Caspian Energy Insight: April 19, 2018
Oil Prices are above $70
The week before, oil prices passed above $70 mark and this was the first time it remained above those levels. At some point during the week, Brent prices hit above $72.8 and currently is trading around $71.7. This is the first time the prices increased this much since the collapse of the oil markets in 2014. After 3.5 years, oil markets are again above $70. Other than Brent prices, currently, WTI trades close to $67 and Azeri light oil trades around $74 this week. Based on these prices, hedge funds continue to increase their optimistic bets on oil, mostly concentrated on Brent.
Currently, the main drive of the prices is regarding the American intentions to increase presence in Syria. On Friday, President Trump gave the signal for the impending attack and Brent price hit its highest point around $72. The main concern among the traders is about the supply of crude oil if another conflict in the Middle East emerges. In addition to the Syrian crisis, uncertainty about the future of Iran deal as well as declining output in Venezuela is of concern. On the supply side, the only good news is from the American shale producers and their record production levels, especially in the Permian Basin. Total production is expected to increase up to 7M b/d which around the edge of the pipeline transportation capacity for crude oil.
Russia’s Economic Struggles Due to Continued US Sanctions and German Rebuttal on Nord Stream 2
Despite President Trump’s willingness and hopes to improve relations with Russia, current American outlook towards their competitor in the Middle East and Eastern Europe is still negative. Due to the new sanctions imposed against Russia’s oligarchs, state officials, businesses, and agencies, the Russian RTS index took a dive with falling 11.4 percent on April 9. This decline is at the highest level since December 2014. Aluminum prices in the world increased with the sanctions against Russian aluminum production companies while Russia, itself, is also thinking of imposing sanctions against the United States.
Although Russia’s hands are mostly tied when it comes to trade and sanctions wars against the West, Duma is currently considering the implementation of a new round of sanctions against American companies. One of these is sanctioning Boeing’s purchase of titanium from Russian producers.
Another blow to Russian businesses came from Germany’s Chancellor Angela Merkel. Although Merkel has been sympathetic towards Nordstream II in recent months, after meeting with Ukrainian President Petro Poroshenko last week, she announced that any project that is going to remove Ukraine’s position as a transit country for Russian natural gas cannot go ahead. Standing next to Poroshenko, Merkel stressed Germany’s support for Ukraine. In the past, the German Chancellor supported Nordstream II as a purely economic pipeline project. However, pipeline projects are never purely economic or commercial.
At this point, the only good news for Russia’s economy came from Finland’s approval for the use of Finnish Exclusive Economic Zone for Nordstream II. Russia had been trying to receive these legal approvals for the use of economic zones for Nordstream’s second line.
Azerbaijan to Start Exporting Electricity to Iran
Thanks to one of the biggest droughts Iran is experiencing this year, the electricity production in hydropower dams in the country are about to decline this year. With increasing electricity consumption, Iran needs to import electricity and the source will likely be Azerbaijan. The Caspian nation will start exporting 180 megawatts in June to account for the shortages in Iran. With increasing demand for electricity, Azerbaijan is looking to attract investment in this sector to produce more.
Azerbaijan is already an essential partner for supplying natural gas to Georgian and Turkish markets. With starting to export electricity to Iran, Azerbaijan will strengthen its places as an essential energy trading partner for the neighboring friendly countries. The Caspian nation will also follow the liberalization of energy markets in Georgia closely. Georgian officials are currently considering a natural gas law reform to move the country’s legislation closer to the EU levels. This will also enable Georgia to attract more investment and expand their natural gas markets. Azerbaijan, the main natural gas supplier for Georgia, will be following the changes in legislation closely.
Southern Gas Corridor: Greek Gas Grid Operator to Carry Out Maintenance Work of TAP
The Greek gas transmission system operator (DESFA) has agreed with the Trans Adriatic Pipeline (TAP) A.G. to carry out maintenance work of the natural gas pipeline in Greece. The deal was announced on April 16, a day prior to the opening of the financial offers for the acquisition of a 66% stake (31% of which is held by Greece’s privatization agency TAIPED and 35% by Hellenic Petroleum) in the operator. The consortium of three of TAP AG companies (Italy’s Snam, Spain’s Enagas and Belgium’s Fluxys) appears to have made a higher bid, amounting to EUR 535M ($661USD), than the rival group of the Spanish Reganosa, the Romanian Transgaz and the European Bank for Reconstruction and Development (EBRD), who ended up proposing to give EUR 457M ($565M). Despite a recent decision of the Dutch Gasunie, also a TAP shareholder, to step out of the Snam-led alliance, the Italian natural gas infrastructure firm, who had teamed up with the Azerbaijani SOCAR during a previous tender back in 2016, and its partners managed to cash in both Snam’s past bidding experience and their implicative advantage over competitors, stemming from their participation in TAP pipeline project, the third segment of the Southern Gas Corridor pipe network, extending from the Turkish-Greek border all the way to Italy. The winning candidates will now be asked to submit an improved, slightly increased, offer in due course, that is going to be discussed at the next board meetings of TAIPED and Hellenic Petroleum.
If jointly viewed, both the decision to assign TAP maintenance work to DESFA and the success of the three of TAP’s six shareholders (the others being SOCAR, BP and Axpo) to secure the operator’s stake on-offer brings us to the distinct benefits into which a win of the tender by “TAP representatives” would translate. In particular, instead of TAP A.G. having to establish from scratch an ad hoc pipeline operator in Greece, the shareholders could leave this task to DESFA, that would this way have the opportunity to expand its domain beyond regulated activities (operation of the national gas distribution network and the Revithoussa LNG Terminal), as has already become with the April 16 agreement. Furthermore, this option will help TAP shareholders save money by exerting majority control over an already existing operating company, whereas DESFA will significantly increase its income and extend its scope of non-regulated activities.
Investments in Central Asia: Kazakh IPOs, TAPI, and Tajikistan
Kazakhstan is hoping to bring investments to the country with IPOs of state-owned enterprises. These include Air Astana, uranium producer Kazatomprom, and Kazakhtelecom with the valuation around $70 billion. Chinese and Russian investors are the main interested parties. Delegations from Kazakhstan are visiting these two countries and considering the number of investments proposed by the two as well as the venues for the IPO. Meanwhile, the country is also doing well with oil output increasing within the first quarter of 2018, by 6.1 percent.
Despite the security concerns in Afghanistan and the rivalry between Pakistan and India, TAPI pipeline is still an impressive project waiting for investment and completion. The project is likely to cost around $10 billion (about one-third of Turkmen GDP) but could eventually deliver 33bcm natural gas per year. With the high costs of the pipeline as well as the concerns regarding security, the investments have been rare. Last month, Turkmenistan’s President Gurbanguly Berdimuhamedow visited the UAE and Kuwait to find additional investment since Turkmengaz currently owns 85 percent of the pipeline consortium. If completed, the pipeline will bring additional cash flow for Turkmen economy, increase the country’s negotiating power for other buyers, and make them even more independent with multiple trading partners. However, the investors are still doubtful of the project with the concerns regarding security issues in the region.
In addition to importing electricity from Uzbekistan, Tajiks are attempting to increase its electricity production potential themselves. Recently, the country secured $88 million in funding from The European Bank for Reconstruction and Development (EBRD) and the United Nations Green Climate Fund to finish Kayrakkum Hydroelectric Power Plant’s final stage. With completion, the capacity of the plant will increase by 38 percent from 126 megawatts to 174 megawatts.
Earlier in the year, Uzbekistan held an expo in Dushanbe in an effort to increase the trade potential between the two countries. Compared to 2016, trade between the two countries increased by 22 percent in 2017.