European natural gas market wrap-up for Week 50

Week 50 Overview

The 50th week of the year was busier than any high street in the world at Christmas time. It was an endless flurry of news coming from Turkey, Russia and Brussels.

While two of the six super-majors (BP and Total) announced their plans to proceed with corporate restructuring, Turkey and TAP were hitting the headlines for their growing role in the European gas industry.

Meanwhile, Russian companies are increasingly focusing on gas production, as an internal long-distance confrontation between Rosneft and Novatek became evident. Rosneft announced its intention to invest in gas production and turn into the second largest producer after Gazprom.

Against this backdrop, the EU made clear it wants to speed up projects and realise the so-called Energy Union, staving off Russian attempts to increase its clout in Southeast Europe. It also increased funds for neighbouring countries, showing some awareness about the strategic role of Serbia, Moldova and Georgia.

WILL TURKEY BE SOON AN ENERGY HUB?

The geographic location gives the country a crucial role for transit in addition to Turkey being a very dynamic gas market, said Vasile Iuga, Country Managing Partner, PwC Romania.

But, in order to increase its influence in Europe, Ankara has to find a way to soften the tensions with Greece about Cyprus. The talks held by Prime Ministers of the two nations are a good sign.

As written by Energy Policy Group Director Radu Dudău, all the state and corporate actors along the Southern Gas Corridor will likely learn to accommodate each other and work together, in spite of occasional rivalry and friction.

Coherently, Turkey stated that the pipeline bringing Azeri gas to Europe remains its priority. Minister Taner Yıldız said the pipeline to be built for transportation of Russian gas to Turkey is not an alternative to the Trans-Anatolian Pipeline (TANAP).

The Azeri gas would transit Turkey and reach Europe through the Trans Adriatic Pipeline. TAP AG kept moving forward with its plans over the last days. On Tuesday, it issued its Invitations to Tender (ITT) for the supply of large diameter ball valves and actuators.

On Friday, it issued ITT for the supply of six gas turbine turbo compressor units. At the same time, TAP has reportedly given notice to European authorities of its intention to double capacity from the onset of its operations.

However, this does not imply a U-turn on cooperation with Russia. Gazprom said it will set up a company named Gazprom Russkaya to proceed with the construction of a pipeline to Turkey.

Ankara said it is also considering an LNG terminal to receive Russian gas. Energy Minister Taner Yildiz announced the plan adding he commits to a $300 million investment with Shell.

Ankara also signed a deal with Algiers. It agreed to increase by 10% its LNG imports from Algeria, from the current 4 bcm/year to 4.4 bcm in the period 2015-2025.

GREECE, CYPRUS AND ISRAEL

Maroš Šefčovič, Energy Union Commissioner, met with representatives of Greece and Cyprus to speak about a project connecting the East Mediterranean to Europe. He reiterated European interest for the pipeline, adding that investment decisions will come only after feasibility studies.

European authorities restated their “conditional” support to new pipeline on Wednesday, adding that the European Commission will certainly help, but that “something has to change” to make the project feasible.

Šefčovič also discussed the privatisation of Greece’s natural gas grid operator DESFA. Greek Energy Minister Yiannis Maniatis asked Šefčovič to hurry up and give the green light to the deal between DESFA and Azerbaijan’s SOCAR, which has acquired a 66% stake in June 2013.

Meanwhile, Cyprus is strengthening its ties with Egypt. Egypt’s petroleum minister expressed to his Cypriot counterpart that Egypt will absorb as much gas as Cyprus can provide.

EUROPEAN NEIGHBOURHOOD STRATEGY

The situation in Ukraine remains of key importance for the European gas sector. As said by Mathieu Boulegue, partner at the risk management consulting firm AESMA, the Russia-Ukraine gas deal is necessary for Kiev, as the country could run into serious difficulties, especially given its coal deficit.

In this sense, Brussels breathed a sigh of relief after Naftogaz’ decision to pay for 1 bcm of natural gas.

As a consequence, Gazprom resumed gas supplies to Ukraine after a 6-month hiatus.

Meanwhile, the EU also stepped up financial backing for both Ukraine and Georgia. European Commissioner Moscovici announced a MoU with Georgia for a two-step program that would allow Tbilisi to get grants and loans for a total of €46 million.

The end of the week also witnessed a frenzy of diplomatic activities by Balkan and Southeastern countries with both Russia and Europe. The region is more important than ever.

The European Bank for Reconstruction and Development (EBRD) and Naftogaz discussed further cooperation. In a meeting in London, Naftogaz’ CEO and EBRD Managing Director also spoke about a loan meant to help Kiev upgrading a key section of its gas transmission system.

HUNGARY AND SOUTH-EASTERN COUNTRIES

Russian authorities continue diplomatic activities with Serbia and Hungary to discuss cooperation opportunities. Russia’s Prime Minister Dmitry Medvedev sees room for future joint projects in the energy sector.

The political situation in Hungary is indeed of primary relevance. The European Union has won in the first round against Gazprom, but additional fights are just around the corner, said Hungarian energy expert Attila Holoda, Managing Director of Aurora Energy. In this sense, the tug of war between Moscow and Brussels could easily take place in Budapest.

Similarly, Bulgaria could turn into another battlefield. The Former Bulgarian Energy Minister blamed the current Bulgarian government for incompetence in the negotiation process, blaming it for the Russian decision to scrap the South Stream project.

Authorities in Sofia don’t agree with recent declarations by Dávid Korányi, Director, Eurasian Energy Futures Initiative at the Atlantic Council. According to Korányi, everybody wins in the demise of South Stream.

Meanwhile, Romania hosted an important meeting of AGRI’s Board of Directors. SOCAR said that the Azerbaijan-Georgia-Romania interconnector will cost between €1.2 billion and €4.5 billion, for a total capacity ranging between 2 and 8 billion cubic meters of gas per year.

Europe intends to react, focusing on interconnectors. Šefčovič said the EC will intensify its work with the Member States of the Central Eastern Europe and South-East Europe.

CORPORATE RESTRUCTURING: BP, TOTAL

BP said it is proceeding with corporate restructuring as a consequence of plummeting oil prices that could have a serious impact on some of its fields. The company is likely to cut middle-management positions in London and Aberdeen.

A less drastic restructuring was announced by Total. The company will try to improve efficiency, leveraging on its new structure based on five geographic focuses for its exploration and production business.

RUSSIAN GAS - GAZPROM, ROSNEFT AND NOVATEK

As said, Gazprom resumed gas flows to Ukraine after a 6-month hiatus.The company will be exporting 43.5 million cubic meters a day.

A few hours before, Rosneft said it wants to increase its production, betting on fields in East Siberia. The company led by Igor Sechin wants to become the second gas producer in Russia.

Novatek’s reaction was just a matter of hours. The company announced that the first stage of the Urengoyskoye field in the Yamal-Nenets autonomous region has reached its full capacity.

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