Caspian Energy Insight: February 21, 2018
Oil Prices Recover This Week
After a dip in the prices the week before, this past week, oil prices have recovered. Following the week of hedge fund liquidations, profit selling, dollar rebound, and American stock market decline, this week Brent increased more than $2.5 per barrel and traded above $65. WTI also recovered above the $60 threshold once again and currently trades around $61.77. Azeri light also went just above $67 on Tuesday following the dip in prices previous week. In light of the profit taking week, the hedge funds also cut down their net long positions this past week.
Saudi Arabia’s Minister of Energy Khalid al-Falih restated his country’s stance on oil prices and aim to diminish global oil inventories. The minister believes that a shortage in oil supply is preferable compared to ending the production cut deal too early. Al-Falih even prefers overbalancing the market to finishing the deal too early. Although this might make sense for the Saudis, it might be less meaningful for the rest of the countries in cooperation. Still, at a time when Saudis are at the verge of Aramco’s IPO, the kingdom believes in keeping the prices as high as possible even if the shale producers of the United States appear as a threat to global oil supply. This position might create issues inside the alliance if the prices collapse again in the future.
During the decline in prices, along with Saudi Arabia, the overall OPEC/non-OPEC alliance continued to hold their ground and renewed their willingness to continue their alliance in the foreseeable future. Both Saudi Arabia and Russia are trying to find new areas of cooperation while the United States is monitoring the situation between its ally and one of the biggest competitors in Eurasia and the Middle East. Indeed, Russia is showing their intentions to buy the stakes of Aramco without the IPO. For a larger OPEC/non-OPEC alliance, a new draft framework is underway as announced by Suhail Al Mazrouei, the UAE’s Minister of Energy and Industry. A permanent partnership could have serious implications for long-term global oil supply and oil prices in general.
Rising Risks for EU’s Energy Supply Security: Big Gain for Russia ahead of Nordstream 2
Last week, finally, Germany developed an official public stance for Nordstream pipeline’s second line which will supply natural gas to the country from Russia, while bypassing transit countries like Poland and Belarus. German Chancellor Angela Merkel said that she saw no threats from the pipeline to Europe’s energy diversification and supply security. This comes at a time when the Vice-President of the European Commission, in charge of Energy Union, Maroš Šefčovič and President of the European Council, Donald Tusk voice their concerns about the Russian pipelines becoming a threat to European energy supply security by creating too much dependence on the eastern neighbor of the union.
Expectedly, Polish Prime Minister Mateusz Morawiecki also disagreed with the German Chancellor and said that the pipeline would create security problems for the pipeline by cutting Ukraine from Russia’s transit routes and making the country even more vulnerable to Russian expansionist threats. Still, Germany had been ambivalent towards such issues even before and instead of confirming the issues raised by other member countries, it had continued its energy deals with Russia. In 2017, Gerhard Schröder, the former Chancellor of Germany from 1998 to 2005, was appointed as the chairman of Rosneft, a Russian state oil company, and this was interpreted as an implicit German support for Russia’s energy policies towards the EU.
Therefore, given the past track record of German politicians and energy companies, the announcement by Merkel is not a surprise. Yet, the consequences of this support can create problems for European energy supply security. Currently, the Southern Gas Corridor (SGC) is the only viable alternative for the union and the EU, as well as the EBRD, is trying to increase funding opportunities and new suppliers for this pipeline. President of TAP Walter Peeraer reaffirmed the benefits of the SGC by calling the pipeline network as indispensable for the EU, being a project of common interest (PCI) for the union.
Georgia Looking to Stabilize Its Economic Growth through the IMF’s Technical Assistance
Last week, a team of economists from the International Monetary Fund (IMF) was in Tbilisi, Georgia, to assist and monitor the structural reforms taking place in the Caucasus republic. The country is in good shape in terms of economic growth and achieved 4.8 percent growth in 2017, which is at an acceptable level for a small size developing country.
The Georgian officials have been taking steps for structural economic reforms in recent years to modernize the Georgian economy through strengthening revenue administration, supporting the capital market development, and improving financial safety nets. The country still needs to implement further changes on Georgian economy. These plans include mobilization of domestic savings to create funds for investment which will in return enable further private investment. Currently, China, Azerbaijan, and Turkey are big investors in the country, but Georgia also needs private investors to participate in the local economy. This way, economic diversification can be achieved. Otherwise, the country will remain dependent on foreign direct investment (FDI) for the foreseeable future.
SGC Ministerial Meeting: Regional Cooperation Applauded amid Search for New Suppliers Continues
On February 15, the fourth Ministerial Meeting of the Southern Gas Corridor (SGC) Advisory Council took place at the Heydar Aliyev Center in Baku. The event was graced by the presence of eminent participators, such as European Commission’s Vice President in charge of the Energy Union Maros Sefcovic, Acting Special Envoy and Coordinator for International Energy Affairs for the US Department of State’s Bureau of Energy Resources Sue Saarnio, Energy Ministers and high-ranking representatives of those countries geographically and/or economically involved in the SGC pipe network. Turkmenistan and Romania, two states of prime significance regarding implementation of the SGC, given that the first one will serve as the starting point of the proposed Trans Caspian Gas Pipeline (TCGP), a critical eastward extension of the SGC, while the second is numbered among initial supporters of a Vertical Gas Corridor from Greece up to Hungary and Ukraine, that will ensure non-stop and bi-directional gas supply for the Balkans and the CEE region, once SGC capacity of 16BCM/a rises, were first-time attendees in the Council. The idea of the establishment of an Advisory Council on the SGC was conceived by Azerbaijan back in 2015, as more countries and companies outside of the Azerbaijan-Georgia-Turkey axis became engaged in this strategically important for the European security of supply energy infrastructure project.
Ministers and political dignitaries convened in the aftermath of a €1.5bn ($1.86bn) loan disbursement to the Trans Adriatic Pipeline (TAP) by the European Investment Bank (EIB), as well as of the allotment of nearly €1.9M ($2.36M) to the TCGP under Connecting Europe Facility (CEF), hinting at the European institutions’ earnestness to bring the SGC online by 2020. To that end, the Council gave the national delegates the opportunity to be briefed on the progress of all four, disparate links in the SGC supply chain directly from their operators and consortia and to look into ways of alleviating leftover barriers to the project’s unhindered realization and possible future extension within a fully integrated and efficiently diversified European energy market. Work on the Shah Deniz Stage 2 has been completed by 99%, South Caucasus Pipeline Expansion (SCPx) and Trans Anatolian Pipeline (TANAP) activities are nearing 95% (per pipeline) and progress on TAP is estimated at around 70%.
After an agreement with BP on the development, exploration and production sharing for the Shah Deniz prospective area entered into force in 1996, it took Azerbaijan a little over a decade to add natural gas to its commodity export portfolio, along with the previously preponderant oil trade. Therefore, it is no wonder that extensions of production sharing agreements (PSA) for the development of Shah Deniz gas and condensate field and of the Azeri-Chirag-Gunashli (ACG) oilfield cluster up to 2048 and 2050, respectively, are welcomed in the draft joint declaration of the SGC Advisory Council, since they both signify the long-term presence of international energy majors, including the likes of BP, Chevron and Exxon, in Azerbaijan’s share of the Caspian Sea. As is roughly stated in the text, disciplined observance of the contracts’ sanctity from the part of Azerbaijan underpins this lasting flux of foreign investment and collaboration in the energy sector.
The Ministerial Declaration moreover emphasizes the critical contribution of Georgia and Turkey to the effectual operation of this energy transport corridor from the Caspian to Europe. Indeed, Georgia’s transit momentousness was consolidated with the construction of the Baku-Tbilisi-Erzurum/South Caucasus Gas Pipeline, the first segment of the SGC, in view of the fact that the frozen Nagorno-Karabakh conflict would not allow for a different routing of the pipeline through Armenia. It is now made plain that tighter energy partnership between Georgia and Azerbaijan, together with progress on its first underground gas storage (UGS) project, will help the country, who joined the Energy Community in 2016, foster security of supply and mitigate the acknowledged winter-to-summer demand imbalance in its social and industrial/commercial sectors. As for Turkey, the SGC satisfies its long-awaited objective to turn into a regional energy hub, even though Gazprom eyeing Turkish Stream gas deliveries via TAP would enfeeble such a scenario.
Conversely, praise for regional cooperation among Azerbaijan, Georgia and Turkey, instigated by the substantial diplomatic capital expended by the US on this purpose and perceived as a driving force for the SGC finalization, doesn’t overshadow recognition of laborious undertakings in the Western Balkans and Central and Eastern Europe in the same direction. In the context of the Ministerial Meeting, letters of intent were signed by SOCAR Balkans and Albgaz, the Albanian gas transmission operator company. Another letter of intent was signed by the Croatian natural gas grid operator Plinacro, Albgaz, the Sarajevo-based natural gas importer, transporter and supplier BH Gas and Montenegro’s petroleum and petroleum products wholesaler Bonus. Besides, Western Balkan states’ zealousness to put the bidirectional Ionian Adriatic Pipeline (IAP) into effect, a pipeline practically extending TAP to Bosnia, Croatia and Montenegro, as well as the launch of the Vertical Gas Corridor project construction works with the initiation of the process for the establishment of the Interconnector Greece-Bulgaria (IGB), indicate the region’s intentness to reaffirm its European perspective by aligning with the energy security acquis.
Finally, as stressed in the Joint Declaration of the Advisory Council, interest remains vigorous to open up the SGC to new gas suppliers from the Caspian Basin, Central Asia, the Middle East, the Eastern Mediterranean Basin and the Black Sea. Extra gas volumes from Azerbaijan, beyond the Shah Deniz 2 field, could be made available in the second half of 2020, when the second stages of the Absheron and Umid/Babek fields come online. Turkmenistan (with volumes from Galkynysh onshore field via the East-West pipeline and from southeastern offshore wells) and Kazakhstan (with volumes from Tengiz field) could join the SGC, providing the TCGP turn into reality. And as for gas deliveries from the Eastern Mediterranean and the Black Sea, these will require time for the conduct of exploration and production phases in the relevant locations of the blocks (Israel, Lebanon, and Cyprus/Bulgaria and Romania) and for the commissioning of supplementary infrastructure. During the Ministerial Meeting, Commissioner Sefcovic also revealed that the EU is actively trying to attract Iran’s attention to the SGC. Nevertheless, it is yet unclear how Iran is going to react to this suggestion because its post-sanctions strategy is mainly oriented to the increase of oil export quantities, Mr. Sefcovic noted. In 2015, the National Iranian Gas Company (NIGC) argued that transportation of gas from Azerbaijan and Turkmenistan via Iranian territory would be the most economical and cost-effective way of linking Europe to Caspian energy resources. In lack of a discussed pipeline connecting Iran’s north-eastern (Turkmenistan) and north-western (Turkey) border, it was quickly understood that NIGC’s recommendation originated from Iran’s overall opposition to the TCGP getting underway prior to the Caspian legal status settlement. Since then, Tehran appears mostly concerned to unlock and send into TANAP domestic gas reserves from the Persian Gulf, especially in the background of the escalation of its year-long gas debt row with Ashgabat, but a pipeline leading from the giant South Pars to Europe is yet to be built, thus delaying the country’ SGC ambitions.
DESFA Privatization: EBRD Is In, the Dutch Are Out
On February 16, Greece’s privatization agency (Hellenic Republic Asset Development Fund -HRADF) made public the details regarding submission of two binding offers for the acquisition of a 66% stake in the Greek gas grid operator DESFA, 31% of which is held by HRADF and 35% by Hellenic Petroleum (HELPE). Progress on DESFA sale forms part of those prerequisite actions needed to materialize in order for the country to successfully conclude the third review of its bailout program, along with privatizations of a 65% of the incumbent gas utility DEPA, a state-owned 35% of HELPE (possibly increased through partial selling of a 45.47% stake controlled by Paneuropean Oil, a member of Latsis corporate group), and the privatization of a 17% of the main power utility PPC.
One of the two binding offers was put forward by a consortium comprised of the Italian natural gas infrastructure company Snam, Spain’s energy company and European TSO Enagas and the Belgium-based TSO Fluxys. The three companies are included among the shareholders of the Trans Adriatic Pipeline, together with BP, SOCAR and Axpo. In the non-binding demand indication phase of the tender, they were joined by the Dutch natural gas infrastructure and transportation firm Gasunie, in a consortium led by Snam (50%). The Snam majority-owned consortium was the favorite of this renewed DESFA tender, as its win could pave the way for the Greek TSO to undertake operation and maintenance activities on TAP pipeline, increasing its income and extending the spectrum of its non-regulated responsibilities. This way, TAP A.G. would equally cut back on spending by exerting majority control over an already existing operating entity, while Gasunie would most probably make it into the pipeline’s shareholding. However, in a quite unforeseen move, Gasunie decided to withdraw from the Snam-headed consortium a day prior to the expiration of the deadline set by HRADF for the submission of non-binding offers. The particular decision could be attributed to the rightward shift observed in the recently sworn in coalition government of the Netherlands, given that all shares of Gasunie are held by the Dutch state, represented by the Ministry of Finance. Therefore, the departure of the former Eurogroup president and Finance Minister Jeroen Dijsselbloem of the Labor Party from PM Marc Rutte’s new cabinet, and its succession by the Christian Democrat Wopke Hoekstra, inevitably resulted in a change in the governmental mindset with respect to investment plans in the less economically robust Mediterranean region.
The second offer was presented by a consortium made up of the Galicia-based Regasificadora del Noroeste, Romania’s TSO Transgaz and the European Bank for Reconstruction and Development (EBRD). In the previous stage of the tender, the Spanish LNG terminal owner was thought of as an outsider. Nevertheless, the latest inauguration of its partnership with Transgaz, who had previously attempted to enter the acquisition process in a joint venture with GRTgaz, an Engie affiliate, but was excluded due to the violation of the Third Energy Package directives on ownership unbundling of TSOs, proved enough to break the mold. In addition, the two firms secured a last-minute participation of the EBRD, estimated at over 30%, raising the Greek government’s hopes of the tender surpassing the €400M ($492.7M) mark, agreed upon with SOCAR back in 2016. EBRD’s emergence in the DESFA tender triggered a negative reaction from the Italian side, who points out the creation of unfair conditions of competition in the tender, while propounding the argument that, in case of the second consortium’s win, liquidity in the Greek economy will not be ensured, as the three bidders are reportedly going to finance their buy with the use of a loan issued by Greece’s systemic banks. DESFA is for the time being a rather profitable corporation, according to the rise noted in its earnings for 2016, while the finalization of the ongoing second upgrade of the Revithoussa LNG terminal by September 1 will to a certain extent adds to its value. That said, one cannot of course guarantee that the operator’s ultimate sale price will necessarily skyrocket far beyond SOCAR’s €400M rate.