Caspian states concerned by low oil prices

EPA/ROBERT GHEMENT

Oil pumps in Baku, Azerbaijan, June 28, 2015. Some experts believe that the current situation with the low oil prices could prove good for Russia, Kazakhstan and Azerbaijan, signaling the need to modernise their economies and to implement the latest technologies.

In 2016, only Azerbaijan and Kazakhstan will reduce their oil production volumes


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ASTANA – Out of the five littoral states, only Azerbaijan and Kazakhstan will cut oil production this year.

According to experts, in spite of the falling oil prices, the oil production situation in the five Caspian states does not cause a lot of concern. But their dependence on the oil revenues will adversely affect their economies.

Today, all the oil-producing countries are behaving as if in a cycling race, waiting for another to make a mistake to take them over, said Konstantin Simonov, the general director of Russia’s National Energy Security Fund.

“All oil producers are trying to maintain production not to lose their markets. And the question of the day is: ‘How long will such situation continue?’” he asked.

As is known, the main law of the market is “demand begets supply”. However, many experts believe that the current collapse of prices in the oil markets is not connected with the demand-supply misbalance but rather with the fact that the dollar has become a liquid asset. Besides, the speculative and, at times, panic factors come into play as well.

Can a reduction of production volumes by the OPEC countries raise the oil prices? That was the topic of discussion of the experts of five Caspian states from Moscow, Astana and Baku.

According to Simonov, last year’s production volumes of Russia, Kazakhstan and Azerbaijan were “not so bad”. For example, Russian production grew to over 534 million, or 1.5%. Azerbaijan and Kazakhstan, though, showed a reduction of oil production volumes by slightly over 1% (46 million tonnes) and by 2% (about 79 million tonnes), respectively.

Good, according to him, is also the situation with the oil exports. Neither Russia, nor Kazakhstan or Azerbaijan has lost their markets. On the contrary (based on preliminary data), last year’s exports of oil from Russia grew by 8% and so did Azerbaijan’s oil exports.

“That is, our countries have not lost the markets,” Simonov said. As far as the forecast for oil production volumes for the “Caspian Five” is concerned, they differ considerably, and for good reasons.

In 2016, only Azerbaijan and Kazakhstan will reduce their oil production volumes, according to Analytical Centre for Oil Studies of Azerbaijan Director Ilhan Shabanov.

“In the Caspian region, in 2016, only Azerbaijan and Kazakhstan are expected to cut their oil production volumes. Russia, Iran and Turkmenistan, on the contrary, will see increased production levels,” Shabanov said.

According to him, major Russian oil producers will continue to increase their oil production.

For many Russian oil bearing fields, the cost of production is less than $10. So the fall of oil prices to $30 per barrel is not an obstacle for them.

Shabanov also talked about Iran’s expected growth of production this year, which announced its plans to the world after the lifting of the sanctions.

“The only question is by how much the production with grow in Iran by the end of this year, by 400,000 to 500,000 barrels or, as the Iranian government has declared, by a million barrels a day,” Shabanov said.

According to him, the fifth Caspian littoral country – Turkmenistan – is not going to give up its oil production growth plans either.

“At 12 million tonnes, Turkmenistan’s oil production volume is not so big, but the republic intends to increase its production. Last year, Turkmenistan completed the upgrading of its refinery, and it can now produce euro-5 standard fuels. By supplying quality gas and diesel fuel to the world markets, Turkmenistan is planning to receive a good margin, better than from simply selling its crude oil,” the Azeri expert said.

He also explained the difference between the cuts of oil production in Azerbaijan and in Kazakhstan.

In his opinion, the lower levels of oil production in Azerbaijan is a natural development, as all the fields there are old by the oilmen’s standards, and are well past their flowing peak.

Even such a major project as Azeri-Chirag-Gyuneshli, has passed, since 2010, the period of intensive production. In 2016, production in Azerbaijan is expected to decrease by one million tonnes, from 46 million tonnes last year to 45 million tonnes this year.

“In Kazakhstan, the situation is different. Some of its oil fields have very high cost of production, so the oil companies have to cut their capital investment, which has affected the production numbers over the past two years,” Shabanov said.

In his turn, the Head of the Centre for Studies of the World Energy Markets of the Russian Academy of Sciences, Vyacheslav Kulagin, provided an explanation of the Russian oilmen’s plans.

“For Russia itself, it makes no sense to cut production now. If it were to do that, it would only happen if an agreement could be achieved with the OPEC states. That said, the production of ‘black gold’ should be conducted in a coordinated fashion, otherwise, Russia may really lose its markets,” Kulagin said.

Kazakhstan, for its part, claims that the expected decrease of production levels this year will be a temporary measure.

“The low oil prices have forced all the companies to revise down their budgets and to seriously look into cutting their production costs,” Kazakhstan’s Energy Minister Vladimir Shkolnik said recently.

According to him, the 77 million reduction of production volumes in 2016 is expected to be made up for later, through putting the Kashagan filed on line, then through the Tengiz expansion project and the second phase of expansion of the Karachaganak project.

However, the collapse of oil prices has seriously affected the economies of Russia, Kazakhstan and Azerbaijan. The Russian ruble has devalued three-fold versus the dollar; the Kazakh currency – by 100%, and the Azeri manat has lost half of its value versus the dollar.

According to Kulagin, the low oil prices directly affected the revenue part of the budgets of all these three countries.

A leading research fellow of the Institute of Economy of the Azerbaijan Academy of Sciences Mais Guraliev believes that the governments of the three countries have failed, over the 20 years, to restructure their economies to avoid oil price dependence.

“Having said that, though, we should admit that it’s more difficult for Azerbaijan, as we do not have such resources as Russia and Kazakhstan. Besides, Azerbaijan’s economy is not as diversified as those of Russia or Kazakhstan,” Guraliev said.

According to him, the budget requirements of Azerbaijan are $9 billion a year. With the current prices, the maximum oil revenue this year would be $2 billion. The question is where to get the remaining $7 billion.

Shabanov added that, during the period from September, 2014 to the end of December, 2015, the government of Azerbaijan spend 10 billion dollars from the National Fund to support the national currency manat.

Ilhan Shabanov believes that half of that amount should have been spent to revive the economy rather than to maintain the manat. Unfortunately, he said, the government of Azerbaijan had failed to take into consideration that the period of low oil prices could last longer.

“For the first time since the independence, the government of Azerbaijan has decided to issue bonds and to take foreign loans to cover the budget deficit. We shall see what results this will yield,” the Azeri expert said.

In his turn, Kazakhstan’s Institute of Oil and Gas Deputy General Director Akbar Tukaev believes that the current situation with the low oil prices could prove good for the economies of all the three countries: Russia, Kazakhstan and Azerbaijan.

Kulagin agrees with him. “The current situation, as a reality check, is good for all the oil producing countries. It is a signal that it’s time to seriously modernise the economies and to implement the latest technologies. What has been talked about for a long time needs to be done now,” he said.

He continued on to say that the budgets of the countries that are not tied to oil are feeling much better nowadays than those that are solidly tied to it. He brought up the example of Saudi Arabia where they came up $98 billion short last year.

“It is a very big hole in the budget of Saudi Arabia, almost 25%. The same shortage is expected this year. The National Fund of Saudi Arabia has shrunk considerably. Its 600 billion dollar reserve can end fast if the situation with the low oil prices continues,” he said.

According to Kulagin, Russia’s 2016 deficit budget is evaluated at 3%. “This means that the Russian economy is not as highly dependent in oil as Saudi Arabia. It also helped that the softer ruble allowed smoother budget adjustments to make our economy more competitive. This also allows the Russian government to pull up the development of the non-energy industries,” Kulagin said.

As far as Kazakhstan is concerned, it plans to continue to develop its infrastructure projects focusing on the development of its transit potential between the East and the West, between China and Europe.

As part of a large-scale privatisation programme, Kazakhstan has put up for sale all of its three major refineries. The republic intends to use the investment thus received to upgrade the three refineries to produce higher value euro-5 standard products.

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