The oil price will grow as the global economy is developing
Caspian Energy (CE): Mr. Minister, OPEC has scheduled to hold the following meeting in June. Shall we expect the participants to reach consensus over the price regulation at this meeting? Is there a single opinion or full disunion among OPEC member states?
Natig Aliyev, Minister of Energy of Azerbaijan: First of all, I would offer to look at the oil price dynamics. As you know, oil price decline on world markets has started since mid of 2014. Unfortunately, no changes were made in November 2014 when OPEC members gathered for the first time after the decline of oil prices and everybody expected them to take some measures in order to restrain oil price decline or regulate them as they had enough levers for it. After this meeting of OPEC, when it was apparent that OPEC is going to take no preventive measures, the oil price has rapidly fallen down to $70 per barrel. Later, the price continued gradually declining throughout 2015 and finally fell below $30 per barrel early in 2016. Many experts explain this fact mainly by the influence of political factors and confrontation taking place between a number of countries. In this regard it would be enough to note the deterioration of Russia-Ukraine, Russia-Europe, Russia-Syria-Turkey relations which have serious economic consequences including the situation with price levels. It is the first reason.
The second reason lies namely in the OPEC countries. These are conflicts in North America, Syria and also the Middle East. We perfectly realize and know it. The third reason is the lifting of sanctions imposed earlier on Iran. These are three major political reasons which affected and caused an oil price collapse.
Among economic reasons concerning the oil industry noteworthy is the shale revolution in the USA – increase of shale oil production volumes. Owing to this, oil production in the USA exceeded 10 mln barrels per day. I mean annual production volume increased by 3-4 mln barrels just within 2-3 years. A set of laws, permitting the US oil export, was approved in the USA, and it definitely affected oil price decline. There are also important factors such as the situation and trends in development of the global economy. First of all, it is a decline of global economic development rates in China and India which substantially lowered its development rates and consumption of energy resources.
In this conditions OPEC was expected to take certain measures to reduce oil production rate which could have adjust market prices to certain extent. Unfortunately, it did not happen. On the contrary, in the course of sessions and meetings OPEC members noted that they have no intention to reduce oil production and export, and will not force the market. The main reason for OPEC countries’ choosing this stance was a certain market segment gained by each country, especially Saudi Arabia, and none of them wished to yield it to any extent.
The situation became more complicated at OPEC’s last session in Qatar because of cancellation of sanctions earlier imposed on Iran which added that its share in the OPEC reference basket of crudes used to total 4 mln barrels per day in due time and no oil production limiting would be negotiable until Iran resumes the pre-sanction level. Libya, which used to hold one of the leading positions among oil exporting countries until certain events, is in the same situation. On the other hand, oil production decline is recently observed in the USA and I believe that this trend is going to continue.
Therefore, considering the current global oil production rate, in reality there are three countries which can still afford oil production increase. They are Saudi Arabia, Iran and Libya. In this regard, everything depended on the wish and stance of these three countries at the OPEC’s Qatar meeting.
I would like to note that high oil prices ($100 or over per barrel) observed for a long time till mid of 2014 were not speculative. These were reasonable prices which reflected the market situation and were reached owing to an economic growth of countries, energy resource consumption and demand ratio, development of alternative and renewable energy and increase of energy efficiency.
Nowadays, it is evident to anyone that low prices observed for a long time have had a strong impact on the economies of not only energy resource producing but also consuming countries. It is abnormal when the oil price falls by 3-4 times and stays low for a long time. It became evident that something is wrong here and cannot continue just this way because all countries face losses, tremendous losses, especially producing countries.
Oil importing countries do not benefit from cheap oil prices either. We cannot observe rapid economic growth in Europe or South East Asia. Once I was told in India and China, which are big consumers of energy resources and crude oil importers, that the growth of oil price by one dollar causes additional budget deductions worth $400 bln for energy resources. But no rapid economic growth has taken place in India or China.
Therefore, Russia, Venezuela, Saudi Arabia and Qatar reached an agreement in February 2016 to either suspend or freeze oil production at the January rate of 2016. It was decided to hold a joint session of OPEC and non-OPEC countries. On the eve of the session the countries reached an agreement and were ready to sign it. However, early in the morning of the next day the meeting participants were asked to wait for a while because negotiations between Iran, Saudi Arabia and Qatar had not been completed yet. When the session finally started after a long delay, we were informed that the agreed project had been changed. A new draft agreement strongly differed from the previous one and stated that countries are ready to freeze oil production at the January rate if all the OPEC countries accept it. It was written word for word that the decision about freezing will enter into force as long as all OPEC countries join in this agreement. The matter involved Iran and Libya which did not attend this meeting. It has become clear that this clause would not work. Discussion took long. It was offered to freeze production at the rate of January. Then, suggestions were made to freeze production at the rate of 4 months of 2016, to create a working group for negotiations aimed at having Iran and Libya joined this agreement. After long unsuccessful discussions, we understood that we are not ready to adopt any declaration or agreement as there is a need for decision of all OPEC member countries without an exception. Once this is done, other non OPEC countries can joint it as well. Though, the meeting in Qatar turned out unsuccessful and I would even say very strange, it anyway managed to find out exporting countries’ positions over oil prices at the global market. It turned out that the oil price is not a simple issue at all. Everybody understood that sooner or later the development of the global economy would drive prices upwards. The only factor that could hold back the price increase was an entry of Iranian oil into the market. Lifting sanctions imposed on Iran was unambiguously perceived as a real opportunity to increase oil production. However, big investments and years will be necessary to bring production rate in Iran up to the pre-sanction level. But nevertheless, the factor of lifting of sanctions from Iran has played its role.
I think that recovery of Libyan fields will make it complicated as their technical condition is not good now. But nevertheless, the tendency will be directed towards oil production increase in Libya.
CE: Do you believe that all producing countries will anyway manage to reach the compromise?
Natig Aliyev: I do not believe that countries will be able to reach any certain agreement. To all appearances Iran and Libya will stick to their positions. Saudi Arabia stated that freezing or reduction of production is not negotiable until Iran and other producers give their consent.
CE: What is your prediction about prices in future?
Natig Aliyev: Despite the fact that many people thought that prices would collapse after the Doha meeting, in reality a slight and noticeable growth of world prices up to $46-$48 per barrel is observed now. It is due to the fact that oil prices for a long time stayed at the rate of production cost in many countries. It is the reason why the price will grow as the global economy develops. I think it will be a very slow growth running with temporary declines, but in general, the trend will head towards the growth at any rate.
CE: Even in case of production growth by the above-mentioned states?
Natig Aliyev: I doubt that countries possessing a potential to raise oil production will increase production very rapidly and quickly. The trend will have remained till the end of the year and I believe it can be even stronger in the following year.
CE: How will this price situation impact on the gas prices?
Natig Aliyev: Gas prices certainly depend on prices on energy resources including oil, fuel oil and everything which helps to produce electricity. But it is not that volatile as the oil price and is reconsidered quarterly in accordance with signed supply contracts. I doubt that gas price will increase fast in near future. It is mainly associated with a lower consumption in Europe. Though, everyone was confident 3-5 years ago that consumption in Europe would increase from current 500 bcm per year up to 750 bcm per year in 2020. But there are still other factors. Gas deficiency for Europe will be of big importance as their production is declining. Norway will never be able to cover the entire gas consumption increase in Europe. Nuclear energy issue is complicated as nuclear energy programs are being rolled back. Besides, it is evident that alternative sources of energy will not be able to take a leading position in the general energy balance at least in coming two decades.
Saying with optimism that we will fully meet our electricity needs at the expense of an alternative energy is too early
CE: A number of European countries plan to switch to 100% of electricity generation at the expense of alternative sources by 2050, the growing demand in Europe is also covered at the expense of renewable sources of energy ...
Natig Aliyev: No matter what the plans are, firstly, the cost price of alternative sources of energy is much higher than that of the conventional electricity. Secondly, large territories are needed in order to generate electricity in such scales that we are currently talking about. Practically, significant part of the European territory will have to be occupied by these farms. Apart from this, it is not that simple from the environmental point of view because production of renewable energy affects both fauna and flora, and there are also other negative aspects.
By the way, the UN statistics does not also make any optimistic forecasts. According to the data of the UN, only 9-10% of the global energy will be generated out of alternative energy. In other words, oil, gas and coal will still share the first, second and third places in the energy balance respectively.
On the other hand, who has funds to bring the share of renewable energy up to 30-50%? Such countries as Germany, Denmark and Holland can afford it. They don’t buy these technologies but export them. For instance, it is one of the main reasons that caused economic crisis in Spain. The thing is that renewable energy is being subsidized. These subsidies are a serious burden for budgets of countries which subsidize the difference between production of renewable and conventional energy. Therefore, Spain, Portugal, Greece and Malta, which have favorable conditions for development and production of alternative energy, failed to achieve high economic development rates. On the contrary, they are the weakest economic links of the EU.
I believe we should move towards the development of alternative energy, adopt experience, build pilot stations in order to gain experience in production and management of alternative energy, in full use of local and climate conditions of every region. But it is too early to say with optimism that we will be able to fully meet our electricity needs at the expense of an alternative energy.
CE: What could you tell about the progress of implementation of the Southern Gas Corridor?
Natig Aliyev: You saw the advisory council meeting hosted in Baku in February of this year. I share President of Azerbaijan Ilham Aliyev’s opinion that it was held on a high level. More ministers than we expected attended this meeting. There was a very open discussion held. All countries stressed the importance of the project, expressed support including high ranking officials of the EU and USA. All of this is the sign that project is recognized and supported by the international community, meets the interests of the European Union and our region. It is a political aspect. On the other hand, we heard reports on implementation of Shah Deniz II, expansion of the Sangachal terminal and South-Caucasus gas pipeline (SCP). It was noted that projects are implemented ahead of schedule. About 70% of operations will be completed in 2016 though we still have two years ahead. Assembling of the platform (topside facilities and jackets) for the development of Shah Deniz field is also underway ahead of schedule. Compressor stations are under construction in Georgia, trenches are being excavated, full amount of pipes have been delivered within the framework of SGC. Implementation of the Trans-Anatolian gas pipeline (TANAP) has been recently discussed in Ankara at the session of the Turkey-Azerbaijan High Level Strategic Cooperation Council with participation of President of Azerbaijan Ilham Aliyev and President of Turkey Recep Tayyip Erdogan. In the course of the session R.T.Erdogan expressed full support to the project and confidence in its timely completion. Construction of the TANAP pipeline began in March 2016 on a 1344km long section from the Georgian-Turkish border to Eskishekher. About 700km of pipes of this section are on the construction sites. Over a 500km long section has already been welded and placed into the trenches.
CE: What is the maximum carrying capacity of the TANAP pipeline?
Natig Aliyev: It is to make about 25 bcm per year. Now there are about 6.6 bcm of gas supplied to Turkey annually. Additional 16 bcm per year will be supplied at Stage 2. 6 bcm of this volume will flow to Turkey while 10 bcm will flow to Europe. In total, it makes about 22-23 bcm.
In the meantime, it is very important to note that the potential to pump about 50 bcm per year has been designed into the project from the very beginning. It means that 8 compressor stations have to be built instead of 2. Why should we build 8 compressor stations now? There are two stations under construction now. That is quite sufficient for us. But if the necessity for pumping higher volume arises due to new gas production volumes, let’s say from Absheron field or other new fields are discovered, we will be able to easily increase the capacity of the gas pipeline.
CE: What stage has the implementation of the TAP project reached so far?
Natig Aliyev: As far as the Trans-Adriatic Gas Pipeline is concerned, the Host Government Agreement over the Greek section has been approved by the European Commission. All legislative issues have been solved. Foundation laying ceremony of the first pipe of this gas pipeline took place in the Greek city of Thessaloniki on May 17. The documentation on construction is fully ready in Albania. Preliminary preparation work for the physical construction is underway. At the same time, the construction of the pipeline in Italy will begin. The only problem concerns the relocation of olive gardens, which is planned to be carried out no later than October and in experts’ opinion will not affect the schedule of construction operations. We try to keep the situation under control together with ministers of countries which are engaged in the project and whose governments unambiguously support TAP.
We rely on our own resources
CE: How deep is Azerbaijan, as a main shareholder of TANAP, interested in getting new exporters from Egypt, Cyprus, Israel and other new Mediterranean fields involved?
Natig Aliyev: There is a fuss permanently observed around the projects bearing such importance of SGC. It can be called a competition, rumors, opinions, when everybody wants to present an opinion as the only “right thing to do” in order to cause a sensation. Therefore, some politicians and economists for example say that the Turkish Stream will somehow affect the SGC without having any idea about essence of the Turkish Stream and the way it can be realized. Or some people say that fields have been discovered in Israel and right now this country which was dependent on energy resource for rather long period of time will be able to deliver big volumes of gas right to Europe. Or they say about discovery of big fields in Georgia or in Cyprus….
We all perfectly know that field appraisal and production of energy resources takes a long time. There is a need for capital investments along with other hard work.
I can say the following: if any party has gas supply capacities for TANAP, either Iran, Iraq, Egypt, Israel or Cyprus, we are ready to expand the pipeline and transport. But it should be a long-term liability of parties. There have been no such proposals received and I think that it will not happen in coming 5-10 years.
I have always said that all projects that are implemented in Azerbaijan are based on our own resources. We never relied on others’ sources and never took them into account when determining economic benefits of projects. The same happened while building BTC and during other projects. I remember in the course of implementation of BTC there were many statements made that this project would not be realized without Kazakhstan’s oil or it would be unprofitable. I said it then and now I continue saying that we never count on other parties’ resources. The same thing is happening now. When making economic calculations, we do not at any rate count on gas from Turkmenistan, Iran or Kazakhstan even if they have a wish to use SCP. I think relying on own resources and abstention from wishful thinking is the most reliable positions otherwise it can end up with only disappointments.
If our partners have an opportunity to export gas, we are ready to negotiate it with great pleasure and try to allocate transit capacities. If they don’t have them, we will continue implementing our projects.
All gas projects are interconnected and there is no need to rush
CE: Mr. Minister, the media sources are widely arguing whether the SGC can or cannot be commissioned before 2020. What do you think in this regard?
Natig Aliyev: Many politicians want to anticipate and claim about a possibility to construct gas pipelines ahead of schedule. However, if we build and commission them, who will need them ahead of time? ...
I believe that nobody. All SGC projects are interconnected. Let us imagine that we receive gas faster, increase capital investment and create 10,000 jobs instead of 1,000, attract additional resources and declare in 2017 that gas is available and the infrastructure is ready. But where are going to sell the gas?
If the South Caucasus gas pipeline is not extended and built on time, if TANAP is not delivered on time at least till Eskişehir, where there is a fork towards Turkey, neither Turkey nor European countries will be able to get gas on time. As of today the agreement is as follows: by the end of 2019 we are expected to supply Turkey with additional 6 billion. Up to this point we have to ensure that gas is available in this volume, the South Caucasus gas pipeline is able to take this gas, and TANAP is ready to receive gas and distribute across Turkey.
Also, TAP should be ready in 2020 so as we could supply additionally 10 billion to Europe.
Therefore, I will repeat again, all the projects are interconnected and there is absolutely no need to rush. If we change the schedule, these changes should be applied to all the projects, and it seems hardly feasible.
The main thing is to fulfill the commitments we signed in December 2013 under which we are obliged to deliver gas on time. If not, we are to pay fines for it. So, if customers are not able to take the claimed gas reserves for some reasons, they will have to pay to us. That is what our commitment implies. Therefore we do not need to deliver it sooner.
When we announce about running over the schedule, we just mean that if a delay happens somewhere tomorrow, we will have a little extra time to rectify the situation.
CE: Gas produced at Absheron field will either flow into TANAP or distributed in the domestic market that Total opposes?
Natig Aliyev: We are watching over the implementation of the Absheron project. Here much depends on the schedule of wells drilled. 1.5 year ago it was supposed that in favorable circumstances it would be possible to receive first gas volumes in 2021. However, it was linked to timely reception of the drilling rig while drilling rigs are all engaged in Shah Deniz project. As far as we know, drilling of one well at Absheron block will take about 9-10 months. Therefore, everything will depend on availability of free time, so called “window” in the time-schedule of use of drilling rigs. If the time schedule is observed, we will receive gas of Absheron in 2021-2022. If not, gas will be extracted a few years later.
Negotiations are anyway held with the drilling club now and everything will depend on the decision that parties are going to make.
All prospects are associated with gas condensate fields
CE: Oil production in Azerbaijan keeps declining. SOCAR, alone, reduced oil and gas production by 10% and 5% respectively. Which measures should be taken to maintain production? Are there plans to improve the situation with reproduction of reserves?
Natig Aliyev: The question is certainly very complicated and sensitive. The thing is that oil production is a very complicated production process. It does not depend on the wish of a producer.
The highest oil production in Azerbaijan’s history was fixed in 1941 when a total of 23 mln tonnes of oil was produced whereafter production started falling. Oil production in Azerbaijan had declined down to 9 mln tonnes in Azerbaijan before the collapse of the former Soviet Union. The reason is simple – exhaustion of fields. The more you produce the lower is oil production as the formation pressure falls down. New techniques and technologies on pressure increase, including gas, water, air injection, etc., should be applied to maintain oil production. Ultimately, it leads to the increase of the recovery ratio and well flow rate. These techniques stop yielding effect in due course and decline of oil production becomes an irreversible process.
The launch of new fields has nowadays been the main compensator of natural oil production decline. Global production increases only at the expense of new fields launched. Without the launch of new fields, global oil production would reduce 64% by 2035.
Azeri-Chirag-Guneshli (ACG) was the last big oil field of Azerbaijan. No other oil fields are expected to be launched for now. All prospects are associated with gas condensate fields. This condensate can be referred to production of light oil.
At ACG block we produced almost 50 mln tonnes of oil per year during 2010-2012. Last year we produced only 41.5 mln tonnes from these fields. The production rate will be even lower this year.
In such conditions decisions aimed at maintenance of stable oil production should be made but not those aimed at increase of production. Here we also need technologies that our consortium partners possess.
Our geologists assume that Mesozoic oil will enable to increase production and become a second oil boom for Azerbaijan. I remember that Mesozoic oil was talked about when I was a student. Mesozoic oil was discovered at Muradlhanly field where large fountains are fixed, up to 10 thou. tonnes per day. But these are small deposits which are becoming exhausted very quickly. No new Mesozoic oil deposits have been discovered yet.
CE: What about shale oil in Gobustan? Will it be able to promote an increase in oil production?
Natig Aliyev: It is not an easy task to produce shale oil. It needs the knowledge of shale oil production technology. We have heard a lot about shale oil. However, what other country in the world besides the United States can openly claim that it produces large volumes of shale oil? The fact is that shale oil production needs a technology completely different from conventional oil production. Everything here is related to hydraulic fracturing, drilling of thousands wells across large areas since it is low pressure oil. A country must have the technological and technical strength of the United States in order to produce it, thus it is not easy.
In order to conduct shale oil production we first of all should study parameters, reserves, every possible methods of studying through exploration, production, operation of wells, etc. Learning is necessary, but it does not mean that shale oil production will enable us to increase sharply the output.
For decades Canada has been developing bituminous deposits (heavy oil) and currently produces tens of millions of tonnes. In Azerbaijan, there are also too many bituminous fields, but we have not commenced their development yet. In the FSU times the pilot exploration of heavy oil at Balakhany field was performed with the lead of Baybakov. Later the explosion occurred and the mine method for development of bituminous field was abandoned.
However, hope should not be given up - exploration continues. We are carrying out research with foreign oil companies in the northern part of the Absheron archipelago. Other searches for hydrocarbon deposits are possible as well.
Editorial note: According to preliminary studies of the Institute of Geology of Azerbaijan, revealed were over 50 formations of natural bitumen and about 60 fields and shale oil flow, including those associated with mud volcanoes, in the Eastern Azerbaijan alone. Anticipated reserves make 200 (1,5bln barrels) and 450 mln tonnes (3.375 bln barrels) of oil equivalent.
We need a pragmatic approach: if we want to use border fields or not
CE: What future do you predict for the border fields in the Caspian?
Natig Aliyev: If you want to know my opinion as an expert, in such issues it is necessary to recognize certain part of fields disputable, for instance Kapaz field, and start negotiations. It is possible only if both sides wish to use it.
Let us suppose that reserves reach 100 mln tonnes of oil. If we want to use them for our economies, we have to hold negotiations and find the way to split it and gain our joint dividends from it as two brothers. The same approach should be applied in case with Iran. There is simply no other option. These negotiations are certainly a rather long process. As early as 1996 National Leader of Azerbaijan Heydar Aliyev created a commission for negotiations with Turkmenistan. I was appointed the head of the commission. Later, a working group on the level of deputy ministers of foreign affairs, which is currently involved in this issue, was created to hold negotiations.
Twenty years have passed but nothing has changed unfortunately. I believe it is necessary to apply a political will, combined with a pragmatic approach if we want to use border fields or not.
Thank you for the interview
Interview made by Jeyhun Bayramov and Emil Mammadov