Week 19 Overview
While the Kremlin announced it would require Ukraine to pay in advance for gas starting from June, European gas companies have been trying to tap into existing opportunities through M&A operations. British shale gas and Nordic LNG industries have been the two main examples of this trend during the 19th week of the year.
UKRAINE – RUSSIA
Over the last few days, Russia’s worse threat turned almost real. Energy Minister Alexander Novak said on Thursday that Kiev did not live up to its obligations and therefore it will have to pay in advance for its gas supplies.
"According to contract... failure of obligations automatically leads to a switch to prepayment for gas deliveries for Ukraine starting from June 1," Novak said in a note, stating that Ukraine’s total debt reached $3.51 billion.
Novak’s declarations followed a note released by Gazprom on Wednesday, claiming that Ukraine did not pay for its gas.
In this context, moving closer to Europe and storing as much gas as possible are the two cards left in Kiev’s hands.
Coherently, on Monday, Ukraine’s Naftogaz joined GSE AGSI+ platform, hinting at a progressive integration of Ukraine into Europe.
‘Gas Storage Europe (GSE) is proud to inform that the GSE Transparency Platform (AGSI+) has been extended to include storage data for Naftogaz of Ukraine. With the data from Naftogaz AGSI+ for the first time expands its coverage beyond EU 28,’ reads a note released on Monday.
A few hours later, Ukrtransgaz released data suggesting that the country increased by 77% its April imports with respect to the same period of 2013. The country imported 2.6 billion cubic meters.
In this sense, the game is coming to a new round of actions and reactions. Kiev is doing what it can to minimize the consequences of eventual disruptions through a mix of increased imports and progressive integration into the European area, while Moscow is playing its diplomatic game more attentively than before. In the attempt to polish its image, the Kremlin will limit military intervention, but it is logical that it will step up efforts to cement its role in Ukraine’s economy.
SHALE GAS: BRITAIN AND POLAND
According to recurring rumours, the United Kingdom is about to launch an onshore licensing round. That will clearly catalyse interests, but it will also require large funding and a coordinated response from the industry.
It comes as no surprise that IGas Energy is trying to capitalize on this renewed interest for unconventional hydrocarbon in the country, moving closer to the acquisition of Dart Energy.
‘This transaction puts IGas at the heart of unlocking Britain’s energy potential. It demonstrates our commitment to, and confidence in, the UK onshore oil and gas sector. This is a British success story establishing IGas as a key contributor to UK energy mix and security. The transaction further strengthens our position financially, operationally and also significantly increases our licenced acreage as we seek to unlock the untapped energy resource that exists in Britain,’ IGas' CEO Andrew Austin commented in the note released on Friday.
The two companies reached agreement on the terms of a recommended acquisition by IGAs of Dart. The estimated value of the total share capital of Dart is A$211.5 million.
This financial and economic frenzy corresponds to an increased political attention. The British House of Lords did indeed publish a report about shale gas, recommending Prime Minister David Cameron to take an active role.
‘The Government should take the lead in setting out the economic benefits of shale and in reassuring the public that with proper regulation environmental and health risks of developing it are low,’ reads the note released on Thursday.
If the UK is getting ready to promote shale gas exploration, Poland is moving forward with its program. The two countries are clearly on the forefront of European shale gas developments, with Warsaw leading the dance. Despite the confusion, the Eastern European country is indeed registering some (mostly minor) achievements on a weekly basis, also in the last days.
On Monday, Polskie Górnictwo Naftowe i Gazownictwo commenced the drilling of the exploratory Tępcz-1 vertical borehole. The Polish company’s intention to investigate the hydrocarbon potential of shale deposits is crystal clear.
‘This is the second borehole to be drilled in the district of Luzino. The previous one, Kochanowo-1, was drilled in May and June 2013 down to a depth of 3,275 metres. The sampled core is currently undergoing testing and analysis to identify the presence and saturation of hydrocarbon deposits,’ reads a note.
LNG: THE SECOND LONG-TERM WINNER
As many other companies, Finland-based Gasum sees a consistent growth of the LNG market. Coherently, it acquired 51% of the LNG distribution business of Norway’s Skangass from the Lyse Group.
‘The Skangass acquisition supports our strategy and the Finnish Government’s goal of speeding up the construction of LNG infrastructure to ensure the availability and distribution of LNG for maritime transport and industry,’ Gasum’s Chief Executive Officer Johanna Lamminen said in a note released on Monday.
At the same time, in the opposite side of Europe, other companies eyes opportunities in the LNG market.
Noble Energy and Union Fenosa Gas (UFG) executed a non-binding Letter of Intent (LOI) for the supply of natural gas from offshore Israel to UFG's existing natural gas liquefaction facilities in Egypt.
‘The LOI contemplates a contract term of 15 years and a total gross sales quantity of up to 2.5 trillion cubic feet (Tcf) of natural gas, or approximately 440 million cubic feet per day over the period,’ reads a note released on Monday.
According to Noble Energy, the price will be in line with the one defined in other natural gas purchase agreements for regional export sales from Israel. It is expected to be mainly based on Brent oil prices.
In this sense, LNG and shale gas have been confirmed as the major early winners of the standoff over Ukraine. In the long term, these options will benefit from eventual tensions between Russia and Europe. What remains to be seen is the role of gas in the long-term. Will European governments try to find a new balance, moving away from their ideological positions? Will they give up with their green intentions?
WHAT ABOUT THE FUTURE?
Germany’s RWE’s decisions probably provide a good preview of what is about to come. The Essen-based utility, which claims to be one of the main partners for sustainable transformation of the European energy system, does not have any intention to walk away from gas opportunities.
An example of this came on Tuesday, when RWE Dea and the State Oil Company of the Azerbaijan Republic (SOCAR) signed a Joint Study Agreement for a joint evaluation of the hydrocarbon prospectivity in shallow waters in an area south of Baku in the Caspian Sea.
In this sense, it is not yet the time for open-face playing and it is difficult to predict what’s coming next. Countries, governments and industries are navigating in seas of uncertainty. Nobody can effectively plan rational financial decisions. However, RWE’s investments indicate that gas is likely to remain central for European energy security. It might sound absurd, but the on-going standoff could result in an extremely effective wake-up call. Industry’s prospects are not rosy, as the competition from coal in the short-term and from nuclear in the long-term could have a negative impact, but the standoff over Ukraine could push European government to consider alternative ways to get gas. Investments, subsidies and onshore licencing rounds are more than likely.
Sergio Matalucci