Is Azerbaijan Running Out of Gas?

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The surge of fossil fuel prices in 2011 sent a wave of paranoia through the world as some worried that the globe had hit "peak oil", the mathmatical point at which the global energy corporations (state-owned and private-owned alike) can no longer pump enough petroleum to power the natural world.  While the concerns turned out to be mostly overblown, thanks to new discoveries in Russia, Venezuela, and the rise of shale-oil fracking, the principle concern about peak energy remains staring in the face of the modern world.  At what point will we be unable to extract enough resources to power the global economy given the exhaustable supply of fossil fuels?  While no country has yet truly ran out of oil and gas, Azerbaijan is reporting declines of gas across the board, suggesting that they might have reached peak gas and will be headed for the roller-coaster-decline of a line graph.  That's bad news for Azerbaijan, but very good news for gas investors.

The Makings Of An Energy Empire

The 1990s proved quite bittersweet to a number of the former Soviet republics in central Asia, collectively referred to as the "stans".  While Azerbaijan isn't a stan, due to the name as well as the fact that they're located on the opposite side of the Caspian Sea, they've experienced the same ups and downs resulting from the collapse of communism and the introduction of a frequently-shaky market economy.  Azerbaijan has little in the way of services, manufacturing, or technology, but one thing that they have in abundance (which many of the stans do not) is fossil fuels.  A full 90% of their exports are petroleum and natural gas, a higher ratio than Saudi Arabia or Russia, due in large part to the 2006 tapping of the Shah Deniz gas fields in their region of the Caspian.  The Shah Deniz were thought to be some of the most productive gas fields in all the world, containing a reserve of about fifty to one hundred billion cubic meters of gas.  The more that geologists surveyed the land, however, the more they found that the abundance of natural gas was limited by the presence of gas condensate due to the pressure of the water above.  While gas condensate isn't inheirantly bad, since petroleum engineers use it to distill heavier crude, it limits the raw output of a gas field.  The Shah Deniz suffers from the condensation process at the same time that the government plans to install a series of pipelines across Asia and Europe to supply gas, punting the problem of output down the road for future generations to solve.

Dependency Doldrums

Azerbaijan predicts that they'll bring about thirty billion cubic meters of natural gas to the surface this year for export.  From any angle, that's a very large quantity of gas, but it's a decline from their production compared to 2014, which was also a decline in gas output compared to 2013.  While some of their other gas reservoirs such as the Chirag or Azeri fields appear to have fewer problems at the surface, the Shah Deniz has seen their output dip by double-digit percentages as geologists report difficulties extracting from condensate-heavy wells.  The national oil minister spun the news as a positive for the nation, claiming that the output reflected more workers putting in efforts to develop new projects, though the writing on the wall suggests that the Azerbaijan gas field projects are unable to provide the dependable high quantity of gas provided by their usual heavy resevoirs.  The lowered output appears bad for Azerbaijan, as such, but also for the EU.  The Trans Adriatic Pipeline, a two-billion dollar project in the making since 2003, would be hardest hit by the decline in gas.  This pipeline, in the state of construction thanks to German, Swedish, and Swiss investors, will run from Azerbaijan through Turkey and into Europe, provides a lifeline of energy from states ranging from Italy to Albania in the hopes of providing an alternative to Russian-owned fossil fuels.  The decision to sneer at Putin may bite the EU in the behind if the Azerbaijani gas fields cannot get the necessary 20 billion cubic meters of gas flow each year planned by the pipeline architects, putting the project at risk of turning into an unprofitable waste much like Boston's Big Dig.  If the Trans Adriatic shuts down, furthermore, the only viable alternative for EU gas will come from the Russian South Stream pipeline, which funnels gas into eastern Europe from Kazakhstan, with Russian providers like GazProm taking a rather favorable cut as it comes their way.

  • The Takeaway: while natural gas hasn't taken as much of a beating on the market as sister fuel oil, it still hasn't given investors much reason for hope.  The Azerbaijan news suggests that one of the world's leading providers of gas is finding their taps running much lower than they'd want.  Investors have several options for gaining value on the backs of the Azerbaijani gas field problem.  Longing the commodity for delivery in the short future appears to represent the best option, because each day with lowered Azerbaijani output puts pressure on the EU to turn to Russian gas, in turn driving up the price.
  • Since the largest producer of gas in Azerbaijan is British Petroleum, longing their stock in tandem can offer a good return on a tighter market for gas.  BP is trading at four-year lows, furthermore, making them a great value buy for investors looking to get in on growth at the lowest possible price.

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