Caspian Energy Insight: August 22, 2017
Oil prices remained above the $50 threshold while also failing to go above $55 levels. The ongoing struggle to decrease the supply in order to push the prices higher is continuing between the swing producers and OPEC.
In a rather good news for oil producers, Chinese oil company CNPC recently updated its forecast for peak Chinese energy consumption to peak in 2014 instead of 2035 and with almost 10 percent the higher amount of consumption which was estimated five years ago. Oil demand will also continue to increase at an annual rate of 2.7 percent until 2020 and slowing down to 1.2 percent until 2030.
While the United States will become a net natural gas exporter in 2017 and continue to increase its LNG exports to the world markets dramatically, Russian observers call the US to be an insufficient alternative for European customers. The US is currently world’s largest natural gas producer since 2009 (after surpassing Russia). The country is boosting its liquefaction capacity for LNG exports to the world markets. However, Russian envoy to the EU Vladimir Chizhov is skeptical. The current price estimates for 1 tcm of US LNG is around $250 and is neither profitable for European customers nor does it have any competitive advantage compared to Russian gas which costs almost half as much. Besides, the American exporters can sell the same gas for more than $300 in Asian or Latin American markets.
Ukraine, Sanctions On Russia, And Pipeline Politics
There have been growing concerns about new sanctions on Russia, especially in the energy sector since the beginning of August. While European leaders supported the American decision, some others, like Turkey, opposed them. Former German Chancellor Gerhard Schroeder, who was recently nominated for the board of Russian oil giant Rosneft as an independent director by Vladimir Putin, also criticized the decision to expand the sanctions on Russia.
Then recently, Russian Energy Minister Alexander Novak announced that both the Turkish Stream pipeline and Akkuyu nuclear power plant to be completed on schedule despite the new sanctions. The Turkish side wants the power plant to be launched by 2023 for it to be ready for the republic’s 100th anniversary. For the pipeline, Russia is planning to start pumping gas through the first line in March 2018 while the second line will be operational in 2019. The minister also showed Russia’s willingness to send gas to Bulgaria, Greece, and Italy through the prospective pipeline. With the underwater section of the pipeline coming to a close, the environmental impact studies completed, the next step will include the 200km land pipeline to be built. The pipeline will have 15.75 bcm capacity, removing Turkey’s dependence on Ukrainian transit completely.
Meanwhile, Russian gas exports to the potential destinations of Turkish Stream recently have increased according to Russia news agency Tass. Among those, Bulgaria was up 11 percent, up 13.2 percent to Greece, up 24.4 percent to Hungary, up 40.8 percent and 22.4 higher year-over-year for Turkey. In total, during 2016, Gazprom increased its natural gas exports by 12.5 percent, to a record of 179.3 bcm.
Still, concerns over financial Russia’s ability to fund building two new pipelines, Turkish Stream and Nordstream II, are still strong. Recently, Gazprom also reported a 6.1 percent decline in first quarter profits, citing lower market prices and increasing operational expenses. Furthermore, unlike Turkish Stream, worries over Nordstream II pipeline are higher with the new sanctions and might force Russia to pay higher transit fees to Ukraine, especially after 2019 Moody’s reports. Despite all the criticisms against Ukraine for being an unreliable transit partner for Russian natural gas, the country showed its ability to transit natural gas to the European customers even while going through a civil war.
Azerbaijan & TANAP
Construction of Trans-Anatolian Natural Gas Pipeline (TANAP) to Turkey is completed by 80 percent with the pipeline on schedule to be commissioned by 2018 to supply natural gas to the Turkish market. The initial yearly supply of 2 bcm will increase up to 6 bcm in later years. The funding for the pipeline also continues to receive support from EBRD ($500M for 18 years), World Bank ($800M), IBRD ($400 for 30 years), and the AIIB ($600M for 30 years). Turkish BOTAS is also set to receive $1 billion from the EIB. The pipeline will have a total cost around $8.6 billion.
These funding opportunities for the pipeline not only create additional funds but also increases the creditworthiness of Azerbaijan and its oil company, SOCAR.
While the pipeline is being built, the company is also increasing its investments in Turkey and partaking in social responsibility projects in Turkey, like provision of drinking water to the villages in Turkish provinces. Currently, the company invested over $12.6 billion in Turkey, eyeing a total of $20 billion once the current projects are completed.
Meanwhile, on a visit to Baku, Azerbaijan, Turkmen President Gurbanguly Berdimuhamedov announced Turkmenistan’s commitment to increase energy cooperation with Azerbaijan to supply natural gas through TANAP. Despite the existing political problems regarding the Caspian Sea, the willingness of the two countries might bring fruitful results for European energy supply security in the upcoming years.