EU markets, has progressively isolated Turkmenistan, leaving the Caspian Sea littoral state with only one remaining notable customer -China. Ashgabat expects exports to Beijing to grow to over 60BCM/a by 2020 (from today’s 30BCM/a), however overreliance on a single consumer market might endanger its long-term profitability and lessen contribution to its hard currency revenue.
Turkmenistan and EU: Ashgabat Mulls Gas Exports via Russia to Europe
Turkmenistan considers the option of shipping natural gas to the Eastern European clientele through Russia, Myrat Archayev, chief executive of state energy firm Turkmengaz, revealed at an energy conference, organized on November 2, in Ashgabat. However, the official did not specify whether any deliberations with Moscow were underway on the issue.
‘’We have a working system of pipelines running in the northern direction through which Turkmenistan historically exported natural gas to Russia and other CIS countries,’’ Mr. Archayev explained. ‘’If mutually acceptable agreements are achieved with buyers and transit countries, this existing pipeline can be used to ship natural gas from Turkmenistan to CIS countries and Eastern Europe,’’ he continued.
Turkmenistan’s suggestion clearly implies that Russia can now serve as a transit corridor for Turkmen gas towards Eastern Europe, given that Gazprom has formally suspended purchases of natural gas from Ashgabat altogether, seeking some $5bn in reimbursements from Turkmengaz for gas supplied between 2010 and 2015. In addition, if implemented, this project will doom to failure the long-discussed Trans Caspian Pipeline, the sole way for the EU to ensure its access to Turkmen, and possibly Kazakh, energy, bypassing both Russia and Iran.