Week 49 Overview
It is not yet time for presents. Christmas approaches, but the gas industry hardly moves on from the autumn fevers. The only exception came from the United Kingdom, with the British government paving the way to shale explorations through consistent tax incentives.
At the same time, the bickering between Brussels and Moscow, the whirligig in the relationship between Ukraine and Russia, and the long time needed by the Polish industry suggests that Santa Claus is still in front of his chimney. Boxes full of good news are resting under the first snow of the year, while a colder winter than usual is expected to push gas prices up; especially in Southern France.
THE UK: WHEN AN AUTUMN STATEMENT SOUNDS LIKE A CHRISTMAS PRESENT
Despite the difficulties, the 49th week gave relief to the British industry, with the government dealing some heavy cards on Friday. The Chancellor of the Exchequer George Osborne did indeed announce a new tax allowance to sustain the shale gas industry. The measure reduces the tax rate from 52% to 30% of the companies’ early profits. Shale gas operators will receive an allowance equal to 70% of capital spent on projects.
“The country that was the first to extract oil and gas from deep under the sea should not turn its back on new sources of energy like shale gas because it’s all too difficult,” commented Osborne in his Autumn Statement.
The move, already discussed earlier this year, is meant to reap the financial benefits of shale gas. Despite the opposition of Friends of the Earth, which said the moves could be illegal, the Government reassured investors on its willingness to sustain indigenous production. The message came across.
The enthusiasm was already clear on Friday. While the Government was spelling out its support to the gas and oil industry, iGas Energy announced the acquisition of Caithness Oil. In this sense, the jittery British industry showed that investors are willing to voice and contractualize their interests. After GDF Suez stepped into the British shale gas industry in October, other heavyweights could soon follow, with Barclays Bank already at the forefront. As disclosed by The Sunday Telegraph last week, the London-based bank could soon fund fracking in Yorkshire through its equity arm Barclays Natural Resource Investment.
This Christmas could be nice and cosy for the British gas industry. The spring will soon arrive and could bring a new flurry of protests but, in the meanwhile, operators can enjoy their warm chimneys in the UK’s countryside.
NO FANCY GIFTS FOR EUROPE
The 49th week of the year was not equally rosy for the rest of European gas industry. The arm-wrestling between Brussels and Moscow could further freeze the hopes for a calm winter in Europe. The tit-for-tat resembled the Cold War, with a long series of actions and reactions.
On Monday, Russia liberalized its liquefied natural gas (LNG) exports in order to decrease its dependence on Europe, which accounts for two-thirds of Gazprom’s. At the same time, Moscow started negotiations with Kiev, after successfully pushing the country away from the free trade agreement with Brussels.
Alexander Medvedev, Deputy Chairman of the Management Committee and Director General of Gazprom Export, intervened in the attempt to calm the tensions. On Wednesday, he tried to defuse the recent concerns with a speech in Brussels, while his company was opening an office there. Those are all proofs of the fact that Gazprom’s short-term future depends on Europe.
On the other hand, Brussels said that the bilateral agreements signed for the construction of the South Stream were in breach of the European Law. The European Commission told Bulgaria, Serbia, Hungary, Greece, Slovenia, Croatia and Austria to renegotiate theirs deals with Gazprom.
The consequences of this bickering will become clear in the next months, possibly in spring. In the while, conditions will remain harsh. European gas prices could rise sharply in the next weeks over colder-than-usual winters. Forecasts indicate that the UK and France could suffer from colder than average temperatures. In particular, Southern France prospects seem grim and dark.
‘The gas market in southern France is facing major tension at the start of winter,’ Commission de Regulation de l’Energie (CRE) wrote on the note released on Thursday, explaining that France needs LNG imports as soon as possible.
Prices in the south have been higher than in the north due to diversion of imports from Europe to Asia and to “structurally” tighter supply. Cold weather and low stocks at the southern French hub of Marseille added further pressure.
The country that should take advantage of the situation is Norway. And it will probably do so despite its internal tensions.
Local companies are proceeding with legal actions against the country to claim compensation for losses due to the cuts in gas transportation tariffs, which were introduced by the previous government and confirmed a few days ago. On Friday, the coalition led by Prime Minister Erna Solberg upheld the decision on the gas transportation system Gassled. The measure will affect gas transported after 1 October 2016. It could encourage energy firms to explore for more gas in the Arctic Barents Sea, where only a few discoveries have been made thus far.
Nonetheless, given the uncertainties related to the other gas suppliers, it is in Norwegian interest to maintain hydrocarbon production at the present levels. The government was said to be working on new measures to reduce costs in its offshore industry. The new laws could be introduced toward the end of next year.
The end of 2014 will mark the Norwegian approach toward hydrocarbon production for the coming years. According to present estimates, investments are indeed expected to start declining in 2015 after peaking in 2014. At least for now, Norway can enjoy the Christmas spirit.
CAN POLAND BE THE NEW NORWAY?
Poland is the country that could follow the footsteps of Norway in the coming years. It could capitalize on the tensions in the next 5-10 years. Polish government hopes so.
Maciej Grabowski, who formally replaced Marcin Korolec at the helm of the Polish Environment Ministry, tried to prove he is the right man to lead Poland toward shale gas production. He speeded the process of writing a new law on shale exploration, while showing signs of consistency. He tried to remain as practical and realistic as possible.
On Friday, he said that the country could wait for other four years to know if the exploitation of shale gas is profitable.
“There are not enough wells, there has to be at least five times more," he said on Polish radio.
Europe cannot wait so long to find alternatives. Its problems are extremely urgent and, with months of snow ahead, the Old Continent may shiver. Governments have to find ways to curb prices.
Sergio Matalucci