Caspian Energy Insight: December 14, 2017
Brent oil traded above $65 whereas US light traded below $58. Azeri light oil trades just shy of $67. Looking at the price changes, the spread between Brent and WTI continues to be wider than historical averages and in futures trading, the spread is even more than $7.
With the current price rally and the extension of the price cut agreement at the end of a three-day ministerial meeting in Vienna between the oil producers, the oil traders and the hedge funds started taking profits. Long positions are being cut down currently in the oil sector, especially in oil products instead of crude.
Despite profit taking this week, the long-term optimism regarding oil prices is continuing among the traders and analysts. With the positive outlook within the past weeks, Goldman Sachs also revised their oil price estimations for 2018 in an upward manner. The bank is now estimating the Brent price to be around $62 while WTI to trade at $57.5 per barrel.
Still, for many, the 2018 price estimates are still at conservative levels, around lower $60s. Including the market dynamics, there are multiple reasons for such valuation. On one hand, the Russian oil companies Rosneft, Lukoil, and Gazprom Neft already want to increase their oil output and therefore the Russian support for the production cuts is shaky and partly the reason why there is going to be a review in mid-2018 regarding the cuts. In a similar vein, Saudi Arabian Energy Minister Khalid al-Falih also admitted the Saudis’ willingness to make sure that “[they] don’t shock the market” and make a gradual exit from the deal.
Of course, all of these concerns are there to make sure the profitability of the US shale producers do not increase dramatically which would make sure that they pump uncontrolled amounts of American crude to the market. That could mean just another collapse in oil prices, taking the OPEC and non-OPEC producers to day one once again. The deal-making countries are trying to keep a delicate balance and they will have to continue doing so for the foreseeable future.
Iran, Turkmenistan: Ashgabat Turns To Arbitration Over The Gas Debt Tiff With Tehran
On December 5, Turkmen President, Gurbanguly Berdimuhamedov, mandated the head of state gas company ‘’Turkmengaz’’, Myrat Archaev, to submit the gas dispute with Iran to international arbitration. Mr. Archaev briefed the President of Turkmenistan during a conference call that talks with Iranian representatives over arrears had not borne fruit and that Iran was after all of the opinion that the bilateral debt row should be resolved in international arbitration.
This change in stance by the National Iranian Gas Company (NIGC), which one month ago was mulling an out-of-court settlement of its quarrel with Turkmengaz, as Managing Director Hamid-Reza Araqi was quoted as saying, led to Mr. Beridmuhamedov ordering for the preparation of all documents necessary in order to take recourse to international arbitration. It has not yet been made known to which court will the parties eventually turn.
As of early 2017, Ashgabat has decided to shut off gas flows to neighboring Iran accusing it of some $2bn of accumulated debt, dating back more than a decade. In Tehran’s view, Turkmengaz exploited for its own benefit a gas shortfall faced by Iran throughout the notably cold winter of 2007-2008, causing a nine-fold price increase of $360 per 1000BCM, instead of the usual $40 tariff. Furthermore, Iran claims that it had acquired its debt in the course of 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. Unlike the gas-abundant South, northern and northeastern Iranian regions remain heavily reliant on gas imports from Turkmenistan due to their poor interconnection with the national grid. During wintertime, Iran was said to have been importing over 30MCM/d of Turkmen gas, although this figure had dropped by half several months before the 2017 cutoff was put into effect.
In late 1997, when the 200km Korpeje-Kordkuy pipeline connecting Turkmenistan and Iran was inaugurated, at the time presidents Saparmurat Niyazov and Mohammad Khatami had announced conclusion of a 25-year supply deal. However, the terms of this agreement have been ever since rewritten and breached. For instance, Turkmenistan had once again used the tap weapon back in 2006 when it halted gas shipments imposing a nine-fold price hike, with which Iran temporarily accepted to put up.
In the backdrop of a sharpening currency crisis, following Gazprom’s 2016 decision to cease purchasing Turkmen gas, the question logically arises as to what extent it would serve Ashgabat’s interests to become further embroiled in this ever-going payment dispute. Having been left with a single viable export route, the one towards China who hopes to have doubled by 2020 the annual Turkmen gas volumes of 30BCM it currently receives, the holder of the world’s fourth-largest natural gas reserves is equally striving to get its gas westward. It is, therefore, no wonder that Turkmenistan has proposed a gas swap deal with Iran in order for its gas to reach Turkey via the Trans Anatolian Pipeline (TANAP). However, given the fact that negotiations failed and it is now up to international arbitration to deal with their debt issue, Iran should by no means be expected to give its consent to the aforementioned idea. Besides, as a country aspiring to supply TANAP by taking advantage of its own huge southern gas reserves, Iran wouldn’t seem willing to re-export Turkmen gas to Turkey because it considers Turkmenistan a competitor regarding the southeastern European gas markets, that are set to be interconnected through the Southern Gas Corridor pipeline network. In other words, an Iranian-Turkmen gas swap deal would have little chance of becoming effective, since both states keep their eyes firmly fixed on TANAP.
Nevertheless, the situation is by far not the same concerning swaps of Turkmen gas with Azerbaijan and Armenia. SOCAR is always interested in buying gas from Turkmenistan during summer months, in order to store and resell it at higher prices in the winter. Meanwhile, Armenia has even offered to act as an intermediary in resolving the Turkmen-Iranian gas conflict by paying off Tehran’s debt to Ashgabat by barter in exchange for Iranian gas shipments to Armenia, even though such a proposal would be most likely rejected.
Finally, the timeframe of the case settlement in international court also plays a major role with respect to another yet project of mutual interest for the two countries that would help Turkmenistan reduce its export overreliance on the Chinese market. As Mr. Araqi recently confirmed, negotiations are currently underway on a deal to swap Turkmen natural gas to the Persian Gulf region, providing Tehran moves forward with construction of the required gas liquefaction facilities. Apart from Turkmen gas exports through Iranian territory, Iran is also exploring the option of resuming oil swaps with fellow Caspian littoral states, as it already did with Russia last week.
In parallel, Iran has launched in August the 170km-long Damgan-Neka pipeline, with a capacity of 40MCM/d, in order to reduce dependence on Turkmen gas deliveries. Should estimations that the particular pipeline is going to fully replace imports from Turkmenistan prove accurate, Iran might possibly not need to worry about future gas standoffs with its neighbor.
Kazakhstan: Bozumbayev Names Azerbaijan A Prospective Transit Country For The Kazakhstani Oil And Gas
With annual oil volumes from Kashagan and Tengiz fields projected to reach 12-13MT and 39-40MT, respectively, within the following three years, Kazakhstan has started seeking viable export routes for oil and gas transit to the world markets. Except for Kazakhstan-China oil import pipeline and the Tengiz-Novorossiysk pipeline, running up to Russia’s Black Sea coast, Kazakhstan is left with practically no other export alternatives, especially towards the targeted EU markets, given the lack of progress on the implementation of the Trans Caspian Pipeline (TCP) project.
Consequently, Kazakhstan has now turned to its geographically and geopolitically western-oriented neighbor, Azerbaijan, in search of the key to the diversification of transit and export corridors for the transportation of its oil and gas reserves. Technical talks on such a possibility were carried out by the intergovernmental commission on economic cooperation between Azerbaijan and Kazakhstan, held last week in Baku. According to Kazakhstan’s Energy Minister, Kanat Bozumbaev, Azerbaijan could serve as one of the priority export routes currently under consideration.
The two states agreed on the creation of a working group that will be responsible for estimating the viability of a planned LNG facility in Western Kazakhstan, from which gas will be shipped to Azerbaijan and from there on to international destinations. A second working group will separately look into the issue of oil transit.
LNG terminals for Caspian gas supplies constitute a long been pondered topic of discussion due to logistic problems and expensive investments that would be required for their realization. However, the fact that this option is, too, put to the table clearly proves the littoral states’ determination to overcome longstanding obstacles, like the yet unresolved Caspian Sea legal status, that have hindered their energy export prospects to the western markets.
Legal Status Of The Caspian Sea And Turkmen Natural Gas
Following the ministerial meeting in Moscow with the foreign ministers of Azerbaijan, Iran, Kazakhstan, and Turkmenistan on December 4-5, Russian Foreign Minister Sergei Lavrov said that the legal status of the Caspian is basically resolved after a 25-year hiatus. The de facto status of the Caspian was already towards being a lake with both Kazakhstan and Azerbaijan actively exploring oil and gas in the respective economic zones.
Still, with the completion of TANAP, TAP, and Turkmenistan’s domestic East-West natural gas pipeline, the only missing link between Europe and Turkmenistan’s giant natural gas reserves is the Trans Caspian Pipeline (the TCP). The pipeline project could carry as much as 30 bcm natural gas to Europe, to become a serious supply security step for the European Union. For years, the legal status of the Caspian had been one of the major problems ahead of the TCP and finally, the pipeline can become a reality in the future.
Along with the TCP, Turkmenistan is already in contacts with Russia for a possibility of selling its natural gas through Russian territory as well. Although Russia is showing interest in buying Turkmen natural gas after cutting its imports in the early 2010s, Turkmenistan might not find them as a reliable trade partner for a second time. Regardless, Central Asian republics and Azerbaijan can finally start negotiating for establishing a Caspian pipeline in the years ahead.
Gas Explosion At Baumgarten Puts Italy In A State of Emergency
An explosion in Austria at the Baumgarten near Vienna hit Italy’s Russian gas imports via Tarvisio and put Italian energy supply security to a serious test. Because of the explosion, Italy’s Ministry of Economic Development declared a state of emergency.
After the explosion, the country immediately started to rely on its natural gas storage which already has the double supply capacity to replace the Russian imports. The supply of natural gas from Russia to Italy is expected to restart on December 13th. Still, this was a serious test for Italian supply security during the harsh winter conditions when gas consumption is at its peak levels for the country.
Pending the initiation of Trans Adriatic Pipeline (TAP), Italy is already taking serious steps towards improving its natural gas supply security. Carlo Calenda, the Italian industry minister spoke along the same lines saying that “If we had had the TAP, we would not have to declare a state of emergency.” Other than Italy, Croatia, Hungary, Slovakia and Slovenia are also among the countries which were significantly affected by the explosion at Baumgarten. Southern and South Eastern European countries have already been in need of increasing their gas supply security and TAP could be the answer not only for Italy but also the rest of the countries in the region.