European natural gas market wrap-up for Week 15

Week 15 Overview

The recent agreement between Royal Dutch Shell and BG Group suggested once more that the gas industry does not miss any opportunity for an identity crisis: the industry is changing fast, the consolidation process is likely to continue, and LNG keeps growing. Should Shell conclude its proposed purchase of BG Group, there will be other aspects to reflect upon - the implication of the acquisition on the LNG projects proposed by the two companies - but at the moment what really matters is that there is an identity crisis - gas is trying to find its way, and Europe is trying to sketch out its strategy for its future’s energy security.

Against this backdrop, the 15th week also witnessed some movements in Southern Europe, and Middle East - while Israel approved gas exports to Jordan, Greek authorities met with officials from Russia, Hungary, Macedonia, Serbia, and Turkey. Even Ukraine is going through a similar process of identity seeking. The government continues its crack down on oligarchs.

UKRAINE - RUSSIA - EU: GAS SUPPLY TALKS POSTPONEMENT, UKRAINIAN GOVERNMENT AGAINST OLIGARCHS

On Friday, gas supply talks with Russian Energy Minister to secure supplies to Ukraine until the end of the next heating season have been cancelled. The European Commission said that, as not all technical questions at expert level have yet been answered, trilateral expert talks need to continue next week in Brussels with a view to properly prepare the next trilateral meeting at political level. This week will tell whether the these ‘technical questions’ are just details or significant political divergences.

Meanwhile, the Ukrainian government continued its crack down on oligarchs and owners of companies in the power sector. Prime Minister Arseniy Yatsenyuk supported on Wednesday a law that would allow the use of gas distribution networks “solely on a paid basis.”

On Thursday, the Ukrainian parliament adopted a law meant to align its natural gas market with the EU’s Third Energy Package, in an effort to move closer to the pillars of “ownership unbundling” and the establishment of a National regulatory authority. The law will take effect immediately, but it will be applicable from October 2015.

On the other side, Europe’s goal of significantly diversifying away from Russian gas is challenging but not impossible in the short to medium term (through 2020-2025). Among the many challenges are the uncertainties regarding some of the most promising non-Russian gas supply options, such as those from the Middle East and Caspian regions, in which Russia plays an important role.

Slovakia has become increasingly important in the ongoing conflict between Russia and Ukraine over Ukraine's strategic alignment with the West. As Slovakia continues to walk the line between both sides, Russia in particular will struggle to boost its influence over Bratislava.

Cooperation with China is only a “medium-term prospect” for Russia, whose production is affected by looming production challenges, declining CIS markets, weak domestic and stagnant European demand, says a report by CEDIGAZ released on Thursday. CEDIGAZ is definitely right when it concludes that ‘the coming decade will be critical for the [Russian] industry.”

TURKEY: TRILATERAL TALKS WITH AZERBAIJAN AND TURKMENISTAN, NEGOTIATIONS WITH IRAN; EU MEETS AZERBAIJAN’S PRESIDENT

Turkey is holding talks both with Iran and Azerbaijan-Turkmenistan to understand how a final nuclear deal between world powers and Teheran would change the picture for the Southern Gas Corridor. An official meeting between Turkey and Iran, and informal negotiations between Turkmenistan, Azerbaijan and Turkey were held simultaneously.

The trilateral consultation among Azerbaijan’s, Turkmenistan’s and Turkey’s foreign ministers - which in the next stage will involve the presidents - is a major diplomatic achievement by Ankara. Turkey began political consultations to bring all sides closer together less than a year ago.

Turkey signed eight memoranda of understanding with Iran, during President Receb Tayyip Erdogan's visit to Tehran on April 7th. Erdogan said Ankara hopes that Iran will provide Turkey with a discount on the gas supplied to the country. He also added that Ankara is ready to increase the level of its Iranian gas imports.

Similarly, Azerbaijan’s energy sector is considering the removal of sanctions against Iran to possibly increase the commercial viability and attractiveness of the Trans-Anatolian Natural Gas Pipeline Project (TANAP). Azerbaijan has decided to keep a major stake in the TANAP consortium and is interested in boosting gas volumes pumped through it to increase future opportunities and financial benefits.

European Commissioner Johannes Hahn and Azerbaijan’s President Ilham Aliyev discussed stronger cooperation between the Caucasus country and the EU during a meeting in Baku on Wednesday. Both sides noted that there were good opportunities for expanding cooperation in this field.

Finally, Azerbaijan’s SOCAR President Rovnag Abdullayev met Afghanistan’s Petroleum Minister Daud Shah Sabah to speak about how to tap into hydrocarbon resources in Afghanistan. SOCAR President stressed the expertise of his company, and its international dimension.

BALKANS AND SOUTHERN EUROPE: GREECE

Recent talks between the Greek government and Gazprom essentially deal with an extension of Turkish Stream. The pipeline would stretch from the Greek-Turkish border up to Northern Greece, then will traverse vertically FYROM and Serbia, before reaching Hungary from where a spur to the Austrian Baumgarten mega-hub will be added.

Representatives of five countries - Hungary, Serbia, Macedonia, Greece and Turkey - met in Budapest on Tuesday, announcing the formation of a working group to facilitate natural gas deliveries. Countries in the region need to search for new, diversified sources of natural gas in the interests of energy security in the wake of the cancellation of South Stream, Hungarian Foreign Minister Peter Szijjarto said.

On Wednesday 8th of April, Greece's Prime Minister, Alexis Tsipras, met with his Russian counterpart, Vladimir Putin, in Moscow. Russia is continuing to secure a stronger footing into Europe’s most fragile and isolated regions, the Eastern Mediterranean and the Aegean.

Serbia is ready to look for new supply sources. According to Serbian officials, the priority will be the interconnection with Bulgaria.

LITHUANIA: LNG TERMINAL AND GAZPROM

As the contract with Gazprom is expiring, Lithuania’s nitrogen fertilizer manufacturer Achema told Natural Gas Europe that the Baltic country's largest single gas consumer is in talks with “potential gas suppliers” and mulls ad hoc options. He also confirmed its stance on the Klapeida LNG terminal, arguing that if the company was compelled to pay the facility maintenance fee of the terminal, it would run into financial problems.

Gazprom initiated the investment arbitration against Lithuania in 2012 aimed at the-then new Lithuanian Law on Natural Gas, following the adoption of the EU Third Energy Package. During the week, Russia’s gas giant has pulled out from an arbitration case against Lithuania in the Permanent Arbitration Court in the Hague.

ETS REFORM, CLIMATE RULE

Modifications to the European Emissions Trading Scheme (ETS) are something that everyone has been waiting for in the national gas industry. A change in regulation could mean that power generation companies have an incentive to burn lower emitting natural gas instead of running on much cheaper, dirtier coal.

In the UK coal use has fallen to levels last seen during the 1850s industrial revolution, causing a significant part of the large emissions reduction last year. The UK's three main political party leaders have pledged to phase out unabated coal. Germany, meanwhile, wants to close down its oldest coal plants to avoid missing its 2020 climate targets.