Week 38 Overview
The 38th week brought 'normal' problems back to the gas industry. In essence, extraordinary events have been overcome and Europe is back in front of a mirror. The Old Continent has to find a way out of economic stagnation and the gas industry has to reflect G20’s commitment to growth.
In this context, the past few days produced at least one good headline along with additional proof of the difficulties Europe faces.
On the one hand, uncertainties stemming from the Scottish vote died away for the sake of London and many British-oriented businesses. Less uncertainties easily translates into lower risks and a more favourable business environment. Positive signs also came out of Turkey and Finland, which both took decisions that will increase energy security in the medium term.
On the other hand, as seen during the G20 summit in Australia, it is clear that Europe will struggle to reach a common line on policies, the energy sector included. Germany stands out, often monopolising debates, as other countries are unable to force Berlin to follow. From the G20 summit, it seems clear that there is an ongoing tug of war between France and Germany. And this is bad for Europe in general.
While Norway’s gas production continues its downward spiral and Brussels keeps stance against Russia, China continues its expansion. Europe’s relative weight is set to decrease, despite ECB’s attempts to take increasingly aggressive steps to foster growth.
BAD NEWS: RUSSIA, POLAND, NORWAY
On Tuesday, a European official said that Europe will support Kiev’s attempt to push Russian armed forces away from Ukraine through a mix of measures, supporting Kiev and increasing sanctions against Russia.
Two days later, on Thursday, the European Parliament also adopted a resolution to stop Russian energy plans in the continent.
‘MEPs call on the EU to regulate third-party businesses in the areas of gas storage, interconnectors and flow-back facilities, and urge the EU countries to cancel planned energy sector agreements with Russia, including the South Stream gas pipeline,’ reads a note released by the Parliament, which creates an additional threat for European assets in Russia.
President Vladimir Putin's reaction to the news was to say that the Kremlin is mulling new counter-measures against Europe and the United States.
Meanwhile, Gazprom stated that its priority is to store gas in its underground storage (UGS) facilities.
‘The Company raised the planned amount of working gas for injection into Russian UGS facilities to 72 billion cubic meters. This is the maximum amount that will be pumped in Russian UGS facilities in the entire history of the gas industry. Now the gas storages contain 63.5 billion cubic meters of working gas. It is planned to complete the injection within the next six weeks,’ Gazprom said in a note released on Wednesday, adding that it is supplying gas to Europe in line with its contractual obligations.
But Polskie Górnictwo Naftowe i Gazownictwo (PGNiG) had a different understanding of the issue.
‘Under the Yamal Contract, PGNiG may order gas supplies up to a maximum daily amount specified in the Contract. The volumes of gas ordered by PGNiG were lower than the maximum volumes, and therefore compliant with the provisions of the Contract. The reasons behind the reduced gas deliveries are being investigated. PGNiG has not yet received any information from Gazprom concerning the reasons behind reduced gas supplies to Poland,’ the company wrote on Friday, also sending a veiled threat. PGNiG said it could take active steps to protect its .
Also out of Poland were updates from San Leon Energy and 3Legs Resources.
3Legs Resources announced it exercised a one-time option to cease participation in activity on its three western Baltic Basin concessions.
‘The Company has concluded that it would be in the best interests of its shareholders to exercise this option, thereby capping its financial liability in relation to the three concessions; it has now exercised this option,’ 3Legs Resources wrote on its website on Wednesday.
A few hours later, San Leon confirmed its commitment to its Gdansk W concession, but betrayed some frustration.
‘While it is disappointing that commerciality has still to be proven in a Polish horizontal shale well, the Company notes that the hydrocarbon liquid:gas ratio in the Lublewo LEP-1ST1H well appears to be in excess of 10 times that in the Lewino-1G2 well. Since finishing testing Lewino-1G2 in January 2014, San Leon has believed that its liquid:gas ratio was at a desirable level, providing liquid sales potential whilst minimising any adverse effects on gas production,’ reads the note released by the Ireland-based company on Wednesday.
And the new blow for Polish shale plans is not comforting for European prospects, keeping in mind that new production would be extremely welcome in a moment traditional producers struggle to maintain the levels registered in the past.
For instance, according to data released by the Norwegian Petroleum Directorate, Norway’s gas production remained below expectations for the fourth consecutive month. NPD explained that production in August is on June levels, reversing the upward trend registered in July. Moreover, for the fourth consecutive month, actual production was lower than previously predicted.
‘Total gas sales were 7.3 billion standard cubic meters (Sm3), which is 0.7 Sm3 less than the previous month,’ reads the note released on Tuesday.
Over past weeks, Norway reported a year-on-year 6% decrease in APA applications, while forecasts indicated that investments in the country’s oil and gas industry would fall 18.5% in 2015 with respect to 2014.
GOOD NEWS: SCOTLAND, TURKEY, FINLAND
On Wednesday, Turkey ratified a Memorandum of Understanding (Mou) for the Trans-Anatolian pipeline (TANAP). A few hours later, on Thursday, Commissioner for Enlargement and European Neighbourhood Policy Štefan Füle met the new Turkish Minister of European Affairs to speak about the relations between the EU and Turkey. Ankara is a key player for Europe’s energy security, and stronger ties with Turkey are clearly good news for Europe.
Also on Thursday, Finland’s Ministry of Employment and the Economy (MEE) gave the green light to LNG terminals in Tornio, Pori and Rauma, committing a total of EUR 65.2 million in energy subsidies.
‘With the help of this support, Manga LNG Oy, Skangass Oy, and Oy Aga Ab will build LNG terminals in Tornio, Pori and Rauma respectively. These new terminals will help facilitate a move to significantly reduce the industrial use of fuel oil and liquid petroleum gas (LPG) in Finland,’ reads a note released on Thursday.
Finally, on Friday, Scotland chose to remain part of the United Kingdom, with 55% voting against independence. Several market participants said that the vote has removed a source of uncertainty. And it is quite an obvious assumption. In this sense, decisions in Turkey, Finland and Scotland can be of some comfort to market participants.
WHAT’S NEXT?
While China continues to develop new import routes with the Power of Siberia from Russia and Line D from Tajikistan, Europe has to find its way to maintain energy security during the winter.
The main step would be to reach an agreement with Moscow, and the possibility is out there.
According to Russian Energy Minister Alexander Novak, Russia, Ukraine and the EU will hold negotiations on September 26 in Berlin. Russia keeps asking for debt-servicing and 385 dollars per tcm.
Price will be the major bone of contention, along with legitimate Russian claims in the aftermath of Ukrainian ratification of the Association Agreement with the European Union happened last week.
In this sense, after doubts over Scotland’s independence had vanished, negotiations with Moscow came back under the spotlight and, once more, Berlin will be the ring for the next round of the talks. Consensus is important, within the European Union and with other important partners like Russia. That is the only way to trigger a recovery, also in the gas industry.
Sergio Matalucci