Week 43 Overview
Forecasts predict a cold winter, autumn is already having an impact on energy consumption (according to GIE data, several countries are already withdrawing gas from their UGS facilities), and many companies are looking at investments in countries were the sun still shines: after Eni’s discovery, rosy expectations in Egypt are pushing companies to buy shares in regional projects. Despite the latest tensions in the Middle East and contagion risks, companies are looking at the region with a favourable eye.
This comes at a moment when Iran is flexing its muscles and announcing its firm intention to export its natural resources to Europe - oil will take months, gas will require years. But a caveat has to be made in the case of gas. The pipeline option does not seem to be on the table at least for the time being, as Teheran seems to prefer LNG to bring its gas to European markets. As said, this will require time. Meanwhile, Russia and Iran committed to further strengthening their ties.
Waiting for more gas from North Africa, European countries will increasingly rely on LNG. On October 22, European Commissioner Miguel Arias Cañete said that LNG consumption will double by 2020. This is also likely given the worrisome production trend. Europe might indeed witness a more than expected decrease in production, as suggested by new taxes on oil and gas operations in Ireland and recent declarations of Norwegian companies.
Another source of complexity could come from Ukraine, where local elections will take place on October 25.
Meanwhile, BP and China National Petroleum Corporation (CNPC) entered into a framework agreement on strategic cooperation for several projects, ranging from shale to management practices.
IRAN: LNG AND COOPERATION WITH MOSCOW
This week, Iran hosted a three-day conference about oil and gas operations.
Iran’s First Vice-President Eshaq Jahangiri said on October 19 that Tehran is ready to play an active role in satisfying the global gas requirements. This came only a few hours after leaders in the United States, the European Union and Iran began making arrangements and preparations for the implementation of the Joint Comprehensive Plan of Action (JCPOA) reached between the P5+1 in July.
On October 20, Teheran also said it expects to triple gas exports, explaining that it will give priority to LNG and a pipeline to Pakistan. “By launching the Save and Export project, some 50 to 60 mcm will be economized” Managing Director of the National Iranian Gas Company (NIGC) Hamid-Reza Araqi said on Tuesday, adding that Iran has the potential to increase its daily gas exports from the existing 80 million cubic meters daily to 300 mcm, not explaining how long this process would take.
In this sense, Iran confirmed its resolve to cooperate also with several countries, explaining that the next summit of the Gas Exporting Countries Forum will take place in Teheran on October 23. At the same time, Iran’s Petroleum Minister Bijan Zangeneh and the Russian counterpart, Alexander Novak, are discussing ways to strengthen bilateral cooperation.
Moscow is indeed expected to issue a $5 billion credit line to Iran, Iranian Minister of Communications and Information Mahmoud Vaezi reported on October 21.
RUSSIA AND UKRAINE: PROBLEMS, AND IMPROVEMENTS ON BOTH SIDES
Russia’s Gazprom and Rosneft are revising their investments plans, with the gas giant revising upwards its 2015 investment plan and Rosneft announcing a deal to sell 8.99% interest in Italy’s Saras. Gazprom wrote that it has added 238.7 billion roubles to its 2015 investment programme, representing a 22% increase with respect to the preliminary figure. The revised figures indicate investments for 1.043 trillion roubles ($16.8 billion).
On October 20, Gazprom said it had discussed the construction of a third production line for its Sakhalin-2 LNG (liquefied natural gas) project with Japan’s corporate giant Mitsui. According to the company, Gazprom head Alexei Miller and Mitsui chairman Masami Iijima discussed potential cooperation during a working meeting.
On the other hand, Filippos Proedrou argues that Gazprom’s financial state is pretty worrisome. Gazprom has been hard hit the last years by a parallel fall in exports and gas prices that have yielded much lower revenues than before. On top of this, Western sanctions have significantly deteriorated its capacity to raise capital. As a result, recent agreements with foreign companies for mutual exploration projects are more a sign of weakness, rather than strength, the scholar explains.
Moreover, efforts to secure financing for Russia's Yamal LNG plant have stalled, with the owners baulking at costly Chinese loans and Western sanctions hampering alternatives, two Russian banking sources told Reuters, warning the search could drag into next year. Novatek owns 60% stake in the company while Total S.A. and CNPC own 20% each.
Kiev is equally registering some positive and negative developments.
Ukrainian Prime Minister Arseny Yatseniuk said that the country has enough funds to buy gas for the coming winter, adding that Kiev would start legal proceedings if Russia does not accept the cancellation of Ukraine's US$ 3 billion debt.
On October 16, the Cabinet of Ministers of Ukraine approved Naftogaz' governance reform plan facilitated by the European Bank for Reconstruction and Development (EBRD), which will introduce an independent supervisory board with ‘wide authority and responsibility.’ After “a transition period”, Naftogaz is expected to turn into a commercial-like company, with a more finance-based rationale.
While the country is trying to increase transparency across several sectors, Naftogaz’s debtors transferred money to the oil and gas company of Ukraine. Companies in the heating and power sectors, along with industrial consumers, owe USD 20.7 billion to Naftogaz as of October 20, indicating a 1.2% decrease with respect to the previous week.
On October 19, the Polish and Ukrainian transmission system operators (TSO) – Gaz-System and Ukrtransgaz - have completed the feasibility study for the interconnection integrating transmission systems of both countries. The planned Gas Interconnection Poland–Ukraine includes the construction of a new gas pipeline between the Hermanowice gas node on the Polish side and Bliche Volytsia on the Ukrainian side. The total length of the pipeline is around 112 km.
Still, as anticipated, the looming local elections might be an hindrance to Ukraine’s plan.
EUROPEAN ISSUES - NORD STREAM II
At first sight Nordstream 2 appears to be a political masterstroke. It divides Western Europeans from Eastern Europeans, it separates the Americans from the Europeans and puts enormous pressure on the sanctions regime. Unfortunately, in reality, it is far from being a masterstroke, argues Alan Riley. According to the Professor, financing issues, the sanctions regime, a tougher regulatory environment and a changed political context are likely to delay the Nord Stream II project and isolate the Western allies of Gazprom.
Coherently, Hungarian Foreign Minister Peter Szijjarto said on October 22 that EU's soft stance on the Nord Stream II project could have to do with the influence of Northern European countries, referring to the power imbalances in the block as a possible reason for the failure of the South Stream project.
EUROPEAN ISSUES - PRODUCTION
The Irish Government announced the introduction of a new "petroleum production tax" which will increase the maximum tax take on an oil or gas producing field from 40% to 55%, explaining the new tax scheme for oil and gas operations.
Norway’s Statoil reportedly said it has already cut costs for the Johan Castberg project by an estimated 30%, explaining that the 50% decrease in oil prices forced the company to reduce spending. This news shows how companies could continue slashing costs over the next months to adjust to the current market conditions. Additionally, it suggests that real cost cuts might be higher than preliminary figures.
Statoil’s production could also be limited by technical difficulties. Icebergs and sea ice can pose a 'real threat' to installations if they collide, Arne Kvitrud, Petroleum Safety Authority’s ice expert, said on October 22. According to Kvitrud, the probability of finding sea ice and bergs south of Bear Island is low, but not zero.
Production will suffer also because of the current market conditions.
Spain’s Repsol said it plans to sell non-strategic assets for €6.2 billion, adding it will cut spending by 38% in the next four years with respect to 2014, as part of a strategy aimed at reducing its debt and doubling EBITDA (at CCS) to 11.5 billion euros.
Similarly, Austria’s OMV has announced its intention to sell a stake of up to 49% in its wholly owned subsidiary Gas Connect Austria (GCA), as part of a plan to strengthen its cash flow and balance sheet. GCA is a company that operates and constructs natural gas high-pressure pipelines in Austria.
US-headquartered Schlumberger reported a 33% decrease in revenues in the first three quarters of the year with respect to the same period in 2014. This is another warning, especially for service companies. “Schlumberger third-quarter revenue decreased 6% sequentially driven by a continuing decline in rig activity and persistent pricing pressure throughout our global operations” Schlumberger Chairman and CEO Paal Kibsgaard commented in a note released on Friday.
IS THE US AN INCREASINGLY IMPORTANT ENERGY PLAYER IN EUROPE?
Providing a broad view on the nexus between energy and security, Adnan Vatansever, Senior Lecturer, King's College London, recently spoke about the three countries that will be most important to the EU's energy security in the future: Russia as the main supplier, Turkey as an important transit country, and the US as an increasingly important energy player.
In a recent conference at the Brussels Energy Club, experts conceded that American LNG exports may be bound for Europe in the future, but a healthy LNG trade will require the development of infrastructure on both sides of the Atlantic. Nonetheless, some experts said that the business has great potential to grow (in Europe): Poland is likely to import up to a third of its future gas requirements through a new LNG terminal on the Baltic Sea coast, while Italy has substantial LNG receiving capacity which could be matched up with US deliveries.
According to Greek newspapers, Athens and Washington are paving the way for a Greek-American joint venture for a LNG plant in Greece. The plan might be announced during US Secretary of State John Kerry’s visit to Athens in November.
EUROPEAN DEVELOPMENTS: INFRASTRUCTURE AND EFFORTS TO INCREASE DOMESTIC PRODUCTION
While Qatari authorities are speaking with their European (Polish and Romanian) counterparts, Poland and Lithuania are showing their potentials.
On Wednesday, Polskie Górnictwo Naftowe i Gazownictwo and Qatar Liquefied Gas Company reached a new supplementary agreement to the LNG supplies contract signed in 2009. Pursuant to the agreement, PGNiG and Qatargas have changed the terms on which the long-term contract will be performed in the first six months of 2016.
Poland plans to play a major role in Central and Eastern Europe.
The EU allotted €295.4 million for the GIPL project, the gas pipeline between Lithuania and Poland. The Polish transmission system operator Gas Transmission Operator GAZ-SYSTEM S.A and the Lithuanian transmission system operator AB Amber Grid inked a trilateral agreement with the EU Innovation Network Executive Agency – INEA.
Warsaw remains interested in new infrastructure projects to mitigate the risks stemming from complex geopolitical developments. Poland's Świnoujście LNG terminal will have a capacity of 5 bcm in the context of Poland's 15 bcm gas demand, which translates into more flexibility.
The country hopes to revive domestic production. On October 22, ORLEN Upstream is starting to work on the exploration project called Miocen. The Ministry of the Environment has granted PKN ORLEN's subsidiary company a concession for the exploration and appraisal of oil and gas deposits.
At the same time, the Baltic states are actually quite well-connected with pipelines and have decent infrastructure connecting all three countries with pipelines connecting all three countries, said Dominykas Tuckus, General Manager, LITGAS. “This has been the case for over the last 10 years, but has never been used for trading because each of the countries had their own suppliers and no trade was happening with others, despite the significant differences in price.”
Finally, also Norway and France showed some room for bucking the production trend.
Norwegian companies and suppliers agreed on new practices for establishing contracts, reportedly aimed at decreasing costs and promoting competitiveness.
Statoil also said that the two new compressors that started up on the Troll A platform this month will help increase gas recovery by 83 billion cubic metres. ‘The compressors are an important measure to meet the Troll field's long-term production profile, currently extending to 2063’ wrote Statoil on Thursday.
France granted three exclusive permits to prospect for liquid and gaseous conventional hydrocarbons, and extended four licenses.
CASPIAN AND CAUCASUS
During a recent conference, Baku’s commitment to realise the pipeline connecting Azerbaijan to Italy came without “if” and “but”, while European institutions’ remarks indicate Brussels’ intention to ask Baku not only to proceed with economic reforms, but also to replicate parts of its political structures based on a “clear separation of powers”. If the two parties want to proceed with a strategic partnership, Europe should avoid cases of double-standard when considering countries out of its reach, and Azerbaijan should promote transparency in order to attract more European investment.
The TAP project registered some steps forwards. Trans Adriatic Pipeline AG (TAP) awarded three contracts for the engineering, manufacturing and delivery of 48” and 36” fittings, isolating joints and scraper traps.
Khoshbakht Yusifzadeh, First Vice-president of the State Oil Company of Azerbaijan Republic (SOCAR), said that Azerbaijan has several new gas projects which will allow for significantly increased output. Replying Natural Gas Europe’s question in the sideline of a business forum co-organized by the Caspian European Club and SOCAR, Yusifzadeh said that “we continue drilling the third well in Umid gas field, commenced by SOCAR in 2010.
At the same time, the deputy head of the State Oil Company of Azerbaijan Republic’s (SOCAR) Gas Export Department has informed Natural Gas Europe that Russian gas export to Azerbaijan is being stopped. Kamal Abbasov said that Azerbaijan halted Russian gas intake at 00:00 (or 19:00 GMT) on October 20th.
On the other hand, Georgia might take the opposite direction, despite the internal opposition. The recently announced plans to diversify the nation's gas supply by increasing shipments from Russia’s Gazprom did indeed raise critical voices. On October 17th, opponents gathered in front the government building in the Georgian capital Tbilisi for a protest action against Gazprom’s possible re-entry into the nation's energy market.
Against this backdrop, regional players spoke in favour of a project to connect Turkmenistan with Azerbaijan.
The supply of Turkmen gas through the Trans-Caspian gas pipeline to Turkish and European markets make this project an important income source for Turkmenistan, Turkish Minister of Energy and Natural Resources Ali Riza Alaboyun told Trend Oct.22.
ENVIRONMENT: GREENHOUSE GAS EMISSIONS, GAS
European greenhouse gas emissions fell to the lowest level ever recorded. According to Brussels, the EU’s member states registered an estimated 23% drop in emissions between 1990 and 2014.
On October 22, Manfred Hafner and Simone Tagliapietra released a note, saying that European authorities should pay more attention to the role of gas in the energy mix.
‘In order to achieve its 2030 renewable energy target the EU will need to rethink its electricity system beyond renewable energy itself, with a particular focus on the role that natural gas might play in the future of the EU energy system,’ reads the note released by the two researchers.
On October 16, BG Group, BP, Eni, Pemex, Reliance Industries, Repsol, Saudi Aramco, Shell, Statoil and Total threw their weight behind an agreement to be reached at the United Nations (UN) Conference of Parties to the UN Framework on Climate Change (COP21). The CEOs of the ten companies formalised their support for a deal meant to limit global average temperature rise to 2 degrees centigrade.
ENVIRONMENT: SHALE
Petrochemicals company INEOS took part in a Scottish National Party (SNP)’s conference in Aberdeen, making the case for shale gas in Scotland. The Swiss company’s intervention is part of its ongoing shale gas information programme, which started earlier this year.
If a Swiss player wants to trigger shale production in Scotland, a British company wants to contribute to China’s shale industry. As said earlier, on October 21, BP and CNPC entered into a framework agreement on strategic cooperation covering potential shale gas exploration and production in the Sichuan Basin.
LAST BUT NOT LEAST, THE EASTERN MEDITERRANEAN AND NORTHERN AFRICA
Eni’s Chief Executive Officer, Claudio Descalzi presented the development plan for the Zohr field to Egypt’s President Abdel Fattah Al-Sisi. ‘The parties confirmed the joint commitment to accelerate the production start-up of the field’ reads a note released by Eni on October 19, referring to a meeting on October 18.
As a result of a competitive bid round, Eni has been awarded two new exploration licenses offshore Egypt, North El Hammad and North Ras El Esh. Eni has been awarded a 37.5% participating interest and operatorship in North El Hammad, where it partners with BP (37.5%) and Total (25%), and a 50% participating interest in North Ras El Esh, where it partners with BP (50%) which will act as operator, according to a press release by the Italian company.
On October 19, the new Libya oil and gas Forum 2015 was launched in London, signalling the intention of the country to promote energy investments in Libya despite the political complexities. It was opened by Mr. Mustafa Sanalla Chairman of the National oil Corporation (NOC).
Over the last hours, European authorities tried to take an active role in the region, speaking with the Libyan Prime Minister Designate Fayez Al Sarraj and Israeli Prime Minister Benjamin Netanyahu.
Cyprus’ Minister of Energy, Commerce, Industry and Tourism intervened too, saying that the relationship between the two countries is as amiable as ever and heading towards closer energy ties. Lakkotrypis is expected to meet his Israeli counterpart Dr Yuval Steinitz in Nicosia in November to discuss the Aphrodite reservoir and decide on the next steps that will lead to the signing of a unitization agreement.
Meanwhile, Israeli Energy Minister Yuval Steinitz is visiting the US in what he described as "a road show" in order to mobilize new investors for energy exploration in Israel. "One of my goals is meeting with top level [executives] from energy companies in order to entice them to come to Israel, not only to develop natural gas fields but also to explore and discover new oil and gas fields," Mr. Steinitz said to reporters.
The Israel Antitrust Authority (IAA) has released new guidelines for companies seeking to explore for natural gas in Israel. The guidelines will make it easier for companies to cooperate in exploration and later in production, though they forbid the participants in the Tamar gas field from taking part in such projects.
Delek envisions that by 2020 natural gas production in Israel will reach 40 bcm/y from 3 reservoirs, and most of the production will be exported. Potential customers include Jordan, Egypt, and possibly Turkey. Delek said that an agreement with Union Fenosa Gas (UFG), the Spanish energy company, is expected to be signed in the next few months for a 15 year period for a 4.5 bcm/y, a total of 70 bcm for the whole period. The gas will be supplied from Tamar to UFG's Damietta LNG facility for re-export to European customers.
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