Week 11 Overview
The consequences of the Crimea standoff on the European gas markets are comparable to the effects of the Fukushima disaster on global nuclear projects. Markets have to revise investment plans and reassess the feasibility of their projects.
It is not just a matter of investments in Ukraine and Russia, as many other countries are equally involved in the process. Poland for example is speeding up its new shale gas legislation, riding the wave of increased fears for Eastern European countries’ energy security.
Nobody can come up with a precise assessment of the backlash but the consequences are so extensive to also change the fate of the South Stream project. The main project currently under construction could have problems finding a middle ground with Brussels due to the on-going bickering over the Third Energy Package.
On the other hand, the current situation could come with a present for the Kremlin. Through Crimea, Russia could indeed gain control over a significant portion of Black Sea oil and gas. The South Stream could then take a new route, saving approximately USD 10 billion.
All these events happened at the same moment European utilities start mothballing their plants to offset the increase in electricity production stemming from renewables during the good season.
SWINGING THE BALANCE IN RUSSIA’S FAVOUR
According to a note released by the Kremlin on Monday, Russia’s Vladimir Putin had telephone conversations with UK’s Prime Minister David Cameron and Federal Chancellor of Germany Angela Merkel.
‘Although the three leaders did express differences of opinion regarding the events taking place, they declared their common interest in de-escalating tension and returning the situation to normal as soon as possible,’ reads the note released on Monday.
Russian authorities continued to discuss the possible scenarios with their counterparts over the week, leveraging Germany’s dependence on Russian gas to decrease Europe’s sovereignty.
On Wednesday, Wintershall said that economic sanctions from the EU against Russia will not remedy the situation in Ukraine and would not help anybody. At Wintershall’s 2014 press conference in Kassel, Chairman of the Board of Executive Directors Rainer Steele stressed that there is no alternative to dialogue.
But Russia is not just maintaining its influence. The country is even trying to increase its clout in Europe, strengthening its relations with Turkey.
On Tuesday, Gazprom praised Istanbul for the cooperation in the Blue Stream project, which is the gas pipeline that brought 13.7 billion cubic meters of gas in 2013.
“For over 11 years Blue Stream has been an illustrative example of the efficiency and reliability of direct Russian gas supplies to European consumers. The project is the first offshore thoroughfare of such scale globally; it represents a great engineering achievement,’ Alexey Miller, Chairman of the Gazprom Management Committee, said in a note released on Tuesday.
The scenario of increased Russian power was confirmed a few hours later, when the authorities in Crimea were reported to plan to nationalize the Ukrainian Black Sea Fleet and Chonomornaftahaz.
“The Ukrainian fleet in Sevastopol will be nationalized in full. We are not planning to let their ships go anywhere. We have also cut off the exit of vessels belonging to Chonomornaftohaz", self-proclaimed Crimean Prime Minister Sergey Aksyonov said.
This event would undoubtedly play in favour of Putin.
BUT THE WEST IS NOT LAYING DOWN ITS ARMS
Nonetheless, not everything has been rosy for Russians. European policies could potentially be detrimental to Gazprom and backfire is just around the corner.
Germany, France, United Kingdom, Italy, Spain and other European countries released on Thursday a document indicating that asset freezes and travel restrictions will be passed if Moscow does not reverse course in Crimea. The list included between 120 and 130 Russian, but excluded Russian President Vladimir Putin and Foreign Minister Sergei Lavrov. According to German newspaper Bild, Gazprom’s Alexei Miller and Rosneft’s Igor Sechin are part of the list.
“I hope that this all ends up being empty rhetoric. It's silly, petty and obvious sabotage of themselves. I think it will primarily affect Rosneft's business partners in the West in an extraordinary way,” commented a spokesperson for the Russian company.
On top of it, there is another risk for Russia. If Kiev fails to honour its obligations and pay for supplies, Gazprom could bear the brunt of the situation and immediately lose an incredible amount of money.
The economic consequences could be so harsh for Moscow that the first analysts changed their assessments on Russia’s growth for 2014. Goldman Sachs revised its prediction down to 1% from 3%, blaming the tension over Ukraine for capital flight that would cripple investment. It said $45 billion had already left Russia this year, mostly Russians stashing money abroad.
MEANWHILE, EUROPEANS MOTHBALL
On Tuesday, RWE Generation decided to mothball the new Lingen CCGT power plant during the summer, given the expected increase in electricity from photovoltaic plants in the next months and low wholesale market prices.
‘Lingen combined-cycle gas turbine power plant (CCGT) in the German Emsland region will be taken off the grid from 1 May to 31 August. During this period the plant will not be available for the electricity market,’ reads a note released on Tuesday.
Similarly, E.ON announced on Wednesday that it would mothball one quarter of its European capacity.
MORE RENEWABLES?
The future of renewables in Europe is strongly intertwined with decisions taken in Oslo. While examining oil and gas operations of the companies it invested in, Norway is also studying ways to decrease its reliance on hydrocarbon productions.
As written in February, its wealth fund, which owns more than 1% of all global shares, could pull out of hydrocarbon investments. The fund is considering increased investments in renewable energy.
SO WHAT?
This new turn, combined with the turmoil in Ukraine, simply increases risks for the European gas industry. As Fukushima temporarily changed the course of the nuclear projects in Europe, the present situation could trigger changes as well. But it is still not clear in which direction.
It could push Europe to increase its bet on renewables as the case of the Norwegian fund indicates. Conversely, the current situation could bring European governments closer to indigenous production. The main example in this case is Poland. On Tuesday, Warsaw backed a law to speed up hydraulic fracturing on Tuesday, offering six-year tax breaks to shale gas projects.
What remains to be seen is European governments’ decisions. Will they prefer to speed up the transition to renewables or will they maintain their reliance on Russian gas?
Sergio Matalucci