Weekly actual topics in Azerbaijan (September 10 - 15)

Analysis Materials 18 September 2012 11:33 (UTC +04:00)

U.S. dollar stronger than it looks

Trading in New York finished with a new record fall of the exchange rate of the U.S. dollar compared to the euro yesterday. Today the dollar today updated its lowest level in four months compared to the euro ($1.3022/ 1 euro), after the launch of the third round of quantitative easing by the Federal Reserve System. In turn, the euro has demonstrated growth after the announcement of the decision of the German Constitutional Court on Wednesday which approved the country's participation in the European Financial Stability Facility and the release of positive statistics on industrial production in the euro area.

An increase of the exchange rate of the euro compared to the dollar does not promise great benefits from a purely economic point of view for many countries in the world actively using the dollar. The dollar is still the most liquid global currency for many countries despite the fact that the dollarization of the economy has reduced in recent years. It is known that 80 per cent of the world's trade turnover falls on to the dollar. In addition, it is the world's reserve currency with almost all the central banks holding the lion's share of their reserves in dollars. Last year, 62.1 per cent of the world reserves were stored in U.S. dollars and 25 per cent - in euros

There is enough 'deep' domestic currency market with many countries in this currency whereby wages are issued and personal savings are stored in dollars The cost of real estate, cars and other major purchases in many countries is still estimated in the U.S. currency although the actual calculation is still in national currencies.

Therefore, all currencies check their strength or weakness compared to the dollar. In addition many analysts today equate the price of oil to an equivalent to the dollar value. Indeed, virtually all of the world's oil is sold in dollars. Their theory is borne out in practice that when the price of oil increases, the dollar usually starts cheaper. Devaluation of the dollar has an impact on other markets. Thus, the demands for metals including precious and agricultural commodities which are traded in dollars are increasing due to the cheapening of the dollar. It is known that gold hit a peak price (1740 USD. /Oz) on Wednesday from the end of February 2012.

The outflow of investors from the dollar was caused by the creation of two opposite dynamics in the movement of the U.S. currency and the EU euro zone. International rating agency Moody's representatives said that the U.S rating may be reduced next year if politicians do not come to a consensus and do not start a real reduction in the budget deficit and state debt. It should be stressed that the U.S. state debt is approaching its legislative threshold. On the other hand, the European Central Bank will continue holding a very soft monetary policy. As a result operators working with cash in the market of bank deposits, convert their dollar assets into euros. The increasing demand for the euro creates a lack and therefore rate appreciation.

There are no fundamental reasons in the euro zone that would support the European currency. The economic growth remains sluggish. Analysts reduced the forecast of economic development in the region. This is greatly stipulated by budget consolidation and a decrease in budget expenditure. The European Central Bank has revised the euro zone GDP annual growth forecast as being a downtrend and the regulator expects a rate reduction by 0.2-0.6 per cent.

The U.S. does not hide its interest in a controlled weakening of the dollar. For the past few years the U.S. rushes about between the ever-increasing federal budget deficit and the foreign trade deficit and the need to maintain the interest of foreign investors in the U.S. economy. According to the U.S. Department of Commerce, in June 2012, the industrial production volume in the U.S. increased on a monthly basis by 0.1 per cent. Exports of goods and services from the U.S. in the second quarter increased by six per cent. The U.S. GDP in the second quarter of 2012 increased by 1.7 per cent compared to the previous quarter, while the EU's GDP fell by 0.2 per cent.

It is also important that the process of the world countries' refusal from the dollar which began in mid-2008 is lengthy. This testifies to the fact that the U.S. dollar will still be dominant in the reserves of each country. It is hard to find an alternative.

Turkmen gas: through Caspian Sea to Europe

Shale revolution, alternative energy, a Russian-Iranian opposition, the discovery of major new gas fields offshore Cyprus, Israel and Egypt - all of these factors will not ultimately affect the creation of the so-called Southern Corridor for the export of Caspian gas to Europe due to a number of political and economic factors.

The economic feasibility of the Southern Gas Corridor and in particular the construction of 300 km of pipes beneath the waters of the Caspian Sea (Trans-Caspian gas pipeline) instead bend around it from the north, or from the south, is said to be cheaper and shorter. The political component of the issue is also not often publicly voiced: in European support for the construction of the Trans-Caspian because it wants to get a new source of gas supply and therefore, relative freedom from Russian dependence. The Iranian route is unacceptable to Europe because of the current confrontation with Iran and the relationship of the West in general.

However if the situation with Azerbaijani gas is clear, then there are questions about future exports of Turkmen gas. A meeting of senior representatives of energy ministries of Azerbaijan, Turkey, Turkmenistan and the EU Energy Commissioner Günther Oettinger, was held earlier this week in Ashgabat and was another step in the achievement of this goal. The main issue in the talks was the implementation of the Trans-Caspian gas pipeline.

It seems that talks in Ashgabat satisfied all parties. Press secretary of the EU Energy Commissioner Marlene Holzner said that "it was a very constructive meeting in which all parties have demonstrated that they are interested in the continuation and implementation of the Trans-Caspian pipeline."

President Gurbanguly Berdymuhamedov said that Turkmenistan is interested in early energy exports to Europe which is responsible for the multi-vector policy in diversifying energy export routes, which he conducts.

Azerbaijan confirmed its position that it is ready to create favourable conditions for Turkmen gas to transit through its territory. The Turkish side has put emphasis on the interest of the country and the TANAP project in Turkmen gas.

Some 199 billion cubic meters of Russian pipeline gas exports out of the 207 billion cubic meters goes to Europe, including Belarus and Ukraine (BP data for 2011).

The ten billion cubic meters of Azerbaijani gas, which is planned to export to Europe through Shah Deniz in 2018 is negligible compared to Russian figures. Another thing, if the Turkmen - first 10, and at least another 30 billion cubic meters of gas in the future will be added to Azerbaijani gas. Russia does not want to share the European gas market - the best in terms of price, and yet the most insatiable with someone.

Iran also thinks about its advantages from the project. While commenting on the export of Turkmen gas via Trans-Anatolia Pipeline (TANAP), director of the National Iranian Gas Export Company (NIGEC) Bidarmaghz said that the transportation of Turkmen gas via the Caspian
Sea and further through Trans-Anatolia Gas Pipeline is impossible, because Iran and Russia will not allow gas pipeline laying through the seabed to protect the ecology of the Caspian Sea. Therefore, he added that the Turkmen gas may be supplied to Trans-Anatolia Pipeline only
through Iran. He said that Iran is ready to transport Turkmen gas through its territory to Turkey.

Meanwhile, the EU shows that it also has leverages over Russia's position in gas issues. Almost simultaneously with the meeting in Ashgabat, the European Commission announced about launching the official anti-trust investigation over the Russian gas company

"Gazprom" is suspected of dividing the gas market to obstruct the free supply to the EU countries, as well as preventing the diversification of fuel sources. The search operations were conducted in several European offices of the company. If the facts of monopolizing the European gas market by "Gazprom", it will face great sanctions.

Europeans are waiting for the interstate agreement to be signed between the two littoral countries, otherwise, any European company or a financial institution will hardly to agree to invest its own capital in the project. From this point of view, a precedent will be the main
incentive for Turkmen gas delivery to the European market.

"Shah Deniz" consortium members will determine the route of gas export to European destination in the first half of 2013. After the final investment decision is taken, the construction operations may be launched. This event will be the basis of the future agreements on using Turkmen gas in the Southern Gas Corridor if not today, then tomorrow.

In September, the WB must call the winner of the tender announced for the preparation of the report on the assessment of environmental and social impact assessment under the Trans-Caspian gas pipeline project. The tender was announced on the basis of the European Commission's
appeal to the WB. Six consortiums led by well-known companies attend it. One can judge about the scope of the work, the complexity and the cost of the ESIA preparation by the time to be allocated for its preparation - about 30 months.

Interest in "relinquished" field in Azerbaijan growing again

In Azerbaijan, the majority of PSA contracts with major international companies were made in the 90's of the last century. All of them are mainly focused on the exploration and development of oil reserves of the Caspian Sea. The gas as a source of huge profits did not have such a value 15-20 years ago as it has now.

From this point of view, the so-called "relinquished" fields, where commercially attractive oil reserves weren't found at one time may become targets for potential investors, who will allocate capital to discover large reserves of gas. History of discovery of Azerbaijani fields Umid and Absheron - a good example of such a reorientation.

In 1953 the first geophysical work was carried out. This was repeated in 1972 in a somewhat improved form. From 1977 to 1992, nine wells were drilled with negative results. It is clear that the exploration was conducted to find, first of all, oil reserves because of its role as the main energy source. More than 200 billion cubic meters of gas and 40 million tons of condensate were discovered as a result of the drilling of an exploration well on the field Umid in 2010.

French Total repeated this success in the field Absheron in 2011. After two unsuccessful attempts the French company announced the discovery of 350 billion cubic meters of gas and 45 million tons of condensate in 2011.

Gas prices are still firmly tied to the price of oil and oil products, despite the growing role of spot deliveries. In 1995-1999, when Azerbaijan has signed most PSA contracts, oil cost was $10-20 per barrel. Gas at these prices is of relatively little interest.

At present, oil is sold by ten times more and the value of natural gas as an object for making investments also increased. The average European import price on gas during the period was $85 per 1,000 cubic meters. In 2011, it amounted to $ 380, that is, increased by 4.5 times.

The policy aimed at reducing emissions of carbonic gas has stipulated the demand for gas in the entire energy balance of many, including European countries. Gas is much more ecological than coal (45 per cent less CO2 emissions during combustion) and oil (30 per cent less emissions). The accident at the Japanese nuclear power plant "Fukushima" has also played a leading role in Europe's gas preferences.

Azerbaijan managed to create a complete gas infrastructure for a short time. Signing an agreement between Azerbaijan and Turkey to build the Trans-Anatolian gas pipeline (TANAP) to transport Azerbaijani gas to Europe must be stressed.

So, the sharply increased prices on hydrocarbons, increasing global interest in gas as the cleanest and most economical kind of fossil fuels, the availability of gas infrastructure - three main factors stipulating the interest of large companies to the previously explored fields in an attempt to find not only oil, but gas.

There are many eexamples of potential investors' returning to once explored oil and gas fields in Azerbaijan. BP has recently offered SOCAR to study shoal around Absheron. "Statoil" signed an agreement with SOCAR to assess geological and geophysical data on the shallow area in the north-west of the Absheron peninsula, by using modern technologies in June.

"Nakhchivan" field is closely monitored by the German RWE. India's ONGC Videsh Limited has expressed an interest to the exploration and development of Babak prospective structure. These examples have been made public, but it is unknown how many confidential talks are being held on the topic.