New branch of Central Asia-China gas pipeline comes online

China National Petroleum Corporation (CNPC) reported in early June that a third branch of the Central Asia–China gas pipeline, also known as line C, had been inaugurated on 31 May, with the first volumes of Turkmen gas now following a new export route across Uzbekistan to the Chinese autonomous region of Xinjiang.

The 1,830km pipeline runs parallel with lines A and B, starting at Gedaim at the Turkmen-Uzbek border and entering Chinese territory at Khorgos. Once in China, it interconnects with the third west-east gas pipeline, which was built by Beijing to take imported natural gas deeper into the country’s heartland and to the east coast where the bulk of its industrial production takes place. Construction of this additional line was started in September 2012 and welding was completed, as initially foreseen, at the end of last year.

CNPC expects that, on completion of all supporting facilities by early 2016, line C will reach its designed annual transit capacity of 25 billion cubic metres. This means that, if all goes to plan, the Central Asia–China gas pipeline will be able to deliver on an annual basis up to 55bcm of Turkmenistan-produced natural gas to Chinese customers. This will represent roughly 20% of China’s domestic gas consumption.

With this in mind, the authorities should proceed to a massive substitution of gas for coal. Reducing coal consumption by 73 million tons a year may allow China to cut its carbon dioxide and sulphur dioxide emissions by 78 million tons and 1.21 million tons respectively. If Turkmenistan delivers on its November 2011 promise to supply as much as 65bcm of gas a year, millions of Chinese will see clearer skies.

For Turkmenistan, the expansion of the Central Asia–China gas pipeline system means that its revenues from the lucrative energy sector will remain stable in decades to come. Unlike Kyrgyzstan and Tajikistan, whose political stability has been compromised by high levels of poverty and the lack of economic opportunities, Turkmenistan has all it needs to remain a deeply autocratic regime with enough gas money to silence domestic critics and secure obedience from ordinary Turkmens.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Caspian: Turkish refinery funding arranged

On 8 May, state oil and gas company Socar said it had concluded a financing agreement with a group of banks to fund the construction of the Star oil refinery at the Turkish port of Aliaga in Izmir province. The contract was signed with five export-import banks from the US, Japan, Spain, Italy and South Korea as well as 15 commercial banks.

The banks will provide $3 billion of funding in the form of 18-year loans. A further $500 million will be offered by Turkey’s Garanti Bankasi as a 15-year loan facility. The latter is also to process all future monetary transactions related to the oil refinery within 15 years after its commissioning. The total cost of the Star project is estimated at $5.7 billion. This means that Socar will still have to provide over $2.2 billion. Construction of the oil refinery is expected to be completed in 2018. The Star oil refinery has been wholly owned by the Azeri state since 19 May when Turkey’s Turcas Petrol sold its 18.5% stake in Socar Turkey Yatirimfor $59.4 million to Rafinery Holding, a local subsidiary of Socar Turkey Energy. The latter now owns 60% of Socar Turkey Yatirim, which owns the refinery project. The other 40% is owned by the State Oil Fund of Azerbaijan. Last May an international consortium comprising Tecnicas Reunidas (Spain), Saipem(Italy), GS Engineering & Construction (South Korea) and Itochu Corporation (Japan) signed with Socar a $3.46 billion engineering, procurement and construction contract.

The Star refinery is projected to have an annual capacity of 10 million tons, 1.66 million tons of which would be naphtha that could go to the Petkimpetrochemical complex. Socar’s share in Petkim currently amounts to 61.32%. Besides naphtha, the new refinery is also expected to produce annually 5.95 million tons of diesel with an ultra-low concentration of sulphur, 500,000 tons of jet fuel, 630,000 tons of petroleum coke and 240,000 tons of liquefied petroleum gas. On 14 May Socar President Rovnag Abdullaev told The Business Year that the total volume of his company’s investments into various business ventures on Turkish soil has amounted to over $20 billion. The Azeri state firm is also active in neighbouring Georgia: as one of the largest taxpayers in the country, it has reportedly invested more than $400 million since 2006.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Kazakhstan increases crude oil export duty

The Kazakhstan government has increased the so-called ‘export customs duty’ (ECD) on crude oil from $60 to $80/ton. This change will take effect on 1 April, according to economy and budget planning minister Yerbolat Dosaev, who unveiled the new export tariff at a ministerial meeting.

The ECD increase should boost this year’s projected government revenue by $2.7 billion. The economy ministry has added $1.6 billion to this total in the form of extra tax income to be derived from the exporting industries’ future profits, which are widely expected to ameliorate after the 20% devaluation of the tenge in February 2014.

The ECD was introduced in May 2008 at the rate of $110/ton at a time when international oil prices were as high as $125/barrel. It was argued that the new duty would enable Kazakhstan to benefit fully from increasingly favourable conditions on global markets as well as its expected stabilising domestic effect.

In January 2009, however, the government scrapped the ECD after oil prices had fallen from their historic highs. As the global market stabilised the ECD was re-introduced in August 2010 at the rate of $20/ton. This was applied to all Kazakhstan-based oil exporters except those whose production-sharing agreements guaranteed stability of the customs regime. In January 2011 the ECD was increased to $40/ton and then again to $60 in April 2013.

The government plans for at least 6% GDP growth by the end of 2014, while also containing annual inflation below a 6–8% cap. The benchmark oil price that serves as the basis for all income and expenditure forecasts has also been increased, from $90 a barrel to $95. Some local analysts have already expressed their scepticism about the latter benchmark, given the possible impact of the crisis in Ukraine on future global oil market stability.

Earlier this month the US administration announced its intention to release around 5 million barrels of crude to the market and cited the need to test the sustainability of the US oil infrastructure after a recent surge of domestic production. Some have seen this, however, as a calculated move as part of Washington’s efforts to punish Moscow for its combative stance on

Ukraine’s Crimea peninsula.

While this quantity is clearly too small to have any significant impact on oil prices, expanding US domestic production may upset both Russia’s and Kazakhstan’s medium- to long-term price expectations.

For more news and expert analysis about the Caspian region, please see Caspian Focus.

© 2014 Menas Associates

Caspian: Azeri Light strengthens on Mediterranean disruption

It seems that Azerbaijan is benefiting from the disruption in other oil producers, notably Libya, as well as the uncertainty caused by the situation in Egypt. Throughout August, protests and labour unrest shut down Libya's two key oil terminals, disrupting exports and helping to strengthen the differential on Azeri Light. On 1 August the price of Azeri Light hit Dated Brent plus $3.95/barrel, the highest since May 2012. Later in August BP attempted to sell a 600,000 barrel cargo at Dated Brent plus $4.75/barrel and found no buyers, however.

 

Azerbaijan's reputation for political stability has been one of its biggest strengths, and with turbulence in other key producers unlikely to end any time soon, the price of Azeri Light is likely to remain high. The government, however, is reportedly taking no chances: according to government sources, it is basing the state budget for 2014 on a price for Azeri Light of under $100/barrel (possibly $90) to serve as a buffer against price volatility. For the past two years the Economy Ministry has based the budget on oil at $100/barrel.

 

In other trading news, there were four loadings of Azeri Light, each of 600,000 barrels, scheduled at Georgia's port of Supsa in August, with five expected in September. Loadings of Azeri Light at Ceyhan were reportedly down this month, by 5,785 b/d compared to July. And ONGC Videsh sold its first cargo of Azeri-Chirag- Guneshli oil since taking over Hess's stake in the project. It sold a cargo of 600,000 barrels for loading at the end of August to Statoil for Dated Brent plus $2.70–3/barrel.

 

For more news and expert analysis about the Caspian region, please see Caspian Focus.

 

© 2013 Menas Associates

Caspian: Oil struck at Zhambyl

Kazakhstan has struck new oil deposits in the Caspian Sea. Recently-appointed Oil Minister Uzakbai Karabalin said on 5 August that workers have located a significant deposit during exploratory work on the Zhambyl structure, being operated by a joint venture between KazMunaiGaz and a Korean consortium led by national player KNOC.

 

Assessment of reserves is ongoing, Karablin said, but “now one can talk about the discovery of a new deposit”, which he called a “joyful development”. The joint venture was established in 2008: Statoil had also been interested but withdrew as part of its Caspian retrenchment plans.

 

The announcement is good news for the Korean consortium as well as for Karabalin, who was appointed last month. Boosting exploration is a priority for the Oil Ministry as well as KMG as part of a plan to dramatically increase the reserves on the national company's balance sheet in the next few years.

 

Karabalin revealed the news at a meeting with President Nursultan Nazarbaev, where he also said that Kazakhstan produced over 40 million tons of crude in the first half of the year.

 

For more news and expert analysis about the Caspian region, please see Caspian Focus.

 

© 2013 Menas Associates

Turkmenistan plans naval patrols on disputed Caspian border

Turkmenistan, the Caspian's most cautious and least well-defended state, has announced plans to boost its navy and patrol its maritime borders as questions loom over the future of the Caspian sea.

Speaking at a naval shipyard where two new missile patrol boats have recently been delivered, President Gurbanguly Berdimuhamedov said that Turkmenistan “needs ships to patrol its maritime borders, to maintain their security and counter negative phenomena and modern challenges”, while stressing that Turkmenistan's naval doctrine was purely defensive in nature.

Although Turkmenistan's naval capabilities are weak and its political will doubtful, Berdimuhamedov's speech was a clear statement that the country is keen to defend its waters amid growing tension over the division of the Caspian.

The EU's decision to open negotiations with Turkmenistan and Azerbaijan on a Trans-Caspian Pipeline (TCP) last month, to bring Central Asian gas west to Europe, has been strongly opposed by Russia and Iran. The Caspian's two strongest states argue that a TCP would cause serious environmental damage and cannot be agreed without the consent of all five littoral countries.

Their real objection, however, is that a TCP would permit an avenue for Central Asian gas to reach Europe without crossing their territory, weakening their regional influence.

In addition, the status of Caspian borders remains contested while the littoral states debate how large a share each should take. This has not stopped exploration of oil and gas deposits, but it has created zones of uncertainty. A recent Wikileaks cable revealed that in 2009, Iran moved an oil rig into disputed waters between it and Azerbaijan, prompting fears of conflict in Baku. Turkmenistan also fears Iranian intimidation.

The country's naval forces are ill-equipped to patrol its borders or defend its territory. It has a handful of rusting Soviet patrol boats operating from dilapidated facilities. The government has been busy purchasing more, however, including some from Ukraine and others from Russia and Turkey. The new missile patrol boats inspected by Berdimuhamedov were built by a joint Russian-Turkmen venture, with most of the work done by Russian firms.

Although the government wants the new navy to be completed by 2015, along with port facilities and a naval academy, Turkmenistan will continue to lag behind its neighbours. Its stated intention to patrol its borders, however, suggests that it is taking its position in the Caspian very seriously.

Sources; Turkmenistan.ru, Eurasianet

For more news and expert analysis about the Caspian region, please see Caspian Focus.

Kazakh tax ruling reversed says Max Petroleum

Max Petroleum has said that the Supreme Court of Kazakhstan has reversed the rulings of the lower courts that had upheld a tax claim brought against the company and remanded the case to the Specialized Economic Court of Almaty for reconsideration.

As a result of the Supreme Court decision, payments towards the tax claim are suspended while the case is pending, including any further appeals, if necessary, through the Court of Cassation, the last court of appeal below the Supreme Court. Max Petroleum has has paid $3.1 million towards the tax claim and will apply to the local tax authorities to offset this amount against the company's other tax liabilities due in the fourth quarter of 2010.

The company continues to believe the tax claim is without merit and will continue to dispute it through the appropriate channels until final resolution, up to the Supreme Court, if necessary. This process is expected to take six months or longer. The Company has not yet received the written ruling from the Supreme Court and will update the market on additional details as appropriate.

To find out more about Max Petroleum please visit Max Petroleum's web site, which you can fine here.

For more news and expert analysis about the Caspian region, please see Caspian Focus.