Week 20 Overview
The convergence of Eastern European countries on a common line for green targets and some steps towards shale gas production across the Old Continent characterized the 20th week of the year, suggesting that Europe might walk away from its high ambitions to embrace a more business-oriented energy strategy. This happened while Ukraine registered its first minor disruptions due to damages caused by “unauthorized people,” and European companies confirmed their commitment to offshore exploration and production in Norway.
NORWAY
Explorations in the North Sea registered mixed fortunes over the last days.
Some companies reported disappointing results in the last week. This is the case for Faroe Petroleum’s Butch East well 8/10-5S and Centrica, which drilled two dry exploration wells, 8/10-5 S and 8/10-5 A, approx. 13 kilometres southeast of the Ula field, in the southern sector of the North Sea.
But the 20th week did also witness some significant achievements.
While announcing the successful completion of appraisal well 16/1-18 on the Edvard Grieg field in the North Sea sector of the Norwegian Continental shelf, Lundin Petroleum revealed it will increase to $1.4 billion – +25% with respect to 2013 – its budget for development projects. The majority of the funds will aim at developments in Norway
Also on Monday, Lotos Exploration & Production Norge and PGNiG Upstream International clinched an agreement for joint exploration activities on the NCS.
A few hours later, Marathon Oil Norge awarded Technip with a contract for installation, engineering and other subsea operations. The scope of the company is to speed up its offshore campaign, which is expected to take place in 2014, 2015 and 2016.
In this sense, the interest for Norwegian hydrocarbons is not in question. And this makes complete sense, given Norwegian importance for European energy security. According to a note released by the US Energy Information Administration on Sunday, the Scandinavian country supplied 21% of total European natural gas needs.
‘EIA estimates that Norway produced 3.97 trillion cubic feet (Tcf) of dry natural gas in 2013, a decline of 0.18 Tcf from 2012. EIA also estimates that Norway's net exports for 2013 were 3.8 Tcf of natural gas, which, because of its modest domestic demand, was 96% of its production.’
SHALE GAS IN THE UK
The market consolidation trend has been confirmed over the last days, following some merger and acquisition activities in the previous week. It is now clear that, in the British shale gas industry, there will be just a few main players with major companies like GDF Suez and Total granting their financial support.
In this context, it comes as no surprise that Egdon Resources confirmed its interest to acquire Alkane Energy’s onshore shale gas assets.
‘Egdon has entered into a conditional sale and purchase agreement to acquire shale gas interests in certain UK petroleum exploration and development licences from Alkane Energy plc. Under the terms of the sale and purchase agreement, in exchange for the acquisition of the Licence Interests, the Company will issue 40,000,000 new Ordinary Shares of 1 pence each to Alkane Energy plc,’ reads the note released on Tuesday.
The company intends to fund the investment issuing 32,000,000 Ordinary Shares at an Issue Price of 20 pence per share. On June 5, the company will hold a general meeting with its shareholders in London.
EASTERN EUROPEAN COUNTRIES: VISEGRAD AND SHALE GAS
Czech Republic, Poland, Slovakia, Hungary, Bulgaria, Croatia and Romania said that an agreement on new targets on greenhouse emissions would not be possible, unless in-depth analyses by the European Commission and a strong financial backing from Europe’s most developed countries.
‘The proposal relates e.g. to the establishment of a new 40% greenhouse gas emission reduction target for Member States following 2020. During the meeting in Visegrad, Ministers agreed that detailed analyses of the costs of this proposal are needed to be carried out by the Commission. Without their results and fair effort sharing between countries, the agreement on the new target will not be possible. Other topics raised at the V4+3 meeting included a discussion on EU Clean Air Policy and GMO packages,’ reads the note released by the Polish government.
The so-called Visegrad Group – V4 (the Czech Republic, Poland, Slovakia and Hungary) – is increasing its clout in Europe under Polish leadership.
In this backdrop, Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) started exploration activities to have a better understanding of shale deposits in Pomerania, on the south shore of the Baltic Sea. Poland is clearly determined to go all the way.
‘Polskie Górnictwo Naftowe i Gazownictwo SA has begun to drill a vertical exploratory borehole, Miłowo-1, the purpose of which is to investigate the hydrocarbon potential of shale deposits,’ reads a note released on Thursday.
It seems clear that Warsaw wants to be the first country to achieve commercial production of shale gas, possibly obtaining the legitimization it needs to take a leading role in Europe. It is trying to become a model for Eastern European countries and not only.
Coherently, other Eastern European countries are following in Warsaw’s footsteps. For instance, Falcon announced that it continues to evaluate the gas potential of the Algyő Formation in Hungary, while its partner Naftna Industrija Srbije (NIS) keeps studying the potential of the Makó Trough.
According to a note released on Friday, the spudding of the second well in Hungary will be followed by further investments and exploration activities in the country.
JKX Oil & Gas has similar targets and expectations in Ukraine. The company is stepping up its efforts to spud the first Elizavetovskoye sandstone well. According to a communiqué released by the company, JKX produced 55.2 MMcfd of gas in the first quarter, registering a 69.32% increase with respect to the first three months of 2013.
“The first quarter of the year has seen the start-up of production on the Elizavetovskoye field in Ukraine with excellent results from the first two carbonate wells. We are about to spud the first Elizavetovskoye sandstone well and are seeking to mobilise a second rig to accelerate the drilling programme on the field,” Paul Davies, JKX Chief Executive, commented.
What remains to be seen is the impact of the on-going turmoil on these activities. Experts expect operations in Western Ukraine to be streamlined and encouraged, while activities in the Eastern part of the country are said to suffer because of the turmoil.
RUSSIA, UKRAINE AND SOUTH STREAM
Russia decided that Ukraine would have to pay for its supplies before June 2, with an immediate stop to the gas supplies to Kiev in case the prepayment was not made.
At the same time, the Kremlin called on European authorities to come up with a proposal to stabilise the Ukrainian economy and to ensure stable transit of Russian gas. This happened while Ukrtransgaz was stepping up its efforts to avoid further disruptions in the Urengoy-Uzhgorod-Pomary Pipeline in the Ivano-Frankivsk region.
"Over the past few days, cases of interference have been documented in western Ukraine’s pipelines. Interferences were localized and did not affect the gas supply and transportation of natural gas according to existing contracts,” Igor Lohman, Chairman of Ukrtansgaz, said in a note released on Thursday.
The Kremlin did not comment on the disruptions, but asked Europe to take a more active role.
“The Russian Federation is still open to continue consultations and work together with European countries in order to normalise the situation. We also hope that the European Commission will more actively engage in the dialogue in order to work out specific and fair solutions that will help stabilise the Ukrainian economy,” Russian President Vladimir Putin commented in a communiqué released on Thursday.
At the same time, Moscow is not wasting time to find alternatives: Russia is not giving up its Chinese and European campaigns.
On Wednesday, Gazprom’s Alexey Miller met Viktor Orban, Prime Minister of the Republic of Hungary. Along with Wien, Budapest is emerging as Russia’s closest European partner. Evidences suggest that the Eastern European country is taking the role of former close allies like Italy. While the new links with Budapest emerge, the close relationship with Rome does indeed seem a vague memory.
As already said some weeks ago, the South Stream could change route and end up in Austria, rather than in Italy. Despite Italian recent commitment, Gazprom is switching its attentions to OMV, with the clear intention to move to Baumgarten the end point of the pipeline.
In this sense, all these events demonstrate that the gas industry is strictly interconnected. Changes in one corner of the world can cause immediate U-turns on the opposite side of the globe, while one company’s decision can lead to a completely different business environment. That is why Russia is probably right – there is a compelling need to negotiate a solution for Ukraine as soon as possible. The gas industry needs time to adjust. Abrupt shakeups are detrimental for everybody, proving that this is not a zero sum game. Losers could easily outshine winners in this strange game, and many also-rans could come out of these confused confrontations.
Sergio Matalucci