European natural gas market wrap-up for Week 7

Week 7 Overview

European authorities and representatives of nine countries held the first meeting of the Central East South Europe Gas Connectivity (CESEC) High Level Group in Sofia last Monday. This is the kind of approach that Brussels seems intentioned to take in order to address the concerns stemming from Russia’s decision to dump the South Stream project, and bet on the Turkish Stream.

The kind of Europe-in-scope and regional-based approach seeks to bring neighbouring countries to the same table to streamline debates about new (and old) regional projects. This “local” way to address European problems might turn out to be Brussels’ hallmark for the coming years. Still, it remains to be seen whether the same approach could help the Old Continent to find solutions for the impasse over Ukraine, and Greece.

Against this backdrop, Russia’s Vladimir Putin, Germany’s Angela Merkel, France’s Francois Hollande and Ukraine’s Petro Poroshenko took part in the 18-hour talks on a settlement to the situation in Eastern Ukraine. The Trilateral Contact Group has signed a document, which also envisaged an unconditional ceasefire starting from the night between February 14 and February 15. But fresh evidence indicates that the truce might soon turn out to be another failed attempt to bring stability in Debaltseve.

Finally, it is also worth remembering that Putin met with Egypt ’s President Fattah el-Sisi. Moscow made it clear: Russia could soon increase its clout in the Mediterranean area.

EUROPEAN PROBLEMS: DECLINING PRODUCTION, INCREASING RELIANCE ON IMPORTS

Cedigaz wrote on Friday that Europe’s declining gas production will increase its dependence on imports. The International Association for Natural Gas Information said that the situation will lead to stronger inter-regional trade and a growth of pipeline gas imports from the Commonwealth of Independent States (Russia, Central Asia).

In this sense, Europe has no choice: if it continues on the present path, the unavoidable challenge of shifting to a low-carbon economy will be made harder by the economic, social and environmental costs of having fragmented national energy markets.

REGIONAL APPROACH: SOFIA, VILNIUS, BAKU, MUNICH

It comes as little surprise that Vice-president of the EC responsible for the Energy Union Maroš Šefčovič, and climate change commissioner Miguel Arias Cañete attended the meeting held in Sofia. During the talks, Bulgaria, Greece and Romania agreed to start a work group for the construction of the so-called Vertical Gas Corridor, which they announced in December, 2014.

The High Level Group, which will meet again by early summer to adopt the Action Plan, covered both external and internal aspects of the supply situation in the region.

Speaking about regional projects, the Interconnector Greece-Bulgaria (IGB) constitutes a cornerstone in gas cooperation between Athens and Sofia in relation to the Southern Gas Corridor project and in particular, the Trans-Adriatic Pipeline (TAP). IGB is crucial if Bulgaria is to meet its aim of 1 bcm of gas deliveries per annum from Azeri SOCAR post 2019 and decrease its almost 100% dependency on Gazprom.

The project is important also because the newly elected Greek administration is considering joining the Turk Stream project and joining forces with Russian companies on energy explorations. The Turk Stream project, which aims to replace South Stream, is being positively viewed by the Greek government.

Meanwhile, Lithuania hosted a meeting to create a fully functional common market for gas in the Baltic States and Finland. The group is expected to come up with an action plan on the development of a regional market by the end of the year.

Almost simultaneously (on February 12th), the first meeting of the Advisory Council of the Southern Gas Corridor was held in Baku with participation of the ministers of partner countries, including Azerbaijan, Georgia, Turkey, Greece, Albania, Bulgaria, Italy as well as the Vice-President of European Commission for Energy Maroš Šefčovič.

Taking part in the first meeting of the Southern Gas Corridor Advisory Council in Baku, Šefčovič stressed the importance of collaboration with Turkey to increase security of gas supplies to South-East Europe. He proposed to Turkey’s Minister Taner Yildiz to increase cooperation through high-level energy dialogue.

Another energy security roundtable (Diversification Strategies) was held as part of the 51st Munich Security Conference. “As regards all the other projects, including projects of diversification of the routes, it is just routes, not sources. And our source is new and our source is, if I may say so, fresh” commented Ilham Aliyev, President of the Republic of Azerbaijan.

IRAN’S REGIONAL APPROACH: TURKMENISTAN AND CHINA

Iran continues its efforts to increase cooperation with neighbouring countries. The National Iranian Gas Company (NIGC) said on Tuesday that it could export gas to Afghanistan through a pipeline or small LNG terminals.

A few days before, NIGC also said it wants to speed up the second part of the project and increase the volume of gas exports to Iraq. NIGC said it will start gas exports to Iraq with 4 million cubic meters per day (MMcm/d) in the first phase. It plans to raise the volume gradually.

Turkmenistan said it will increase gas production by 9 percent to 83.8 bcm/a. It is also aimed exporting 48 bcm/a of gas in 2015. Turkmenistan has at least 34 bcm/a of gas to export to China.

RUSSIA: CHINA, EGYPT AND TURKEY

Russian authorities continue to work at full steam on their cooperation opportunities with China. On Friday, Miller said that the company is discussing a contract and a technical agreement on Russian gas supply to China via the western route. On Thursday, held a meeting in Tomsk today to consider the progress with the Company's investment projects related to gas supply to China via the eastern route.

Egypt and Russia signed agreements on Tuesday to step up cooperation in the energy and the agriculture sectors. Several Russian reports indicate that Cairo will soon join the Eurasian Economic Union.

Recent crisis in Ukraine, reemphasised role of Turkey not only for the EU, but also for Russia. Ankara could soon be key to avoid new risk of gas supply disruption to Europe.

The first string of the Turkish stream could be a replacement for the Western Balkan side, designed to serve Istanbul. Still, details on Turk Stream's second string are not clear, although contracts have been signed for the supply of and laying of the pipes last year.

NEW PROJECTS: JOHAN SVERDRUP, E.ON'S BET ON LNG

Lundin Petroleum Norway, Statoil, Maersk Oil, Det norske oljeselskap and Petoro submitted a plan for development and operation (PDO) for Phase 1 of the Johan Sverdrup field to the relevant Norwegian authorities. The partners of the field expect the gross capital expenditures for Phase 1 to be around NOK 117 billion (€13.52 billion).

E.ON played its cards right to build on a strong position in the LNG business, signing a package to export US gas to increase its global gas portfolio. It concluded a precedent agreement with Gulf South Pipeline Company to ship gas on the planned Coastal Bend Header Project for 20 year. The gas will then be bought free-on-board by Düsseldorf-based E.ON Global Commodities, which just concluded a compatible 20-year agreement for shipping capacity of up to two LNG vessels with Japan’s MOL.

INTERVIEWS ABOUT:

Underutilised infrastructure key to increase Europe’s gas security - interview with Johns Hopkins SAIS, Sciences Po Paris, CEO of International Energy Consultants (IEC)

Reaching a fully liberalised single EU gas market - interview with Patrick Heather, Senior Research Fellow at the Oxford Institute for Energy Studies

Eastring project: increasing connectivity with new markets - interview with Miroslav Bodnár, Member of the Board of Directors and Director of Strategy, Eustream

Russia’s gas export reorientation is a logical move - interview with Simon Pirani, Senior Research Fellow at the Oxford Institute of Energy Studies

Israel’s natural gas industry: beyond regulatory hurdles - interview with Natan Sachs, fellow at the Brookings Institution

Low oil prices for two years not to affect peripheral areas - interview with ristinn Einarsson, Senior Adviser at Icelandic National Energy Authority (Orkustofnun)

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