The prices at the world oil markets are in favor of SOCAR

The prices at the world oil markets are in favor of plans of State Oil Company of Azerbaijan (SOCAR). During five months in 2012 average oil price was slightly higher than $118 per barrel. This is a good price for budget of Azerbaijan, which is based on the oil price of $100 per barrel. If situation remains stable in European economy, the government will be able to breathe with relief, though some experts are still pessimistic and forecast reduction of prices to $50.00 per barrel. There are grounds for such pessimism. Since March Brent oil price dropped from $128 to 90.00 per barrel. Now it went up again, but this is most likely connected with stoppage of Iranian oil import by the European countries from July 1, 2012. Investors watch closely all political and economic factors that can affect oil prices.

Price reduction is pushed by the economic decline in the developed countries. But on the other hand, low oil price is one of the conditions for these countries to overcome the crisis. As the demand is going down, they may need additional reduction of oil prices, which will be able to help the economies of the countries, which are not rich in the resources. Although the current economic crisis in Europe was not triggered by high oil prices.

Some countries rich in raw material are preparing for a negative scenario, when oil price would go down. Kazakhstan government decided to take into account various variants of development of events in the budget. It is going to offer the government to revise the budget for the next fiscal year. They believe that oil price could down to as low as $50.00, if the world conjuncture gets worse. Such sentiments are not noticeable in our country and some economists and parliament deputies are sure that our budget will not be sequestered.

Nobody doubts that in the future Azerbaijan should make sure that economy does not depend on the oil revenues. However, the country has diversified the field with the emphasis to oil refining and oil products sale. Such a policy is rather logical, especially if such projects are implemented at the expense of SOCAR’s own resources and borrowings. The oil refinery will be most likely built in Turkey and in the near future SOCAR plans to build oil refinery in Kyrgyzstan (despite some problems) and buy oil refinery in Switzerland. It was recently reported that oil refinery will be most likely built in Georgia, probably in Batumi. SOCAR creates new huge assets (first of all outside of the country). Good assets could be always sold. With such intensive activities of SOCAR cost of its assets is estimated at only 17 billion AZN. But market value of the assets would have been much higher, if SOCAR would have been a corporate enterprise. In case of crisis price of products of refining usually drops much slower, than raw material itself. It is not accidental that during the crisis all big oil companies sharply increase the volume of refining. The shortcoming is a high capital intensity of such projects, but such investments are recouped faster, than investments into the oil and gas production. It is important that the upgraded oil refinery (as increased volume of transit) could temper economic crisis after the oil production decline. The Azerbaijani government repeatedly stated that SOCAR’s activities are based on commercial principles. Meanwhile, any projects of gas production, gas transportation and gas sale are rather politicized and one cannot avoid that.

Active foreign expansion has its own shortcomings. Creation of jobs outside of the country at the expense of Azerbaijani investments must be compensated by restoration of potential jobs inside the country. In addition, the juridical status of SOCAR’s daughter enterprises is not clear, so washing out of SOCAR’s assets is not ruled out. New amendments into some laws fully block access to information about type of property in these companies. At last, the number of the projects is not that high, so SOCAR’s net profit and borrowings are not enough for implementation of the projects and the company asks the government for help. Expansion of such a practice could have negative consequences for the entire economy.

There are serious problems at the gas market. Last time we spoke about new tendencies at the market, which are connected with emergence of slate gas. Re-orientation of the market is already a fact. Even powerful Russian company Gasprom is interested in slate gas. The volume of slate gas is not mentioned, but it is obvious that it will keep on growing. The pipe gas becomes more expensive, than slate gas. Development of spot markets is in progress. One can suppose that chances of AGRI project will grow. In any case, Georgia is interested in such projects and though it does not have hydrocarbon resources, it tries to interest Japan in this project. US stops to be importer of hydrocarbon resources and this is a serious signal for the market. In the previous months volume of Azerbaijani oil import to this country reduced. A lot of ecological problems are connected with slate gas production. However, one should bear in mind that interest in slate gas is pushed by new production technologies and tougher demands to observation of ecological standards. In particular, according to the seismic standard, during slate gas production local points during hydro explosion of beds should not exceed 0.5 magnitude on Richter scale.

During implementation of infrastructural projects political aspect becomes more important. Europe is satisfied with information about TANAP project. The only missing link in implementation of the Southern Gas Corridor project is the trans-Caspian gas pipeline. Although Europe needs Turkmenistan gas to diversify the suppliers, sale of gas to the west is a geopolitical factor. The most important thing is to break a corridor to Middle Asia, where the main economic spheres of influence were divided between Russia and China. World changes and the idea of Hartland are still alive. In addition, Middle Asia is very rich in natural resources.

The results of the oil and gas conference Caspian Oil & Gas 2012 in Baku are still under discussion. SOCAR Vice President Kho0shbakht Yusifzada said at the conference that the forecasted gas resources in Azerbaijan are estimated at 6 trillion cub.m. and the forecasted oil resources – 4 billion tons. The proved gas resources of the country are estimated at 2.5 trillion cub.m. and oil – 2 billion tons. This is dictated by the necessity to maintain interest of investors in this country. BP believes that oil resources in the country do not reach 1 billion tons. The volume of gas condensate, which is an associated product of gas production, could reach 350-400 million tons and no new oil fields have been discovered recently. The specialists doubt that the country has 2 billion tons of oil. During the first five months this year the oil production was reduced by 2.8%. this will help to return to the previous volume of production and it seems like the oil production peak has passed.

The specialists have no doubts as to the gas resources. All recently discovered fields were gas bearing ones. Exploration of new fields also demands huge capital investments. Total company has submitted a detailed information about results of drilling of the first exploration well on Absheron field. The company believes that resources of the field could be even higher- about 600 billion cub.m. of gas. Drilling of the second exploration well has been postponed, because of lack of free semi-submersible drilling rigs. SOCAR also discusses acquisition of modern semi-submersible rig, which costs about $800 million, to carryout drilling in the ultra-deep sections. It is also important for the Umil and Babak fields, which Azerbaijan decided to develop by itself. It has recently carried out 3D seismic exploration on the Babak field.

The Centre for Oil Studies believes that Azerbaijan will have enough gas resources for as minimum 60 years. Annual gas consumption in the country is 10 billion cub.m. One should also take into account the fact that a real level of consumption is almost three times lower, because the losses rate in Azerbaijan makes 30%. SOCAR tries to solve this problem at the expense of a big project for upgrade of the gas distribution system of the country.

Signing of a commercial agreement on TANAP in Istanbul last month has become a significant event. It was signed by President Aliyev and Turkish Premier Erdogan. Signing of the agreement dotted the problems of Shah-Deniz shareholders. Due to lack of clear perspectives about consumers as well as unavailability of infrastructure, the works of the second phase were constantly out off. Now everything is clear and go-ahead has been given. TANAP, construction of which will start at the end of next year, will have a carrying capacity of 16 billion cub.m. of gas a year at first (6 billion cub.m. a year for Turkey). In the future the gas pipeline capacity could be increased up to 32 billion cub.m, of which 20 billion cub.m. of gas Azerbaijan will export to Turkey and 12 billion cub.m. will be used for Turkey’s needs. Signing of another important document, which is a part of the gas package, preceded signing of the agreement. It was related to all aspects of gas deliveries to Turkey and transit through this country. The commercial details of the agreements were not announced, though some of them leaked in press. The new agreement did not clarify jurisdiction of the project and other issues, but the mechanism has been launched. Azerbaijan and Turkish shares in the project remained the same. BP estimates cost of the project at 7-7.5 billion Euro, but final cost of the project will be known only after working out of the feasibility study of the project, which will be ready by mid-2013.

This time the Shah-Deniz consortium has acted very carefully. The project of gas pumping via SEEP, which had to be implemented by the consortium itself, was removed from the agenda. Two competing projects – Nabucco West and TAP – are left to pump Caspian gas to the European countries from the Turkish border. The first project has an obvious advantage, because Caspian gas will be sent directly to Austrian Baumgarten. Baumgarten has a big gas storage, which opens a possibility for spot gas sales. A rather famous consortium of oil companies stands behind the second project.

This is another big infrastructural project for Turkey, which will create thousands of new jobs in this country. Azerbaijan becomes a big investor into the Turkish economy. Europe welcomes signing of the agreements and mentioned importance of construction of the trans-Caspian gas pipeline. The high-ranking leaders of Azerbaijan, Turkmenistan and EU will have to meet soon, but this is not a good moment for the meeting. Russia stated openly that it will be opposed to construction of the trans-Caspian gas pipeline and relationships between Turkmenistan and Azerbaijan have aggravated, because of the disputable field Kapaz (Sardar). Meanwhile, European Union acts as if the Caspian status problem does not exist and tries to accelerate bilateral talks between Azerbaijan and Turkmenistan.