Week 25 Overview
The 25th week of the year could pass into history (at least of the gas industry) as the moment of one of the most ironic developments of geopolitics in Europe. Germany’s Angela Merkel, the woman who has been dictating the political developments in Europe the last ten years (including an increase in cooperation with Ukraine, and a deterioration of European ties with Russia’s Vladimir Putin), could witness, in her next two years as a Chancellor, a renewed increase in economic ties between national companies and Russian energy firms. The German energy sector, which is basically one of the very few German sectors suffering a inferiority complex to competitors in Europe, could soon capitalise on Merkel’s decisions. Assuming that the recent developments are real intentions and not simply political posturing, the irony is that Berlin could further consolidate its control over European decisions, also because of its sanctions against Russia.
While Moscow was doing its political exercise with Germany and Greece, the summer finally came, pushing companies to speed up offshore exploration efforts. In this sense, Russia has been flexing its muscles during the St. Petersburg International Economic Forum, European companies tried to do the same.
GERMANY AND RUSSIA
During the first day of the St. Petersburg International Economic Forum, some deals indicated that Russian gas strategy might rely on Germany and the Balkans. Considering that the European Union is reportedly closer to extending economic sanctions by six months against Russia, this piece of evidence might appear quite counterintuitive. The most likely, though not mutually exclusive, explanations might be (i) an inability of the Chancellor Angela Merkel to impose her political will on German companies, and (ii) some form of bluff on the German side, where political declarations for the European public are going in the opposite direction of national intentions.
On Thursday, the big news: Gazprom agreed to build a new pipeline to Germany under the Baltic Sea with Germany’s E.ON, Anglo-Dutch Shell, and Austria’s OMV. The declaration came amid political pressure from the German industry - Wintershall, BASF’s subsidiary, released a report calling for stronger ties between Berlin and Moscow.
Current EU-Russia gas trade is based on three key axes: the Nord Stream pipeline, the Yamal-Europe pipeline through Belarus, and the pipeline system crossing Ukraine. Of these three routes, only the Ukrainian gas transportation system is not controlled by Gazprom, Brugel wrote in a report. Gazprom has asserted several times that it will cut off gas transits through Ukraine by the end of the decade. Either Turkish Stream (with its 49 bcm per year devoted to the European market) or an expansion of Nord Stream (55 bcm per year) alone would allow Russia to circumvent Ukraine.
In this sense, the German card is a viable option, especially given current trade patterns. Gazprom CEO Alexei Miller told Vladimir Putin on Monday that Germany bought almost 70% more gas in May 2015, compared to May 2014.
Russia’s Gazprom also said it intends to keep 2016 gas production at least at the 2015 level of 450 Bcm, a company representative told reporters Thursday as reported by Platts.
The European Commission reacted, writing on Friday that the new pipelines from Russia to Germany should be compliant with EU legislation. "The European Commission recalls that new pipelines must be built in full compliance with EU legislation and will be vigilant about the rigorous application of EU law notably in the field of energy, internal market and competition" reads a note released by European institutions.
Current capacities of Russian-German infrastructure are not being fully exploited. Gazprom would like to make full use of the OPAL pipeline, but the European Commission, the German regulator and Gazprom have not yet reached a decision on the conditions for an exception from the EU's Third Energy Package that would allow Gazprom to control more than 50% of the capacities.
RUSSIA, RUSSIA, AND MORE RUSSIA DESPITE THE LOOMING SANCTIONS RENEWAL: TURKISH STREAM, GREECE
Greece and Russia signed a Memorandum on Friday to extend the Turkish Stream gas to Greece. According to several newspapers, after signing the deal, Greece said that funding would come from Russia’s development bank VEB.
Gazprom CEO Alexei Miller announced on May 7, after a discussion with the Turkish Energy Minister, that South Stream look-alike Turkish Stream will be ready to supply Turkey with gas by December 2016. In effect, Gazprom revived its contract with Italian contractor Saipem (controlled by state-run Eni SpA).
In this sense, Turkey and Russia are expected to clinch a deal on the Turkish Stream soon. Russian natural gas exporter OAO Gazprom finally took a step forward for the Turkish Stream Pipeline, and relayed coordinates to Turkey.
But some experts also questioned why to proceed with the Turkish Stream and a new pipeline to Germany? Are the two projects compatible?
In this sense, while confusion over Turkish Stream continues, Rosneft sent leadership messages to markets. On Wednesday, similarly to Gazprom, Rosneft confirmed its intention to keep hydrocarbon production stable in 2015-2017, reporting a 49% year-on-year increase in gas production in 2014 to 56.7 bcm.
The second day of the St. Petersburg International Economic Forum witnessed more and more deals, with Russia’s Rosneft taking once more the lion share. Among others, Rosneft signed deals with a subsidiary of US-based General Electric, with France’s Total, with Italy’s Pirelli Tyre, and especially with UK-based BP.
The company led by Igor Sechin further showed how national companies can cope with sanctions, maintaining ties with Western companies and progressively switching to Asian markets. The company, which is reportedly on the verge of acquiring a stake in India’s Essar Oil, also completed the Kara-Winter 2015 program, defined as the ‘largest arctic expedition in the world in recent 20 years by the scope and the structure of works.’
It is worth remembering that Russia has the largest proven reserves of conventional natural gas, amounting to approximately 48 tcm. This gas is also cheaper to produce than unconventional resources.
However, as said by Tatiana Mitrova, Head of the Oil and Gas Department at the Energy Research Institute of the Russian Academy of Sciences, things are not that rosy for Russia either. “Now we are facing a stagnant demand both for oil and gas globally. These two commodities are providing 70% of Russian export and 50% of Russian federal budget revenues, so you can imagine how painful that is” she said.
QUOQUE TU SHALE GAS? CONVENTIONAL FIRST
Two studies out this week suggested that oil and gas activity, specifically deep injection of wastewater, is the cause of a surge in earthquakes in Oklahoma and the central United States. To slow or stop the earthquakes, the studies say, oil and gas producers will need to cut the volume of waste fluid they're injecting into wells.
Meanwhile, UK's Lancashire County Council planning officer recommended that the planning application at Preston New Road should be approved, triggering enthusiastic comments from the representative body for the UK Onshore Oil and Gas industry (UKOOG) and Cuadrilla Resources, which would clearly like to kickstart shale gas production in the country.
Waiting for its shale projects to speed up, UK-focused Egdon Resources announced the commencement of an Extended Well Test at the Wressle-1 oil and gas discovery in licence PEDL180, located to the east of Scunthorpe, where Egdon operates with a 25% interest.
Similarly, US-based FX Energy announced that the Miloslaw-4K conventional well has started drilling, targeting Poland's Permian Basin. ‘The well is located in the Fences license approximately 15 kilometers northwest of the producing wells at Lisewo-1 and 2’ reads a note released on Tuesday.
NORWAY TEETERS, BUT DOES NOT STOP
While the Norwegian parliament reportedly approved the development plan for giant Johan Sverdrup field, the Norwegian industry is trying to find new partners to maintain its clout in Europe. Norway-based Aker Solutions and US-headquartered Baker Hughes agreed to cooperate on early-phase studies to help customers improve the overall economics and value of oil and gas field developments.
But Norwegian efforts did not seem enough to stop Germany’s Wintershall from selling a package of assets on the Norwegian Continental Shelf for US$ 602 million. As part of the package, Wintershall is also reducing its share in the own-operated Maria Development by 15% to 35%.
On the other hand, Lundin Petroleum announced that its wholly owned subsidiary Lundin Norway AS commenced drilling of exploration well 16/4-9 S on the Luno II North prospect. The news came on Wednesday, a few hours after Statoil’s note announcing that it could reduce workforce by 1,100 - 1,500 permanent employees by the end of next year.
THE REST OF EUROPE: THE REST OF EUROPE?
Brussels is advocating more and more that LNG is the ultimate painkiller to its headaches. But one has to take into account that the Russian Gazprom could depress markets even further by increasing discounts. Moscow retains a favourable earnings-to-turnover ratio and can afford it.
Nonetheless, European institutions are taking their Energy Union commitments seriously, presenting a flurry of initiatives over the last days. On Monday, the European Commission, France, Portugal and Spain set up a High Level Group to promote infrastructure projects in South-West Europe.
The days of mega infrastructure projects for the European energy sector are likely over, according to Vice President of the European Commission, in charge of the Energy Union, Maroš Šefčovič. Addressing members of the press in Hungary's Ministry of Foreign Affairs as part of his diplomatic road show to discuss the Energy Union with EU member states, he said that interconnectors will make the gas system of south-east Europe part of the overall European system.
Despite the European Commission’s statements, progress towards achieving a common energy policy across the European Union (EU) and boosting the continent’s energy security is likely to be hampered by differing objectives at the national level. The findings of Verisk Maplecroft’s 2015 Energy Import Security Index (EISI) support this line of reasoning.
Romania came under fire once more for its gas strategy, with the European Commission referring the country to the EU Court of Justice for failing to adopt an emergency plan under the EU Security of Gas Supply Regulation (EU) No 994/2010, and Hungarian Foreign Affairs Minister Peter Szijjarto pointing the finger at Romania, and Croatia.
While Petroceltic was announcing its exit from Romania, Sweden-headquartered Tethys Oil started its drilling programme in Lithuania. Petroceltic said that it will redirect its focus to Egypt and Italy.
Lithuania’s largest single gas consumer, Achema, a nitrogen fertilizer producer, will not evade contributing to the maintenance of the country‘s liquefied natural gas terminal in the seaport of Klaipeda. For now at least, as Vilnius County Administrative Court has turned down the producer’s complaint against the State Pricing and Energy Control regulator (VKEKK) as unfounded. But the company reports it is resolute to defend its interests.
On Tuesday, mixed figures emerged from the operations of junior companies focused on Italy. Sound Oil abandoned the second appraisal well pending a possible sidetrack at its onshore Nervesa discovery, while Northern Petroleum and Sound Oil received EIA approvals for exploration permit applications in the Bel Paese. All in all, the mood remains positive.
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Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci