Week 41 Overview
The last week has turned the spotlight on the South Stream project, showing that the pipeline connecting the Russkaya compressor station near Anapa (Russia) with Tarvisio (Italy) and Baumgarten an der March (Austria) will be both the reason and the instrument for the next phase of arm-wrestling between Moscow and Brussels.
Russia and the European Union will try to change the project in line with their economic and political needs. At the same time, they will also try to use it as a negotiation tool in the wider context of their tense diplomatic relations. Eventual Russian concessions will be made in exchange for something back. Eventual European concessions will come at a price for the Kremlin. In European gas matters, politics and economics are inextricably linked.
The last days also showed that the negotiations will continue to have an impact on the transit countries of the proposed pipeline project. At first, the EU (and the United States) had focused on Bulgaria. Now, it turns its attention to Serbia.
In this backdrop, Gazprom’s revision of the project’s costs seems to play to the European strategy.
This happens while Azerbaijan strengthens ties with Italy, Germany’s BASF tries to finalise an asset swap deal with Gazprom, Ukraine receives the first deliveries of Norwegian gas, and the United Kingdom prepares for the 14th onshore licensing round.
SOUTH STREAM PROJECT, RUSSIA, EU, UKRAINE, SERBIA
Early this week, EU’s next foreign policy chief Federica Mogherini said that the European Commission will revise its relations with Russia.
“I would say that we need a mix of assertiveness and diplomacy. The balance would also depend on the reaction of the bear,” Mogherini said, adding that Brussels has to work “day by day with President Poroshenko.”
“Political conditions are not right,” she noted referring to the pipeline connecting Russia and Europe.
But that did not have an apparent direct consequence on the trilateral negotiations. A few hours later, Kiev and Moscow said they were willing to continue the talks to find an interim gas deal.
‘Arseniy Yatsenyuk confirmed the readiness to continue together with the European Commission negotiations with the Russian side on supply of natural gas from Russia. The Ukrainian side is ready to a mutually acceptable solution on the basis of market pricing for gas and its transit, said the Prime Minister,’ the Ukrainian government wrote on Monday evening.
Despite the declarations, Ukrainian authorities are clearly reticent to accept inconvenient European proposals. Logically, they would rather prefer other solutions.
“We have brought a special action in the framework of the general procedure. Within a month the court, unless we find an understanding in the trilateral format, will take a decision on the temporary price and terms of gas deliveries. As now it is a question of energy security of Europe,” Yatsenyuk explained, suggesting that the court ruling might be an effective alternative to trilateral talks.
Meanwhile, European authorities started speaking in public about the consequences of eventual gas disruptions. On Monday, European Commissioner Günther Oettinger said that Europe can easily handle a month without Russian gas, while it could have some more problems in case of a six-month stop.
Oettinger also proposed to hold the next round of trilateral talks in Berlin on October 21. It is likely though, that the change in diplomatic ties between Kiev and Moscow will go at the same speed of the South Stream negotiations.
In this context, Serbia plays a pivotal role and its teetering behaviour is a proof of the current uncertainties. Belgrade changed its position in a few hours.
On the one hand, on Tuesday, Serbian authorities met with Russian officials.
Minister of Foreign Affairs Ivica Dacic met with Russian Minister of Energy Alexander Novak in Moscow, laying the ground for the visit of Russian President Vladimir Putin to Belgrade on October 16.
‘He pointed out that Serbia wants to strengthen cooperation with Russia in the energy sector, as well as to address the issue of privatisation of some enterprises in our country and put them into operation,’ reads a note released by the Serbian government on Tuesday, referring to Dacic’s statement.
At the same, Belgrade made it clear that it has ‘no problem regarding the South Stream because our country wants its construction, while all other problems need to be solved by Russia and the EU.’
But, as said, things changed in a few hours.
On Wednesday, the European Commission released a memo with the key findings of the Progress Report on six countries willing to be part of the European Union, one being Serbia.
Brussels outlined the strengths and the weakness of the country, saying that Belgrade has to promote a higher degree of alignment in the energy sector. In its memo, the European Commission also referred to the South Stream project.
As a consequence, Serbian Prime Minister Aleksander Vucic immediately intervened, saying it “makes no sense” to start construction.
The Serbian U-turn was not good news for the Kremlin. And the following hours were even worse for Moscow.
On Friday, Ukraine unveiled it started receiving gas from Norway as a consequence of the deal between Naftogaz and Statoil. The government said deliveries began on October 1.
"We have started receiving natural gas under the contract between the Naftogaz of Ukraine and one of the world's largest energy operators, the Norwegian company Statoil," Prime Minister of Ukraine Arseniy Yatsenyuk said on October 8, as reported on the government’s website.
AZERBAIJAN - ITALY
Azerbaijan decided to open its fourth National Confederation of Entrepreneurs Organisation (AEC) office in Italy, after opening similar services in Turkey, Germany and Ukraine.
The decision was announced in Baku on Thursday.
A few hours before, Rome hosted a conference on the Trans Adriatic Pipeline, underlining the importance for the country and for Europe.
GAZPROM - BASF
On Thursday, BASF’s Wintershall confirmed a major deal with Gazprom was on track. The German company could soon finalise an asset swap deal with the Russian companies despite some doubts.
‘It was pointed out that the swap would enable the companies to substantially strengthen their positions along the entire value chain from upstream to downstream,’ reads the note released by Gazprom on Tuesday.
According to the Russian company, the companies also discussed ‘joint infrastructure projects including South Stream.’
UK ONSHORE LICENSING ROUND
While progressing with its integration programme after the acquisition of Dart Energy, IGas said it is joining forces with other market participants to take part to the 14th onshore licensing round in the United Kingdom.
‘Work is progressing, with a number of partners, on the submissions for various blocks in the 14th Round of onshore licensing. Applications will close on 28 October,’ the company wrote in a note, adding that the new IGas Energy Shares will be admitted to trading on Thursday 16 October.
The company also made clear its intentions to progress with its unconventional drilling plans, while monetising three gas projects to fund further investments.
WHAT’S NEXT?
We will continue speaking about the South Stream project, Russia and Ukraine at least until Moscow and Kiev will agree on an interim deal. But, as said, other important events might soon take place in other areas of the Continent. The coming onshore licensing round in the UK is an event to watch. The evolution of the ties between Azerbaijan, Europe and Russia will be equally important. Finally, the debate on energy efficiency and targets will be another factor to keep well in mind, an element that could easily change the future prospects of gas in Europe.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci