Caspian Energy Insight: January 10, 2018
Brent oil prices rose close to $69 per barrel when WTI saw its highest levels around $63 in the first week of 2018. Azeri light crude is selling close to $70. The gap between WTI and Brent continues to stay wide while Azeri light is expectedly in higher demand by the consumers.
One troubling result of the oil prices this week is WTI’s jump over $60. If the prices can stay above this level in the upcoming months, there is a possibility that American shale producers to increase their production significantly. The OPEC and non-OPEC strategy to cut down production to increase prices can be questioned if prices increase too much, yielding even a bigger response from the American shale crude producers.
The agreement may come to an end due to geopolitical crises or Russia’s willingness to pump more oil to the world markets. Looking back in 2017, among the producing countries, Russian oil production hit a 30 year high of 10.98M bpd. This is despite the fact that the pace of growth slowing down. The country’s participation in production cut deal with the other major oil-producing countries in the world made Russian oil producers hit the breaks.
The Russian agreement was to cut 300K bpd from its historical high points of 11.25M bpd and the government had reached that target in 2017. However, Russia also made it clear that they did not want to continue with production cuts as much as the Saudis.
Record Levels In Russian Natural Gas Production In 2017 And Positive Outlook For 2018
Although Russia hit the breaks in oil production last year, natural gas production was at 63.5 bcm for the last month of 2017. Overall, Russia closed the year with a record level of 690.5 bcm, a 7.9 percent increase in production levels. This is also 2.9 percent higher than the record levels in 2011. Looking at the ongoing projects, Russia continues to commit building the new gas exporting pipelines. Therefore this record levels of output still have a potential to improve, ongoing and pending pipeline projects like Turkish Stream, Nordstream II, Siberian Power pipelines, and new LNG projects targeted towards the Asian consumers. The United States became the largest natural gas producer in the world back in 2009, thanks to the shale revolution but current pace of Russian pipeline and LNG projects might change the holder of the crown despite the US sanctions on Russia.
As part of the plans, Gazprom has already completed more than a third of Turkish Stream with 700 kilometers of 1,860 kilometers of pipes already laid. The company plans to have the pipeline arrive on Turkey’s shores by May 2018. The project also has a date of commencement around the end of 2019. With Turkish and Balkan natural gas demand increased significantly within the past few years, Gazprom is eyeing to capture these markets by establishing the pipeline on schedule.
Azerbaijan: Georgia Quits Russian Gas Over Azerbaijani Pipeline Gas Imports
Following a 2006 decision by the Georgian government to liberalize the small-sized but largely import-dependent national gas market, the country turned to Azerbaijan in order to diversify its energy options away from ITERA’s, and subsequently, Gazprom’s export monopolies, already established at the time. As the South Caucasus Pipeline Expansion (SCPX) nears completion within 2018, and more gas from Shah Deniz 2 is scheduled to reach Georgia by 2019 increasing the country’s gas share in form of a transit fee up to 800MCM/a (5% of the 16BCM/a from SD2), Tbilisi is brought closer to the sought-after tighter energy partnership with Baku. According to the recently approved natural gas balance for 2018, Azerbaijan’s state energy firm SOCAR and the Shah Deniz consortium are going to turn into Georgia’s primary gas suppliers, providing 1.866BCM and 813.9MCM, respectively. A further 9.4MCM will be locally mined, the Georgian Ministry of Economy revealed. This means that Georgia won’t have to buy any natural gas from Russia in the current year.
Serving as a vital transit corridor for the conveyance of Caspian oil and gas to the Turkish and EU markets, Georgia, who approximately consumes a total of 2.2-2.4BCM/a, is at the moment engaged under two contracts with the SCP and SD consortia for optional (up to 5% of gas transported through the SCP) and supplemental gas (up to a maximum of 500MCM/a under special terms), set to expire in 2022 and 2025. The country has also finalized a separate supply agreement with SOCAR for the purchase of gas via a pipeline from the Gazakh district of Azerbaijan, whose throughput capacity is expected to reach 1.5BCM/a after completion of necessary maintenance work.
For the past several years, Gazprom has been supplying Armenia with gas via the North-South Gas Pipeline, that forms part of Georgia’s gas transmission network, by continuously renewing short-term contracts with Tbilisi. Georgia would charge 10% in kind for this Russian gas to Armenia (200MCM/a), which was added up to its social gas package and was used to balance winter peak demand.
In January 2017, Gazprom Export and Georgian Gas Transport Company agreed upon a gradual monetization of Russian gas transport activity across Georgian territory. In line with the two-year deal, that luckily doesn’t entail any ‘’take-or-pay’’ or ‘’use-or-pay’’ provisions, by 2018, the gas transit service will entirely shift to monetization, but Georgia will still be able to buy extra gas volumes at a discount ($185/1000CM, instead of the previously imposed tariff of $215/1000CM) to cover seasonal gas supply deficits. For the time being, the economic profitability for Georgia is put into question, since Russia has extended lower gas price for Armenia ($150/1000CM) until the end of 2018, a fact that might make it hard for Georgia to buy equal gas quantities with those received under the former in-kind contract, thus leading to unavoidable increases in actual tariffs for household consumers and power generation. Nevertheless, the new transit pact is harmonized with the terms of the EU-Georgia Association Agreement that requires of Tbilisi to accept the transit fee in money, and not in a commodity.
Despite the notably different types of its contracts with Azerbaijan and Russia, Georgia will need to start negotiating their renewal prior to expiration dates. This is because of any discussed re-export arrangement of Iranian gas towards Georgia with the help of neighboring Armenia, a state lately seeking itself a transit function, seems rather difficult to be concluded under present circumstances. For one thing, Gazprom’s full ownership of the Armenian gas transmission system would normally allow Russia to have a say in such an operation, much to the discontent of the Georgian public opinion. In addition, Armenia’s eagerness to up gas imports from Iran via the Iran-Armenia Gas Pipeline and send them over to Georgia and from that point onto the Western markets is strictly linked with Iran’s alacrity to serve as a transit route for Armenia’s gas imports from Turkmenistan. Given the year-long gas debt dispute between Tehran and Ashgabat, already decided to be settled in the International Court of Arbitration, the second precondition of Armenia’s planning now appears far from attainable. Finally, Iranian gas might in the short run prove costlier even than the Russian for Georgia, as its price would double because of the transit fee applied while on Armenian ground.
Furthermore, progress on the proposed conversion of the Samgori South Dome depleted field into a $270M underground gas storage facility (UGS) will also help bolster durable energy security in Georgia by dealing with imbalances between seasonal supply and demand. A relevant feasibility study has been carried out, while the European Bank for Reconstruction and Development (EBRD) has confirmed it is going to finance the project.
Therefore, the news that Georgia’s gas balance for 2018 has almost completely switched the national gas supply to Azerbaijan, a pure low-cost provider for Tbilisi in lack of one or more intermediate transit states, is, indeed, encouraging. Firstly, it shows the extent to which Georgia has managed to capitalize its cooperation with Baku in the context of crucial trade and energy projects, finally gaining its energy independence from Gazprom. Lastly, Azerbaijan offers Georgia an opportunity to further develop the diversification strategy the country decided to put into implementation over a decade ago since its winter peaks might after 2020 be met with even more gas from Turkmenistan, Kazakhstan, and even Iran, shipped to Europe through the Southern Gas Corridor.
Nord Stream 2: Commissioner Sefcovic Reaffirms EU’s Assiduity In The Diversification Of Gas Supply
‘’What we have highlighted from the beginning is that, from an energy security perspective, we want to have diversification of supply, we want to have new sources, new routes and new suppliers,’’ the European Commission Vice President in charge of Energy Union, Maros Sefcovic, said in a recent interview for Energy Post. In this vein, Mr. Sefcovic questioned the ‘’pure’’ commerciality its promoters habitually attribute to Nord Stream 2 pipeline project.
The European Commission Vice President referred to the 2009 Russia-Ukraine gas tiff as a ‘’bad experience’’ for the Bloc, that later on prompted formal proceedings against Gazprom for possible abuse of a dominant position in upstream gas supply markets in a series of Central and Eastern European member-states. Even though in 2017, the Directorate General for Competition decided to settle the case without a fine imposition, confrontation soon reignited over the construction of the second export line of Nord Stream, running from Vyborg to Greifswald through the Baltic Sea, that is said to be depriving Ukraine of billions of dollars in transit fees.
To that end, the Directorate General for Energy has already submitted a request to the Council in order for the Commission to be granted a mandate to negotiate an EU-Russia agreement on Nord Stream 2. ‘’To deal with such a politically and legally complex and sensitive project, where there is a collision of legal norms, and we have such a lot of political concerns on this project, I believe that the best way to try and resolve it is through negotiations,’’ Mr. Sefcovic said.
Finally, the Vice President stated that he expected to see a formal adoption of the Commission’s proposal to render the Third Gas Directive applicable to offshore import pipelines from third countries ‘’in January or February.’’ In November, the Commission suggested that key elements of the 2009 directive, namely third-party access, tariff regulation, ownership unbundling and transparency, should apply to all gas pipelines to and from third countries up to the EU border.
Having already included the Southern Gas Corridor and the East Med infrastructure pieces in its third list of projects of common interest, the EU has indicated its full engagement to a diversification approach, believed to be undermined by projects like Nord Stream 2. Nevertheless, views on the pipeline’s role as a supplementary gas route towards Europe that would strengthen Austrian Baumgarten’s position by averting disruption incidents like the one witnessed in December, also form part of the heated debate surrounding Nord Stream 2.
Positive Externalities Of TAP: Greece, Albania And Malta
With TAP’s construction continuing, there are several positive externalities reported on the path. While rapid economic growth and increase in foreign direct investment are reported in Albania for the third quarter of 2017, Albania is enjoying the benefits of the pipeline before it is even commenced. Along with Albania, Greece is another country with positive externalities of Trans-Adriatic Pipeline, the 878 km project that is under construction since 2016. Greece experienced more than 30 percent basic metals sector growth in 2017 although overall manufacturing grew only about 2.6 percent through the year. Both Albania and Greece are on the path of TAP, receiving FDI and experiencing an industrial boom in relevant sectors.
Other than the countries on the path of TAP, like Albania, Greece, and Italy, this week another country came to spotlight for TAP, Malta. Malta is planning to sell natural gas to Sicily through its upcoming pipeline. Daniel Azzopardi, CEO of the Energy and Water Agency, the company in charge of building the pipeline announced for Malta to receive more than 2 bcm natural gas through LNG and the excess gas is going to be sold to the European market. The planned pipeline will connect Maltese network to Sicily, Italy, giving Malta access to TAP’s Italian section, increasing Maltese gas supply security as well. The 159 km long pipeline will be finished by 2024 and will cost around 322M Euros. The preparations start immediately.