Week 18 Overview
In the 18th week, politicians across Europe and beyond delivered their messages, often incoherent, but always highly geopolitical in their nature. Declaration after declaration, every government has been trying to bring forward its own agenda, looking for the best political umbrella to safely table its delusions of grandeur. The plethora of statements can be legitimate, but it is highly unlikely that even half of the proposed project will be realised. Some pragmatism is necessary.
A new LNG terminal in Estonia when the Klapeida facility in Lithuania can meet 80% of the gas needs of the three Baltic countries, a pipe through the Caspian to deliver Turkmen gas to Europe or imports of gas from Turkmenistan via Iran, the Nabucco gas pipeline as a result of the cooperation between Iran and Bulgaria are just some of the ideas under discussion.
Apart from market conditions, developments and final investment decisions will depend on: i. the ongoing negotiations on the Iranian nuclear program, ii. the ties between Turkey and Europe, iii. the arm-wrestling between Ukraine and Russia, iv. the stability in the MENA region, v. the intention of Caspian countries and Central Asia to move closer to Europe or rather remain committed to strengthen relations with China. In this sense, before speaking about any new infrastructures, politicians should scientifically study, understand, and possibly solve some of these difficulties.
The picture is so complex that simple declarations don’t even vaguely make the grade. Easy words will not do the job. Quantity should be left aside for quality - instead of over-speaking about energy, European politicians should come up with a few new feasible ideas, calling for Brussels’ help only where necessary and relevant. If European countries continue asking for the moon, they will remain stuck in the darkest mud. Confusion, if not part of a clear strategy, does not normally help.
In a sense, when Energy Charter’s Secretary General Urban Rusnák said that the Energy Union package misses an external dimension, he was right. It seems clear that the Energy Charter wants to fill the vacuum allegedly left by European authorities, finding an important mission that would avoid countries following in Italy’s footsteps and leave the organisation.
CONFUSION 1 - TURKISH STREAM
At the beginning of April, Serbian officials carried out intensive diplomatic activities aimed at including Serbia in the Turkish Stream project and finding ways to secure the delivery of gas from Azerbaijan. The Turkish Stream is a good substitute for the abandoned South Stream project, but it is highly questionable whether Greece, Macedonia and Serbia will find the money to get involved in the Russian-Turkish project.
The Greek Foreign Minister Nikos Kotzias held bilateral talks with his Hungarian counterpart where it was unofficially agreed to have both the Vertical route and the Turk Stream as joint projects that will link the Balkans with Central Europe. Greece, Bulgaria and Romania are indeed boosting joint efforts to develop the Vertical Gas Corridor, proposed by the EU's Commission over the past year as a diversification tool.
Another source of confusion stems from political manoeuvring and geopolitical poker, as the case of Athens perfectly shows. The Southern Gas Corridor and Turkish Stream are both geopolitical and economic projects, but the former is a reality and the latter is not. Greece has a right to explore alternative options and use its geographic position to its advantage but the government should clearly distinguish reality from mere speculation.
CONFUSION 2 - EAST MED
Similar uncertainties hang over the Eastern Mediterranean, where domestic rivalries and geopolitical tensions might hinder developments. Nonetheless, some good signs could come in the coming months. According to a statement issued by the Delek Group, by the second half of 2015 ‘the partners will submit to the government of Cyprus ‘a notice declaring Aphrodite commercial under the SPC with a drafted development plan of Aphrodite.
Noble Energy told Natural Gas Europe that the Aphrodite field, discovered in 2011 and estimated at 4.54 Tcf, has the potential to supply the domestic market and help meet strong regional demand. Noble added the Texan company was looking forward to working closely with the government and the people of Cyprus to achieve the economic benefits that these resources can provide, as well as increase energy security.
A solution to the arm-wrestling between Nicosia and Ankara would foster momentum too, creating the right framework for additional explorations in Cyprus’ waters. Nicosia and Washington sent conciliatory messages, paving the way to an effective negotiation table.
Meanwhile, Cyprus, Egypt and Greece agreed to increase economic ties and business relations, while joining forces to tackle terrorism in the Eastern Mediterranean and in the Middle East. The three heads of state made similar remarks, agreeing on need to discuss the demarcation of their maritime zones.
In this sense, Greece, Cyprus and Egypt want to unlock the potential of the region as an alternative energy source for Europe. Some suggested that they must secure the whole region through military operations, which will reassure the oil and gas companies that nothing will interfere with their operations.
CONFUSION 3 - IRAN, CENTRAL ASIA
Iran is eager to attract European energy companies into country, which left Iran’s oil and gas sector since 2005 due to the sanctions, impacting Iran’s ability to benefit from its own hydrocarbon resources. The possible removal of sanctions will open the pathway of Iran’s natural gas exports towards Europe.
The current developments could prove to provide Greece and Iran with a rare opportunity to bolster their bilateral relations and play a strategic role in the region. Where should Greece and Iran’s interests lay? In energy cooperation, of course.
Iran is preparing to boost its gas output by at least 66% during the coming years, and Teheran is right: some of its clients are likely to increase Iranian imports in the coming years. Pakistan, Oman, and Turkey will need Iranian gas, despite their interest in increasing domestic production (Oman) or diversifying gas supplies (Turkey) or incurring financial problems (Pakistan).
Countries from Kazakhstan to Kyrgyzstan, from Ukraine to Uzbekistan have the potential for rapid development too, if they can adopt long-term energy policies. Coal, oil and gas are currently the major energy industries across most of the EECCA.
Maroš Šefčovič, Commission Vice President, reconfirmed the intention of the European Union to enter into a memorandum of understanding with Turkmenistan and Azerbaijan. “We would like to engage with Turkmenistan a little bit more, just to really discuss with them the prospect of the gas supply from Turkmenistan to the European Union,” Šefčovič said.
CONFUSION 4 - IMAGE OF THE GAS INDUSTRY, FINANCIAL RESULTS, EUROPEAN STRATEGY
Adding to the geopolitical complexities, the gas industry presents also technical aspects that are often counterintuitive. The shale debate is one of the main arenas. For instance, the significant slowdown in drilling and fracturing activities that was started on Barnett at the beginning of 2009 did not lead to a collapse in production, proving that technicalities are often key to understand the industry. In 2015 in spite of the significant decrease in drilling activities, gas and oil production will still increase. If the oil and gas stay at their current prices, a slow decrease in US production will occur not before mid 2016, says Philippe Charlez commenting on his new book.
Meanwhile, British and Norwegian players came under the spotlight on Monday, as a group of international investors started their trial against the Norwegian government for its decision to cut gas pipeline tariffs, while Royal Dutch Shell was reported as being responsible for watering down European renewable energy targets. These two pieces of news could tarnish the image of the gas industry, both internally and externally.
Over the last few years, the British neoliberal philosophy seemed to gradually fade away, as London is growing protective of strategic assets based in its borders, tipping the balance in favour of a UKIP-led rhetoric and sounding the death knell to Tatcher’s doctrine. The government's opposition to bids for BP is the most obvious example.
On an European level, things are not any clearer. Brussels’ strategy seems to hinge more and more on stronger ties with Ukraine and higher transparency, but it is not obvious that the strategy will lead to anywhere. European Commissioner for Competition Margrethe Vestager launched on Wednesday the Commission's third high-profile inquiry in three weeks, taking aim at state aids for utilities. European authorities will investigate whether capacity mechanisms, designed to encourage investment in power plants to fill the expected capacity gap and decrease the likelihood of black-outs, are effective and don't distort competition.
This does not seem enough. Azerbaijani experts asked for some additional support from the European Union. “We still have some problems in Italy, that are created artificially by lobbyist organizations or those interested in impeding the project in Italy, with other countries paying the price for such activities. The EU should be more active in preventing such things or addressing regulatory problems. We are taking all the financial and technical risks, materializing these projects with our partners, but they have to take all the responsibility for solving, for example, regulation issues that arise in Italy,” said Gulmira Rzayeva, Senior Research Fellow at the Center for Strategic Studies of Azerbiajan. Senior Research Fellow at the Center for Strategic Studies of Azerbaijan.
A few days after, though, while the Italian government was approving the Trans Adriatic Pipeline (TAP) dismissing regional opposition, regulatory authorities in Albania, Greece and Italy released a joint opinion aimed at prolonging the validity period of TAP's exemption from some provisions of the EU Gas Directive, following in the footsteps of the positive opinion expressed by the European Commission and the Energy Community Secretariat. TAP moves on.
Against this backdrop, several companies reported their Q1 results over the last few days. The fact that almost all of them confirmed their guidance for the year indicate that companies have already adjusted their strategies. The fact that they are increasingly focusing on one segment or another, depending on their strengths and weaknesses, demonstrates the need for a higher specialisation in the industry. Saipem, E.ON, Engie (former GDF-Suez) and Galp Energia are four examples.
CONFUSION 5 - UKRAINE AND THE BALTICS
The country that would benefit from the slowdown of projects is Ukraine. Whichever pipeline will be built first, Gazprom's Turkish Stream, or the competing trans-Turkish TANAP pipeline, Ukraine will lose some of its importance as a transit country. But some hope resides in the Eastring project - the country may reap the benefit in case it managed to become a key logistical hub connecting the Visegrad Four, i.e. Poland, Slovakia, the Czech Republic, and Hungary.
Waiting to be able to come up with a personal strategy, Ukraine continues to act as the good younger brother of the European Union, following the rules of the 28-member block both on an energy and political level. Kiev is following Brussels’ guidance in several sectors, ranging from pension schemes to the judicial system.
At the same time, Ukraine's Naftogaz has submitted a Statement of Claim in its Gas Transit Arbitration against Gazprom. The Statement of Claim submitted this week to the Arbitral Tribunal under the Rules of the Stockholm Chamber of Commerce, follows a previous Statement of Claim against Gazprom in the Gas Supply Arbitration submitted earlier in January of this year.
Lithuania's Natural Gas Transmission System Operator Amber Grid signed an agreement with the European Union’s Innovation Network Executive Agency (INEA) for the construction of the €63.7 million Klaipėda-Kuršėnai gas transmission pipeline. The pipeline is meant to connect the LNG terminal and the Baltic states. According to Amber Grid, the terminal could meet more than 80% of the natural gas demand in Estonia, Latvia and Lithuania.
Estonia announced it will start building an LNG terminal next year with the first natural gas sales expected for 2019. Whether or not the EU backs the project – the Union’s decision should be known by the end of the summer - Estonian holding Alexela is ready to take on building such a terminal on its own. But doubts remain - why to build another LNG terminal, will it make economic sense, are we dealing once more with politics.
RUSSIA: WHERE THE GAS INDUSTRY NEEDS TO BE A CERTAINTY, DESPITE DIFFICULTIES
Germany and Poland are in pole position to lead the way to stronger ties with Ukraine. The two countries confirmed their stance on sanctions against Russia during a meeting in Warsaw attended by the two heads of state.
Also as a result of tensions with the West, changes will not happen overnight in Russia either, but the reasons there are quite different. While the share of the independent gas producers is increasing and the competition in the domestic market is becoming tougher, there seems not to be a strong economic rational point for the state to promote liberalisation in the gas industry. On the other hand, the current situation is putting additional pressure on Gazprom to move away from oil indexation to spot indexation, and experts see room for change in the contracts.
Finally, the Russian oil and gas industry has reported mixed results, with NOVATEK and Gazprom at the opposite ends of the spectrum. The independent natural gas producer led by Alexander Natalenko registered a 23.5% year-on-year increase in profit for the first quarter, while Gazprom put on paper that the combination of weak rouble and falling oil prices hit its 2014 profits, which were down 86% to RUB 157,192 millions.
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Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci