Caspian Energy Insight: September 27, 2017
Oil Prices Hit 59 Dollars
Since the dipping points below $46 in mid-June, oil prices have been increasing slowly but steadily. Within the past week, the pace has increased and the prices went briefly above $59 and settling just below in recent days. Along with the price of Brent oil, Azeri light price also passed the $60 threshold for the first time in months.
With these positive developments, OPEC is happy with the direction of the market, with both Iran and Saudi Arabia able to reach the target oil price for a positive budget balance. Since mid-2014, oil prices have consistently been low and only in recent months the market is starting to look promising for the producing countries. Overall global consumption has also increased, making things easier for oil producers. Oil consumption has increased 1.9M bpd in 2015 and another 1.3M bpd in 2016. The current consumption forecasts for 2017 is also promising for OPEC.
The price increase is happening despite the fact that Russia pumped 200K bpd more oil the first half of this year compared to the last. Russia’s pledge was to cut 300K bpd in November 2016 and looking at current production patterns the biggest partner of the production cut might not necessarily be following the pledge.
Greece: Snam-led consortium and Reganosa shortlisted for DESFA sale
Greek privatization agency (HRADF) qualified two finalists to proceed to the second phase of a tender for the sale of a 66% stake in state natural gas grid operator DESFA. An investment scheme consisting of Italy’s Snam (50%) and Spain’s Enagas, Belgium’s Fluxys and the Dutch Gasunie (16.6% each), as well as the Spanish company Regasificadora del Noroeste, are the two bidders eligible to submit binding offers, according to Friday’s decision by HRADF and Hellenic Petroleum. The shortlisted candidates will sign a non-disclosure agreement and, subsequently, will obtain access to the operator’s infrastructure (virtual data room) for their due diligence purposes. HRADF holds 31% out of the 66% stake on offer, while the remaining 35% is held by Hellenic Petroleum. Under its third bailout program, Greece is obliged to conclude the privatization by the end of 2017.
The consortium of the four national gas grid operators, three of whom (Snam, Enagas, Fluxys) are also shareholders in TAP AG, is at the moment considered the undeniable frontrunner. It should be noted that Snam had teamed up with the Azerbaijani SOCAR during a previous tender procedure, while the Dutch state-owned entity Gasunie was equally interested in joining the scheme at the time. Presently, the Snam/Enagas/Fluxys/Gasunie consortium’s prospective success in securing the 66% stake could pave the way for DESFA to undertake operation and maintenance activities on TAP pipeline. That is to say that, instead of TAP AG establishing from scratch an ad hoc pipeline operator on the Greek ground, the shareholders could assign this task to DESFA, expanding its domain beyond regulated activities (operation of the national gas distribution network and the Revithoussa LNG Terminal). Such a scenario translates into distinctive benefits for both sides: TAP shareholders will save money by exerting majority control over an already existing operating company, whereas DESFA will significantly increase its income and extend its non-regulated activities. As Fluxys CEO recently pointed out on the Belgian daily Les Echos, the three companies’ participation in TAP pipeline project might give them an advantage over competitors in the DESFA tender.
Meanwhile, the Galicia-based Regasificadora del Noroeste, the so-called outsider of the competition, operates its own LNG import terminal in Mugardos since 2007, in addition to a 130km-long gas distribution network in northwestern Spain. Furthermore, from this year onward, it operates a smaller LNG import terminal in Malta.
Initially, expressions of interest were submitted by four more investment schemes: Macquarie Infrastructure and Real Assets (UK); a consortium composed of Romanian state-owned Transgaz and France’s GRTgaz; Integrated Utility Services (USA); PowerGlobe LLC (Qatar). The Transgaz-GRTgaz joint venture was numbered among the favorites to win the tender. However, it was excluded from going forward for final bidding because the GRTgaz doesn’t fulfill ownership unbundling certification requirements and, therefore, its qualification for the next phase of the process would constitute a violation of the Greek law 4001/2011 on ownership unbundling of transmission system operators, based on the European Commission’s Third Energy Package directives. The French natural gas distribution company Engie owns a 75% stake in GRTgaz.
Interestingly enough, the newly-launched tender resulted in the attraction of an overall number of six candidates, while antecedent privatization efforts had failed to gather an equivalent array of investors. This isn’t only due to Greece’s undisputed strategic position as one of EU’s energy gates, be it for Azerbaijani (via TAP), Russian (via Turk Stream and ITGI), Iranian or even Cypriot gas, but it largely has to do with the operator’s notable profitability, as well. In particular, DESFA announced a total of 206MM euros ($243MM) in annual earnings for FY 2016, signifying a 32MM euro rise ($38MM) in comparison to 2015. Nevertheless, there are still regulatory issues held in abeyance. For instance, the shortlisted bidders have put pressure on Greece’s Regulatory Authority for Energy to leave DESFA tariff levels and weighted average cost of capital unchanged until 2022. In addition, they’ve asked for further clarification of terms with regard to a 350MM euro ($413MM) recoverable amount (for past investments) that is to be demanded from DESFA through tariff charges over a 20-year period.
It should be reminded that, in 2013, during a previous call for expressions of interest organized by the Greek government, Sintez, a Russian private firm rumored to be indirectly controlled by Gazprom, seemed to have secured the acquisition of DESFA’s domestic gas pipelines with a $1.9bn bid, an amount five times higher than the estimated objective value of the network. However, the deal collapsed a week before the announcement of the Final Investment Decision on TAP pipeline project by the BP-led Shah Deniz consortium, as the European Commission intervened in calling for the mandatory application of its Third Energy Package directives on energy market liberalization. Thus, Gazprom was deterred from operating the Greek gas grid as a monopoly.
Soon after Sintez and another Greek-Czech group dropped out, a consortium of SOCAR (49%) and Snam (17%) proposed a 400 MM euro offer ($472MM) for the acquisition of the same 66% stake in DESFA. SOCAR had at the time been advised by the Commission to form a consortium with a European fully unbundled transmission system operator so that the Azerbaijani state-owned company would be able to abide by the Bloc’s third-party access rules. In November 2016, negotiations once again floundered, as the Greek government decided to legislate for a rise in DESFA’s gas tariffs by a lower amount than expected by SOCAR. Consequently, the Azerbaijani side declared their intention to purchase the share at 260MM euros ($307MM), implying the new legislative measures might reduce their chances of achieving profitability. Today, HRADF hopes that the new tender might match, or even surpass, the 400MM euro price that SOCAR had been offering, but this will mostly depend on the companies’ current commercial appetite, in combination with the state’s long-term commitment to regulatory reforms.
Azerbaijan: TANAP construction completed by 82%, SCPX by 90% -SOCAR President
Construction of the Trans-Anatolian Natural Gas Pipeline (TANAP) has been completed by 82%, while its section to the Turkish city of Eskisehir will have been finished by mid-2018, Rovnag Abdullayev, president of Azerbaijan’s state oil company SOCAR, affirmed on September 20, in Baku. Furthermore, he stated that construction works on the expansion project of the South Caucasus Pipeline have moved forward by over 90%.
The SOCAR-operated, 1.850km-long TANAP comprises the central branch of the Southern Gas Corridor route that will eventually transport gas from Azerbaijan’s Shah Deniz field via Georgia to the western Turkey border by 2018. Following the completion of the Trans-Adriatic Pipeline (TAP) around 2020, 10 BCM of TANAP’s 16 BCM initial capacity will be pumped to Europe via Greece, Albania and Italy. The remaining 6BCM will be supplied to the Turkish market. The pipeline’s capacity is expected to increase up to 23-31BCM/y by 2023-2026 with hopes of receiving Turkmen, Kazakh, Iraqi or Iranian resources in due course. TANAP stakeholders include SOCAR (58%), Botas (30%) and BP (12%). Its overall cost is estimated at $8.5bn.
The South-Caucasus Pipeline Expansion (SCPX) will hook up with TANAP at the Eastern Turkey border. It is being built by BP since 2013 across Georgia in order for the SCP’s capacity to increase up to 22BCM/Y by 2018, as part of the Shah Deniz Stage 2 development to export an additional 16BCM/y of gas to the Georgia-Turkey border.
Russia & Turkey: Turkey ratifies intergovernmental agreement with Greece on ITGI
On September 19, the Turkish cabinet formally ratified an intergovernmental agreement with Greece allowing for the development of the Interconnector Turkey-Greece-Italy pipeline project. The approved gas deal, which has now been released in the country’s official government gazette, brings at the forefront yet another forgotten pipeline route, apart from Turkish Stream, for the purposes of the transportation of Russian natural gas in the EU through the Southern Gas Corridor. Also, it indicates Turkey’s willingness to further enhance energy cooperation with Russia following progress on Turk Stream sub-sea construction.
The ITGI had started out as a proposed natural gas pipeline agreed to by Turkey’s Botas and Greece’s DEPA back in 2003. In 2005, the two state energy companies were joined by Italy, who had expressed interest in the extension of the pipeline across the Adriatic Sea to its southern part. Construction on the Turkey-Greece connection was completed in December 2007, but the extension to Italy has not yet been built.
Even though the Interconnector had been granted the status of a Project of Common Interest for the realization of the Fourth Gas Corridor by the European Commission back in 2009, it was later abandoned, just like Nabucco pipeline, following the Shah Deniz FID on TAP. However, in 2016, the CEOs of IGI Poseidon, a joint venture between DEPA (50%) and the Italian Edison (50%), signed a MoU with Gazprom in relation to gas supplies from Russia across the Black sea through third countries to Greece and from Greece to Italy. Therefore, the revival of the ITGI pipeline project at this stage reflects the parties’ commitment to creating a southern gas supply route in order to respond to the mounting European demand. For the time being, Gazprom hasn’t excluded the possibility to utilize the extra 10BCM of TAP, as soon as the pipeline’s capacity doubles after 2020, for delivering its gas to Europe via either Turkish Stream or ITGI, taking advantage of the fact that the second half of TAP is open-access.
Northern Iraq and its Global Repercussions
The independence referendum took place in Northern Iraq despite protests from the Bagdat government, Iran, Turkey, and the west. The referendum received overwhelming support and will have implications on regional politics, energy projects, and possibly global oil prices depending on the severity of responses it will receive from the neighboring countries.
There are multiple countries involved in developments in the region. While Russia’s Rosneft agreed to build a 30bcm capacity gas pipeline to the region, people also celebrated the result of the referendum with Israeli flags. This created additional tensions in Bagdat, Tehran, and Ankara. Turkish president Erdogan threatened to freeze the normalization process with Israel unless it stops supporting Kurdish independence efforts in the region. Although, this referendum itself cannot affect the global oil prices since Northern Iraqi oil production has a minuscule part in global oil supply, an increase in tension between Israel and other countries in the Middle East due to the referendum and independence movements might have a larger, global impact. Current production levels show that Northern Iraqi field only represents 15 percent of Iraqi oil output and less than 1 percent of global oil supply.
On Sunday, Iraqi Prime Minister Haider al-Abadi urged the foreign countries to stop importing crude oil from the autonomous region. However, these kinds of restrictions do not usually work when there is oil to be sold by a producer and oil to be bought by a potential consumer. The reaction from Turkey, the primary transit country for Northern Iraq’s oil, will be decisive in this case.