Ilham Shaban: "Azerbaijan benefited from OPEC deal"

Ilham Shaban: "Azerbaijan benefited from OPEC deal"

At the end of last month, OPEC countries and other oil-producing states signed a new agreement on oil production cuts, which will last until March of 2018 this time. However, oil markets didn't react to this event positively - oil began to drop in price, and today Brent trades below $49 per barrel. Director of petroleum studies center Caspian Barrel Ilham Shaban discussed the results of the first deal for the world and Azerbaijan in an interview with Vestnik Kavkaza.

- What are the results of the first OPEC deal?

- Last year Azerbaijan agreed to participate in OPEC plans. OPEC and 11 other countries discussed cutting production levels since February of 2016, Russia was the initiator of these talks. The process was tiresome, because it was the first deal of such type. Meetings could not be arranged, sides could not agree on certain positions, so oil prices continued to drop. Positive signals were only sent in October, as soon as information that Russia and Saudi Arabia will coordinate their actions as key participants in the deal was leaked. OPEC conference was held on November 30, and for the first time since 2008 the cartel was able to change its quotas, reducing them by 1.2 million barrels per day. Meeting of non-OPEC countries was held 10 days later. They agreed to cut production by 558,000 barrels per day, and it was just a gentleman agreement: if they would not do this, there still would be no legal, commercial or any other penalties. As a result, at the May conference, OPEC reported that it fulfilled this agreement by 102%.

- Then why oil prices dropped after that?

- Indeed, right now we can see a decline in oil prices, not growth like after November 30, when prices went up by 20% in a very short time, from $43-44 per barrel in November to $55 per barrel in January. The problem is simply that the market has expected much more from this conference, it expected new steps from OPEC and other countries. At the end of last year, OPEC+ struggled to keep oil prices at the level of $55-60 per barrel, and this goal was achieved within one quarter - but the initial impact of the deal is fading away and no longer affects the markets. In April prices dropped to $45-50 per barrel, and only in May, when Russia and Saudi Arabia once again began to announce that they really want to preserve this agreement and stabilize the situation, so that' why they're negotiating with other countries, prices have raised to $54 per barrel at the peak. At the same time, the average May price was still at $51 per barrel, and this is an indicator that the market didn't get what it expected from OPEC and other major players. As a result, prices were the lowest since the beginning of this year after the deal was extended.

- Did the fact that the United States are increasing their production somehow affected this situation?

- America, the largest player on the market outside of OPEC, has increased its production by more than 270 thousand barrels per day. According to forecasts, they will increase production even more, by 130-140 thousand barrels per day, by the end of this year. But the United States are only a part of overall problematic picture, since OPEC production has also increased because of Nigeria and Libya, whose quotas have not been reduced due to the fact that revenues from increasing oil export will be spent to stabilize internal political system, while bring stability to the market. But this is not what the markets were waiting for - they hoped that if production volume are growing in the first half of the year, then production cut by another 500 thousand barrels per day to compensate the growth in Nigeria and Libya will help to maintain the balance. However, OPEC and other countries have decided that if the goal has already been achieved, the prices are at the right level and stocks are decreasing, this will be enough. This drop in prices is also affected by the fact that the market didn't consider latest extension of the deal to be serious. That' why the market has reacted like that and prices didn't went up.

- What was the state of Azerbaijan's oil and gas industry when the deal with OPEC was signed?

- 2016 was, I would say, the most difficult year for the Azerbaijani oil and gas industry. In particular, there was almost no revenue from gas to the State Oil Fund of Azerbaijan, because since May of last year all incomes from Shah Deniz were spent to finance Shah Deniz-2 and purchase of gas in the framework of Shah Deniz-1 for internal market. In other words, all revenues were spent on current expenses. The only income came from the Azeri-Chirag-Gunashli fields. Last year, the Azeri-Chirag-Guneshli revenues amounted to $5.1 billion, in 2015 they amounted to $7.6 billion, and in 2014 - $16.26 billion. There's a clear trend of decrease in revenues from oil industry.

- How did OPEC deal affected Azerbaijan?

- The deal is very positive. Data of the first 4 months shows that revenues from the Azeri-Chirag-Guneshli fields increased by $463 million compared to the same period of 2016 - and it happened despite the fact that production dropped by more than 900 thousand tons. All of that happened thanks to the fact that the price of BTC FOB Ceyhan oil raised (in fact, about 80% of Azerbaijan's exported oil to the world markets is delivered through the Ceyhan terminal to the Mediterranean) by more than 40% compared to the first four months of 2016.

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