Caspian Energy Insight: October 27, 2017
The price of oil within the past week has stagnated around the same levels within the past week. After reaching the highest levels at around $59 in September, Brent oil came close to these levels at around $58 last week and continues to linger at this level this week. Accordingly, Azeri light oil, which is consistently more expensive, compared to Brent, is also trading close to $59 this week.
OPEC will have its next meeting by the end of November next month and the current discussion is revolving around how to proceed with current output cut. Last time the agreement took place was in December 2016 to cut production levels and the organization was relatively successful in achieving production cuts and increasing oil prices from lower $50 levels to higher $50s.
Mohammed Barkindo, an executive at OPEC, also hinted the organization would likely renew its output-cutting agreement early November during the next production meeting for the 14-country organization at the annual Oil & Money conference in London. The comments came after Putin’s willingness to extend the deal “at least until the end of 2018” during Saudi Arabian King Salman’s visit to Moscow earlier this month. Currently, the agreement is going to expire in March 2018 unless it is renewed in the November summit. Still, Russian Energy Minister Alexander Novak said if the output pact is not extended Russia would increase oil output. Therefore, it is imperative for oil producers to reach an extension agreement on the summit.
In recent years, several oil-producing countries show the tendency of moving into petrochemical industries and these new projects tend to be the news in the weekly reports CPC covers. However, for the long term, it is also important to be aware of potential excessive supply for the long term. Will there be too much supply in the petrochemical industry in the future, dumping the prices down?
Natural Gas, Europe, Ukraine, and Others
Natural gas prices have been increasing in Europe within the past year. In August 2017 alone, Germans paid $188 per tcm which is four percent higher than July and 16 percent higher than August 2016! Overall, the prices in the first eight months of 2017 are 19.5 percent higher than the year before. Germany paid 3.8 billion Euros more in the first eight months of this year compared to last. While increasing crude oil prices compared to the lows of 2015 are translating into natural gas prices this year and making natural gas exporters economically better off, it is also boosting the possibility of LNG exports into the EU. Recent reports show that only a German-Russian agreement or any others (for the Turkish Stream) might create conflicting legal issues and therefore a general agreement with the EU might be needed.
Meanwhile, Ukraine’s national natural gas company bought 17.5 bcm natural gas in the first nine months of the year, which is 3.1 bcm higher compared to the year before. About 7.1 bcm of this came from European countries while the rest is a result domestic production. Overall, Ukraine imported 41 percent of its natural gas needs while none of this came from Russia in 2017, just like 2016. This shows how Ukraine is getting for the years when Russia is aiming to bypass Ukraine completely. While Ukraine is getting ready for future bypass, Russia still needs to get final approval from the EU for Nordstream II and Turkish Stream.
In Asia too, the consumption forecasts are positive. Both in India and China, the estimations show a positive trend for both countries although the prices -in India especially- are increasing. According to analysts at Sanford C. Bernstein & Co., natural gas will enter a “golden age” and the consumption will grow from 206bcm to 300bcm by 2020.
Finally, IEA’s “Global Gas Security Review” is out. The report focuses on natural gas supply security at a time when we see cold spells in Europe, hurricanes in the United States, and diplomatic tensions in the Middle East (including Iraq and Qatar).
Azerbaijan: Aliyev, Radev Vow Close Energy Cooperation
Azerbaijan’s President Ilham Aliyev received his Bulgarian counterpart Rumen Radev in Baku. The two leaders pledged to strengthen cooperation in the trade and energy sectors during a joint press conference, following their meeting. According to the Bulgarian leader, Azerbaijan can actively contribute to the gasification of Bulgaria’s household sector and the development of the national filling station network, thanks to its high technological capabilities.
‘’The energy sphere will unite us for many years, and we reaffirm our support for the implementation of the Southern Gas Corridor project,’’ Mr. Radev said, stressing Azerbaijan’s crucial role in the implementation of the EU priority energy project. ‘’We have reaffirmed mutual interest in the development of transport and gas corridors between Asia and Europe. Our countries occupy a strategic position in the region, and we must take full advantage of this position,’’, Mr. Radev added. ‘’We are satisfied with the level of cooperation in the political and economic fields. However, I’m sure that our potential in the economic sphere is higher than it is today,’’ Mr. Aliyev stated from its part.
Bulgaria is going to receive around 3BCM/a of Shah Deniz gas via the planned Interconnector Greece-Bulgaria (IGB), once the pipeline is commissioned, after 2020. IGB constitutes one of the two extension links of the Trans Adriatic Pipeline towards the Balkans (the other being the Albania-Montenegro Ionian Adriatic Pipeline).
Iran, the US Sanctions, and the Caspian
The US President Donald Trump made an announcement that he will be asking Congress to revisit the Iran Nuclear Deal. Previously, the deal was enacted by President Obama through an executive order, which can be undone by the following president. An executive order does not require the consent of Congress to pass and Trump repetitively called the agreement “very bad” for the United States. While independent reports confirm Iran’s cooperation with the IAEA officers on the field, the US issued its concerns about Iran’s compliance with the agreement. Since Iran is trying to increase its oil supply to the world markets, it is important to keep the agreement floating to receive international investors to extract more oil and natural gas. Current estimates show that Iran needs significant improvements in its facilities to increase its oil and gas supply.
Meanwhile, in a show of improving trade relations across the Caspian, Iran’s Minister of Petroleum Bijan Zanganeh showed the country’s interest in selling its energy resources to Uzbekistan. Current plans show that Iran could start exporting its oil to Uzbekistan through the existing rail connection through their Central Asian neighbors.
The Caspian Sea Legal Status: Draft Convention Mostly Agreed Upon by the Littoral States
On October 18, delegations from Azerbaijan, Iran, Kazakhstan and Russia attended an international conference titled ‘’Peace, Stability and International Cooperation in the Caspian Region’’, that was held in the Turkmen capital of Ashgabat. According to an announcement issued by the Turkmen Ministry of Foreign Affairs, the littoral states’ representatives outlined their national positions on joint economic and environmental activities and possible ways of solving common problems, as well as on the establishment of scientific marine centers and the development of a national marine strategy.
At this stage of the multilateral deliberations, it seems that most provisions of the future convention on the status of the Caspian Sea have already been agreed upon, the special envoy of the president on delimitation and demarcation of the border with neighboring CIS member states, Igor Bratchikov, admitted. “It is well known that ‘only an insurance policy gives a full guarantee’. But seriously speaking, there are all chances and all conditions for a successful outcome of the negotiation process on the status of the Caspian next year,” Mr. Bratchikov was quoted as saying.
Back in June 2017, Ashgabat had hosted the 49th meeting of a special working group on the development of a Convention on the legal status of the Caspian Sea at the level of deputy foreign Ministers of the Caspian littoral states.
At the bottom of the dispute lies the question as to whether or not the Caspian should be dealt with as a lake or a sea. In recent years, there has been a considerable legal debate on the applicability of the United Nations Convention on the Law of the Sea (UNCLOS) to the case of the Caspian. In spite of the signing of a series of bilateral and trilateral pacts on the delimitation and use of the Caspian seabed, coastal countries have not yet found common ground to settle the issue. For instance, Russia, Azerbaijan and Kazakhstan all agree on the principle and method of dividing seabed rights along with a modified median line. On the other hand, Iran strongly opposes the median line principle, claiming the Caspian is a lake and demanding that it be equally divided among the littoral states, an option that would increase its current share of the sea from 14% to 20%. As for Turkmenistan, it also appears to be in favor of a five-sector division approach, but with the use of an unorthodox (by international law standards) demarcation methodology of its own.
The long-unsettled status of the Caspian Sea has hindered progress on the implementation of the Trans-Caspian gas pipeline (TCP), a project considered optimal for the delivery of Turkmen, and possibly Kazakh, energy resources to the European market. Azerbaijan, Kazakhstan and Turkmenistan, supported by the European Union, argue that they should be able to freely develop energy extraction and transportation projects in their respective sectors even before the all-inclusive Convention on legal status is signed. However, Russia and Iran deem the construction of the TCP illegal prior to the ratification of the Convention.