Week 44 Overview
The last week made a convincing case for a renewed interest in upstream. Despite several market participants suggested that the 14th licensing round in the UK drew little attention, recent deals hints at a growing interest for operations in the UK, as well as in Norway and Algeria.
The most interesting deal is probably the one signed by Italy’s Enel with Algerian authorities. The largest utility in the Bel Paese signed contracts for two exploration blocks on Wednesday, in the attempts to avoid a decrease in local production that would further reduce exports to Italy and Europe.
Against this backdrop, the European Union finally managed to broker a deal between Russia and Ukraine. This it the result of Brussels committing to provide unprecedented levels of aid to Kiev. This clearly translates into an abundance of gas available in the markets, which is likely to have an impact on prices.
Finally, the last days also suggested that service companies might soon benefit from the increased interest in the upstream. Most of the service companies are completing their internal changes. Some are already reaping the benefit of their plans to cut costs and rationalise operations.
RUSSIA, UKRAINE AND THE EU
Russia and Ukraine, finally signed a 4.6 billion dollar deal on Thursday, with the Kremlin opening the door to a “fair dialogue on all issues.”
The outgoing European Commission registered an expensive success two days before the end of its mandate. European officials said that the EC will provide ‘unprecedented levels of … aid.”
Some commentators wrote that the deal marks Russia’s intention to give up a confrontational approach, showing it has no means to compete with Western countries. This might be the case, but it is only one side of the story.
Europeans are indeed committing to a support to Ukraine, mulling new investments in pipelines between Eastern Europe (mainly Poland) and Western Ukraine. The decision comes with a high degree of risk for the European Union. Ukraine is a huge country, the seventh by population in the Old Continent.
In this sense, the deal signals Europe’s weakness too. Rather than cementing and finding new ways to improve the bloc’s economic performances, Brussels prefers to bet on an enlargement of its sphere of influence. The almost unconditional financial support to Kiev could backlash on Brussels in the coming years.
Meanwhile, Lithuania’s President Dalia Grybauskaitė did not feel the gloomy prospects of an enlargement of the European Union. She preferred taking part to the welcoming ceremony for the arrival of the LNG storage vessel in Klaipėda.
“The liquefied natural gas terminal is an important strategic project and a great victory of our state. It is not only energy independence, but also political freedom. From now on, nobody will dictate us the price for gas or buy our political will," Grybauskaitė said in a note released on Monday evening.
On the other side of the “Wall,” Belarus and Russia strengthened ties also in the oil and gas industry, with Belorusneft buying Russian assets for the first time in its history. Belorusneft-Siberia, LLC purchased oil company Yangpur for 3.575 bln Russian rubles.
NORWAY: PGNiG, Lundin, Statoil
While Total keeps divesting its Norwegian assets, several companies are voicing their interest for old and new offshore fields.
On Monday, Wintershall proceeded with its plan to focus on oil and gas production, divesting assets in East Germany. The company sold 15.79% share in Verbundnetz Gas (VNG) to EWE for €320 million.
Wintershall, which has stepped up its activities in Norway in September, could be interested in buying more assets on the Norwegian Continental Shelf. Indeed, the company clearly stated it might soon increase investments in exploration and production. This would be perfectly in line with the current trends in the European oil and gas industry.
On Tuesday, PGNiG Upstream International bought shares in four NCS fields from Total E&P Norge.
‘Transaction is a part of implementation of PGNiG's strategy and allows significant increase of hydrocarbon production outside Poland,’ the company wrote in a press release.
Also on Tuesday, Statoil said it is about to launch its subsea wet gas compressor station, working on the final testing at Horsøy outside Bergen. The company should install and proceed with the hook-up to Gullfaks C in 2015.
‘By adding 22 million extra barrels of oil equivalent from the Gullfaks South Brent reservoir the compressor will help extend the field’s productive life,’ reads a note released on Tuesday.
Meanwhile, Lundin Petroleum AB commenced drilling operations at its exploration well 6405/12-1 in PL584.
‘The well will investigate the hydrocarbon potential of the Lindarormen prospect in PL584, located 150 km northwest of Kristiansund on the Norwegian coast and approximately 80 km northeast of the Ormen Lange Field,’ reads a note released on Thursday.
UK: small companies
Over the last days, the British gas industry demonstrated its intention to take advantage of favourable policies, with new market movements throughout the week.
‘InfraStrata, the independent petroleum exploration and gas storage company, is pleased to announce that, together with joint venture partners Corfe Energy Limited and Brigantes Energy Limited, it has signed an agreement with Southwestern Resources Limited with respect to offshore Dorset licence P1918,’ reads a note released on Monday.
Southwestern is a new company established to tap opportunities in the country. Similarly, other small players are stepping in.
On Wednesday, Horse Hill reported minor achievements at the Horse Hill-1 exploration well near Gatwick Airport.
On Thursday, Egdon Resources announced the completion of drilling operations at the Burton on the Wolds-1 conventional exploration well in Leicestershire.
SERVICE COMPANIES
France-based Technip reported a year-on-year 16.2% increase in revenues in the third quarter of the year. However, the EBITDA margin decreased from 11.6% in the third quarter of 2013 to 10.8% in the third quarter of 2014.
The company’s revenues for the third quarter totalled €2.8 billion.
“The third quarter showed solid delivery against our objectives, with business won across our segments and geographies,” Thierry Pilenko, Chairman and CEO, commented in a note released on Thursday.
Norway-based Kvaerner reported a even better performance. Operating revenues for Q3 amounted to NOK 4 004 million, compared with NOK 3 080 million for third quarter 2013. Earnings before Interest, Taxes, Depreciation and Amortisation (EBITDA) for the quarter were NOK 194 million, compared with NOK 180 million in the same period last year.
“The aim for this process is to enable competitive prices for new projects in parallel with gradual margin improvements. As a first step, we expect to complete the announced 15 percent cost reductions over the next months,” Jan Arve Haugan, President & CEO of Kvaerner, said in a press release.
On the other hand, Italy-based Saipem registered a slowdown.
“We continue to implement our turnaround plan for Saipem, though market conditions have deteriorated impacting the pace at which legacy contracts are resolved and the execution of new contracts,” Umberto Vergine, Saipem CEO, said in the press release.
The company’s revenues for the third quarter totalled €3.5 billion, with €1,856 million coming from new contracts.
Eyes on NORTH AFRICA
Operations in North Africa will remain under the spotlight. Investors are clearly interested in the ongoing political developments in the Maghreb area. A more stable political context and a reduce in subsidies for local consumers could soon lead to the discovery of new fields and, eventually, an increase in export to Europe over the medium term. Enel probably got it right.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci