The government failed to prevent Holland disease (extension)

We have never seen such an open struggle for gas export to Europe as in the pas months. For instance, in the past the officials spoke about competitiveness of Trans-Anadolu  (TANAP) and trans-Adriatic gas pipelines (TAP) and the Russian South Stream unwillingly and almost veiled. Very often this issue has been even denied by the interested sides. But now it is absolutely obvious that the problem exists at least in the present time.

The relationships between the customers, transit countries and suppliers of gas have never been simple. All three subjects of the gas policy try to choose the most advantageous position. Europe tries to achieve not only political coupling with the post-Soviet space, but also growth of competition at the gas market to finally achieve price reduction. On the contrary, the countries-suppliers would like to have high gas prices, reliable markets and outlet to such markets. In the past the transit countries tend to create gas hubs to get an equal voice with the suppliers and customers.  Right now the relationships have reached a peak. Having met rebuff of the EU  in the  South Stream gas pipeline construction, Russia tries to implement this project at any cost, in particular, by tempting Turkey with the possibility to become the biggest gas hub in Europe. Now the entire gas will be accumulated on the western border of Turkey and it will have to conduct talks with the countries-consumers. After refusal of some European countries to build the project, the South Stream has been renamed into the Turkish Stream. In the same way Gasprom tempts small Greece, which is in foreign debt.

Now few people remember that this big game started from Russia’s attempt to exclude Ukraine from its gas transit. The military conflict on the east of Ukraine has aggravated situation even more. Even reverse gas deliveries for Ukraine started from the Eastern Europe. Europe wanted to punish Russia for the gas blackmail, for its refusal to obey the European Union (EU) Third Energy Package, which it very often resorts. Gas deliveries from Azerbaijan are extremely import for Europe, even if the volume of future gas export from Azerbaijan is incomparable with Russia’s possibilities. This opens the way to other gas sources in the region, except Russia.

Although Gasprom occupies approximately 30% of the European gas market, both the European countries and the US do not like Russia’s attempt to alienate the EU member-states. This could be seen on the example of Greece. In Macedonia these attempts have almost led to the civil war.

It seemed till recently that hardly anything could prevent implementation of TANAP and TAP projects. Azerbaijan has enlisted the support of Europe. The contracts for gas pumping from the Shah Deniz fields are ready. In May 2015 Italian Premier approved beginning of construction of the Italian TAP section. The support has been received on many international sites. Last time this has been mentioned at the Eastern Partnership summit in Riga. This also could be seen from the preferences that Azerbaijan receives. Early this month it was announced that the first 10 billion cub.m. of Azerbaijani gas export to Europe will not fall under the EU Third Energy Package. SOCAR must answer  several questions concerning privatization of Greek gas distribution company DESFA, after which EU will make a decision on compliance or lack of compliance to the European market rules.

Europe’s intention to implement the Southern Gas Corridor seems obvious. Many expectations are connected with the Turkmen and Iranian gas. And the last month has introduced serious corrections into this process. At the reception devoted to the anniversary of the country’s independence on May 27, 2015, President Ilham Aliyev said that “artificial obstacles” are put for the project.  He has accused neither Russia, nor Greece, which is the first country on the TAP route. Russia is very aggressive in the current gas game. It has started construction of the offshore section of the future gas pipeline, not expecting of the contract with Turkey and tries to be the first country on the south of Europe. In other words everything has gotten mixed up, but President’s reproaches were first of all addressed to the EY. President Aliyev also said that in case of problems with TAP, Azerbaijan will sell part  of gas to Turkey or find other sources of gas deliveries.

It seems that against the background of the current problems SOCAR could reduce its activity. But one should understand that this is impossible, because the entire economy is oriented to export of hydrocarbons. The works on the Shah Deniz Phase 2 project are in full swing. $5 billion has been already spent for its implementation during the first several months. TANAP construction has started in Turkey.

One can notice some feverish activity of the State Oil Company of Azerbaijan (SOCAR). It is connected with the fact that despite slump of oil prices, one should preserve profitability of the company. Oil extraction on Azeri-Chirag-Guneshli (ACG) has stabilized. But SOCAR tries to compensate reduction of oil production by growth of oil products export (+47%).

Switching to predominant gas production has gradually taken in hand. According to SOCAR administration since the end of 2006 till mid-April 2015 61 billion cum. of gas and 16 million tons of condensate has been extracted from the Shah Deniz offshore gas condensate field. But 46% of this gas was used for the local economy. Gas production is becoming SOCAR’s priority. It is not accidental that by the early 2017 SOCAR tried to cover the entire country with the network of gas filling stations. The company hopes to increase share of liquefied gas in the retail trade of oil products up to 30-35%. This is cheaper and environmentally cleaner, than consumption of petrol and the first gas station has been already opened.

We have already written that SOCAR has decided to become a part of the economy diversification on the basis of hydrocarbon resources. For this reason construction of methanol or carbamide plant has started. But it became clear that the plant does not receive sufficient volume of gas (its daily demand in gas is 650 million cub.m.) and cannot increase production. Either SOCAR really  has gas shortage, or it would like to increase gas prices to have a free surplus for export.

The dynamics of oil prices constantly introduces corrections into the government’s plans. In particular, in quarter 1, 2015 assets of the State Oil Fund of Azerbaijan (SOFAZ) decreased from $37,104,100 to $34,930,500 (-5.86% against early 2015).

Last month the oil prices fluctuated in the range between $63.00 and $65.00. However,  biggest Russian oilman Vagit Alekperov has clarified this issue. There are no doubts that oil is a very politicized sector of economy. However, LUKoil President said that slump of oil prices (they dropped by almost 50% against last year) has to do exceptionally with the economic and technological problems of the field. Alekperov is confident that in mid-term average oil price will be $75.00 per barrel and at its next session OPEC will reduce the extraction quotas. But such expectations have the reverse side. Rise in oil prices will cause growth of shale gas production and the prices could go down again. Iran constantly excites the market with its statements that as soon as the sanctions are lifted, it could increase production up to 5.7 million barrels a day.

The energy sector demands more weighted decisions. In the countries with high corruption level, construction of energy objects becomes more advantageous, than production quality products at low cost price. The corruption margin is rather high here. It could be the fact that when the period of stable operation comes, then a lot of local shortages are revealed. The talks about low profitability of electric energy are not stopping. Having isolated Azerishig into a separate company, the government has decided to solve several tasks at once. It has partially satisfied demands of the European Energy Charter. It has also defines transportation of electric energy as a separate important goal of the energy sector, which in the future could open access for the private manufacturers, at least in the alternative power. Finally, this decision has aimed Azerenerji to generation and solution of the problems related to quality and cost of the generated electric energy.

Start: http://contact.az/docs/2015/Economics&Finance/060600118496en.htm#.VXmfVvntmkp

http://contact.az/docs/2015/Economics&Finance/061000118884en.htm#.VXmey_ntmko

to be continued