Week 22 Overview
Once more South-Eastern Europe made the headlines in the gas industry. Over the last days, Croatian Prime Minister announced that Zagreb will decrease its reliance on Gazprom, while Russian Prime Minister said it will soon meet Slovakia’s Head of State. According to a note released on Monday, the parties are expected to sign ‘several agreements.’
At the same time, Turkey came back under the spotlight. While some rumours indicated that the Kremlin might be waiting Turkey’s parliamentary elections on June 7 to take a decision about cooperation with Ankara, mixed evidences emerged about the Cyprus issue.
On the one hand, Turkey's President Recep Tayyip Erdogan voiced a strong opposition to any compromise on the country's position on natural gas resources surrounding areas of the Turkish Republic of Northern Cyprus (TRNC).
On the other hand, the Turkish-Cypriot Negotiator Özdil Nami sent conciliatory remarks.
“I believe there is a common vision between the Greek Cypriot and the Turkish Cypriot leaders and the ambition to make rapid progress’ he said in an emailed note, adding that President Mustafa Akıncı and his delegation will work toward the creation of bi-zonal, bi-communal federation in Cyprus.
SOUTH-EASTERN EUROPE: INTERCONNECTORS AND STORAGE
Prime Minister Aleksandar Vučić said that Belgrade will take on board Washington’s proposal to decrease its energy reliance on Russia. “Regarding energy safety, energy security, we are ready to diversify the sources of gas for Serbia, which is very important for our American friends as well,” he said in an interview with The Associated Press.
Problems in the region are not only political, but also technical. ACER wrote on Friday that gas capacity demand exceeds the technical capacity at about 15% of entry and exit sides at interconnection points (IPs) across the EU. It detected the majority of contractual congestion in the South/South East region, followed by the South region.
Against this backdrop, it is easy to understand that both Bulgaria and Romania might have problems achieving the desired gas-hub status. Many local governments claiming they will promote energy hubs are fallacious and groundless, an expert recently said in a conference in Brussels. Theoretically, he argued, only Ukraine and Turkey could succeed in such endeavours.
Nonetheless, infrastructural developments in the region will increase energy security. E.ON Romania said that the company maintains 2014 investment levels also in the current market conditions. It said it intends to upgrade a 550-kilometre pipeline system. Of the EUR 94 million to be invested in gas and power distribution networks, over 36 million will be directed to the gas network.
Also Zagreb is moving forward. Croatian authorities announced that the construction of the LNG terminal on the Island of Krk in the Adriatic Sea should begin in mid-2016. The construction period would be three years with the terminal operational by in 2019, according to Mladen Antunovic, Director of LNG Croatia.
Indeed, some see in LNG the main pillar of the Energy Union. In its latest report, Athens-based Institute of Energy of South East Europe assessed that for the Vertical Corridor to be successful, the European project needs to have a significant LNG component.
But not all the experts foresee an uptick in the LNG market. Showing a diagram of LNG imports into Europe, Andrew Walker, Vice President Global LNG, BG Group, suggested that Europe is starting to stabilise at 4 bcf/day, hitting a plateau. “I don't think we're seeing a flood of cargoes coming back to Europe based on the price indicators” he recently said.
In this context, along with interconnectors, storage is an important element too. Managing Director of E.ON Gas Storage Nicole Otterberg said that the Gas Storage Europe (GSE) is lobbying for a change in how transport costs are charged and how they are currently shouldered by the gas storage sector. “For us it is necessary for transmission costs to and from storage to be as low as possible and they should only be charged in case storage sites create additional costs to the transmission system” she told Natural Gas Europe.
Finally, in the last days, companies and countries voiced their willingness to move forward with new projects. Austria’s OMV said it is interested in using Bulgarian pipes for Romanian gas, while Macedonia is reportedly ready to take part in the Turkish Stream after Brussels’ approval.
This could help fulfilling the region’s growing needs. South East Europe’s total natural gas consumption was 26 bcm in 2012, 10.2 bcm of which was produced by Romania, and 2 bcm by Croatia. Natural gas consumption in South East European countries is expected to increase to 44 bcm by 2025, and 50 bcm by 2030 due to population growth and GDP growth higher than in any other European region.
MENA REGION: TURKEY, CYPRUS, ISRAEL, ALGERIA, EGYPT AND LIBYA
Unlike Romania and Bulgaria, Turkey’s ambitions to become a gas hub are grounded in reality, as Azerbaijan’s cooperation with Ankara on the Southern Gas Corridor should bring Azeri gas to Europe by 2019. Other options for Turkey to become an even more important gas transit country are there, but they are not that easy. According to Simone Tagliapietra, additional alternatives like Turkmenistan (gas reserves estimated at 18 trillion cubic metres), Iran (estimated at 34 trillion cubic metres), Iraqi Kurdistan (reportedly between 3 and 6 trillion cubic metres), and Israel (estimated at 1 trillion cubic meters) remain possible, but difficult.
Turkmenistan, fourth in natural gas reserves globally, has recently gained potential as an important alternative provider. The fact that Russian Gazprom, suddenly decided to reduce by 70% its imports from the country, had a particularly negative impact to their bilateral relations. It also paved the way for establishing a dialogue between the EU and Turkmenistan. But, as said, this option remains complicated.
Israel’s option is difficult too, given the geopolitical complexities in the region. Turkey’s President Recep Tayyip Erdogan strongly opposed any compromise on the country's position on natural gas resources surrounding areas of the Turkish Republic of Northern Cyprus (TRNC) and Cyprus. "The energy resources will be the property of both sides of the island, not only Greek Cypriots. Within this context, Turkey will be the the key country to ship these resources to international markets," Erdogan said.
Despite Erdogan’s blunt remark, UN-led peace talks aimed at reunifying the ethnically divided island of Cyprus have resumed. President Nicos Anastasiades and the newly elected Turkish Cypriot leader Mustafa Akinci met in Nicosia to discuss a possible resolution for the division of Cyprus. This could be good news for Israel.
Meanwhile, David Gilo, Israel’s Antitrust Commissioner, announced his resignation from his position. He said that his decision had to do with the government’s lenient approach towards Delek and Noble’s control of the largest share of the natural gas market.
The decision could be a game changer. According to some commentators, the EU should focus on commercial developments between Israel and Egypt to unlock the benefits of the gas riches in the East Med. They argue that gas exports to Egypt prove successful, then the chances of gas arriving to EU countries through Egyptian LNG could rise dramatically.
As Turkey and Israel, Egypt and Libya continue drawing attention too. European companies did indeed confirm their commitment to exploration and production in the region. Eni made a new discovery of gas and condensates offshore Libya, in the Bouri North exploration prospect in Area D, 140 kilometers from the coast and 20 kilometers north of the production field of Bouri, while Shell will reportedly start shale gas production from the Apollonia field in the Western Desert in May 2016.
Algeria’s Prime Minister Abdelmalek Sellal said that this country will beef up investments in the energy sector, promoting an “historic” energy connector to Italy that will increase European energy security. It comes as no surprise that the two Prime Ministers confirmed their support for Bernardino Leon, UN’s special envoy for Libya.
RUSSIA AND THE SOUTHERN GAS CORRIDOR
Total’s Chief Executive Patrick Pouyanne said on Friday he expected lenders to unblock funds for the $27 billion Yamal LNG project by the end of the year. Simultaneously, the company said it expects to grow production launching 15 Upstream projects in the near future.
But the ties between Europe and Russia are not all peace and light. Speaking about the antitrust case against Gazprom, Professor Alan Riley offered that the Commission could impose a fine up to 10% of Gazprom's turnover of the preceding business year, which could amount to $15 billion. “However, the Commission would not actually pose a fine of that size – I reckon between half a billion and $3 billion if you look at previous practice” he added. He also referred that his advice to Gazprom has been to settle the case, as the publication of a prohibition decision would be highly detrimental for the company.
Meanwhile, on the Russian front, internal disputes could bring Rosneft to move its planned LNG terminal away from Sakhalin.
Gazprom is raising its voice also about European projects. Gazprom’s Alexey Miller said that the Trans Adriatic Pipeline (TAP) was planned to be completed in 2017, but then the deadline was moved to 2021. He voiced concerns that the project may be delayed even further. Additional complexities might derive from the Greek U-turn on the project, as Athens is now reportedly seeking transit fees.
Conversely, Michael Hoffmann, External Affairs Director, Trans Adriatic Pipeline (TAP), said the pipeline project is on schedule and is moving into the execution phase. The land process is very complex, he explained.
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Capital and operating costs in the North Sea will fall between 10 and 20%, with UK-focused Upstream companies reaping the greatest benefits of lower prices and Norwegian operators following suit. Wood Mackenzie explained that the UK and Norway will ‘deflate’ at different rates because of specificities of the Upstream projects in the two countries sharing North Sea’s riches.
Ukraine's Naftogaz wants to show Western partners it is able to increase the transparency of its operations. Coherently, it initiated publication of price and volume statistics related to the company’s gas imports.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci