Week 39 Overview
Russia has played such a well calculated strategy that US President Barack Obama is now forced to pay close attention to President Vladimir Putin. The two heads of state will meet over the coming days. Most likely, they will be speaking about Syria, the MENA region, cyber wars, and Ukraine. Despite its internal problems, Moscow seems perfectly able to define the agenda of other world leaders, as well as the headlines of newspapers across the world.
Over the last week, Natural Gas Europe focused on the trilateral talks between Ukraine, Russia and the European Union.
At their latest meeting on Friday, Volodymyr Demchyshyn, Minister of Energy and Coal Industry of Ukraine, Aleksander Novak, the Russian Energy Minister, and Maroš Šefčovič, Vice-President of the European Commission, agreed on all substantial commitments of the governments of Russia and Ukraine, which are to be included in the Binding Protocol within the framework of the new gas supply "winter package”. The parties are working on it.
Logically, the priority for Kiev is now to find a solution to its short-term problems.
From a Russian perspective, the latest developments are coherent with its 'confusion' strategy, hinging on European difficulties. While Moscow will likely work on its goals, Brussels will be stuck in its migration crisis and possibly on other reasons for internal confrontations. Additionally, it will be called to spend energy and resources on Ukraine. Naftogaz did indeed ask, and probably obtained, the commitment of the European Commission to provide financial support to Ukraine to fund gas purchases. This could create further tensions within the EU.
It is clear that Moscow wants to let media speak about its moves, hiding its most important decisions while giving journalists great, sometimes empty, stories to write about: Turkish Stream, Schlumberger’s bid for Eurasia Drilling Co, and the trilateral talks are just two examples of this refined tactics made-in-Russia. The latest news about the Arctic natural gas project in Russia (Yamal) could provide another example of how to divert the attention from important geopolitical issues.
Against this backdrop, the Baltic seems to be the only region actively reacting to Moscow’s strategy. Finland and Lithuania announced a move towards LNG.
RUSSIAN STRATEGY: WHERE TRADITION MEETS CREATIVE INNOVATIONS
Gazprom's new strategy appears to focus on dealing with the European energy market as a whole instead of piecemeal, significantly affecting Ukraine. Nord Stream II will increase Gazprom's direct export capacity to 110 billion cubic meters, far greater than Germany's annual demand of about 80 bcm (of which Gazprom supplies approximately half). Gazprom certainly is looking beyond Germany with the project to both Western and Eastern Europe, writes Stratfor.
Logically, together with Nord Stream 1 and an additional 55 bcm yearly capacity, Northern EU states and primarily Germany are clearly leading the way in the pan-European natural gas market and strive to reap considerable profits in the coming decades as the primal redistribution hub for gas across the Continent.
According to Vladimir Socor, the new project is disruptive for Ukraine on several levels. Socor explains that the signed agreement for Nord Stream II project will discourage other Western companies from investing in the upgrade of Ukraine’s transit system, as long as the bypass threat hangs over that system. Additionally, he writes that, at the current level of transit fees, Ukraine’s transit system is expected to turn loss-making if the transit volume drops below 40 bcm per year.
But Nord Stream II is not Moscow’s only move, as Ukraine is not its only battleground.
On Monday 21 September Gazprom sent proposals to the European Commission to settle the claims of the antitrust case launched in April. According to Simone Tagliapietra, this move can be considered part of a wider strategy of Gazprom aimed at a rapprochement with the EU.
Additionally, Putin is managing to regain some clout in the Middle East, and in the Balkans.
Elaborating on the recent attacks to oil and gas infrastructure in Turkey carried out by the Kurdistan Worker’s Party (PKK), Orhan Gafarli reported some evidence that could hint at a cooperation between Russia, Iran and the PKK. He said that Moscow is the major suppler of weapons and explosives used by PKK, explaining how Russian interests are in line with PKK actions.
Russia is also working on other projects, not only to increase its clout, but also to stop other countries’ expansions.
US-headquartered Schlumberger said on Thursday that it will not extend its Wednesday deadline for Moscow to approve its $1.7 billion offer for a stake in Eurasia Drilling Co. The Wall Street Journal wrote that the announcement ‘ratchet up pressure on Russia’s antitrust officials’. An alternative reading is that Schlumberger changed its mind, acknowledging the unfeasibility of its plans.
However, these successes do not mean that Russia does not have problems.
Nord Stream 2 may hurt Gazprom's commercial and financial performance. "The original Nord Stream was funded by project finance. We believe raising multi-billion dollar project financing for Nord Stream 2 in the capital markets would probably be much harder now. This is because Western sanctions have significantly hindered international funding to Russian corporates, even those not directly sanctioned," Fitch said in a note.
THE MAJOR EUROPEAN OPTION: AZERBAIJAN
Azerbaijan has a great potential. The volume of gas extracted from Shah Deniz field in Azerbaijan reached 64 billion cubic meters from July 2007 to September 2015, the First Vice President of State Oil Company of Azerbaijan Republic (SOCAR) in Geology Geophysics & Field Development Issues, Khoshbakht Yusifzade, announced. Turkey imported 55% of the gas from the field.
Azerbaijan’s SOCAR is not simply trying to export gas. It is also working to take an active role in Europe’s energy assets. Azerbaijani newspapers wrote about the cooperation between SOCAR, Italy’s Snam and Greece’s DESFA, claiming that Snam intends to acquire a stake in the Greek natural gas transmission system operator. The move, which is consistent with previous declarations, would give legitimacy to SOCAR’s plans to buy a 66% stake in DESFA.
On Wednesday, Azerbaijan’s SOCAR and Italy's Snam did indeed sign a memorandum of cooperation to assess the initiatives put forward for the development of the Southern Gas Corridor in Baku. The memorandum envisages the exchange of information and thorough evaluation of various works.
Meanwhile, Trans Adriatic Pipeline AG (TAP) invited companies to pre-qualify for the supply and delivery of the Supervisory Control and Data Acquisition (SCADA) system and fibre optic cable. ‘These are the final large package contracts to be awarded by TAP for project construction as company provided items’ reads a note released on Monday.
THE MAJOR EUROPEAN ALTERNATIVE: NORWAY
A Norwegian court ruled in favour of the national government in a lawsuit put forward by mighty international investors who argued that Oslo illegally cut fees on the 8,000-km (5,000-mile) Gassled gas pipeline network. According to the companies, the decision of the Norwegian government could cost them 15 billion crowns ($1.8 billion) in lost earnings by 2028.
While narrowing its production forecast for the full year on strong performance, Norway-focused Faroe Petroleum cut its net exploration, development and production capital expenditure for 2015 from £135 million to £100 million pre-tax. Production guidance for the full year 2015 narrowed to 9,000-10,000 boepd from 8,000-10,000 boepd also because of the addition of a new well on the Brage field.
THE BALTIC REGION AND POLAND
Poland and Lithuania reached an accord on gas interconnector, GIPL, with the European Commission (EC) helping both sides reach common ground. “We have managed to finally reach agreement being very strongly supported by the European Commission,” Algirdas Butkevicius, the Lithuanian Prime Minister, told media.
Indeed, European authorities are closely following the region.
The European Commission approved under EU state aid rules Finland's plans to grant €23 million to construct a small scale LNG terminal at Pori on Finland's west coast, concluding that the project contributes to environmental protection and to the security of gas supply in Finland whilst maintaining competition in the Single Market. Currently, there are no LNG terminals in Finland.
Markets and private companies are moving too.
Following the announcements made by Baltic states toward a stronger cooperation in the energy sector, Sweden’s Thetys Oil said that the drilling of the Tidikas-1 exploration well on the Raseiniai licence onshore Lithuania has been successfully completed. The discovery is likely to trigger a renewed focus on upstream activities in the Baltic region, both onshore and offshore, in a moment Latvian and Lithuanian governments are trying to come up with stronger cooperation.
However, Latvia’s gas distributor AS Latvijas Gāze is weighing legal options against the country’s Public Utility Commission (PUC) after the latter passed legislative acts enabling Latvian consumers to pick any natural gas supplier. Gazprom-co-owned Latvijas Gāze insists the Latvian gas legislation guarantees them until 2017, when the country, as required by the EU, will start gas sector ownership unbundling.
EASTERN MEDITERRANEAN, AND MIDDLE EAST: A LOT OF TALKS
Nostra Terra and Independent Resources signed a “strategic” joint venture agreement to invest in producing or near-production assets in the Mediterranean and North Africa region, showing that an increasing number of companies are now looking at the region. ‘Under the terms of the Agreement, the parties will co-operate in areas of project identification and due diligence, financing, geological exploitation, technical support, operations and procurement with a geographical focus on North Africa with immediate attention focused on Egypt and Tunisia’ reads a note released on Monday.
The Israeli Parliament approved earlier in the month the natural gas framework. However this approval will only be final once ratified by Israel’s Antitrust authority or its Economy Minister on the grounds of security interests. The Antitrust Authority is currently operating without a general director following the resignation of Mr David Gilo, its former commissioner, due to his objection to the natural gas framework. The Economy Minister is also refusing to bypass the Antitrust authority.
Meanwhile, Iran is looking for ways to strengthen ties with its main regional partner - Oman - while holding talks with India for a $15.2 billion investment package, whose faith also depends on gas prices. Teheran said it plans to explore for unconventional resources in the Sea of Oman.
TOTAL’S PROBLEMS
France-headquartered Total announced its intention to reduce capital expenditures to 23-24 B$ in 2015, from the peak of 28 B$ in 2013, adding that it will further reduce investment down to 20-21 B$ in 2016, before returning to a sustainable level of 17-19 B$ from 2017 onwards. Total is the first oil major to announce this kind of cuts, signalling that it expects the drop in crude prices could be prolonged.
U.S. federal energy regulators extended their years-long effort to crack down on a contested form of market manipulation on Tuesday, alleging that French firm Total SA and two of its traders rigged southwestern natural gas prices for years.
GAS PROSPECTS: THE INDUSTRY IS WORKING, BUT THE ENVIRONMENT REMAINS DIFFICULT
Changing dynamics in the global LNG market hint at a stronger role of European markets, and a decreased interest of American players to export given a minimal growth of the global markets, which are expected to increase 'only' between 2.1 and 2.5% in 2015. ‘In the United States, signs of the end of the rush for LNG projects begin to show: no new project has applied for an export license to the Department of Energy during the quarter (this had not happened since Q1 2011), the first withdrawal from the FERC process by a project was announced by Excelerate Energy, and more FID schedules are facing increasing delays’ reads a note released by Cedigaz on Wednesday.
As the slump in oil prices continues, investments in the global energy sector are under pressure. A report from energy research company Wood Mackenzie said that oil and natural gas projects worth $1.5 trillion are uneonomic under this circumstances.
Operators cannot simply rely on squeezing the service sector, but need to focus on project optimisation and other measures to push prices down, Wood Mackenzie said on Monday. The service sector is expected to suffer in the next years, as a reduced investment environment might drastically impact on new projects.
For instance, Halliburton announced it will be implementing additional workforce reductions.
Liquidity problems are taking a tall on many companies. The board of directors of Bergen Group Hanøytangen AS has resolved a petition for bankruptcy on 25 September 2015.
As reported by Reuters, General Electric Co said on Thursday it reached an agreement with Britain's export credit agency for up to $12 billion in financing. Coherently, Bloomberg wrote that oil services companies in Europe are finding alternative ways to raise cash and repay debt.
While opening its consultation process to axe jobs in Aberdeen, Technip announced it is partnering with Samsung Heavy Industries (SHI) to design low motion semisubmersible production platform. Under the terms of the agreement, Technip will provide its engineering expertise, while SHI will put on the table its experience with semi-submersible FPS construction to develop a new design and delivery model.
OTHER EUROPEAN DEVELOPMENTS: CROATIA, BULGARIA
Zagreb reportedly postponed the signing of the deals with Eni SpA, Medoil Plc, INA Industrija Nafte d.d., Oando Inc and Vermilion Energy Inc for on-shore and off-shore drilling. Apparently, it already agreed to award the licences, which cover a two-year exploration period, extendable by three years. However, the Government does not want to politicise the issue, in an attempt to avoid a loss in the tight general elections that should take place in November.
Bulgaria continues attempts to decrease its dependence on Russian gas, repeating it is ready to finalise a deal to build the IGB gas link to neighbouring Greece. However, it seems that, once more, its energy faith does not completely depend on its will. Sofia said several times it is ready to proceed with the 182 km pipeline, but it explained on Wednesday it is waiting for a decision of the new Greek Government.
INTERVIEWS AND OTHER CONTRIBUTIONS:
Talks with Wood Mackenzie specialists about Iran’s gas potentials and export opportunities
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