Week 17 Overview
The last week consecrated a change in the ties between Russia and the European Union. The Commission brought forward a case against Gazprom for abuse of dominant position. This came in a moment Brussels is showing a remarkably united approach to increase energy security. Companies, organisations and authorities vocally call for increased integration of national energy markets.
Meanwhile, Ankara expressed some criticism for Russian positions. This could be a signal toward stronger relationships between Europe and Turkey. On the other hand, the International Association for Energy Economics (IAEE) could tip the balance in favour of Eurasia.
Against this backdrop, Azerbaijan confirmed its key role in the European industry, while fresh analysis suggested that Iran could soon run into problems if it does not take its domestic consumption into serious consideration.
Finally, Baltic countries proved that they want to take an active role in Eastern Europe, giving examples and providing assistance in the Balkans. And they are right. Things are changing in the gas industry, but not many European prominent figures are willing or capable to take the lead - apart, of course, from European Commissioner Margrethe Vestager.
MESSAGES FROM BRUSSELS: CASE AGAINST GAZPROM, INTEGRATION, COORDINATION
The European Commission gave Gazprom 12 weeks to answer its Statement of Objections (SO) for alleged abuse of dominant market position in Central and Eastern European gas markets. The widely-anticipated decision triggered the enthusiasm of Ukrainian officials, raised some doubts among Russian experts and encountered strong opposition from Gazprom. Tatiana Romanova, Associate Professor at the School of International Relations, Saint-Petersburg State University, commented that the timing - and not the decision- shows a degree of politicisation on both fronts.
We asked five experts their opinion about the European Commission’s move. It seems that almost everybody agreed on the fact that it will not be a game changer. In one way or another, Vestager’s decision is part of a broader change already taking place in the ties between Brussels and Moscow.
More generally, Gazprom might benefit from the EU antitrust case, in the sense that it might provide the necessary outside impetus for Gazprom restructure its business model in the EU accordingly to new market realities. This would be consistent with actions already taken by other EU gas suppliers such as Statoil.
Though improvements have been made, there are still too many European countries entirely reliant on Russian gas, EU Commissioner for Energy and Climate Action, Miguel Arias Cañete said at an event in Dublin on Thursday. The statement comes a day after the European Commission sent Russian major Gazprom a Statement of Objections, alleging it had breached antitrust regulations.
Big energy sector players stepped in on Wednesday to call on countries and European authorities to support the coordination of national policies and join forces to promote higher integration. The CEOs of four leading energy companies, and the sector association Eurelectric delivered similar messages: climate protection depends on Europe-wide solutions, and not on short-term fixes.
ACER presented an implementation plan, including the methods to calculate the metrics of each wholesale market and the self-evaluation process of National regulatory authorities. ACER gave clear guidelines, showing signs of leadership which could lead to a stronger role soon.
Earlier this week, the European Union laid the ground for an arm-wrestle with Gazprom by enticing Turkey and Azerbaijan. Vice President of the European Commission Maroš Šefčovic said that Brussels will support Turkey to realise the Trans Anatolian Natural Gas Pipeline.
TURKEY: BETWEEN RUSSIA AND EUROPE
Turkey is probably not at a crossroads, but it will certainly be a litmus test for Russian aspirations to launch a common energy platform over the borders of Russia, Belarus, and Kazakhstan. Ankara could soon be called to decide whether take the European or Eurasian path, or try to walk in both direction. The International Association for Energy Economics (IAEE) could be a way to change the balance between Europe and Eurasia.
Over the past year, Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan remained in close contact and minimized public disagreements, but tensions between Russian and Turkish officials have been pronounced in recent weeks. In early April, Turkish Foreign Minister Mevlut Cavusoglu publicly criticized Russia. He condemned Russia's treatment of Turkic minorities in Crimea.
NORTHERN AFRICA, EAST MED: EUROPEANS STAY PUT, ISRAEL AND ITS INTERNAL DEBATE
While the European diplomacy and political elite gathered in Luxembourg on Monday to get ready for an extraordinary European Council on Thursday centred on the situation in the Mediterranean Sea in the aftermath of the latest migrant drownings off the coast of Libya, Spain’s Repsol and Italy’s ENI reiterated their commitment to operations in North Africa. European companies could even gain from the current developments in the area.
Shell’s takeover of BG has raised the question of whether the preliminary $30 bn deal with the partners in the Leviathan field to supply gas to BG’s LNG plant in Idku, Egypt, via an undersea pipeline will come to fruition. Doubts about Shell’s intentions raised over the last days - the Anglo-dutch company may not wish to work closely with Israel.
A renewed hope for a resolution of the dispute between Noble Energy/Delek Group and Israel’s Antitrust Authority without the breakup of the monopoly resurfaced ahead of the formation of a new government in Israel. While no concrete information has been leaked yet, a shift towards a more lenient policy is expected.
IRAN, AZERBAIJAN: DIFFERENT FUTURES?
Iran has signed several contracts and memorandum of understandings for exporting 50 mcm/d to Iraq, 30 mcm/d to Oman and 30 mcm/d to Pakistan. By 2025, the natural gas consumption of the country would increase by four times. This sounds the alarms for Iranian officials to adopt appropriate measures.
Azerbaijan’s authorities said that they will contribute to the diversification of Europe’s energy needs, pushing down the price of Russian gas. After a two-day meeting of the Hungarian-Azerbaijani Joint Economic Committee, Budapest said that any other project would only be ‘a long-term plan or a dream.’
Amid speculations about Iran, Russia, Turkmenistan and even Iraqi gas flowing via the Trans Adriatic Pipeline (TAP), Azerbaijan says it will fulfil its own commitments for realisation of the project. The Vice President of SOCAR Elshad Nasirov told Natural Gas Europe that there is no problem in delivering the first 10 bcm/a of Azeri gas to TAP, but a second gas supplier will be needed to join the project later on in order to meet EU’s laws.
EASTERN EUROPE, UKRAINE: THE BALTIC COUNTRIES AN EXAMPLE FOR THE OTHERS?
Baltic countries dealt with governments of the Balkan Peninsula, with Latvian officials meeting the Serbian government, while Lithuania praised Moldova’s decision to take the “European way”. The meetings hints at a growing focus on Eastern Europe, increasingly seen as a pivotal area to avoid mayhem and additional fractions within Europe.
In Eastern Europe, Poland, Hungary and Bulgaria remained under the spotlight for different reasons.
Explorations for shale gas in Poland had ‘not significantly affected the state of the environment’, reads a report commissioned by the Polish Ministry of Environment. According to a note released by the Ministry, the work performed by national research institutes and universities suggested that fracking did not have a significant impact on groundwater and surface waters.
Hungary’s MOL Group reported a full year result for 2014 in line with 2013 levels, with downstream strengths almost offsetting weaknesses in the upstream and midstream segments. Despite the recent expansion in the North Sea through the acquisition of several assets, MOL’s strategy seems to continue in its downstream expansion, leaving the upstream competition to other companies.
After the meeting on Wednesday in which Bulgaria, Greece, and Romania signed a framework agreement for the Vertical Gas Corridor, Romania’s Victor Ponta, Serbia’s Aleksandar Vucic and Bulgaria’s Boiyo Borrissov spoke on Friday about new interconnectors. On the same occasion, the three Eastern European countries formed their Visegrad-inspired Craiova Group.
The Bulgarian government has made strides over the past few months in its attempts to firmly establish itself at the centre of the natural gas route game in the Balkans. It has nevertheless found itself in the uncomfortable position of being unable to accommodate diverging energy policies.
In the latest report on Croatia, the European Commission has warned that Croatian Law on the gas market does not encourage competition, and that such a situation could jeopardize further integration into the European energy market, as well as projects such as the LNG terminal on the island of Krk. The document also outlined that between 2008 and 2012, Croatia's gas prices rose by 45% and 94% for domestic and industrial consumers respectively. The growth was due to a VAT increase (25% for both electricity and gas), and a major rise in the natural gas shipping rate.
On April 9th 2015, the Ukrainian parliament took a long-awaited step towards a competitive and secure energy plan in Ukraine. As with any other law on market liberalisation, this piece of legislation creates a legal framework for such liberalisation and shows political will to this end; the Parliament of Ukraine has done its part. Now the ball is in the hands of the executive branch, and, ultimately, the incentive should shift to the market itself.
IN THE INDUSTRY THIS WEEK: LNG, AND CONSOLIDATION (ONCE MORE)
The current year could mark a change of pace. With the announcement that Shell are targeting a $70bn deal for BG Group, and in doing so increasing their current LNG capacity to around 33 million tons per annum, the big dollars to secure gas capacity are coming into sharp focus.
While the Kremlin is strengthening its ties with a host of countries around the world, Western companies continue their negotiations that would lead to a consolidation of the gas industry. Majors and smaller players equally gave signals of interest in M&A operations on Thursday. According to Wood Mackenzie, this could come amid a renewed interest for Black Sea resources in the near future.
Despite optimistic forecasts for the gas industry in the coming months, companies keep suffering. Halliburton reported that North America experience an unprecedented decline in drilling activity during the first quarter.
BP agreed to sell its stake in the Central Area Transmission System to Antin Infrastructure Partners for £324 million ($486 million). The simultaneous deal signed by E.ON and Meridian LNG, along with the celebration for the Pori LNG proves once more the increasing focus on Liquefied Natural Gas.
Russia has a five year window, at best, to successfully enter the global LNG markets. But even that window is closing fast.
NORTHERN EUROPE: NORWAY
While Dutch production gives clear indications of difficulty, Norway tries to increase its clout in European gas markets, launching its 2015 oil and gas licensing round in mature areas and eying new opportunities in the Barents Sea.
The Polarled pipeline will transport its first gas from the Aasta Hansteen project to Norway’s coasts in 2017, Germany’s Wintershall said on Wednesday, keeping the 2-week momentum for the Norwegian gas industry going.
European companies are increasingly looking at cooperation opportunities to decrease costs. This growing trend most recently saw cooperation with neighbouring countries such as Kazakstan. UK-focused Egdon Resources is an example. Announcing its interim results for the six months ended 31 January 2015, the company clearly voiced its intention to team up with larger operators.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci