GLOBAL FLOW

The oil market seems to be recovering from a long period of turbulence. The sharp fluctuations in oil prices that were observed in late 2015 turned into a stable growth trend in the first quarter of 2016, leading prices to settle steadily in the neighborhood of 50 dollars per barrel. This stability was not even shaken by a meeting OPEC held in early June. At that meeting, the cartel continued its policy of staying away from regulating the market.

According to the minister of energy of the United Arab Emirates, Suhail al-Mazroui, the 2 June OPEC meeting did not set extraction quotas but came to a consensus not to increase oil production. "The agreement is that we decided to continue our strategy. The market is recovering, the gap between supply and demand is shrinking. Oil surplus in the market is also shrinking," he said.

Oil more important than anything else

Moreover, while adhering to maintaining its production levels amid low prices, the cartel actually reaches its main goal. The difference between supply and demand in the market has decreased from 2-2.5 million barrels per day to 1.2 million. The decrease in supply is mainly caused by production decline in non-OPEC countries - mainly the USA, Canada and Mexico amid production growth in Iran. Most experts expect a balance to come to the market as soon as next year. However, a certain impact on prices may be made by sales of oil being stored in storage units and tankers around the world, the volume of which is estimated at 600 million barrels, as well as US capacity to increase shale oil production within a short period of time. Oil-producing countries seem to have completely forgotten the initially unpromising idea of "freezing" oil production. Overall, no alternative is capable of shaking the oil future of the planet yet.

According to BP's forecasts, in the next 20 years oil and gas will remain the main sources of energy, but a decline in energy consumption is expected around the world to 1.5 per cent per year from 2.5 per cent in the past 20 years. According to BP Chief Economist Spencer Dale, who spoke at a presentation in Baku, this is mostly due to falling consumption in China - from 8 per cent per year over the past 20 years to about 2 per cent in the coming 20-year period. Asia will be the main driving force in energy demand. In particular, BP forecasts say, Asian countries expect an increase in people's incomes, which will lead to an increase in the number of cars (outside the Organization for Economic Cooperation and Development, the number of cars will triple to 1.5 billion in 2035), and this will certainly lead to an increase in oil demand.

In the structure of energy consumption, the largest increase is expected in alternative energy, but even with a 6.5-per-cent annual increase, its share in aggregate energy balance will increase from 3 per cent to just 9 per cent.

Among non-renewable sources, natural gas will demonstrate the highest growth, as it will gradually push coal out of aggregate energy balance. Even in the oil-gas pair, gas is increasing its share. Just 10 years ago the ratio of consumption was 60 over 40 per cent in favour of oil, but a balance has now been achieved, and in the coming decade 60 per cent of liquid hydrocarbons consumed will be gas. According to BP estimates, although energy demand in OECD countries will remain stable, diversification of supplies has in recent years been a matter of particular concern for the European Union, most of whose members are also members of the OECD.

Year of challenges

Energy supply to Europe was one of the most important issues at the traditional Caspian Oil & Gas exhibition and conference held in early June. The event was organized by ITE and Iteca Caspian. Incidentally, the exhibition and conference coincided this year with the 20th anniversary of the conclusion of the contract to develop the gigantic gas condensate field Shah Deniz, gas supplies from which will be the first alternative for Europe in the next five years. The system to supply this gas joins the Southern Gas Corridor project, which is gigantic even by European standards. The project includes both expansion of gas production from the Shah Deniz field and creation of a full-fledged system of export and transit of Caspian gas to Europe.

"The Southern Gas Corridor is an economic project and, at the same time, a security project, as global energy security issues have nowadays come to the foreground. Everyone now understands that it is impossible to talk about countries' national security if there is no energy security. It has always been our goal to use the energy factor to deepen cooperation," Azerbaijani President Ilham Aliyev said at the opening of the Caspian Oil & Gas exhibition. He pointed out that the project brings together the interests of producing countries, transit countries and consumers.

The importance of the implementation of the SGC project to ensure the energy security of European countries was also stressed by US President Barack Obama and British Prime Minister David Cameron in their congratulatory messages on the occasion of the opening of the exhibition. It is important also to note that the implementation of this major project continues amid the three-fold decline in oil prices that has had a negative impact on almost all oil-producing countries, including Azerbaijan.

The Azerbaijani president said that 2016 is a year of challenges for all oil-producing countries. "We are even more seriously engaged in the diversification of the economy in order to completely eliminate dependence on the oil factor and to enable Azerbaijan's economy to become a long-term sustainable economy. Much is to be done to this end. Oil prices have fallen several times over, which, certainly, is a challenge for all countries. However, I believe that Azerbaijan is overcoming this challenge with honour. The year 2016 is to be a year of stabilization, and we are already seeing this. I am confident that economic growth will be restored from next year," the president said.

He said that in these circumstances the emphasis is placed on the implementation of social programmes. "The decline in oil prices has created a stressful situation, and I believe that this has been in our favour. Many institutions, including government agencies, have got accustomed to being allocated very large amounts of money for the implementation of different projects. We now approach these issues from a more economical point of view. Public funds are only allocated for priorities. Most funds should come from the private sector. Domestic and foreign investors are investing, they believe in us, and I think that over the past few years we have gained an excellent reputation as a reliable partner," the president said.

Incidentally, the topic of saving was almost the main one at the Caspian Oil & Gas conference. The fall in oil prices, on the one hand, created difficulties in the global economy but, on the other hand, it has led to a cheapening of the cost of a number of ongoing projects, first of all, the SGC project, because pipes and equipment used in the construction are becoming cheaper. "So, in current circumstances, the cost of works in Phase 2 of the development of the Shah Deniz field is estimated at 23.8 billion dollars, and this includes 4.9 billion dollars' worth of work to expand the South Caucasus Pipeline," Azer-baijani Energy Minister Natiq Aliyev said. Previously, these works were estimated at 25 billion dollars. He said that the cost of the project to build the Trans

Anatolian gas pipeline (TANAP) is now estimated at 9.3 billion dollars (previously estimated at 11-12bn dollars) and the cost of works to build the Trans-Adriatic Pipeline (TAP) 6 billion dollars (previously 8.9 billion dollars). As a result, the SGC project will now cost between 39 and 40 billion dollars, the initial cost being 45 billion dollars.

In addition, SOCAR is also implementing a saving programme. According to Vice-President Suleyman Qasimov, SOCAR has been implementing over 700 projects in all of its structural units to optimize costs put together in cooperation with Ernst & Young. Owing to this, it has managed to reduce the prime cost of oil production by 13 per cent and improve productivity by 26 per cent. The efficiency of the project is now over 150m manats, and the company expects to save a total of almost 340m manats.

Crisis no obstacle to gas

But in any case, the emphasis is placed on a timely implementation of the Shah Deniz 2 project and the SGC transport system, and it will have a very significant impact on the diversification of the Balkans, and southern Europe, which is effectively dependent on one supplier at present.

According to Energy Minister Natiq Aliyev, the launch of the TANAP project in 2018 and the supply of an additional 6bn cubic metres of Azerbaijani gas will help reduce Turkey's dependence on Russian gas whose share is as high as 58 per cent. At the same time, Azerbaijani gas is significantly cheaper than Iranian and Russian in the Turkish market.

An expert at the Oxford Institute for Energy Studies, Simon Pirani, confirmed this in his report at the conference in Baku. He believes that Turkey's demand for Azerbaijani gas may significantly exceed the 6bn cubic metres envisaged by the contract within the framework of phase two of the development of Shah Deniz. He stressed that Turkey is currently the only European gas market that continues to expand, and Turkey's demand for gas will have increased significantly by 2020.

With regard to Europe, Azerbaijan will need to conduct a correct pricing policy for a greater promotion of its gas, because a competitive confrontation from Russian and US gas is expected there in the coming years amid a decreasing consumption in Europe.

"Today, the average price of gas is 154.4 dollars per 1,000 cubic metres, and by 2018 the average price is projected to be 176-206 dollars. Therefore, in order to compete with US liquefied natural gas, Russia can sell its gas for 140 dollars per thousand cubic metres. Therefore, Azerbaijan should consider these players to get a share of the European market," Pirani said.

At the same time, the expansion of the gas pipeline system will enable Azerbaijani gas to access all Balkan countries. According to Natiq Aliyev, the TAP consortium is working on the possibility of joining the Ionian-Adriatic gas pipeline to supply gas to Montenegro, Bosnia-Herzegovina, and Croatia. Croatia-Hungary, Hungary-Romania, and Slovakia-Romania connectors will enable Azerbaijani gas to access the Balkans and Eastern Europe.

Gulmira Rzayeva of the Azerbaijani Centre for Strategic Studies said at the conference that the TAP pipeline will resolve the issue of diversification of supplies in that region, which is not covered by interconnectors.

She said that Azerbaijan's export potential would expand after 2020 by another 15bn cubic metres per year. "About 5bn cubic metres can be expected from the Absheron field, 5-7bn cubic metres from the Umid-Babek block, and 4-5bn from the deep-sea layers of the Azeri-Chirag-Guneshli block. It should be remembered that phase three of the development of the Shah Deniz field is also expected in the future. At the same time, Azerbaijan's demand for gas will have increased by 2025 from the current 10.9bn to just 13.5bn cubic metres, mainly due to the development of the industrial sector, which will help significantly increase exports overall," Rzayeva said.

It should be taken into account that the SGC system creates capacity to deliver Turkmen and Kazakh gas, and in the future also Iranian and Iraqi gas, to Europe.

So, the Southern Gas Corridor system, being created by Azerbaijan, contributes to changing global energy flows in the Eurasian continent, and to diversification of routes and sources of gas supply to Europe which remains one of the largest consumers of gas, as well as to the creation of a stable source of revenue for Azerbaijan not only from gas sales, but also from the possibility of using this route for the transit of third-country gas.

FIRST-HAND 

"The Southern Gas Corridor is an economic project and, at the same time, a security project, as global energy security issues have nowadays come to the foreground. Everyone now understands that it is impossible to talk about countries' national security if there is no energy security. It has always been our goal to use the energy factor to deepen cooperation."

Ilham ALIYEV, the president of Azerbaijan