Caspian Energy Insight: January 31, 2018
Following brief tests of $70 levels within the past two weeks since December 2014, this past week oil prices have declined and Brent currently trades above $68.5. WTI did not drop as much as Brent prices and currently, it trades around $64.50. Despite the drop in prices, Azeri Light managed to float just shy of $71. Hedge funds also continue their eagerness to invest in petroleum, a situation largely unchanged since December 2016, despite fears of a downward trend, expected for 2018.
With such promising news about the oil markets, Exxon Mobile also showed their interest in shale oil. The company will triple their investments by 2025. The current trend in increasing crude oil production will likely go on in 2018 and according to the US Energy Department’s estimations, American production will rise up to 10.3M bpd this year from 9.3M in 2017.
Catching with the pace of the American producers, Canadian shale producers in Alberta are also increasingly optimistic in the year ahead. Currently, shale accounts for only 8 percent of Canadian crude output with room to grow. With high extraction costs in tar sands, Canada can get some lessons from the Permian Basin in Texas and engage with more investments in shale industry in the future.
The problem with current flow through shale oil in North America is the rising costs for drilling. Recent statistics show an increase on around 10 percent drilling costs within the past year and such costs can increase in 2018 if demand continues to increase. Such change in costs could delay the response of shale producers to the market changes.
Of course, this is good news for Saudi Arabia, where the crown prince is eyeing continuous high prices in 2018 so that the IPO could bring more revenues for the country, attempting to transition its oil economy into a more diversified form.
Energy Sector Investments and Potential for Azerbaijan
Energy Sector in Azerbaijan passed through an active week. This week SOFAZ received its first payment from the Azeri-Chirag-Gunashli (ACG) project around $450M. The number will go as high as $3.6B. Meanwhile, the country also signed an agreement with a new international partner, Global Energy Solutions for servicing onshore and offshore energy terminals.
In Davos too, Azerbaijan and Georgia received encouraging statements from European Commission Vice President for Energy Union Maroš Šefčovič who reinstated the EU support for diversification of energy supply lines through the Southern Gas Corridor (SGC). Special Envoy and Coordinator for International Energy Affairs at the U.S. Department of State Sue Saarnio also supported the SGC last year with further extensions through Turkmenistan via the TCP. This would surely put a dent in Russian dominance in Europe while ensuring the EU’s supply security concerns.
Along with the current increase in American support for natural gas projects in the Caucasus, Šefčovič’s comments are even more relevant. Littoral states of the Caspian have agreed on the status of the sea and now it is more likely to see Central Asian natural gas resources in Europe. Being one-third dependent on Russian natural gas currently, the EU desperately needs to diversify its natural resources through alternative sources. With political problems in North Africa creating supply problems, decreasing Norwegian output, and price disadvantages of LNG supplies, the SGC is the only viable option for the EU’s diversification efforts.
The union already listed the SGC under its list of projects of common interests (PCI), thusly helping the SGC to receive preferential treatment for potential funding opportunities. In the energy sector, outside funding has been more and more important at a time when supplying countries are not willing to pay more than their fair share due lowering oil prices and tightening the market.
While increasing its natural gas sales to Turkish market and getting ready to enter the South European market soon, Azerbaijan’s urban gasification is 100 percent completed while the rest of the country is covered by 93 percent as President Ilham Aliyev announced this week. The numbers are up from 51 percent since 2006.
Southern Gas Corridor: EU Allots €1.9M for the Trans Caspian Pipeline Study
Having earned a place into the Commission’s third list of Projects of Common Interest (PCI), published in November 2017, the proposed 300km-long Trans Caspian Gas Pipeline (TCP) now gains access to financing from the Connecting Europe Facility (CEF) €30bn ($37.2bn) fund. Out of the €873M ($1.1bn) that the Commission, with the consent of its member-states, announced it will allocate to 17 key energy infrastructure projects, the Turkmenbashi-Baku line is entitled to €1.872M ($2.32M). The amount, decided to be distributed following an application by W-Stream Ltd, the promoter of both TCP and White Stream pipeline projects, will cover front-end engineering design (FEED), detailed route surveys, the Energy Saving Initiative in the building sector (ESIB) scope of activities, since both Azerbaijan and Turkmenistan are INOGATE partner countries, trans-national permitting and long lead items. According to the Georgian Energy Ministry, two study proposals, including sea-bed survey and FEED, had been submitted on 11 October 2017, in order for the project to qualify for EU financing. The pipeline, that will be able to carry as much as 30BCM/a in the westward direction, is expected to cost around $5bn. PCIs are eligible for a total of €5.35bn ($6.6bn) in funding, which is being invested in energy, transport and digital infrastructure under the CEF framework between 2014 and 2020.
Long ruminated upon, the idea of a subsea natural gas pipeline that would link the gas fields of southeastern Turkmenistan to paying markets, has been one of the most salient in the quiver of the EU/US projects in the region. In an earlier overland version promoted by Shell, the pipeline would be routed across northern Iran towards Turkey, but due to the vexation of both Washington and Tel Aviv, the variation designed to traverse the seabed of the Caspian Sea was the one finally advanced. Within that time, there have been plans to include Kazakhstan’s Tengiz field into the TCP, prior to its ending point at the Sangachal Terminal. In 1999, Turkmenistan’s Competent Authority for Oil and Gas made public the conclusions of a preliminary feasibility study on TCP, conducted by Enron under a US government grant. However, the project was soon after abandoned as a result of the failure of Azeri and Turkmen negotiators to demarcate their Caspian Sea border, after the discovery of what ended up to be defined as a series of ‘’disputed offshore oilfields’’. Furthermore, the discovery of the Shah Deniz gas field in the Azerbaijani sector of the Caspian, in that same year, enabled Western energy companies to send on the desirable quantities of natural gas to the European markets via a southern supply corridor on the docket, without having to become embroiled in the legal challenges of the Caspian delimitation.
In February 2015, Maros Sefcovic, the European Commission’s vice president in charge of the Energy Union, declared that the Bloc wishes to work out a technical and legal basis for the Turkmen gas supply via Azerbaijan. Nevertheless, objections from Russia and Iran, who insist that the legal status of the Caspian should be settled prior to the start of construction works, in combination with a series of questions concerning the pipeline’s commercial viability, have impeded progress on TCP to this day. In the aftermath of a two-day visit by the Turkmen President Gurbanguly Berdimukhamedov to Baku, in August, the realization of the Trans Caspian pipeline project has once again returned to the forefront. Even though the yet unresolved status of one hydrocarbon deposit, called Kyapaz in Azerbaijan and Serdar in Turkmenistan and lying literally in the middle of the TCP route, was left unmentioned in the post-meeting statements, the two neighboring countries appeared willing to overlook their differences in the name of a mutually beneficial partnership. Amid the latest geopolitical shifts, with the US imposing fresh sanctions on Russia and Iran, and against the backdrop of Turkmenistan’s energy impasse, by cause of Gazprom’s halt on Turkmen gas imports and the country’s few eastward export options, apart from China and the slowly progressing Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline, Azerbaijan and Turkmenistan might at this time see an opportunity to evolve into alternative suppliers to Moscow. Therefore the scenario of a joint development of the Kyapaz/Serdar now sounds more plausible than ever before.
In addition to the potential settlement of an over-20-year-long bilateral row, there are also good prospects regarding an agreement on the Caspian Sea legal status, another yet stumbling rock to the TCP implementation. Technical work on the draft convention is to be completed in a February summit, in Kazakhstan. In December 2017, Russian Foreign Minister Sergei Lavrov had revealed that the text of the convention was ‘’practically ready’’, whilst his Azerbaijani counterpart Khalaf Khalafov specified that rights for laying pipelines were foreseen in the draft under appraisal by the littoral states and that only those countries, across the sectors of which the pipelines will be laid, will have the right to either accord on or refuse to comply with such actions.
In the background of the positive developments, the optimistic timetable presented by the Georgian Energy Ministry to the Energy Community bringing the TCP online by 2020, the year when the Trans Adriatic Pipeline (TAP) is also scheduled to be commissioned, might sound even doable. In March 2017, the Georgian Oil and Gas Corporation acquired a 10% share in W-Stream Ltd. The inclusion of TCP amongst the CEF-funded projects, along with other vital investments, like the €101M ($124M) in support of the Cypriot gas network and the €3.7M ($4.6M) awarded to the Malta-Italy Gas Interconnection, both aiming to hook the isolated islands to the EU gas network, and the €578M ($716M) granted to a submarine electricity interconnection between Spain and France, the largest CEF contribution ever made to the electricity sector, can be read as an economically and politically momentous choice.
First, it shows the EU’s authentic resoluteness to open the Southern Gas Corridor to new supplier countries beyond Azerbaijan, as well as to get involved into further political deliberation with the Caspian littoral states in this context. Such a rapprochement does not only intend to ensure the Bloc’s energy diversification and security of supply in a more competitive price environment. It could also serve as a suitable occasion for the wider EU-Central Asia set of bilateral and multilateral initiatives to be strengthened in virtually all other cooperation domains. Secondly, the approval of the Commission’s proposal by the member-states sends a positive signal to investors and interested parties as for the well-timed completion of TCP, although the 2020 horizon seems to many rather unattainable. EU’s choice to pump a significant sum into the TCP’s study process clearly denotes that the long-debatable project has once again gained momentum, favored by the auspicious geopolitical conditions that have prompted the Bloc to mobilize expertise and resources in the pursuit of a genuine diversification of its suppliers and energy mix.
Uzbekistan to Continue Investing in Both Oil and Non-Oil Sectors in 2018
Uzbek President Shavkat Mirziyoyev is also eyeing to increase the gas reserves of Uzbekistan. The target is extremely aggressive where the country intends to produce 63 bcm natural gas and 3M tons of oil. In 2017, the country was able to produce 56.5 bcm natural gas and 806K tons of oil. These investments will be through multiple companies, the biggest one being Uzbekneftegaz. Meanwhile, Surhan Gas Chemical Operating Company in Uzbekistan is also investing in new gas fields at the 25 Years of Independence field to supply resources for the gas processing complex for polyethylene, polypropylene, and sulfur production. Currently, the expected size of the reserves is around 100bcm and the company is aiming to process at least 2bcm gas per year for chemical production. The county will also continue to invest in its natural gas distribution system in the year ahead.