Weekly actual topics in Azerbaijan (Feb.20-25)
Where to direct Turkmen gas?
Turkmenistan ranks fourth on the largest natural gas reserves in the world. From year to year, it increases production volumes. According to BP, Turkmenistan produced 42.4 billion cubic meters of gas in 2010 compared to 36.4 billion cubic meters in 2009. According to the National Statistics Committee, the production volume in 2011 increased by 40.6 percent compared to 2010. Turkmenistan more and more needs additional export routes of supply.
The Turkmen President was re-elected for another term. After his re-election, the policy of multipolarity of the sale markets remains unchanged. Turkmen energy resources will continue to be exported to the world markets via the best alternative routes, local experts and international observers said. Besides the existing export routes to Russia, Iran and China, there are three alternative Turkmen gas export routes: the Trans-Caspian, Trans-Afghan and Caspian projects. What is going on around these projects and what is their status today?
The Trans-Afghan gas pipeline (Turkmenistan-Afghanistan-Pakistan-India)
The design capacity of the Trans-Afghan pipeline (the territories of Turkmenistan, Afghanistan, Pakistan and India - TAPI) is up to 33 billion cubic meters of gas per year, length - more than 1,700 kilometers. Buyers are Pakistani and Indian gas companies.
Official Ashgabat has recently reported that the principal agreement was reached with Pakistan at a cost of Turkmen gas. The agreement will be signed soon. The price of transit through the territory of Afghanistan remains unresolved. At present, the principle of forming an international consortium is being discussed. The issue with the financing of the project is being resolved.
The main obstacle to the project implementation is the lack of security guarantees for the construction and further exploitation of the gas pipeline, especially in the Afghan area, despite assurances from the Afghan government and at a lesser extent, the presence of a competing project on the route Iran-Pakistan.
These two factors do not objectively give the chances for TAPI to be implemented in the coming years. The intention may be strengthened by the latest facts. It seems that the confrontation of major world powers is intensified in the region.
According to Pakistani media with reference to the unnamed sources, Russian energy minister and Gazprom senior officials will visit Pakistan to discuss Russian side's participation in the project of Trans-Afghan gas pipeline. Pakistani The Nation said that the fact of Russia's interest in the TAPI project and possible participation of Gazprom irritate the U.S.
On the other hand, according to the Pakistani media, the Americans are trying to persuade Islamabad to block the participation in the construction of the Iran-Pakistan gas pipeline, offering LNG supplies for a discount price as an alternative. However, at a meeting in Islamabad, Pakistani President Asif Ali Zardari has recently assured his Iranian counterpart of commitment not only to successfully complete, but to speed up the project implementation.
The last news from the pages of The Express Tribune, reports on Russia's proposal to the Pakistani side to provide Gazprom with the right to build the Iran-Pakistan gas pipeline (an Iranian plot was almost constructed) worth $ 1.2 billion beyond the competition. According to the report, in this case, Moscow will ensure financing for the project.
It seems that the construction of the Trans-Afghan gas pipeline is supported by the U.S., Russia, and importing countries. But it is clear that it is impossible to implement the project without resolving the inter-Afghan problems. At the same time, it will lose relevance, especially for Pakistan, if the Iran-Pakistan project is implemented.
Caspian gas pipeline (Turkmenistan-Russia)
The design capacity of the Caspian gas pipeline (along the coast of the Caspian Sea from Turkmenistan to Russia via Kazakhstan) is up to 30 billion cubic meters a year. In May 2007, the presidents of Russia, Kazakhstan and Turkmenistan signed an agreement to build a gas pipeline. At present, the preparation of a feasibility study was suspended under the influence of the global recession and changed conjuncture. Senior Russian officials have previously stated that the agreement was reached to freeze the project. Turkmenistan said that there were no such negotiations. Indeed, what does Russia need additional pipeline for, if the main - Central Asia-Center is not filled completely.
Trans-Caspian gas pipeline (Turkmenistan-Azerbaijan-Europe)
The design capacity of the Trans-Caspian pipeline stretching about 300 kilometers (through the bottom of the Caspian Sea between Azerbaijan and Turkmenistan) linked to the demand for Turkmen gas to Europe and the determination of the status of the Caspian Sea. There are no direct agreements for the project implementation. The European Union gave a mandate to start the negotiations to prepare an agreement between the EU, Azerbaijan and Turkmenistan on the Trans-Caspian gas pipeline in September 2011. But at present, the status quo of the project remains unchanged. Russia and Iran stand against the implementation.
Thus, all the alternative projects on Turkmen gas export, in fact, suffer a fiasco now. The only country welcoming the current situation is China. It continues to increase the volume of gas purchased from Turkmenistan at a favorable price. Turkmenistan and China signed an agreement for additional gas supplies via the Turkmenistan- China pipeline in November 2011. The contract envisages an increase in gas supply by 25 billion cubic meters of natural gas per year. This will bring the total amount up to 65 billion cubic meters of gas per year taking into account the previous agreements.
Nabucco: power in weakness
Nabucco will lose its strategic importance with changing its original conception and becoming smaller pipeline than it was initially planned, senior advisor on international energy and climate policy at the German Institute for International and Security Affairs (SWP) in Berlin, Friedemann Mueller believes.
It is quite a fair statement which is hard to deny. Indeed, Nabucco is turning into relatively small pipeline project with shorter route and double-reduced capacity and the name changed but anyway it is better than to lose face. The favourite child of EU nursed for over ten years is again not allowed to die. Why?
The united Europe is considered a global power that is not befitted to waste words or to quit. Nobody must have any doubt about the EU's cohesion and performance capability; otherwise an idea can come to mind that the Union is weak and invalid. Fresh examples of what is called the EU's cohesion and unity show themselves in giving the second package of bailout to Greece to drag it out of an imminent default, as well as a painful decision to impose an embargo on Iranian oil imports although at the second try.
Nabucco seem to be in the same range. It is now unacceptable for EU to admit the project's failure after years of talks and negotiations never mind the money spent, efforts made and people involved. EU's ambitions are the answer to the question why Nabucco is still alive albeit transformed.
One of the four proposals aimed for delivering Caspian gas to Europe is out of game. Yesterday Marlene Holzner, a spokesperson of EU Energy Commissioner Guenther Oettinger, commenting possible options of delivery of Caspian gas to Europe, noted that the European Commission may support a combination of pipelines instead of entire one if they will meet the EU's requirements namely if there are smaller pipelines, they should not have less capacity than that of Nabucco and should have internationally based agreement. Today, as is well known, Nabucco has been the only project supported with an intergovernmental agreement.
In spite of private interests of states and companies or any inner contradictions amongst member states any decision will be adjusted with the EU's common interests. This is why the EU, other conditions being equal, will insist on decision in favour of Nabucco or, to be more precise, Nabucco-West.
Recently Nabucco Gas Pipeline International has submitted the project's new conception to the Shah Deniz consortium. The consortium's official representative told Trend that, according to the new conception, which is called Nabucco-West, the pipeline will be laid from the Turkish-Bulgarian border to the Austrian Baumgarten, which will allow shortening materially the length of pipeline. Earlier Dow Jones Newswires reported with the reference to a source familiar with the issue that the consortium of Nabucco project proposed a pipeline which will have roughly half of Nabucco's initial capacity of 31 billion cubic meters.
The original concept of Nabucco project, designed to transport gas from the Caspian region and Middle East to the European countries is intended for the construction of a pipeline from the Georgian-Turkish and Iraqi-Turkish borders to Baumgarten. The construction of Nabucco pipeline is planned to start in 2013 and the first supplies will start in 2017. The length of the pipeline will be about 3,900 kilometers with maximum capacity of 31 billion cubic meters a year. The project's shareholders include Bulgarian Energy Holding, Turkish Botas, Austrian OMV, German RWE, Hungary's FGSZ and Romanian Transgaz, each holding 16.67 percent of shares.
What attracts foreign bankers to Azerbaijani banking sector?
International financial institutions and foreign banks are interested in the Azerbaijani banking market and their interest is only increasing. The Central Bank of Azerbaijan (CBA) continues to receive appeals from companies that want to invest in the banking system.
The CBA is interested in "brand" banks entering the domestic banking market and has always supported foreign banks joining the local market. Azerbaijan has no restrictions on the participation of foreign capital in the banking sector.
In general, the participation of banks with foreign capital in the banking sector contributes to the increase in competitiveness, the use of new technologies and the improvement of using corporate governance standards, which ultimately improve the quality of rendered services and to give reliable banking products.
Twenty-three of 44 banks operating in Azerbaijan have foreign capital.
Foreign capital in seven banks ranges from 50 to 100 percent. There are two branches of foreign banks in the country. There are five representative offices of foreign banks in Azerbaijan. Commerzbank, Citi bank, Societe Generale are among them. It will be possible to transform these offices into subsidiary banking institutions in the future.
The CBA is considering the Turkish İş Bankası's proposal to acquire an existing bank in Azerbaijan or create a new bank.
Instability in the global economy and the crisis have further increased investors' interest in entering the markets of developing countries.
The competitiveness level of private banks attracts foreign players in the Azerbaijani banking sector. Liquidity in the Azerbaijani banking sector is estimated as the excess. It reaches or exceeds 100 percent in some banks. For example, in 2011 the growth of household deposits in Azerbaijani banks amounted to 21 percent, the loan portfolio - 19 percent, the share of liquid assets in total assets is 18 percent. Capital adequacy is 16 percent, while the share of overdue loans in total loan portfolio - 6.3 percent.
Scaling up the operations in the country's private sector has especially strengthened the country's commercial banks and allowed them to attract new customers, by improving their financial indices, including profitability and efficiency. Major challenge for today's Azerbaijani banks is to finance the modernization of the country's economy. The banks must be modernized. They should increase a sufficient amount of assets and improve corporate governance. In 2012, the radical modernization of the supervisory framework and regulation of the banking system based on the latest international standards and experience will be the CBA's main priority.
The prospects of the Azerbaijani banking system does not cause doubts among the experts and analysts of international rating agencies. International rating agency Moody's appreciates the increase in the share of the Azerbaijani private banking sector in the country's credit market. According to the analysts of the international rating agency Standard & Poor's, a situation that has arisen in the Azerbaijani banking sector today, is quite stable. The banking sector has no problems with liquidity.
Azerbaijan's sovereign rating has been recently raised from "BB +" to "BBB-". The country moved into a different category - investment. Once the rating has investment grade, many investors who are guided by this rating, in accordance with its investment strategies can go to the markets of these countries.
The matter rests in the fact that in the near future the world leading banks' interest in the banking market of the country will increase. Today, Azerbaijan is known in the world not only as the possessor of rich reserves of hydrocarbons but as a transit country for the supplies to the world markets. It plays an important role in ensuring Europe's energy security. But the country also has prospects to become a country known worldwide for the services. The market of banking services may become one of them. The possibility of establishing one of the regional financial center, a regional center for Islamic banking in Baku is being discussed.
Producers dictate gas price
The discussions about the need to develop a new pricing mechanism for gas, when the prices on oil and gas are determined independently of each other, are being held several years. It is notable that this topic appears when spot prices on gas are reduced.
On February 22 spot price on gas at the British National Balancing Point (NBP) reached $382.6 per 1,000 cubic meters, reducing from record $600 per 1,000 cubic meters in early February. Rising in temperature will help to further reduce the price on "blue" fuel on the European stock exchanges.
The price on gas was $92.3 per 1,000 cubic meters on U.S. stock exchanges. The prices on gas in the U.S. last year dropped by 32 percent and renewed a two-year minimum. The decrease in prices was caused by an increase in supply of this fuel. According to Barclays Capital preliminary estimates, in 2011, gas production in the U.S. increased by 10 percent and may rise by 4 percent in 2012. Thus, the experts expect a further decline in gas prices.
At present, exporting countries determine the prices on natural gas proceeding from the oil price and the so-called replacing oil products, such as fuel oil. For example, a large Russian company Gazprom's gas price in the long-term contracts is connected with oil quotations with a lag of 6-9 months Accordingly, the fluctuation in oil prices leads to a change in gas prices. At the same time, this connection is the guarantor of the predictability of prices. There is no better formula for calculating the gas price in the world yet.
The countries - importers of gas purchasing gas from a supplier through the contracts, mainly, long-term ones, are not always satisfied with such a formula of gas price. Disputes sometimes reach the arbitration tribunal. In their view, there will be a fair price if market-based components are taken into account and increase the share of spot and swap transactions for more than 25 percent. European companies' push has already made the Russian "Gazprom" to reconsider the gas agreements with several European partners. As a result, the Russian concern has agreed to take into account the market gas price in its price formation.
This time Turkey acted in terms of the differentiation of oil and gas prices. It is going to appeal to the partner countries on the energy market. "If the current exploration and oil and gas production are conducted on a different formula and the cost of these processes is not the same, then why gas prices are still dependent on oil prices?" Turkish Minister of Energy and Natural Resources Taner Yildiz said.
At present, the price on Azerbaijani gas exported to Turkey is $330 per 1,000 cubic meters. Turkey also imports gas from Russia for $ 450, from Iran for $420 per 1,000 cubic meters.
Yes, the gas price is now lower than that oil. The main reasons for this in the world practice are such breakthroughs in the technology such as horizontal drilling and hydraulic layer fracturing. Moreover, many companies get associated gas during oil production. High oil prices push the companies to drill new wells and increase production volumes. As a result, the production of associated gas automatically increases. This leads to an increase in supply in the market.
The data from SOCAR's audit report as of 2010 show that as of 2010 SOCAR's prime cost of oil increased by 20.8 percent, while natural gas reduced by 11.3 percent. The reduction of expenditure (amortization expenses, salaries, social charges, expenses on consumables, etc.) led to a reduction in the cost of 1,000 cubic meters of SOCAR's gas at 11.31 percent to 40.07 manat in 2010 compared to its level in 2009.
But whatever the partners' arguments would be in favor of reducing gas prices - low cost or low spot prices, the main trump is eternal thing between seller and buyer, namely, the seller wants to receive maximum money for the goods and the buyer is willing to pay the minimum. However, taking into account the current situation in the global energy market, one can conclude that gas producers are lucky today.