Caspian Energy Insight: March 28, 2018
Oil Prices are Testing $70
Compared to early March, oil markets are performing well the past two weeks with even testing $70 levels. The last time oil prices hit $70 levels were in January, twice, briefly. This week, oil prices continued to increase compared to last week. Currently, Brent trades above $69 while WTI is above $64. Meanwhile, Azeri Light is trading around $67 this week. In trading markets, the bullish positions have finally improved by 95M barrels. The expectation for oil prices by the traders is upwards.
While the current production cut agreement is in place for OPEC+ partners, the group of countries is also deliberating on changing the inventory target they had initially. The partners are aiming to reduce the global crude oil inventories to 5-year average levels but there is no complete agreement so far.
Still, the biggest development in oil markets this week was not oil prices testing $70 levels or OPEC+ deliberating on changing the goal post for inventory targets but rather the initiation of Chinese oil futures in Shanghai market. The introduction of oil futures contracts in Yuan at the Shanghai International Energy Exchange included oil in seven forms from UAE, Qatar, Yemen, Iraq, and China. This is the first credible challenge against the petrodollars since most of the market in oil trade carries through the US Dollars. Still, despite the introduction of oil futures contracts in Yuan, without American, Saudi, and Russian crude oil, the market will remain limited.
In the first day of trading last Friday, the highest point of trade volume included a few millions of barrels in crude oil. However, in New York and London exchanges, the trade volume can exceed hundreds of million barrels to at times, billions of barrels. At this point, the Chinese yuan denominated oil futures contracts to create a Chinese benchmark do not pose a threat to petrodollars, yet, they should still be followed by the traders in the future.
OPEC+ Meeting in Baku, Azerbaijan: Implications for Azerbaijan’s Foreign Policy
Meanwhile, preparing to become a full-blown OPEC member in the near future, Azerbaijan offers to hold an OPEC+ meeting in Baku. The offer was announced by the OPEC Secretary General Mohammad Barkindo following his series of meetings in Baku last week. Azerbaijani Energy Minister Parviz Shahbazov also explained Azerbaijan’s willingness to become a member of OPEC and hold the meeting in Baku while praising the achievements of the cartel in sustaining its production cut agreement along with other nonmember oil-producing states, including Russia. Shahbazov believes that the production cut agreement contributed to the stabilization and the balancing of the oil markets in the past year. Current compliance is around 129 percent per the production cut agreement by the member states.
As being one of the major oil and gas producing countries in the Caspian, Azerbaijan and its trade partners benefit from a stable oil market. The next OPEC+ meeting will take place in April 20th in Saudi Arabia. The current objective of the major partners of OPEC+, including Russia and Saudi Arabia, is to extend the cooperation between the countries beyond the agreement.
OPEC membership actions are only a part of Azerbaijan’s recent foreign policy initiatives to go beyond the Caspian. With TANAP, Azerbaijan is increasing its ties with Turkey and Georgia. With the completion of TAP, being part of the EU project of common interests (PIC), the country will also become an essential partner of the union and its southern members. Therefore, OPEC membership, coupled with the completion of the Southern Gas Corridor (the SGC) can change the face of Azerbaijan in the region and beyond. With potentially new countries joining the SGC to export gas to Europe, Azerbaijan can improve ties with Central Asia or find new ones in Eastern Mediterranean. Once a small Post-Soviet nation is becoming a regional player.
The EU already wants Azerbaijan to start exporting gas to its member countries, Greece and Italy as a start. With potentially new suppliers in the SGC, the pipeline network can supply gas to the Balkans and beyond towards Central Europe. With Russia’s completion of Nordstream and new projects including Nordstream II and Turkish Stream, the SGC will be the only viable alternative to Russian imports for the EU, which desperately needs diversification of its energy imports in recent years.
Tehran Closes the Year on Pre-Sanctions Oil Export Levels and Gas Self-Sufficiency
Iranian oil exports towards the Asian and EU markets averaged at 2.6Mbbl/d throughout the past 1396 year, in the Solar Hijri calendar (20th March 2017-20th March 2018). This level, representing some 2.155Mbbl/d of crude and 428,000bbl/d of condensate, slightly exceeds the 2.5Mbbl/d of average exports during the pre-sanctions era, up to 2012. Within the first six months from the lifting of the most nuclear-related economic and financial sanctions by the US, the EU and the UN, Iran restored oil exports at 2Mbbl/d and concluded crude sale contracts with European companies, like the Spanish Repsol, the Italian Saras and Iplom and the Greek Hellenic Petroleum. Up until the final month of the Persian year 1395, which ended on 21st March 2017, Iranian oi exports had reached 3.05Mbbl/d. As a result, the founding member of OPEC (along with Iraq, Kuwait, Saudi Arabia and Venezuela) ended up being regularly scolded by the Organization for its failure to adhere to promised production cuts under a 2016 deal to curb a global oil glut. In the preceding fiscal year, around 60% of crude exports were delivered to Asian oil refining plants, while the remaining 40% were purchased by European customers, the biggest of whom being France’s Total and Italy’s Eni and Saras. Out of the Asian countries, India and China imported most of the crude, while South Korea received the largest volumes of condensate.
The 2.6Mbbl/d average, although noteworthy from the perspective of Iran’s rapid rebound of exports at over pre-sanctions figures, still appears incompatible with the agreed OPEC cap for the rebalancing of the oil market, mainly due to the sharp rise in the country’s domestic oil output over the last months (up by 165,000bbl/d between April 2017 and January 2018). But amidst speculation that the current US administration might withdraw from the nuclear pact, especially in the aftermath of appointments of John Bolton as the top national security adviser and Mike Pompeo as Secretary of State, these export quantities are subject to change. Potential resumption of US-imposed sanctions against Tehran could bring about a decrease in Iranian exports by 250,000-500,000bbl/d by the end of 2018, as well as an upward trend in oil prices driven by geopolitical instability, in combination with fears of an imminent trade war with China.
In a separate development, Iran’s President Hassan Rouhani stated on March 20 that the country is poised to achieve natural gas self-sufficiency in 2018. As the gas output at the giant Persian Gulf field has nearly doubled over the previous four years (from 285 to 555MCM), Iran will not need to purchase gas from any other external supplier this year. Furthermore, the National Iranian Gas Transmission Company (NIGTC) announced that last year 182BCM of natural gas was injected into the national network, which was extended following completion of IGAT-6. This sixth trunk line of the Iranian gas grid will be able to carry 110MCM/d of natural gas from the South Pars to the southern and western parts of the country (up to the provinces of Hamadan and Kermanshah). At the same time, another bunch of pipelines, such as the Damghan-Neka line, is used for the transport of natural gas from the South Pars all the way to Iran’s North, previously heavily dependent on Turkmen gas imports due to its poor interconnection to the gas-abundant southern regions. The two neighboring states have been since early 2017 involved in a dispute that resulted in Turkmenistan halting gas exports to Iran due to the latter’s unpaid debt.
Around 2.5BCM of Gas Will Be Required for the Astana Gasification Project
Around 2.5BCM of natural gas is going to be required in order for a project on the gasification of Astana and of Kazakhstan’s central and northern regions to be implemented, the country’s Vice-Minister of Energy Magzum Mirzagaliyev said last week. According to Mr. Mirzagaliyev these volumes represent about half of the gas needs of Kazakhstan’s southern parts, currently standing at about 5BCM. The Vice-Minister also stressed out that the response to the domestic gas demand remains an area of priority as far as Kazakhstan’s natural gas balance is concerned, although he didn’t rule out the possibility of further future exports. Kazakhstan used to export 13.7BCM of gas abroad. This amount has been increased by over one third following a year-long, the $1bn-worth agreement between KazTransGas and PetroChina on the shipment of 5BCM via the colossal Central Asia-China gas pipeline, inked in October 2017. KazTransGas, the operator of the Kazakh gas pipeline system, hasn’t named the suppliers of this gas but has revealed that some of it will come from reserves in its underground storage facilities. However, this statement by Mr. Mirzagaliyev raises once again the question of Kazakhstan’s actual ability to participate in the Southern Gas Corridor (SGC), via the connection of the Trans Caspian Gas Pipeline (TCGP) to Tengiz field. Owing to the country’s limited gas surplus, the state-owned oil and gas firm KazMunaiGas and Gazprom have extended until 2038 the long-term Karachaganak sales and purchase contract, providing for the delivery of some 10BCM/a of gas to Russia’s Orenburg gas processing plant and for steady supplies to the Kazakh market, including through swaps.
A few days earlier, Energy Minister Kanat Bozumbayev specified that the price of natural gas intended for Kazakhstan’s ill-supplied capital and central and northern areas (taking into account average market price plus transit tariffs) is going to range from 47 to 50KZT($0.15-0.16)/CM, an amount certainly low if compared to EU prices but relatively more expensive than prices in the eastern Aktubinskaya oblast and, in any case, a lot more expensive than the widely used coal. Nevertheless, the 3 million residents of the particular geographical territory are highly encouraged by the authorities to switch from coal to natural gas, as the rising number of vehicles in Astana and the coal-fueled power plants have intensified the problem of smog and bad air quality.
Kazakhstan’s President Nursultan Nazarbayev has set a rather ambitious deadline of 1.5 year for the Astana gasification project to take effect, i.e. for the materialization of the $1.2bn Saryarka gas pipeline, an extension of the Beineu-Bozoi-Shymkent main gas pipeline from Kyzylorda region to Astana and from there on to Kakshetau and Petropavlovsk, into four distinct phases. At the moment, the level of centralized gas supply in Kazakhstan is 50%, covering nine western and southern regions. Kazakhstan’s domestic gas output has reached 52BCM/a, from only 8BCM/a produced right after the country’s independence. In 2017, 2,600 tons of Russian LNG was delivered to Astana and the poorly gasified Center and North of Kazakhstan, under a 2016 contract between Gazprom Export and Global Gas Regasification for LNG shipments from Russia to Kazakhstan by motor transport. Realization of the Astana gasification project will allow for the switching of 192 private boiler houses, 48 small communal boiler houses, 22,000 private residential houses and Astana’s CHPP-1 and CHPP-3 (hot-water boilers implemented in already existing infrastructure of Central Heat and Power Plants, CHPP) to natural gas, positively affecting the ecological condition in the capital. On the other hand, the inadequacy of financial resources could push back the project’s deadline, even though talks to attract support from the European Bank for Reconstruction and Development (EBRD) are underway.
European Parliament Votes Against Greens’ Motion to Reject the PCI List
A motion tabled by a group of Green MEPs to exclude major gas infrastructure projects from the European Commission’s list of projects of common interest (PCI), on the basis of their incompatibility with the EU’s commitments under the Paris Agreement, was largely voted down by the European Parliament on March 14. The Southern Gas Corridor (SGC) system of mega-pipelines (South Caucasus Pipeline: SCP, Trans Anatolian Pipeline: TANAP, Trans Adriatic Pipeline: TAP), together with the yet unrealized Trans Caspian Gas Pipeline (TCGP), can be found among the 173 priority energy projects which comprise the third version of the particular catalogue, published in November 2017.
According to the Greens’ rationale, only electricity and smart grid projects facilitating the clean energy transition should be eligible for EU funding, whereas gas pipelines and terminals would have to be deprived of their PCI status in the context of the fossil-fuel divestment movement. However, since the European Parliament is not allowed to position itself on individual projects of the PCI list and, consequently, reject or accept them, MEPs were required to decide on whether or not to force the Commission back to the drawing board to propose an entirely new list. As shown by the vote break-up, the center-right European People’s Party (EPP) overwhelmingly rejected the motion. A diverging sentiment was observed in the Social Democrat (S&D) MEPs due to their deep-rooted a priori ecological concerns. Still, it is worth mentioning that about a quarter of MEPs were supportive of the Greens’ effort, in a sign of the prevailing uncertainty within the Bloc with regard to the role of natural gas as a bridge-fuel to renewables in the context of the carbon-free internal energy market.
Given its overall importance in comparison with other projects on the list, derived from its size, cost and security-of-supply objectives, the SGC remains high on the EU’s diversification agenda, as proved by this latest voting result. This is also why single project segments have been recently receiving loan disbursements and financial support from the European institutions. In February, some EUR1.9M ($2.4M) were pumped into the TCGP study under Connecting Europe Facility (CEF). Subsequently, the European Investment Bank (EIB) approved loans of EUR1.5bn ($1.9bn) for TAP and EUR932M ($1.2bn) for TANAP. Therefore, despite the lack of consensus on the preferred way of switching to renewables (either immediately or gradually via the less dirty natural gas), or even on the most affordable renewable energy target for 2030, the SGC maintains its position as a key alternative to the predominant, but questionably reliable, Russian gas imports to the EU. Besides, as soon as the initial 16BCM/a network capacity (6BCM/a for the Turkish and 10BCM/a for the European markets through TAP) doubles, on the condition that more Azerbaijani, Turkmen or Iranian gas is secured, the SGC will satisfy the rudimentary goal of the European Commission as for the enhancement of the access of multiple gas producers to the EU and the development of more than one hub (Turkey, Greece, Bulgaria, Albania, Italy) that will collect the gas.
Central Asian Investment Activities in Kazakhstan and Uzbekistan
Kazakhstan’s KazTransGas will be giving the control of its subsidiary in Georgia to a local company called Georgian Industrial Group. Meanwhile, Kazakhstan will also receive $250 worth of investments from the Eurasian Bank for Reconstruction and Development (ERBD) in renewable projects. Overall, 52 facilities will be built and the project is aiming to receive international financial investments.
Finally, Uzbekistan has plans to export electricity to Afghanistan. In a recent foreign policy action, the Central Asian republic is already taking interest in Afghanistan in a mediation role. As part of its regional initiatives, Uzbek state is considering to improve trade relations as well. As part of the investment, the Asian Development Bank is also investing $70M in the project having $150M overall cost.