Week 21 Overview
Rather than shedding light on Europe’s Eastern flank, the Eastern Partnership Summit (21-22 May) in Riga seemed more a celebration of the geopolitical confusion mounting in Europe’s backyard. The final joint declaration is a clear example. It did not result in anything new. Indeed, 26 out of the 30 sub-declarations making up the document used one or more of the follow expressions: welcome (used in 19 different sub-declarations), reaffirm (6), reconfirm (3), remain committed (3), recall (3), commend (3), reiterate (2). In other words, nothing new emerged from the summit.
Against this backdrop, it comes as no surprise that each country and each side voiced its own request and expressed its (partial) understanding of the situation. Ukraine “urged” Brussels not to be scared of Russia, Lithuania wrote that the Eastern Partnership promotes security and well-being, Russian newspapers wrote that the Summit “ended with division”, while European Council president Donald Tusk asked Russia to be “a bit softer, more charming” and less “aggressive”.
Remembering past harsher comments, Tusk’s recent words seem to mark a U-turn in European approach to Russia. Despite the political crossfire over the unrest in Macedonia (Russian Foreign Minister Sergey Lavrov said that Westerners’ interests might be behind the situation in the Balkans), something might change soon in Europe and Eurasia. A temporary pacification might bode well both fronts’ needs. In this context, it is logical that Serbia will be more and more a level playing field, an important negotiation table, and an important litmus test for ties between Brussels and Moscow.
EASTERN EUROPE, BALKANS : MORE INTERCONNECTIONS AMID TENSIONS?
The South-Eastern Europe remains a critical area, and governance has a major role in the instability of the region. This is the case in the gas industry too. “If we go regional, we need to have regional decision-making structures. The EU is ill-suited for regional decision-making. I think we have to keep that in mind,” Vice Chair of the Board of Regulators of the Agency for the Cooperation of Energy Regulators (ACER) Walter Boltz recently said.
While Naftogaz was transferring $32 million to Gazprom, Russia, Ukraine and the EU held trilateral talks on the implementation of the EU-Ukraine Association Agreement/Deep and Comprehensive Free Trade Area (AA/DCFTA). European authorities showed some openness, making conciliatory remarks, but confirmed that the treaty will be provisionally applied from 1 January 2016.
Bulgaria, Hungary, Romania and Slovakia declared their support for more efficient interconnections. During the Eastern Partnership Summit in Riga, the four countries signed a document recording common political intent to further integrate their gas markets.
Eustream said that the north-south direction in the transmission systems in Czech Republic and Slovakia can be strengthened through the construction of a new compression station that would more than double the technical capacity from the Czech Republic to Austria to 140 mcm/day by 2018. According to Slovakia’s TSO, the extension of the capacity between the interconnection points Lanžhot (CZ/SK) and Baumgarten (SK/AT) would lead to higher market integration in Central Europe.
The region is making significant strides also in the upstream segment. Palomar Natural Resources and San Leon Energy said on Tuesday that they should bring gas online from the Rawicz-12 well in Poland in early 2016. According to the two companies, Rawicz field is expected to be the largest gas development in Poland for around 20 years.
Similarly, Albania is joining other Mediterranean countries in the new oil and gas rush in the region. Local officials confirmed on Monday that they remained committed to the bidding round for seven offshore and onshore blocks. The deadline for the onshore blocks Four and Five in southern and southeastern Albania and Dumre is June 15, while the remaining blocks’ deadline is June 25.
Despite these achievements, market forces sometimes play against diplomatic intentions. For instance, Latvia’s state gas company Latvijas Gaze is not interested in liquefied natural gas from neighbouring Lithuania’s LNG terminal in the seaport of Klaipeda. “Our demand for gas in Latvia is completely satisfied by the long-term contract with Russian Gazprom” said Mario Nullmeier, deputy chairman of Latvijas Gaze's board.
Business as usual is a difficult option also in other contexts, but not impossible. Poland's state-controlled gas distributor PGNiG could receive a discount from its biggest supplier Gazprom, within the next six months, the Polish treasury minister said on Tuesday.
At the same time, Kiev tries to maintain its strong approach toward state-building.
Speaking about transposition of the Third Energy Package into Ukrainian legislation, also insiders showed some astonishment. “We are sometimes surprised it was passed, because it's really against the interests of some powerful oligarchs in Ukraine, Yuriy Vitrenko, Managing Director, Head of International Business at Naftogaz of Ukraine, said. He also contended that the company is very optimistic about Ukraine's future in regards to this law.
RUSSIA AT LARGE: GAZPROM STUMBLES, NOVATEK INCREASES CLOUT
Moscow seems open to make marginal concessions to European companies.
Russian authorities said that Moscow will take a decision on Schlumberger’s bid for Eurasia Drilling in two to three weeks. Federal Antimonopoly Service’s Dmitry Makhonin told Reuters that the Russian agency had no objections to the deal from a competition point of view, but explained that the government will be responsible for taking the final decision.
Sweden-based Lundin Petroleum announced that Rosnedra, the Russian licensing authority, has issued a production licence for Morskaya field located within the Lagansky Block in the Russian part of the Caspian Sea. The production licence is valid until 2035 and covers approximately 50 km2, said the company.
Meanwhile, Total and Novatek announced the start-up of gas and condensate production from the onshore Termokarstovoye field, located in the Yamalo Nenets Autonomous District of the Russian Federation, confirming the French company’s intention to continue operations in Russia. Against this backdrop, Russia, the US and Ukraine remain stuck in political crossfire.
On the other hand, some Russian posturing remains part of its overall strategy, some commentators recently argued. According to an article published by Jamestown Foundation, Russia is probably preparing for major military actions.
The EU needs to be aware that actions against Russia’s commercial practices may risk escalating conflicts across Europe. According to an article published by German Marshall Fund, a more aggressive European energy policy may lead to Russian threats to energy security may come. This might take the form of military and cyber moves against electricity, and hydrocarbon infrastructure.
In this sense, Moscow is like to prefer a lower profile under some conditions, but remain ready to embark on more risks. Oleg Aksyutin, a member of Gazprom’s executive board, said that the construction on the offshore section of the 1,100 km Turkish Stream pipeline will begin in the shallow waters of the Black Sea in early June. This is an unprecedented event in the history: a country is starting construction of a gas pipeline abroad without signing agreement with a gas client. This might be related to Turkish elections, Russian plans and existing contracts.
Meanwhile, despite some problems reported by Gazprom, the last days confirmed Russian strategy in the gas industry.
While keeping stable its gas production in the Sakhalin-2 project at 16 to 17 bcm in 2015, Russia’s Gazprom announced on Tuesday that total production for the year will be around 450 bcm. On the base of the first quarter, expected production has been therefore decreased by 35 bcm from 485 bcm announced at the beginning of the year.
It sounds normal that Novatek and Rosneft are the catalysts for growth in Russia. According to James Henderson, Senior Research Fellow at Oxford Institute of Energy Studies, by 2017-18 Gazprom's market share of domestic sales will fall below 50% for the first time ever.
MIDDLE EAST, CAUCASUS, CENTRAL ASIA: EGYPY GAINS TRACTION
Relations between Russia, Turkey and Iran are being influenced by a complicated set of cross-cutting and often contradictory interests. Turkey’s Middle East policy is thus in a current state of flux. But in its quest for new regional partnerships, it is unlikely to seek out either Iran or Russia. Rather, Turkey may be expected to seek closer cooperation with Saudi Arabia or re-build its relations with Israel.
Although the incumbent BOTAS predicts an overall increase of 19 billion cubic metres on the current 50bcm/year annual consumption until 2020, Turkish gas distribution companies say this increase is more likely to be around 8bcm over the same period, driven by household demand. This evidence recently brought some commentators to conclude that the Turkish Stream is not at all a response to Turkey’s gas demand growth.
BG International continues negotiations to buy gas from the deepwater Leviathan field offshore Israel for its LNG facility in Idku, Egypt. This improves the prospects of a deal to be sealed soon. The news comes a month after some commentators suggested that Royal Dutch Shell’s acquisition of British Gas could jeopardise the deal to export natural gas from the Leviathan field offshore Israel to Egypt.
BP increased its stake in the West Nile Delta (WND) project in Egypt, buying 17.75% of in the ongoing Phase 1 from DEA, which is entering into its capital intensive phase. After the approval of the Egyptian General Petroleum Corporation (EGPC), BP will hold a 82.75% stake in the project.
As Egypt, Algeria could also step up efforts to increase production. Recently, following the cabinet reshuffle, Salah Khebri replaced Youcef Yousfi as Minister of Energy. ‘Khebri has a rich academic and professional path in the fields of energy and economy’ reads a note released on May 17.
Finally, while Turkmen President Gurbanguly Berdymukhamedov was confirming his firm intention to promote a Trans-Caspian Pipeline, market movements indicated that the Turkmenistan’s part of the Caspian Sea is becoming more and more important. Dragon Oil, which is one of the main player in Turkmen waters, confirmed it is considering the £3.6 bn takeover offer put forward by Emirates National Oil Company.
WESTERN EUROPE: LNG, DOMESTIC PRODUCTION, FINAL GO AHEAD FOR TAP
Amid uncertainties related to the Middle East’s exports capacity and Russia's LNG projects put on hold as a consequence of international sanctions, Canada, Australia and US are reshaping the gas industry. The notion that triple A-rated, stable, geopolitically secure democracies are becoming the largest new supply sources of internationally-traded LNG is a game changer, IEA’s Laszlo Varro recently said.
Norway is not having a similar LNG strategy. It recently increased its international profile, but hurdles are always around the corner. Statoil announced on Wednesday that the leak which occurred on the Gudrun platform in the North Sea is of the highest degree of seriousness. Also on Wednesday, another Norwegian company - Det norske - reported a dry well in the North Sea in a licence operated by Talisman Energy Norge. Similarly, the Norwegian government released a note saying that Statoil came up empty-handed in its drill near the Helm field in the Norwegian Sea.
UK is trying to propel its domestic onshore production. On Friday, Third Energy submitted a planning application to North Yorkshire County Council to hydraulically stimulate and test various geological formations, at the existing Well KM8 at Kirby Misperton. But the prospects for shale gas could take speed in England only. The Scottish National Party will indeed chair he UK Parliament’s Energy and Climate Change Select Committee. The consequences are difficult to predict.
Things are going a bit smoother in Italy. After completing the logging of its second appraisal well, UK-based Sound Oil confirmed various gas bearing levels in its Nervesa licence in North-East Italy. Accordingly, the company will now proceed to complete the well and to test the well thereafter, after which a further announcement will be made.
Moreover, the Italian Government has granted Trans Adriatic Pipeline (TAP) its Single Authorisation Permit. European Commissioner Miguel Arias Cañete commented that the permit represents the final go ahead for the pipeline connecting Italy with Azerbaijan.
In an interview with Natural Gas Europe, Enel committed to decrease its exposure in the E&P business in Italy and in Algeria. Italy's largest utility said it will increase its focus on contracted and regulated assets.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci