Week 5 Overview
News from the Americans - Chevron abandoned another of its European shale projects, while GE signed two contracts in areas strongly related to the European Union. These investment decisions were the most revealing events of the 5th week of the year, suggesting that 2015 is not going to be the year of shale gas in Europe, but a period of stronger focus on higher efficiency and cost cuts. It could also be the year of a increasing US clout in Europe.
Meanwhile, it became evident that divergent interests in the EU could add to the current tensions between Europe and Russia. This increases the odds of a gas crisis in Ukraine, further weakening Kiev. The summer package could remain a hard nut to crack.
US - EUROPE RELATIONSHIP: NEW AND OLD INTERESTS
European Commissioner Šefčovič said that Brussels needs a stronger energy diplomacy, which could also negotiate better deals with the US. Šefčovič is also working on the Energy Union Strategy, which should be adopted by the College of Commissioner in about a month. The document will give a better indication of the future of gas in Europe.
The American oil and gas industry would benefit from the new European energy interconnections, as the infrastructures would create apt conditions for LNG exporters, ExxonMobil’s Richard Scrase said in an interview.
Meanwhile, the United States’ House of Representatives approved a bill to fast-track permits for exports of natural gas. The lawmakers voted 277 to 133 to approve the bill.
The American Senate sided with the industry and flatly rejected an effort to repeal a provision environmentalists call the "Halliburton loophole. The 35-63 vote left regulation of hydraulic fracturing firmly in the hands of state agencies, as industry prefers.
Last but not least, American technology capitalised on the renewed interest for efficiency in Europe. General Electric signed two contracts with Norway’s Statoil and Algeria’s Sonatrach to export its know-how.
EU - RUSSIA - UKRAINE: KIEV NEEDS SUPPORT
Kiev keeps withdrawing gas from its Underground Storage Facilities. This is a negative sign in a moment Russia and the EU go on with their toe-to-toe, backlashing against Ukraine’s security.
It is obvious Kiev will need more help from Europe. Ukrainian authorities are already meeting European counterparts.
Brussels extended sanctions against Russia, but additional measures against Moscow remain unlikely. Strong opposition to Moscow could indeed endanger the necessary cohesion to avoid the implosion of the European Union.
Meanwhile, Moscow is trying to strengthen ties with some countries in Europe. Austria’s OMV and Russia’s Gazprom sealed a deal for amended gas supply contracts, not disclosing the contract details.
Gazprom is also changing its business model in Europe. The company is no longer eager to access downstream. It also repatriated its head trading office from London to Saint Petersburg.
Russia is going through difficulties, and experts see negative consequences on its plans. Vladivostok LNG project could not survive.
Oil prices are the main cause of the situation. As a consequence, investment cycles for things like pipelines might not generate revenues for 20-25 years, Gazprom's Chairman of the Board of Directors, Viktor Zubkov said in Vienna.
This could make space for new investment opportunities of Chinese companies in Russia. Moscow’s isolationism will translate into an increased reliance on domestic technology, and a dependence on Chinese cash.
STUDIES: HOW THE GAS INDUSTRY WILL LOOK LIKE IN 2015?
The negotiations for the new European strategy go on in Brussels. Over the last days, it emerged that there are two opposite position: the German point of view, and the UK/Czech point of view.
Investment and development budgets for upstream in Europe are expected to fall from US$6.9 billion in 2014 to US$5.8 billion in 2015 as a consequence of the drop in oil prices. European shale gas will bear the brunt of changed market conditions.
It comes as no surprise that Gazprom reported a decrease in gas sales from 339.8 bcm in the first nine months of 2013 to 317.1 bcm in the same period of 2014. The Russian company registered a fall in demand from Europe, Russia and the rest of the former Soviet Union.
Meanwhile, poor upstream results hint at lower investments. Royal Dutch Shell announced new global restructuring programmes in 2015, while Austria’s OMV revised downwards its annual investment for 2015 and 2016 to a range of EUR 2.5 to 3.0 billion from EUR 3.9.
CAUCASUS, TURKEY, IRAN: CONFUSION REFLECTS COMPLEX CHANGES IN THE AREA
Gazprom and Turkish Minister of Energy and Natural Resources Taner Yildiz agreed on the new route of the new gas pipeline connecting Russia and Turkey. 660 kilometers of the pipeline’s route will be laid within the old corridor of South Stream and 250 kilometers – within a new corridor towards the European part of Turkey.
Moscow and Ankara continue their negotiations for price discounts. Russian President Vladimir Putin offered a 5-6% discount, but Turkey is aiming for a minimum 15% discount.
In this context, it is important to understand the prospective relevance of Turkey in regional developments. That is why, we gave space to a policy brief saying that Ankara’s regional energy leadership is likely to be over before it began.
In this sense, diplomatic spotlight for 2015 will most certainly be on Baku with Istanbul being placed as a major intermediate stop. An alignment between Moscow and Baku, should it be fruitful, might shake up the entire gas route plans of the West with plans for a Russo-Turkish, alignment - Turk/Turkish Stream.
Russia and Georgia are reportedly holding negotiations too. But Tsibilisi is intentioned to make the most of the situation. It continues its way to the construction of its first UGS facility.
Iran could take advantage of the geopolitical confusion to gain the upper hand. Teheran said it will add 150 mcm of gas per day to its export capacity.
BALTIC: INTEGRATION, SHALE
The Baltic states have moved towards stronger co-operation. Lithuania’s natural gas supply and trading company LITGAS confirmed it will supply first gas to Estonia from February 1.
The on-going tensions also raised the tones of the debate in other countries. Two Lithuanian heavyweights clashed over the role of shale gas in the Baltic country.
Lithuania’s LITGAS signed its second contract for gas supplies to Estonia on Wednesday. According to the deal signed with Eesti Energia, the Lithuanian gas supply and trading company will start supplying gas in March.
SHALE GAS: UK, ALGERIA, HUNGARY
The British cross-party House of Commons Environmental Audit Committee (EAC) wrote that fracking should be banned. In preparation to votes on the Infrastructure Bill, the Committee said shale gas is incompatible with the UK's climate targets.
The UK Prime Minister David Cameron embraced the industry's stance, opposing the work done by the Environment Audit Committee. He rejected the call for a moratorium on fracking.
Nonetheless, some analysts said that Cameron did not go all out for shale. The result is that we don’t quite know what will happen.
UK’s Lancashire County Council accepted Cuadrilla’s proposal to defer the decision on the company’s applications for shale gas exploration at Preston New Road and Roseacre Wood. The Council postponed its decision by eight weeks.
Edinburgh pushed it further. Scotland is going to impose a moratorium on unconventional hydrocarbon activities.
The shale gas debate is not fiery just in Europe - Algeria hosted protests like the UK. The Head of the State intervened to reassure the population, adding that exploitation of this new energy is not yet on the agenda.
Meanwhile, in Hungary, Falcon said its partner in Makó Trough Licence did not respect the agreement signed in January 2013 for a three-well drilling programme, adding it is looking for other options to farm out the licence.
But the most stinging shale debacle came from Poland. Chevron, the leader in multinational efforts to develop shale gas resources in Europe, announced that it would not continue operations in Poland.
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Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci