Week 45 Overview
In the aftermath of the downing of the Russian airplane over Egypt, the Kremlin announced its decision to send missile systems to Syria to protect its forces. Russia’s ability to intervene in the Middle East is likely to have an indirect impact on gas developments in Europe.
This comes at a moment when Europeans are struggling to find a political solution to the migration crisis and to the growing tensions in the Balkans. Over the last days, Ukraine called on Europeans to remain united, showing that the stability of the EU should not be taken for granted.
‘Not since the end of World War II has Europe been compelled to face as many formidable challenges as today,’ Hungary’s Foreign Minister Péter Szijjártó said as reported by a note released on November 3.
Logically, Russia can capitalise on the moment to reinforce its clout in Europe. On November 4, the German cabinet approved a plan to remunerate utilities to set aside some of their coal-fired power capacity. This indicates that consumption of Russian gas, at least in some parts of the continent, might soon increase - as also proved by Gazprom’s export figures for October.
The European Commission is trying to solve this complicated riddle, working on several options. At the moment, according to officials and leaked documents, LNG and a better understanding of the domestic resources seems to be the best ways to avoid over-reliance on Russia.
The Eastern Mediterranean could be an alternative. Eni and BP continue to work on this at a time when the regional balance is about to change once more as a consequence of the Turkish elections that gave a strong majority to President Tayyip Erdoğan.
EASTERN EUROPE AND THE BALKANS: MIGRATION CRISIS AND GEOPOLITICS
The Nord Stream II project continues drawing skepticism.
Poland joined the club of Eastern European countries that opposed the Nord Stream II project. “From the point of view of domestic diversification and policy, these projects are extremely irrational, because these are examples of bypassing various regulations to liberalize the gas markets which are in place in the European Union. In other words, Nord Stream I & II are not subject to regulation that gas pipelines running through the EU are, and this is an evident example of an irrational approach and a lack of solidarity in Europe” Janusz Steinhoff former Deputy Prime Minister of Poland recently commented.
The migration crisis could last for years, with undeniable backlashes across the continent. ‘In South Eastern Europe, several countries have seen large numbers of refugees transiting their territories’ reads a report by the European Bank for Reconstruction and Development, which explains that the latest developments are putting economic pressure on a ‘number of countries in transition.’
Geopolitics play a role.
Colliding international interests with respect to the Balkans and the weaknesses of the South Eastern European countries might pave the way for a destabilisation of the region. Experts from Bulgaria, Serbia, and Macedonia agreed on Wednesday that there are reasons to worry - not only for the gas markets - as structural problems might increase the impact of the “US-Russia confrontation in the region.”
The risk of political instabilities emerged on November 4, when the Romanian Prime Minister Victor Ponta resigned.
Against this backdrop, an agreement between Moscow and Belgrade to expand the Banatski Dvor underground gas storage facility in Serbia may be signed by the end of 2015, the Serbian ambassador to Russia said on November 3 as reported by Sputnik.
Some experts hope that market forces can help (South Eastern) Europe.
“The principle that we are promoting is that the European market must prevail in any design of infrastructure and connectivity regarding natural gas” Mihnea Constantinescu, Special Envoy for Energy Security (Romania), commented in a recent conference. The contribution was made during a gathering of the country’s natural gas experts in the Romanian Senate.
Despite the difficulties of the European Union, Albania confirmed its strong intention to join the block. According to the Prime Minister’s Office, negotiations for Albania’s membership will start in 2016.
BALTIC COUNTRIES, AND UKRAINE: MARKET FORCES AND DIPLOMATIC ACTIVITIES
As Romania, the Baltic countries are making the case for a market-based approach to gas.
“We’re very keen at the moment to find a supplier, hope to get a good deal from Cheniere, and to get the first shipment of US gas into Europe” Lithuanian MEP Antanas Guoga told Natural Gas Europe. Guoga added that if the Russians provide the best price, Lithuania shouldn't reject that for American gas.
At the same time, Lithuania is looking at political and financial developments in the United States.
Long term, US LNG, will be cheaper on a cost basis than LNG from most of the rest of the world, according to Kimball Chen, Chairman, Energy Transportation Group. Chen said it is possible to buy proven Marcellus shale reserves for less than $1/mmBtu. “To produce it, treat it and get it to a pipeline that will take it to a coastal liquefaction site is probably $1 – so for less than $2/mmBtu you can get gas into a liquefaction plant.”
At the moment, the Baltic countries are Ukraine’s most vocal allies. Ukraine’s Prime Minister of Arseniy Yatsenyuk is in Riga, on a working visit at the invitation of his Latvian counterpart Laimdota Straujuma.
President of Ukraine Petro Poroshenko met with a delegation of the European Parliament on November 5, saying that European assistance is needed. “The unity of the European Union is vitally important for us,” Poroshenko stressed in Kiev.
In other words, Ukraine is struggling, and needs continuous help.
Political wrangling in Ukraine turned clear on November 5. State Security Service (SBU) detained Olena Lukash, allegedly involved in crimes against the Maidan protesters. She was Justice Minister during the presidency of Viktor Yanukovych.
In the meantime, Ukrainian authorities said they will buy natural gas from Russia until the end of the year, but will purchase all Ukraine's gas from Europe in the first quarter of 2016 if Russia does not offer a competitive price. “We expect and hope that Russian gas sellers will be rational and propose competitive prices to us," Naftogaz Chief Executive Andriy Kobolev said on November 3.
The country prepaid gas for only five days, Gazprom's CEO Alexey Miller said on November 1.
"By the end of October, the Gazprom's exports to the non-CIS rose by 41.36%. At the same time, Ukraine reduced the consumption of Russian gas threefold," Gazprom CEO Alexei Miller on November 2.
MARKETS: REVENUES GO DOWN, PRODUCTION AND FRICTIONS UP
The Norwegian oil and gas industry has suffered three setbacks in just a matter of hours. Eni received an audit by the Petroleum Safety Authority (PSA) on the newly built Goliat FPSO, which indicated 8 "non-conformities", and 8 "improvement points”. At the same time, Statoil said it decided to cancel a rig contract with Songa Trym, four months before the expiration of the contract on 4 March 2016. Other companies reported problems too.
Norway registered mixed results on November 4, with Det Norske Oljeselskap reporting EBIT for the third quarter at -91 million USD and Statoil awarding a 178 million USD contract to Jacktel for providing accommodation services on the Joahn Sverdrup oil field. As done by others over the last days, Det Norske deepened cost cuts and raised output forecasts.
An increase in production is envisioned by European and American companies alike. On November 5, for example, US-based Continental Resources said it is working to increase output from its shales.
Companies are basically trying to pump more oil and gas in order not to lose market shares, while investing in new fields despite the current low oil price environment. In 2016, Faroe planned one frontier exploration well in the Barents Sea and two near field exploration wells, one in the Norwegian North Sea and the other in the Norwegian Sea. ‘Production is continuing to perform above expectations and therefore 2015 full year guidance has increased to 9,500-10,500 boepd.’
Logically, financial stress comes with some tensions.
A group of investors decided to appeal the judgement issued by Oslo City Court in September, which stated that Norway was not to be held liable for the damages lamented by the group of investors as a consequence of the government’s decision to cut fees on the 8,000-km Gassled gas pipeline network. ‘The Company has decided to appeal the Oslo City Court’s judgement and will issue an appeal to this effect’ reads a note released by Njord Gas Infrastructure on October 30.
Life is not that easy for Gazprom either.
Even if the business model of Sakhalin III is appealing to Japan, the energy relations between Russia as a producer and Japan as a consumer have many questions, such as whether Japan's demand matches Russia's expectations. By 2030 the nation is planning to decrease the use of natural gas from 131bcm in 2015 to 92 bcm.
It is the right moment to be creative in finding new solutions.
Three energy companies active in the UK Southern North Sea agreed to team up to cut costs. ‘Petrofac, Faroe Petroleum and Eni Hewett have established an innovative cost saving partnership to drive efficiencies and commercial synergies across their UK operations in the Southern North Sea’ reads a note released on Wednesday.
New technologies and new M&A operations could come in handy as well.
‘Oil wells could soon be providing an unlikely source of renewable energy. The hot water that is removed during the hydrocarbon drilling process could provide a large, untapped source of geothermal energy, according to studies’ Eni reported on October 30.
BP has said that by merely applying the best available technologies to discover oil and gas resources, it would increase "proved reserves" from 2.9 trillion barrels of oil equivalent to 4.8 trillion barrels. The company also stressed the importance of digital technologies and the growing importance of wind and solar energy.
Finally, Royal Dutch Shell that a $70 billion takeover of BG Group has enabled Shell to identify a $1 billion increase in pre-tax synergies to $3.5 billion. That amount equates to a 40% increase in synergies. Its takeover plans would work also at mid $60s Brent prices, it said on November 3.
SHALE GAS IN THE LITHUANIA, POLAND AND THE UK
Shale enthusiasts might have had some problems over the last days, but they also had the chance to see a slim beacon of hope.
Lithuania says it has not scrapped its shale gas exploration and mining plans, but that it is putting them off indefinitely. “The dynamics of global oil and gas prices have been very adverse to hydrocarbons and we might be seeing it for very long, so pursuing alternatives does not make much sense," Kestutis Dauksys, a Lithuanian lawmaker and member of Lithuanian Parliament’s Energy Committee, told Natural Gas Europe.
On the other hand, according to Interfax, Poland’s next public tender for new oil and gas acreage will be a litmus test of the domestic shale gas potentials. The Russian media outlet wrote that ‘the Polish shale revolution is all but dead.’
The UK government announced on November 4 another change of heart for what concerns its shale plans. It decided to ban fracking in protected wildlife sites. Greenpeace UK expects a vote to allow fracking under National Parks, Areas of Outstanding Natural Beauty and World Heritage Sites in the coming weeks.
A local UK council previously approved planning permission for a proposed IGas project to drill two exploratory wells in order to evaluate geology and assess potential shale gas recovery, IGas announced in a statement Friday as reported by Platts.
EASTERN MEDITERRANEAN AND NORTH AFRICA: ENI, BP AND ROSNEFT
Eni was once more the protagonist in this part of the world.
While agreeing on the sale price of the 12.5% stake in Saipem with Fondo Strategico Italiano, it continues its negotiations in North Africa. Its CEO Claudio Descalzi met with Algerian officials on Tuesday. Descalzi discussed its strategy to strengthen ties with Algeria and state company Sonatrach.
On October 29, Eni announced the success of the Nidoco North West 3 well dirilling in the Nooros exploration prospect, located in the Abu Madi West licence in the Nile Delta. According to the Italian company, the licence is estimated to contain about 15 billion standard cubic meters of gas.
Eni is also trying to find a compromise in Libya. The cash-strapped country is reportedly proposing an unconventional repayment scheme for the Italian company’s $2 billion investment in the Bahr Essalam offshore project - Libya’s National Oil Corporation (NOC) wants to repay it with crude oil.
While Eni continues with its plans to promote a regional gas in the Eastern Mediterranean and the Kremlin says that it is intentioned to continue supporting Syria’s Bashar al-Assad, Saipem and Gazprom met in Moscow. According to the note, the parties reviewed crucial issues of the current and future cooperation.
Similarly, Rosneft, BP, Total, and Noble Energy are looking for opportunities in the region.
On November 2, Rosneft and the Egyptian General Petroleum Corporation (EGPC) signed an agreement for supplies of oil products to the Egyptian company.
BP then announced on November 5 that it has signed a Heads of Agreement (HoA) with the Egyptian Minister of Petroleum Tarek El Molla meant to accelerate the development of the Atoll gas discovery. Development of Atoll will be executed and operated by Pharaonic Petroleum Co. (PhPC), BP’s joint venture with EGAS and Eni. It should help the country meet its energy needs.
Total spoke about its investments in Cyprus.
French energy major Total intends to drill for natural gas in offshore Block 11 in Cypriot waters before its exploration license runs out in February of next year, reports said on Wednesday.
News also came from Israel.
The approval of the regulatory framework for the country’s natural gas industry advanced on November 1, when in a political deal, Economy Minister Aryeh Deri resigned. He will be replaced, at least temporarily, by Prime Minister Benjamin Netanyahu. Commentators are expecting the political process leading to the final approval to last a few weeks, as it may involve a petition to the Israeli High Court in order to block the regulatory framework.
Noble Energy says it has cut capital expenditure in 2015 with respect to the previous guidance, adding it increased sales volume expectations for the fourth-quarter of the year. In relation to its operations in Israel, the American company said that natural gas sales volumes averaged 303 MMcfe/d in the third quarter of the year, which represents a 15% increase on the same period in 2014.
Noble Energy will make final investment decisions (FIDs) concerning Leviathan and Tamar fields in around a year's time, Noble Energy CEO David Stover said on November 2. Stover said that marketing efforts in the Mediterranean are ongoing and mentioned Eni S.p.A's Zohr offshore Egypt discovery in a positive manner. He also asked to de-linked Tamar and Leviathan, which would allow investors “to look at those as two separate FIDs.”
IRAN: EXPECTATIONS AND NEED TO WORK WITH OTHER PLAYERS
Iran voiced its willingness to sell gas to Europe, even if doing so has no economic justification. “This is because we want to use our economic relations to create some political cohesion,” Amir Hossein Zamaninia, the Iranian deputy oil minister in international affairs, was quoted as saying by the IRNA newspaper.
However, there could be competition for eventual Iranian gas to Europe. Once the sanctions on Iran are lifted, the breakthrough of Iranian gas exports will likely begin, but, not earlier than 2020, due to the lack of appropriate infrastructure and high domestic consumption. This places Turkmenistan in a more competitive position, due to the prompt completion of the East-West pipeline, and the country’s relatively low domestic consumption. For the delivery of Turkmen gas to the European market, the most economical and feasible option is construction of the TCP to Azerbaijan, where it will link with the TANAP, argues Eldar Latypov.
While working to boost gas outputs from several fields, Iran is negotiating with several countries. Apart from its European interests, Teheran is also in talks with Kuwait.
AZERBAIJAN RE-AFFIRMS STRATEGIC PARTNERSHIP WITH TURKEY
Azerbaijan and Turkey are walking in the same direction.
President Erdogan’s success in securing a return to single party government in Turkey should make life a lot easier for Azerbaijan’s Socar and other current and prospective foreign energy investors. The two attacks on the existing Baku-Tbilisi-Erzurum gas pipeline, as well as an attack on a train carrying pipe sections for TANAP at the end of July, all took place in the Sarikamis district of Kars in northeast Turkey. And Sarikamis lies right on the planned route for TANAP.
The spotlights were on the Turkish elections, but also Azerbaijan hosted elections which led to similar results. The ruling party, New Azerbaijan, won a clear majority in the Parliament.
Turkey and Azerbaijan are trying to join forces, not only in the gas sector. Socar is working on tender procedures to construct a cogeneration unit in Turkey, Azernews reported.
Baku is also trying to cement its ties with Georgia. President of the Republic of Azerbaijan Ilham Aliyev went to Tbilisi on November 5 for an official visit.
OTHER STORIES
Russian gas supply to Azerbaijan depends on its price, a source in the State Oil Company of Azerbaijan said as reported by Trend on November 5. Earlier, Azerbaijan Methanol Company (AzMeCo) signed a contract with Russian Gazprom for gas supply to the methanol plant, but had to suspend it, since it was unprofitable, according to the source.
Socar doesn’t rule out the possibility of transporting Russian gas to Iran through Azerbaijan, SOCAR’s president Rovnag Abdullayev told reporters on October 30.
In conclusion, Iraq’s southern province of Basra has established a new initiative to attract foreign direct investment to its oil and gas sector. The Basra Council – the country's political authority for economic capital – has announced it will set up an investment vehicle company designed to attract international investors in key sectors including oil, gas, infrastructure, petrochemicals, and fertilizers.
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