Weekly Overview: Russian Export Routes, the North Sea and North America

The week ended with the surprising announcement on Friday that the six prospective co-venturers in Nord Stream 2 would not become equity holders in Nord Stream 2 AG.

Their plans to form a joint venture had crumpled in the face of the Polish competition authority’s opposition. But as recently as August 10, OMV, one of the six, told journalists that Nord Stream 2 would go ahead, and in a joint statement – in the middle of the Olympic Games fortnight – they said they would have to find other ways to ensure Europe's security of gas supply. This could mean each of the five western European companies paying Gazprom's invoices for their share of the goods and services. Gazprom remains the sole shareholder of the Swiss-registered entity.

Turkey and Russia got their gas plan back on the agenda last week, making good on their promise to tie their countries closer together with another sub-sea gas line, Turkish Stream. The first Black Sea-bed line between the two, the 16bn m³/yr Blue Stream surprised observers as the cost and effort were thought unnecessary: Ukrainian transit was cheap and available. Blue Stream did however allow Gazprom to reach a major consumer with no transit states in between, removing Turkey's argument for cheaper gas.

In 2016, the same solution to the same problem, Turkish Stream, is far more problematic. Russia's president, Vladimir Putin, pronouncing on Gazprom's project, admitted there will  have to be talks with the European Commission (EC) about the terms on which the gas can flow into Europe.

That could explain why Russia’s energy minister, Alexander Novak, was reluctant to commit in an interview to more than the first and possibly second line: in all four lines could be built, with two perhaps branching off to Bulgaria. The last time Russia planned gas deliveries under the Black sea to Bulgaria the entire South Stream was scuppered by the EC, on pipeline tendering and procurement irregularities: a technical solution to the EC's political problem.

There were also talks between Iran, Russia and Azerbaijan which augured ill for other plans to bring gas to Europe: the Southern Gas Corridor is looking a less likely route to market now for Turkmen gas, following the communiques from Baku regarding cooperation on transport of gas between the three states.

South Stream, originally a Russian-backed spoiler for the Nabucco project, could allow Gazprom to compete with Azeri gas in southeast Europe, but it might be easier to get gas into the Trans Anatolia pipeline at some point near the Greek border, where Tanap meets the Trans Adriatic Pipeline, and square matters up with Baku later. That is, if wholesale gas prices rise enough to justify developing Azerbaijan’s other offshore giant fields – formerly a shoo-in for the doubled Tanap.

Returning to the Ukraine transit question, there has been discontent in Kiev with Gazprom failing to maintain contractual pressure at the eastern border since early June, if not earlier, putting Ukraine through the expense of managing the necessary pressure to ensure Gazprom's customers receive their nominations. Naftogaz has invited the EC to help set up a monitoring group.

One of the consequences of liberalised European gas markets is the greater flexibility in gas supplies: previously the flow would be flattish year-round, the unwanted gas going into storage in the summer.

But in today's market not only is storage less necessary than in the past, but also Gazprom's affiliates and customers in Europe are trading gas more flexibly and shorter-term. This strains a system that, while it has potentially huge amounts of storage and linepack, is now stretched thin and apparently running on a 'just-in-time' basis.

The situation reached a head August 9, when Ukraine transmitted 276mn m³ of Russian gas to the EU border, up from 230mn m³ the day before, owing to maintenance works on the Nord Stream pipeline.

Gazprom gave no advance warning to either Naftogaz or Ukraine's transmission system operator UkrTransGaz of the increase, Naftogaz said – even though Gazprom had thought to notify its European partners of the dates of the planned outage in December 2015.

It is too early for Gazprom to comment on sales in the second quarter, but its first quarter saw a colossal increase to its core 'Europe and other' markets: up 49% to 58.1bn m³, an increase of 19bn m³ on 39.1bn m³ in January-March 2015. Sales to former Soviet countries declined by 15.5% (by 2bn m³) to 10.9bn m³, while those in Russia declined more modestly to 75.4bn m³, just 6% or 4.9bn m³ less than in 1Q 2015. Much lower prices – just $6/mn Btu in non-FSU Europe for the winter 1Q -- meant there was only a small rise in its revenues though while profits were down by a third.

The mergers and acquisitions market ticks over, with the £18mn ($23mn) minnow, San Leon, still chasing the $200mn Nigerian project, and hoping for readmittance to London's AIM shortly now that a shareholder has advanced the cash. As it counts as a reverse takeover, shareholders must now vote on the deal, which the company describes as "transformative." It has announced the appointment of a former boss of Shell Nigeria, Mutiu Sunmonu, as non-executive chair, which would add some heft to the operation.

Shell continues to experience problems in the Delta, and declared force majeure on much of the gas flowing into the Nigeria LNG liquefaction facilities following a major pipeline leak. As it  investigates the cause of that, the Anglo-Dutch major re-declared force majeure on its Bonny Light oil export terminal August 12, just a month after restarting it, which means most of Shell’s gas export feed and both its oil export terminals are shut or heavily constrained.

Back at home in the North Sea, industrial action has been suspended by the unions and contractor Wood Group, meaning that maintenance work can continue on Shell’s seven platforms in exchange for their usual terms and conditions.

The need for changing the existing terms though has been recognised in the interests of preserving the life of producing assets insofar as it makes economic sense.

Austria's OMV sold down its stake in Rosebank in early August and in the process knocked about half a billion dollars off the book value of what was a 50% stake (now 20%). It had paid Statoil $2.65bn in August 2013 for a cluster of Norwegian and UK North Sea assets of which Rosebank was the biggest. The others were minority stakes in Gudrun and Gullfaks and all of Schiehallion. OMV did not disclose the present book value.

The share of the costs to develop the UK oil and gas field would have drained OMV of resources it cannot afford, CEO Rainer Seele said at its quarterly results press conference. It has already knocked a third off its average production cost/barrel since 2014 and, from now on, its future focus is on low-cost oil provinces, such as Russia and the Middle East.

Iran was not mentioned as a target for OMV but it has launched the new Iranian petroleum contract (IPC), opening up the prospect of attracting foreign investors. But when it comes to gas, there is an abundance wasted in flaring that could go into power projects or liquefaction plants without even needing to drill. Iranian officials expect the first IPC with a foreign company to be signed in the next three or four months.

Across the Atlantic, US gas demand remains strong enough to draw large amounts of Canadian gas south of the border, something that so far has only happened in winter with high prices.

The Energy Information Administration's weekly report said the high level of net imports from Canada followed a "near-record summertime level" which was reached near the end of July, when they exceeded 8bn ft³/d. The five-year (2011-15) average over the June through August 10 period is 6.8bn ft³/d.

Cheniere is confident of starting up its second Sabine Pass LNG train by next month, on schedule, thus maintaining the call on US/Canadian gas for export this autumn. Jamaica meanwhile announced the arrival of its first ever LNG, aboard Golar Arctic on August 5; new Caribbean micro-markets for LNG could soon open in the coming years in El Salvador and Panama.

William Powell