Weekly actual topics in Azerbaijan (May 21 - 26)

Turkish gas market: No alternative to Europe, but a fall back

While Europe, tired of the crisis and torn by the contradictions between the interests of the EU as a whole and the self-interests of member countries, is trying not to miscalculate in choosing new routes for its hydrocarbons' supply. While this is showing a significant hesitancy, Russia, driven by its own interests is trying to 'remove' its potential competitors, that is gas suppliers for the Southern Gas Corridor, by promoting its mega South Stream project aimed at the same customers in Europe as the Southern Corridor.

Azerbaijan also pursues national interests. It will bring its gas to European markets, but if for some reason the conditions including commercial ones are unacceptable, it's necessary to have an alternative plan of action. That means an alternative market for the sale of at least 10 billion cubic meters additionally to the already approved supplies.

The Turkish gas market today is one of the most promising in Europe. According to international energy agencies its share of gas in the total energy balance of the country for the last 20 years increased from 5.5 to 32 per cent. In the forecast of gas consumption among all European countries, growth in gas demand in Turkey between 2010 and 2035 years is the highest (Outlook for Economy and Energy of the world and Russia until 2035, Moscow, 2012).

The latest statistical data also confirms this. According to the Turkish state pipeline company Botas, in 2011 Turkey imported 39.7 bcm compared to 32.5 billion in 2010. In 2011, Turkey sold on its domestic market about 39.4 bcm of gas compared to 31.5 billion cubic meters in 2010. Among the gas exporters to Turkey, Russia ranks first. It supplied nearly half of all the imported volume and is followed by Iran and Azerbaijan. Import growth continues this year. In the first quarter, Botas imported from various sources about 12.74 billion cubic meters of gas compared to 10.88 billion in the first quarter of 2011.

The main factor of growth in gas demand in Turkey is a sharp increase in recent years in energy consumption (half of the gas is used for electricity). According to the Turkish state-owned electricity transmission corporation (TEIAS), electricity consumption in Turkey in 2011 increased by nine per cent, compared with 2010, amounting to 229.3 billion kW / h. Electricity consumption in the first quarter of 2012 increased by 9.4 per cent to 62.4 billion kW / h.

The rapid development of industry in Turkey, the transition of industrial enterprises and thermal power plants from fuel oil to natural gas and several other factors also contribute to the growth in gas demand and this trend is projected to continue.

It is also worth noting the relatively high domestic gas prices which also confirms the attractiveness of the Turkish market. In April-May, the price to the public amounted to $381 per 1000 cubic meters of gas and for industrial enterprises - $355.

This means the picture of the Turkish gas market albeit superficially described, gives reason to say that this market for Azerbaijan is the ideal fall-back option to export additional volumes of gas. The essential argument in this scenario will be the price. Turkey imports gas from Russia for $450 per 1000 cubic meters, from Iran - for $420. Azerbaijani gas is supplied to Turkey at the lowest price at $330. In this case not even a strategic relationship between the two countries, but the commercial benefits will prompt Turkey to replace some volume, let's say, of the Russian gas by Azerbaijani.

Maybe such a possible scenario would motivate Europe to be more decisive and Russia becomes less rigid in the matter of Caspian gas access to European markets.

'The Southern Gas Corridor' is one of priority energy projects for the EU. It is intended to diversify the routes and sources of supply, thereby increasing its energy security.

Gas which will be produced in the second stage of development at the Azerbaijani Shah Deniz gas condensate field is currently regarded as the main source of supply.

Total reserves of the Shah Deniz field are estimated at 1.2 trillion cubic meters of gas. Under the contract and in the second stage, Turkey will receive six billion cubic meters of gas. In total, it's planned to produce 16 billion cubic meters during the second stage of development.

Iranian budget reduces dependence on oil revenues

The international community is focusing on the Iranians state budget for 2012.

Iran's state budget for 2012 approved by parliament is 5.66 quadrillion rials (about $ 461 billion), or 9.5 percent more than last year (5.17 quadrillion rials).

Iran's ability to ensure the revenue component of the state budget because of the restrictions on exports of Iranian oil to the world markets is under question. According to Iran's five-year development program, the Iranian government achieved reducing dependence of the state budget on oil revenues by two times this year.

An analysis showed that Iran's state budget revenues will be mainly formed from traditional sources, one of which is taxes. This year, it is expected to receive $ 37 billion due to taxes. The proceeds through this line will increase due to the increase in taxes by 20 percent in Iran this year. It should be stressed that the taxes with National
Iranian Oil Company are indicated in a certain clause of the Iranian state budget as oil revenues.

Another major source of the state budget revenues are the funds released as a result of reducing the state subsidies for energy resources and other raw materials in the domestic market. The revenues from the subsidy reform program this year will amount to $54 billion.

Iran's state budget expects to receive $50 billion by selling oil on the world markets. It was mentioned that Iran expected to get $ 100 billion through this line in last year's budget.

But if Iran manages to ensure a way out of the planned oil volume to the world markets,
the profits from it will be much higher as the price per oil barrel in the state budget is set at conservative $ 85, while world oil prices exceed $ 100 per barrel.

The proceeds from state-owned commercial companies and banks are also accumulated in a separate clause of the Iranian state budget, which will allegedly receive over $ 100 billion.

That's all sources of replenishing the budget revenues. They were briefly and clearly set out the points of the main financial document of the country and are designed to implement the tasks set before the country. However, it is hard to imagine how the Iranian government plans to ensure the budget revenues for this year in light of upcoming
toughening the sanctions that undermine the entire economy.

The sanctions, aiming to undermine the country's economy and to divert Iran from developing a nuclear program, will have a negative impact on tax collection and the activities of companies. The income expected to be received from the reduction of subsidies, will be absorbed by devaluation of the rial and inflation, which currently ranges within 19-22 percent. Therefore, it is not ruled out that Iran's budget revenues will be corrected in the future.

The budget has been made ​​up on the basis of a fixed exchange rate of the Iranian national currency compared to the U.S. dollar, which now hits 12,260 rials to $ 1.

Price for risk: Exxon prefers Erbil to Baghdad

Tensions between the Iraqi government and Kurdish autonomy-related to issues of oil production and exports in its territory, is preserved.

Baghdad insists on the exclusive right to authorize production and export of the whole Iraqi oil, including that which is produced in the territory of autonomy. The Kurdish Regional Government (KRG), by contrast, believes that it is eligible itself. Recent events related to the negotiations between Turkey and KRG on the construction of the pipeline and the implementation of direct export supplies of oil, can escalate the situation even more.

"We will be able to directly export oil from Kurdish regions in August 2013," Natural Resources Minister Ashti Hawrami said. Baghdad immediately responded by warning the KRG and the Turkish side about the inadmissibility and illegitimacy of such actions, bypassing the central government.

However, not this is a precedent in ignoring the claims of Baghdad to approve all agreements on oil production and export.

Fourth license round for the development of hydrocarbon resources of Iraq will be held in Baghdad in less than a week. Iraqi Oil Ministry spokesman Asym Jihad said 12 blocks, both oil and gas will be submitted in the frame of the tender. The tender will be attended by forty-seven companies from different countries.

The American company Exxon has been excluded from participation in it due to the signing of an agreement with Kurdish autonomy to develop six oil blocks in its territory without the sanction of Baghdad in October last year. Baghdad demanded cancellation of the deal and threatened to exclude the company from participation in the tender.

The company asked for time to think. Then there were conflicting reports in the media - either about freezing by company of activities on the territory of autonomy, then the commitment to signed agreements. As a result, the last press release from the Iraqi Oil Ministry on April 19 didn't include Exxon. It preferred to keep its presence in Iraqi Kurdistan.

Why did the U.S. oil giant voluntarily deprive itself of potential units in the contract to develop fields in southern Iraq, which contain much more oil reserves than available in the territory of Iraqi Kurdistan, knowing also that thereby it spoils the relationship with central government? Is everything explained only by the fact that it is easier to do business, to agree upon the terms of contracts and to share profits on better terms with the Kurds than with Baghdad? The matter rests in the big investments and this is amid the confrontation in dividing the power between Baghdad and Erbil in terms of oil production and exports.

Western companies usually prefer to take a wait-and-see attitude in these disputable cases, without risking their capital, or in general withdraw if the problem settlement takes an indefinitely long period of time or turns into in the conflict.

Regarding Exxon, it is supposed, there is something that justifies the risks.

Iraqi and Syrian Kurds were first after the fall of Saddam Hussein's regime and second in the wake of the "Arab Spring" and the events in Syria who publicly declared that all their efforts will be made to establish an independent Kurdish state. This process can take years, or it can not take place in the foreseeable future, or under the influence of a controlled chain of events. It can be greatly accelerated. But in any case the question arises, who will be the first and principal partner of the young independent state, having great reserves of hydrocarbons, or, if we speak in a roundabout way, who will oversee Kurdistan oil.

It is not a secret that the control over energy resources, especially if they are in a region like the Middle East, is one of the priorities of the U.S policy. U.S. big companies represented and represent the U.S. national interests in various countries where they deploy their activity, especially in the oil producing countries. Perhaps, this is the price which Exxon pays for Washington to be already on the scene when the day of Kurdistan's independence occurs.

According to BP, Iraq's proven oil reserves as of early 2011 amounted to 115 billion barrels, which leads the country in the third place in the Middle East after Saudi Arabia and Iran. There are 40 percent of Iraqi oil, or about 45 billion barrels in Iraqi Kurdistan.

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