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Listen: Azerbaijan prepares to host OPEC/non-OPEC JMMC, boost domestic energy sector

Azerbaijan will host the OPEC/non-OPEC joint ministerial monitoring committee meeting in Baku on March 18, pushing it into the global energy spotlight. S&P Global Platts Moscow bureau chief Nadia Rodova and oil editor Rosemary Griffin discuss the current state of Azerbaijan's energy sector and the key trends to follow as it seeks to boost cooperation with OPEC member countries and further develop its role as an energy producer and transporter in the region.

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BARKINDO: "This is the compelling story of a Caspian country that rose from modest roots to leverage its natural resources and go on to become a key energy player on the international stage. There is no doubt that Azerbaijan will continue to play a significant role in the decades to come, including in the partnership between OPEC/non-OPEC in the declaration of cooperation."

NADIA: That was OPEC secretary general Mohammed Barkindo speaking last summer about Azerbaijan and its historic role in the global energy market. Baku is proud of being the birthplace of the global oil industry, the place where, for example, the Nobel brothers built their fortune that eventually became the financial ground for the famous Nobel Prize. Now as the country prepares to host the next meeting of OPEC/non-OPEC joint ministerial monitoring committee, or JMMC, what are the key issues affecting the Azeri oil and gas industry and what does it hope to gain from its moment in the spotlight? I'm Nadia Rodova, managing editor at S&P Global Platts bureau in Moscow and I'm joined today by oil editor Rosemary Griffin to discuss this. So Rosemary why Azerbaijan?

ROSEMARY: Well since the deal came into force the JMMC meetings have been hosted by various participating countries, and at OPEC's headquarters in Vienna. Azerbaijan offered to host one in 2019 and that invitation was accepted. It had a strong interest in joining the deal with oil accounting for 80% of exports and GDP dropping significantly in response to the price drop three years ago. Azerbaijan also has close political and energy ties with non-OPEC leader Russia and has demonstrated pretty good compliance with its production cut commitments so far.

NADIA: Right, the country's declining output from mature fields makes this a relatively easy task, although there have been some monthly fluctuations. Liquids production in Azerbaijan, which traditionally includes crude oil and gas condensate, peaked at over 1 million b/d in 2010 and has gradually fallen since then. Last year, though, we saw a 2% annual increase in liquids output. This was largely thanks to growing gas condensate production from the giant Shah Deniz-2 project that was launched in the middle of last year. Crude production continued to fall. This year, the downward trend is likely to continue and total liquids output to fall modestly, by around 10,000 b/d or less, Platts Analytics estimated.

ROSEMARY: Again, this is likely to help Azerbaijan to meet its commitments to cut 20,000 b/d from September 2018 levels in the first 6 months of 2019. Statistics for January indicated that it has yet to reach this target, with the output falling only marginally to 793,000 b/d.

NADIA: The JMMC meeting could also be an opportunity to secure external support for new projects that will help underpin production in the longer term. Especially given the recent unfortunate news that the US companies Chevron and ExxonMobil are considering to exit the country's flagship oil project, Azeri-Chirag-Gunashli, which accounts for over 70% of the country's total output.

ROSEMARY: Exactly. Hosting the JMMC is a good opportunity to showcase the domestic industry and intensify talks over potential bilateral cooperation. We are already seeing some signs of progress there. For example in mid-February Azerbaijan and Saudi Arabia set up a committee to look into expanding energy cooperation. It's still early days, but they are considering cooperation on petchems, renewables and energy efficiency.

NADIA:Azerbaijan is also pushing for an increase in regional cooperation. After 20 years of negotiations, the five littoral states of the Caspian signed the Convention on the legal status of the Caspian Sea last August, which could facilitate shared development of the Caspian's vast hydrocarbons reserves.

ROSEMARY: That could include greater cooperation with fellow non-OPEC deal participants and long-standing energy partners Russia and Kazakhstan. Azeri and Russian companies have well established joint oil and gas projects and Baku hopes companies like Lukoil will increase their presence in the country. Recently, we've also seen Azerbaijan sign a number of new agreements with Kazakh companies, including a January memorandum between Socar and KazMunaiGaz on oil and gas exploration, transport and trading. Socar also held talks with Kazakh transportation companies KazTransOil and Kazmortransflot at the time, so we may see some more progress in those areas in the future.

NADIA: Transportation is a really promising area of cooperation. Baku would like to secure greater volumes of Kazakh crude flowing via Azerbaijan to international markets as production in the Central Asian country is set to grow. At present, Kazakh producers export crude mainly via Russia and those volumes rose significantly after the Caspian Pipeline Consortium last year completed a massive expansion project. The pipeline runs from Kazakhstan along the Caspian shore to the Russian port of Novorossiisk and its capacity rose by nearly 70% to around 1.5 million b/d from 2014. This and other Russian routes, however, may be unable to accommodate Kazakhstan's growing output after 2021, and Baku and Astana are in talks to make crude supplies via Baku-Tbilisi-Ceyhan pipeline economically attractive for Kazakh producers.

ROSEMARY: Developing joint projects with some other regional players could be less straightforward. Azerbaijan has indicated it would like to develop Caspian projects with Turkmenistan and Iran but disputes over resource ownership have thus far stymied those plans. Sanctions against Iran are another potential risk.

NADIA: It will be interesting to see how the meeting goes next month and track developments in the region going forward. That was Rosemary Griffin, and me, Nadia Rodova today in the studio. Join us again for the next S&P Global Platts Oil Markets Podcast.