Caspian Energy Insight: October 11, 2017
The price surge of oil within the past month seems to have cooled down. After reaching the highest levels at around $59 in September, brent oil declined since then and is currently just above $56. Accordingly, Azeri light oil, which is consistently more expensive, compared to Brent, is trading right around $57 this week.
Oil markets are historically volatile and this did not change within the past two decades, therefore it is not very easy to predict what will happen to the prices next year. However, it is safe to say that within the past year, the industry was able to get out of the lowest points of 2015 without returning back.
For next year, it will be essentially important to follow the OPEC production agreement, the behavior of the US shale producers, and non-OPEC producers’ commitment to production cuts. Along with these ordinary market dynamics, a potential deepening of the conflict in Qatar, instability in Northern Iraq or a potential regime change in Venezuela might shake the supply side of the equation for oil prices.
Meanwhile, as part of Saudi Arabia’s Vision 2030, the plan to list Saudi Aramco in 2018 is on track, senior Saudi officials announced in Moscow on Thursday. Saudi Arabia is also signing investment agreements with Russia. Headed by Saudi Crown Prince Mohammad bin Salman, the Middle Eastern nation is attempting to diversify its economy and cut its reliance on oil industry and the IPO of Saudi Aramco is part of the strategy. The current plan is to raise as much as $100 billion from the listing 5 percent of the company according to Saudi estimates whereas investors report that the company will be valued around $1-$1.5billion instead.
Turkmenistan: TAPI Project Halted Due to Low Gas Prices
The $10bn Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline project has been delayed due to the current decline in natural gas prices, Afghan ambassador to Turkmenistan Mirwais Nab said. The Afghan envoy reportedly argued that companies in charge of developing the Turkmen Galkynysh field, the second largest natural gas field in the world after South Pars, that is planned to provide supplies for both TAPI and Trans Caspian Pipeline, namely Türkmengaz, CNPC, Hyundai Engineering and Petrofac, failed to predict the recent plunge in natural gas prices. Simultaneous use of fracking and horizontal drilling has gradually led to a sharp increase in US shale gas output. As a result, in 2016, natural gas prices plummeted to their lowest level in 20 years and are projected to remain locked in at $3/MMBtu, as US production is estimated to keep growing by 1-2% per year in the decades to come, according to EIA data.
The 1.814km TAPI pipeline will cover 214km before reaching the Turkmen-Afghan border. In Afghanistan, it will traverse 774km through the provinces of Herat, Farah, Helmand, Nimroz and Kandahar. The 826km-long route within Pakistan will pass near Quetta, the provincial capital of Baluchistan, and Multan in the province of Punjab, finally reaching India at Fazilka. The pipeline was first launched in December 2015 and is expected to carry 33BCM. Mr. Nab emphasized that construction on Turkmen territory will continue and the pipeline will have been laid till the border with Afghanistan by July 2018, in line with the existing timetable.
Turkmenistan’s contribution to the rising needs for natural gas supplies in India and Pakistan predicted to expand by a further 50% until 2030, is seen as a means to escape from its nearly total export dependence on China, following Russia’s 2016 decision to resume imports of Turkmen gas. Beijing has already completed the construction of Central Asia-China gas pipeline from Turkmenistan and has scheduled for construction a second pipeline, the so-called line D through Uzbekistan, Tajikistan and Kyrgyzstan. By 2015, Turkmen gas exports to China skyrocketed to nearly 80%, compared to an average of just 1% in 2009, while Turkey, Turkmenistan’s second largest partner is attributed only 5% of total exports. Ashgabat expects exports to China to grow to over 60BCM by 2020, from about 30BCM today. Therefore, implementation of TAPI project is considered vital for the achievement of the desirable eastward diversification objective by Ashgabat, as well as for the promotion of deeper regional integration.
Iran: Tehran to Pump More Gas to Turkey – Rouhani
Iran intends to boost natural gas exports to Turkey in the context of a national plan to strengthen economic bonds with a neighboring country, Iranian President Hassan Rouhani announced during a joint news conference with his Turkish counterpart Recep Tayyip Erdogan in Tehran, state TV reported October 4. ‘’We agreed to widen our economic ties. Turkey will import more gas from Iran. Meetings will be held next week to discuss the details,’’ President Rouhani said after his meeting with Erdogan.
Iran has repeatedly expressed willingness to transport its natural gas to the EU through TANAP. The finalization of an LNG plant, whose construction has been suspended since the mid 2000’s due to sanctions imposed by the P5+1 group over Iran’s nuclear program, or the implementation of a proposed $6bn pipeline project from South Pars field to the Turkish border pose as essential preconditions for provoking the sought-after wave of Iranian gas towards the Turkish market. In the past, Iran has even proposed to serve as a transit corridor for Azeri and Turkmen gas deliveries to Turkey, mainly due to its opposition to the realization of a Trans Caspian link. However, the lack of an existing pipeline that would cross the country in a northeast (Turkmenistan)-northwest (Turkey) direction has undercut such a scenario. Trying to restore subtle internal balances in a fragile post-sanctions regime, Iran now arrogates to itself a greater role in the Southern Gas Corridor, this time by means of domestic output in the aftermath of French Total’s commitment to developing Phase 11 of the giant South Pars gas field.
Turkey: Environment Ministry Approves EIA For Turk Stream’s Offshore Segment
Turkey’s Ministry of Environment and Urban Planning announced final approval of the Environmental Impact Assessment (EIA) for the offshore segment of the Turkish Stream pipeline. The draft EIA was drawn up by ELC Group Inc. on behalf of South Stream Transport B.V., the company responsible for the completion of Turkish Stream, and made public on June 21 in order to be amended by the Review and Evaluation Commission (REC). The document comprises information on potential environmental and social impact of the offshore section of the pipeline, entailing recommendations for the mitigation of possible adverse results and the enhancement of the beneficial ones.
Turkish Stream, a pipeline that replaced South Stream back in 2014 because of the negative European view towards the project, as it was believed to undermine diversification of gas supplies, and to reinforce Gazprom’s market dominance, consists of two undersea lines along the Black Sea with an export capacity of 15.75BCM each. The two links basically serve to replace gas coming from Ukraine, Moldova, Bulgaria and Romania to Turkey and from there onto to the EU territory via the Turkish-Greek border. The quick progress so far made with the construction of the Gazprom-financed pipeline (170km of pipe already laid along the Black Sea’s seabed) proves Turkey’s remarkable cooperative approach regarding the implementation of a southern supply corridor for Russian gas.
Kazakhstan: Gazprom, CNPC, Kazmunaygas Initiate Cooperation in NGV Market
On October 5, in the course of the 7th St. Petersburg International Gas Forum, Russian energy major Gazprom, China National Petroleum Corporation (CNPC), represented by PetroChina vice president, and Kazakhstan’s state-owned oil and gas company KazMunayGas inked a Memorandum of Understanding setting the framework for a long-term strategic cooperation in natural gas vehicle (NGV) market, particularly via the development of the indispensable natural gas filling infrastructure on the Europe-China International Transport Corridor. According to the press release issued by Gazprom, the document provides for, inter alia, an assessment of the potential number of gas-powered cargo vehicles and the amount of natural gas that could be used for refueling vehicles at the Russian, Kazakh and Chinese sections of the route up until 2030. The performed analysis is to serve as the basis for the creation of a tripartite roadmap with the help of which natural gas filling network will be developed along the aforementioned corridor.
Following the realization, back in 2009, of a 50-50 joint venture between CNPC and KazMunayGas, a 2.228km-long oil pipeline stretching from the port of Atyrau along the Caspian coast to Alashankou, in China’s northwest Xinjiang region, the two countries have been kept steadily interested in extending energy collaboration on new infrastructure projects, as shown by this latest agreement. Having been described by the Kazakh president Nursultan Nazarbayev as the ‘construction of the century’, the emerging Europe-Western China Transport Corridor constitutes one of the potential routes developed under China’s Belt and Road Initiative. The EWC ITC aims to link the Chinese port of Lianyungang, in the Yellow Sea, with the port of St. Petersburg, in the Baltic Sea. An alternative Belt and Road corridor between the EU and China passes through Georgia, Azerbaijan and Kazakhstan, avoiding Russia (Piraeus to Khorgos corridor). In both cases, Kazakhstan has good chances of rendering from a landlocked country into a transcontinental energy and logistics hub of the wider Eurasian space. Besides, as stated on October 4 by Luc Devigne, deputy managing director for Europe and Central Asia in the European External Action Service (EEAS), during a conference on EU-Kazakhstan relations, Astana is the ‘living proof’ that it could be possible for Central Asian countries to maintain good relations both with the EU and Russia.
Azerbaijan: Energy Investments and Conflicts
Azerbaijan’s President Ilham Aliyev called the extension of the Contract of the Century (COC) a historic development with better terms than before for SOCAR. The share of the state oil company will increase from 11.6 to 25 percent, and the share of Azerbaijan’s profit oil will be 75 percent. The president also gave the latest completion rates for Southern Gas Corridor. “The implementation of the Shah Deniz-2 project has been completed by almost 96 percent. The South Caucasus Pipeline, envisaging the transportation of Azerbaijani natural gas to Georgia, is 98 percent complete, the TANAP project is 82 percent and the TAP project is 53 percent complete.”
The development of the SGC is essential for both Azerbaijan’s economy and European countries’ energy supply security. The current official position of Azerbaijan and the EU is to improve the energy trade between the Caspian and Europe in the upcoming years. Along with this investment, the transit countries are also benefiting from foreign direct investment. For instance, out of this grand project, Albania received more than 800M Euros so far and this number is expected to reach $1.5 billion upon completion of the project.
The biggest beneficiary transit country so far is Turkey. The country received more than $15.75 billion energy investments within the past 10 years, along with $130 billion in other sectors. Of this investment, SOCAR singlehandedly is responsible for $12.6 billion since 2008. Along with the investments for the SGC, SOCAR acquired PETKIM and started to build a refinery on the Aegean coast, called STAR.
Iran & the Caspian
Iran signed two agreements with Russia’s Lukoil to look for hydrocarbon reserves in the southern parts of the Caspian Sea. The agreement comes at a time when there are still significant disagreements between littoral states regarding the legal status of the Caspian. Iran has already discovered an oil field, Sardar-e Jangal, in the southern parts of the Caspian Sea which contains an estimated 1.4 trillion cubic meters of natural gas and some 500 million barrels of recoverable crude. Experts believe it could become Iran’s first major oil/gas field development project in the Caspian Sea, as the country has already made progress in studying the field’s geological structures and its reserves.
Turkmenistan and Russia
The presidents of Russia and Turkmenistan signed a strategic partnership agreement in a show of cooperation between two countries whose ties are sometimes clouded by disputes. In an official visit for the first time in five years, Vladimir Putin and Gurbanguly Berdymukhammedov signed a rather symbolic deal during a one-day visit by Putin to Ashgabat at the beginning of October.
Putin mentioned the decline of trade volume between the two countries in the past and stated his hope to improve in the years ahead. Following pricing disputes and Russia’s intention to sell and consume domestic natural gas in recent years, Turkmenistan’s natural gas exports to their Post-Soviet fellows have declined. Since then, Turkmens have been looking for alternatives to Russia, China being the biggest alternative in recent years, as well as consuming some of the energy production domestically in the petrochemicals industry.
During the visit, Berdymukhammedov announced Turkmenistan’s readiness for cooperation with Russia once again: “I would like to mention that we respect and understand Russia’s interests in Central Asia. We here are always ready for the continuation of our close and systemic cooperation that is a stabilizing element for the region,” he said. The president also agreed with Russia’s involvement in Afghanistan to stabilize the region.
Turkey Nuclear Energy
Current news and reports from the region show that Akkuyu, Turkey’s first nuclear power plant, will only see new reactor construction activity in 2018. Contrary with the stalling nuclear station activity, Turkey’s Minister of Energy and Natural Resources, Berat Albayrak, announced that construction of TANAP will be completed earlier than planned. The minister also noted the initiation of pipe laying for 1261-inch pipes through the Marmara Sea. The length of TANAP’s underwater section is 19 kilometers.
TANAP’s construction is completed by 82 percent. The length of TANAP is 1,850 kilometers with an initial capacity of 16 billion cubic meters of gas. Around six billion cubic meters of this gas is meant to be delivered to Turkey, with the remaining volume to be supplied to Europe. The project’s total cost is estimated at $8.5 billion.