Caspian Energy Insight: January 17, 2018
Last week oil prices have briefly gone over $70 per barrel for the first time since 2014. It was at these levels for almost six consecutive months when oil prices started to crush in mid-2014. In December 2014, oil prices have seen $70 and continued to decline. This week, after more than three years, the Brent prices have seen $70 and currently trading just shy of those levels. WTI, the American benchmark, is around $64. Azeri light, as always trades above Brent and WTI, around $71.5 currently and went briefly above $72 this past week.
The protests in Iran, declining crude oil stockpiles, booming global economic conditions, significantly cold weather trends in the United States, and continuing OPEC/non-OPEC deal for production cuts have been weighing on the direction of oil prices lately. Since some of these indicators are unlikely to change in the near future, we expect further increase in oil prices in the upcoming weeks. Hedge funds also continue to keep their bullish positions on oil futures and only a few are ready to bet against the rising prices as of yet.
As reported in this brief over the past few months, this continuous upward trend is exactly what Russia has feared happening and this continuing trend makes the agreement in November 2017 more fragile than ever. The drivers of the OPEC/non-OPEC deal, Russia and Saudi Arabia, have been holding onto this frail agreement on cutting oil production for price recovery. Bearing the fruits of the deal, oil prices have already increased more than 50 percent within the past six months. While both countries are benefiting from such an agreement, Russia is concerned about the American shale producers jumping on the gun to increase their production significantly.
The Russian government is also feeling the pressure of major oil producers in Russia asking to increase their production levels. The country has already broken the record oil production levels in 2017 and the companies report that they could increase their levels even further. The head of Lukoil recently cautioned against oil surpassing the $70 threshold and said that it could be time to smoothly exit the production cut deal if the prices remain at those levels for more than six months straight.
Despite Russia’s current concerns about cutting global production levels by 1M bpd for all consenting participants, Saudi Arabia has everything to gain from increasing oil prices in 2018. The kingdom is eyeing the looming IPO of Saudi Aramco and higher oil prices will be one of the major determinants of valuation of the company. Although both countries have accepted the existence of an oil glut globally, the Saudis have more reasons to benefit from the deal currently. The monitoring committee of the production cut deal will gather together in Oman at the end of the month to discuss the current market outlook.
Along with the reasons above, there are also other partially related issues for the sharp price increase in recent weeks. These include events like temporarily shutting down a British oil pipeline that used to bring around 400K bpd to the world markets or tensions in Iraq and Venezuela. Combining such instant disruptions with the current positive trends in the oil market, the prices have been benefiting as a result.
SOCAR and IBM Create Joint Venture
Azerbaijan’s state oil company SOCAR and IBM, the US multinational technology company, have established a joint venture called Caspian Innovation Center LLC, SOCAR said in a message posted on its website Jan. 15. The joint venture was created for the purpose of building and operating a competitive analytics and delivery center to provide IT, business transformation and business consulting services in Azerbaijan, the Caspian Region and other countries. “The SOCAR-IBM joint venture will offer its services to SOCAR and other companies in the region, in order to facilitate digital business transformation and boost the efficiency of production in the energy industry and across sectors,” the message said. “The transformation program will bring the best-practice processes and technology from IBM to Azerbaijan and region. The joint venture will set a basis for practical solutions and IT-related analytics in Azerbaijan, thus essentially contributing to the development of the human capital.” This strategic partnership will engage SOCAR’s industry expertise and IBM’s digital, cognitive computing and data science capabilities in building differentiated industry solutions and competencies in the region, according to the message. Based on the reached agreement, the SOCAR-IBM joint venture may expand its activities into other business intensive areas, such as in new geographies or with various customers.
Oil and Natural Gas Production of Azerbaijan in 2017 and Outlook for 2018
Playing along with the OPEC/non-OPEC production cut deal in 2017, Azerbaijan produced 3.36M tons of oil in December and 37M tons overall this past year. Out of this production, the country exported 27.2M tons of oil to the world markets, generating an income above $10.7 billion throughout the year. The US EIA estimates that Azerbaijan will produce around 790K bpd this year on average. The Caspian nation also exported 325.3K tons of chemical products, generating an income of $79.6M.
Looking at country’s operations abroad, Azerbaijan is currently the biggest foreign investor in the Turkish market, reaching to $20 billion by the end of 2018. There are around 40K Turkish workers participating in SOCAR projects. Also eyeing the completion of mega projects like TANAP, Azerbaijan is looking to increase its exports to Turkey starting this year.
In addition to the Turkish market and TANAP, Azerbaijan is continuing to make deals to sell natural gas to additional Balkan countries. At a recent presidential meeting, Bulgarian president announced his country’s support for the launching of the interconnector with Greece in mid-2018 which will enable the Balkan nation to receive natural gas from Azerbaijan. Bulgaria is in the market to buy 1 bcm natural gas from Azerbaijan every year. Currently, only 3 percent of Bulgarian households use natural gas for heating and excessive coal use is leading to significant air pollution.
Completion of the SGC will have multiple positive effects for Europe from alleviation of air pollution to increasing energy supply security, not to mention the positive externalities for domestic economies of the Balkan nations on the way of natural gas transit.
Russian Gas Continues to Dominate Europe
Already breaking records in natural gas production levels in 2017 and a positive trend for 2018, Russia continues to be instrumental for European energy needs. Although the EU has been eyeing diversification options for its energy imports, Russia remains as the main option for the continent for the foreseeable future. Within the past year, Russia delivered 193.9 bcm natural gas to the EU and Turkey, a third of the continent’s consumption levels; that is 8 percent higher than 2016, and a current record.
To increase its natural gas supply security, the EU is pursuing legal and political strategies to bloc new Russian natural gas pipelines to enter through its borders. However, only in 2017, thanks to economic recovery across the continent, exports to France increased by 7 percent and Germany and Austria received records levels of Russian gas.
Being one of the cheapest options for the consumers, Russia will likely increase it natural gas production in 2018 as well since the country is engaged with multiple new export routes ranging from pipeline projects like Turkish Stream, Nordstream II, Siberian Power pipelines, and new LNG projects targeted towards the Asian consumers. For the projects related to the EU consumers, like Turkish Stream and Nordstream II, there are skeptics inside the union but Russia is continuing with its building efforts.
Azerbaijan: First Bonus Tranche for the ACG Contract Extension to Be Paid in 2018
The consortium of foreign investors is going to provide Azerbaijan with the first tranche of a promised cash bonus for the extension of the Azeri-Chirag-Gunashli contract up to 2050, Azerbaijani President Ilham Aliyev said on January 10th during a cabinet meeting on the results of the socio-economic development of 2017 and objectives for the future. It should be noted that this additional bonus of $3.6bn will be paid to the State Oil Fund of the Republic of Azerbaijan (SOFAZ) in equal installments over the course of the following eight years. ‘’The extension of the Azeri-Chirag-Gunashli contract also brings us other important dividends. First of all, SOCAR’s share increases from 11 to 25%. 75% of the profit oil will remain on the Azerbaijani side. I can say that this is an excellent result for a young and independent country achieved with foreign investors in the oil sector,’’ Mr. Aliyev added.
The first production sharing agreement on the development of the Azeri-Chirag-Gunashli offshore oilfield clusters – ‘’Contract of the Century’’ concluded on September 20, 1994 – would remain valid up until 2024. Nevertheless, the BP-led consortium decided to restate and extend the deal seven years prior to its planned expiration. As part of the renewed contract, a $40bn capital will be invested by the foreign consortium in ACG within the next 32 years. The updated partners’ shares are: BP, 30.37%; AzACG (SOCAR), 25.00%; Chevron, 9.57%; INPEX, 9.31%; Statoil, 7.27%; ExxonMobil, 6.79%; TP, 5.73%; ITOCHU, 3.65%; and ONGC Videsh Limited (OVL), 2.31%.