About the company: Established as a joint venture with the State Oil Company of Azerbaijan Republic (SOCAR), Cross Caspian Oil and Gas Logistics LLC coordinates and provides integrated hydrocarbons transportation services across the Caspian Sea to the Black Sea and the Baku-Tbilisi-Ceyhan (BTC) main export pipeline entry point through marine, pipeline and railway shipments. The company is committed to operational excellence acting in a safe and environmentally responsible manner and adhering to all international standards. The company has a unified vision of the Caspian-Black Sea hydrocarbons transportation; networks all transshipment facilities across the Caspian Region; has over 1.2 million tons of crude and oil products transshipment capability per month, multimodal transportation solutions for crude oil and oil products as well as a highly professional staff steered by an experienced management team. All operations are performed strictly in accordance with international standards.
Caspian Energy (CE): Mr. Solovyov, what success did Cross Caspian attain in 2015?
Dmitriy Solovyov, General Director, Cross Caspian Oil & Gas Logistics LLC: It stands to mention that 2015 was not an easy year for the oil and gas industry taken as a whole. As an oil transportation company, we are not an exception either. The reason is the negative trend of prices for hydrocarbons. On the one hand, it puts oil producing companies under pressure as their profits decline, and makes harder to ensure increase of investments and development of fields. On the other hand, considering the logistics, all big oil producing companies always try to diversify export of hydrocarbons from their fields within reasonable limits. Considering a diversification of export directions from a perspective of a producer, for a company it is preferable to have an economic parity in terms of profits gained from sale of hydrocarbons as a result of their transportation in all directions.
But it is not always the case. There are directions which are more or less beneficial. Some routes are technically demanding. High oil prices make it possible to gain big profits and provide more options for oil producing companies in terms of selection of alternative routes - both from the perspective of economy in terms of risks and guaranteed receipt of certain income at a higher rate, and from a technical viewpoint in terms of maintaining optimum production volumes. Oil prices are falling today. Accordingly, it affects profits and flexibility of oil producing companies. Economic factors are taken into account in order to optimize expenditures. Priority is given to directions which provide the best economic outcome, require minimum operating expenditures and no additional capital investments. Thus, the number of alternative routes, considered as an option, is decreasing.
Considering the situation in the market of hydrocarbons globally, it is obvious that the market is going through hard times both in terms of geopolitics and economy. Therefore, on the one hand we have decreasing prices at oil markets, which make oil companies limit a number of functioning export routes. On the other hand, geopolitical risks are also expressed in economic risks and make companies seek alternative ways of delivery of hydrocarbons. Thus, we have two factors and a dilemma of selection of an optimal balance in order to obtain a maximum positive economic outcome when assessing possible alternative routes of transportation.
Risks are monetized after all. Therefore, on the one hand we have a tough competition of different export routes and difficulties that producers face in terms of diversification. On the other hand, there is a need for diversification.
Accordingly, the year is not easy, so we should maintain current volumes and fight for attraction of new volumes. Considering the region as a whole, it involves transportation of Tengiz oil from Kazakhstan (FGP of Tengiz field). Big hopes are rested on Tengiz field which still does not produce commercial oil. CPC (currently under stage by stage expansion and will soon have an annual capacity of 67 mln tonnes) can cover an additional oil production volume in Kazakhstan. As CPC is priority for Tengiz and Kashagan oil from the economic and technical point of view (technically, it is the most preferable export route and the cheapest one), its filling will make alternative routes, including our corridor, more attractive. Possible opening of the Iranian market and resuming of oil swap operations, attractive strong enough, in this direction should not be ruled out.
As we see, the growth of crude oil transit will be observed in the region after the startup and expansion of the Kashagan and Tengiz fields. Production rates of Turkmen oil will remain at the same rate. About 300,000 tonnes per month have been recently transported for pumping into the BTC. Inconsiderable volume is transported on a monthly basis via terminals, located on the Caspian coast of Azerbaijan, in the direction of Batumi terminal in Georgia.
As far as other volumes on the Caspian are concerned, they are relatively stable and no instantly available additional sources for growth of hydrocarbons transit are observed. In regard to the market of oil products, the balance of refining and consumption remains on the same level, or the growth of refining is offset by the growth of consumption. In this way, it is possible to attract additional volumes into our corridor only at the expense of redirection of oil products from other routes, as well as in case of the reverse direction from the Black Sea with the aim to import oil products.
Despite all difficulties, we continue providing our clients with services on a stable high level, do not compromise the quality of services. In present conditions we try to understand our clients, provide services as flexible and transparent as possible, are ready to handle freights of various sorts of oil and oil products, maintaining their quality, regardless of the volume. We are also ready to offer considerably flexible conditions for transportation of small spot volumes as well as long-term big volumes.
CE: What are the capacities of transportation in the Caspian-Black Sea region?
Dmitriy Solovyov: As far as crude oil is concerned, we should take the expansion of CPC into account. In addition to our wish to compete and ensure maximum quality of services and attractiveness of the corridor, we should take into account that CPC is nowadays not just a serious competitor.
Economy for pumping Kashagan and Tengiz oil are not simply attractive in CPC – it is much better than any other direction. Firstly, oil from these fields can be pumped directly into the CPC and becomes available for sale in the Black Sea after pumping. Secondly, CPC, just like any other big pipeline (annual capacity makes over 60 mln tonnes), has a quite attractive transportation tariff compared to any other type of transportation. To reach our corridor this oil should be loaded into rail tank cars, then unloaded, transshipped in the port of Aktau and loaded into a tanker which we shall receive in Baku. It is noteworthy that expenditures and distances covered in Kazakhstan are comparable with our corridor, which means Kashagan and Tengiz oil faces costs and a technologically complicated transportation within the territory of Kazakhstan before it reaches our corridor. Nevertheless, Kashagan is a big project. It will increase total production in the Caspian. Tengiz field also undergoes an active development. Logistics of hydrocarbons is a quite conservative area. Positive work experience gained by the region’s consignors from working with reliable partners also plays a positive role as diversification moves to the forefront. Our positive experience gained as a key contractor in transportation of big volumes of Tengiz oil and provider of transportation services for over 7 years also plays an important role.
CE: What are the prospects of increase of transportation figures?
Dmitriy Solovyov: As far as crude oil is concerned, over the period of working with Tengizchevroil we handled almost 20 mln tonnes of crude oil. We certainly aim at holding our positions and consider Tengizchevroil as a priority client. Certain decline has been currently observed in transit of Kazakhstan crude oil, caused by CPC’s expansion and other factors which we discussed. Our goal is to work with Tengizchevroil, a key client of our region, increase a carrying capacity from 3 up to 5 mln tonnes per year in future as well as attract future volumes of oil from Kashagan and other fields of Kazakhstan as much as it is possible and technically realizable, up to additional 5-6 mln tonnes per year. Garadag terminal which has been operating since 2008 (condensate of Shah Deniz field is delivered to the Black Sea ports of Georgia by railroad) is currently under expansion. We are currently engaged in expansion of oil capacities of the terminal. Construction of the tank farm designed for storage of crude oil and oil products will be completed in 2016. The work on completion of construction of port facilities is planned to be completed in 2016. Oil loading rack is already handling condensate. Accordingly, we enhance our assets in terms of quality and quantity. Connection of the Garadagh terminal to BTC is a big advantage for our clients. Availability of two terminals such as Azertrans and Garadag, linked to BTC system, will ensure not only flexibility from the point of view of clients but also maximum comfort in terms of logistics. Despite the availability of several sorts of crude oil, BTC’s quality bank requires an accurate work and prevents blending of oil sorts, when directing them into BTC, if certain technological and accounting procedures are not observed. Expansion of the Garadagh terminal will also ensure a technological flexibility in terms of required technical maintenance of all terminals and always available additional facilities for oil acceptance. It will also make it necessary to meet all modern requirements in terms of environmental protection because a new terminal is being built in compliance with all modern standards which regularly change. All of it provides additional attractiveness for clients. As far as Turkmen oil is concerned, we currently see this oil flowing in the direction of BTC. In general, the major trend is redirection of crude oil toward pipelines, be it CPC or BTC. Railway transportation can hardly compete with pipelines in terms of economy and safety of transportation. Consignors consider the Black Sea option of transit by a railroad as an alternative route if directing oil into pipeline systems is found impossible.
Turkmen oil has been actively transported via BTC for the last few years. We would like to maintain the volume of its transportation within at least 3 mln tonnes per year. Thus, even if we speak only about crude oil we see an opportunity to fight for volumes reaching at least 10 mln tonnes per year in future. A lot depends on the dynamics of oil production increase at Kashagan field and Tengiz field. Lifting of sanctions imposed on Iran can also change the balance of transportation of oil and oil products in the region. Certain part of Turkmen oil can flow in the direction of Iran within the framework of swap operation. It also concerns the very sorts of Kazakh oil which traditionally flew to Iran. Certain volume of oil products will definitely flow to the north regions of Iran. Despite high consumption in the north part of the country, oil refining has been based far in the south of the country and it was the Caspian region supplying north of Iran traditionally. In the meantime, apart from the competition, it will soothe tension in the region and have a positive impact on business activity.
Regarding oil products, the majority of their transit falls to the share of Turkmen oil products as Kazakhstan almost fully consumes oil products which it produces. Besides, permission of control bodies is needed for their export. Consumption of oil products in Azerbaijan has increased as well. All gasoline is practically consumed on the domestic market. Only part of it is imported. Thus, when it comes to oil products, there should be optimal and competitive offers for those volumes of Turkmen oil products, which were shipped in other directions, as well as a joint work of all transportation market players providing maximally efficient conditions in terms of economy. As it was stated, opening of the Iranian direction after lifting of sanctions will also make corrections. Therefore, from my point of view, considering the period covering the upcoming 5 or 6 years, the growth and maintenance of volumes of the oil transport in the Caspian-Black Sea transit corridor, be it BTC, Black Sea terminals or combined volumes, depends on production growth at Tengiz and Kashagan fields, and the decision of their operators and partners about distribution of volumes.
The Caspian-BlackSea corridor has its own positive aspects. Despite all oil producing companies prefer shipping their oil into pipelines, the ability of companies, lending complex reserves on transportation of oil cargoes, to diversify transportation of volumes and provide alternative options for transportation of hydrocarbons plays a big role.
But the pipelines also have technical nuances. The higher is the oil volume, which is supplied, the bigger is the potential damage in view of the potential risk of stoppage of oil loading into the pipeline. The higher is the volume, loaded into the pipeline, the bigger is the potential negative effect, even though the risk can seem to be minimal. In other words, the risk is important even if it has a relatively low probability. Therefore, a unique package proposal that we can offer to our clients is a distribution of volumes between the Black Sea direction (Kulevi, Poti and Batumi ports) and oil delivery into the BTC (directly into the entry point). In case there is a necessity to redistribute volumes toward the Black Sea, we are capable of getting this job done with minimum delays if not within a real time. It is a considerably serious aspect for an oil producing company as the reduction of the carrying capacity in any point of the logistics chain will anyway lead to suffering of preceding links, including fields. Spontaneous regulation of production volumes, especially with current oil prices, is unprofitable. The risk is high enough and none of the producers would like to face it.
CE: As you noted, to compete with alternative routes it is necessary to offer package proposal for consignors. To what extent has it been developed?
Dmitriy Solovyov: Consignors attach importance to a package of proposals. It is a major principle of work of Cross Caspian – to provide integrated transportation services so that a client can use two key directions. Firstly, it is a package contract, which includes all technical and operational complications, makes it possible to provide coordinated transportation services and minimize any problems during the physical movement of cargo. It helps to set an operative planning for a long-term period, not for current month and quarter, but for considerable long period. As far as the economic factor is concerned, an opportunity to integrate provided services has another advantage. Costs, which influence on transportation, are integrated and grouped, which makes it possible to consider them within a single package. It is also a big plus. On the one hand, a client has an opportunity to choose services and conditions of provision of transport services which he needs, has an idea about the way the cost of transportation will be assessed. On the other hand, it is a serious consignor who has significant volumes. We can hold a dialogue on his behalf with key players – our partners in the market of cargo transportation and obtain a maximally beneficial proposal.
It is noteworthy here that no route is self-sufficient. In reality, if we offer a client an end-to-end package proposal from a field (pier or a platform) or a tank farm, where its crude oil and oil products are stockpiled, right up to the point of sale to the third party, a client gets a maximally integrated package of services, requiring minimum management from his side and maximum flexibility from our side. On the other hand, considering the geography of fields, it is not always that easy. Thus, the length of the transportation route can be long enough. The number of players from the initial point right up to the last one is not always limited to one or two key contractors. For instance, in order to deliver oil from Kazakhstan’s field to our corridor, it fist should be delivered by railroad to the port of Aktau, loaded into a tanker and only then delivered to one of the terminals in Azerbaijan. Thus, before we receive oil on board of a tanker in Aktau or Baku, a client anyway has to work (under FOB or CIF conditions) with a number of contractors and service companies, providing him logistics services, until he has his oil loaded on tanker in Aktau. The cost of oil transportation from a field to the board of a tanker in the port of Aktau is comparable with a total cost of services of our entire corridor. It points to the fact that no matter how flexible and economically beneficial conditions we offer, once a distance leading to us is set inefficiently or economically not attractive for a client, it lowers commercial attractiveness of the route. It is applicable to all sections of export route. There is a need for cooperation and codirectional actions. Considering current realities, integration is needed to ensure successful handling of significant volumes of crude oil and oil products. No matter how attractive, professional and effective one link is, if others operate in non synchronized manner, it is certainly a minus. From our point of view, considering volumes which flow through the port of Aktau, such integration would provide an opportunity of additional loading of the Kazakhstan port and terminals as well as tanker fleets of Kazakhstan and Azerbaijan.
CE: Do you have infrastructure limits within the corridor in case of flow of big oil volumes from the eastern shore of the Caspian?
Dmitriy Solovyov: We do not see infrastructure limits as the carrying capacity of the railway corridor, if rail tank cars and locomotives are available, exceeds current demands and is capable of handling volumes reaching up to 15 mln tonnes of hydrocarbons per year. Total capacity of terminals in Azerbaijan and Georgia makes over 15 mln tonnes. It is carrying capacity of hydrocarbons by a railroad. Garadagh terminal is being expanded as well, which will increase capacities of terminals. Apart from this, a huge tanker fleet is based in the Caspian. Taking the carrying capacity into account as a whole, it outruns the growth of production at fields which are potentially considered as major clients for transportation. Construction of the Garadag terminal has been motivated by development of Tengiz and Kashagan fields. The second and third phases of expansion of the Garadagh terminal, which imply construction of offshore mooring facilities, are designed for hosting big deadweight tankers. It is exactly what has been taken into account in the concept of development of KCTS (Kazakhstan Caspian Transportation System).We are ready to accept big oil volumes. The projection of the Garadagh terminal was launched as early as 2006. The tank farm will be increased by another 200,000 cubic meters in 2016. Four more berths are planned to be commissioned.