Caspian Energy Insight: June 23, 2017
Oil prices continued to decline the past week from $46.11 per barrel for Brent to $42.53, despite concerns regarding the Qatari crisis, with shale producers in the US increasing their level of production. In the past 4 years, OPEC’s oil revenues declined from $1.2 trillion to $446 billion, while giving some of the market share away. The last great fall in oil prices came after two shocks raised the prices dramatically (in 1973 and 1979). That decline in prices in the 1980s lasted around 20 years and played a major role in the collapse of the Soviet Union.
The current decline in prices has already translated into a crisis in Russia, following the annexation of Crimea, and currently, Saudi Arabia is also experiencing hardship with revenues declining from $332 billion in 2013 to $134 billion in 2016, while at the same time losing more than 20 percent of foreign reserves. The Saudis increased taxes and utility fees and are considering selling some of their shares in the state oil company, Aramco. Yet, it is still early for alarm bells since the kingdom has little to no debt with pricey assets that can create additional funds. However, the question is if the current government spending levels will be sustainable in the long term.
In other news, Turkey’s foreign minister has announced that he will travel to Kuwait after a short visit to Qatar as part of Ankara’s push to reach a diplomatic solution to the Gulf crisis. This comes after three fellow members of the Gulf Cooperation Council (Saudi Arabia, Bahrain and the UAE) have cut political and economic ties with Qatar, accusing them of aiding terrorist organizations. Kuwait has begun mediation efforts to de-escalate tensions and promote effective dialogue (Aljazeera.com).
Russia’s Gazprom and Austrian energy group OMV are now considering talks about Turkish Stream. If the two parties can reach an agreement, the project would likely boost the importance of OMV’s Baumgarten gas hub, which distributes around 57 billion cubic meters a year. The project would be an extension of the TurkStream pipeline, which Gazprom plans to finish by the end of 2019. These plans could pump Russian gas to Italy, which currently receives supplies from Baumgarten via the TAG and SOL pipelines (Hurriyetdailynews.com).
While Russia is trying to continue expanding its sphere of influence in Eastern Europe and the Middle East, US congressional leaders announced an amendment this past Wednesday that will allow the US president to impose sanctions on anyone who “makes an investment, or sells, leases, or provides to the Russian Federation… goods, services, technology, information, or support that could directly and significantly facilitate the maintenance or expansion of the construction, modernization, or repair of energy pipelines by the Russian Federation.” This comes as the United States continues to deal with Putin’s “meddling” and Iran.
Turkish Stream and Nordstream II
Last week we mentioned how Ukraine teamed up with Poland to develop a regional gas hub on the border between two countries to supply natural gas to the region that has a non-Russian origin. The aim has always been to alleviate EU’s dependence on Russian gas. The Third Energy Package was another institutional and legal solution for Russian dependence.
While all these discussions continue on how to respond to Russia, Turkish Steam makes headway and Russia’s energy minister wants to know the European Union’s official position regarding the Turkish Stream. The first pipeline will run from Russia to Turkey through the Black Sea. The second pipeline will send oil to Bulgaria where the South Stream was originally planned. Initially the pipeline was on track to hold 65 billion cubic meters per-year with a total of four pipelines. The current annual capacity is now on track for two pipelines of 15.57 bcm/y each.
The mandate for this decision will be announced in late August or early September. However, it will not be an easy decision for Europe. Russia is one of the biggest suppliers of European natural gas needs (around 1/3rd of annual supply). It also continues to invest in the European energy market through building NordStreamII and the Turkish Stream, attempting to make Russian gas the most competitive and reliable gas source for European needs.
Meanwhile, the EU’s views are not unitary at this point. On one side the Baltic states and Eastern European members suggest that NordStream II would give Russia even more than the one third share of the European oil trade that it already has. On the other hand, Germany believes that this would be a cheaper gas pipe for Europe. Nordic countries disapprove of the pipeline being placed in their territorial and economic waters. Also, this would take away revenues from not only Ukraine but also Ukraine’s neighboring EU member countries by bypassing Ukraine, which would leave the former Soviet republics without transit tax revenues. The European Commission’s Vice President of the Energy Union met with Russia’s Minister and Ukraine’s Deputy Minister of Energy in Kazakhstan to discuss the mandate for negotiations on NordStream II with Russia on June 11, 2017. The draft mandate will be presented on the 26th of June at the Energy Council in Luxembourg. The final mandate aims for completion by late August or early September.
As of right now, NordStream II is on track to be financed by OMV, Engie, Royal Dutch, Shell, Uniper, for a long term amount of $10.1B. NordStream II is estimated to hold 55 bcm and is planned for completion by 2018 (euractive.com, 2017).
Iran is reaching pre-sanction levels of oil production. Iran’s 2017’s first quarter of oil production was marked at 3.796M bpd, which was an increase from the prior quarter’s production of only 3. 741M bpd. Iran’s export of oil for last month was 1.1 M bpd. This number suggest that Iran is back to pre-section export levels. In light of the recent OPEC agreements, it will be essential for hedge fund managers and investors to follow this number.
In addition, Ali Kardor, the Managing Director of the National Iranian Oil Company, announced this past weekend that the NIOC will sign $15 billion of new oil contracts with international companies over the next two years. This comes in the wake of Iran’s commitment to rank “first to third among main energy players in the world.” He also announced that Iran will be host to the 16th International Gas Union Research Conference in 2020 (iranenergy).
The Energy Minister and former SOCAR head, Natig Aliyev, died this past weekend. He represented Azerbaijan in its negotiations with foreign companies over major energy contracts and took parts in talks with OPEC members on global oil production. Aliyev was a prominent figure in the Azerbaijani oil industry and will be remembered for his achievements (Hurriyetdailynews.com).
Kazakhstan & Georgia
Kazakhstan and Georgia’s Presidents discussed bilateral cooperation. In the past few years, Kazakhstan has become one of Georgia’s main investors and now the two countries are looking to improve their trade relations. The recent talks included discussion of how the two countries could continue to be transit states through the Black Sea and the Caspian. The use of the Batumi oil terminal is an ideal gate-way as well as the Caspian transit route through Baku (astanatimes.com, 2017).
Turkmenistan is in the process of cutting some of the inefficient energy subsidies from the domestic market. During a government meeting President Berdimuhamedov announced that the state benefit system – providing free electricity, gas and water—has become ineffective and he has instructed Deputy Prime Minister Hodjamammedov to prepare to end the program which has been in place since 1993.
The country is facing a serious economic crunch and is beholden to gas exports, almost all of which flow to China through a pipeline Beijing paid for. Russia and Iran have since turned away as customers. These subsidy plans are unpopular among the consumers and are also extremely inefficient in the long term. Thus, the removal of these subsidies could potentially make Turkmenistan better off. The cuts will lead to declines in consumption of electricity, natural gas, and water, enabling the state to export more resources to the world markets or to neighboring countries. This might have a J-curve effect on Turkmenistan’s economy. Therefore, despite the initial social and political costs, the long term benefits will make the country better off.