State of the Energy Union Revealed
In one of the most important developments in recent times for the European gas market, the European Commission revealed its first State of the Energy Union this week.
In its documents, the Commission highlighted geopolitical difficulties that are hindering progress and development of diversification of supply. It also suggested that Bulgaria, Czech Republic, Estonia, Finland Hungary, Latvia, Lithuania and Slovakia don’t have significant alternatives to Russian supplies. Regional cooperation and LNG were the two options presented by the policy conclusions.
Also, critically for the European gas market this week, a Dutch Court temporarily limited gas extraction in Europe's larget gas field, the Groningen field to 27 billion cubic metres (bcm) of gas a year following a series of shallow earthquakes at the site.
FIRST STATE OF THE ENERGY UNION, NORD STREAM II
Presenting the first State of the Energy Union on November 18, Vice President of the European Commission, in charge of the Energy Union, Maroš Šefčovič, explained that geopolitical risks are slowing down diversification efforts. The current complexities are likely to have played a role in the European Commission’s decision to reduce the scope of its actions. With respect to the first list, the executive body of the European Union took 53 projects away from the second list of Projects of Common Interests (PCI).
The decrease in the number of projects holding PCI status with respect to 2013, which the Commission explained in light of the need of a greater focus, was mainly due to less gas projects in the list.
On the other hand, the Tesla and Eastring gas pipeline projects have been included in the European Commission’s updated Project of Common Interests (PCIs) list.
In other documents connected to the State of the Energy Union, the European Commission has officially thrown its weight behind Ukraine, saying it has to remain part of Europe’s gas network. 'Despite the difficult political situation, Ukraine has proven during the winter 2014/15 to be a reliable transit partner for Russian gas. The EU believes that it is in the interest of all parties that Ukraine remains an important transit country,’ reads a press release.
The Commission also reiterated that it would scrutinise whether the Nord Stream plan complied with EU rules, adding it will not provide any concession.
The debate about the project to expand the pipeline connecting Russia with Germany via the Baltic Sea remains heated.
Germany's Vice Chancellor Sigmar Gabriel aligned himself with Vladimir Putin on the Nord Stream gas-pipeline expansion issue, Euractiv reported on November 17.
But Eastern European countries are not giving up. The Nord Stream-II project does not enjoy the support of the European Commission, says a former President of the European Parliament. “No financial or any other support for Nord Stream-II at the level of the European Union,” Polish MEP Jerzy Buzek recently said.
DOMESTIC PRODUCTION: DUTCH COURT LIMITS GRONINGEN GAS EXTRACTION; NORWAY KEEPS INCREASING PRODUCTION
A Dutch Court temporarily limited gas extraction in Groningen to 27 billion cubic metres (bcm) of gas a year, adding on November 18 that the NAM consortium could be allowed to ramp up production if cold weather necessitates doing so. “This may be raised to a total maximum of 33 billion cubic metres only if the 2015-2016 gas year proves to be relatively cold," reads a statement released by the Council of State’s Administrative Jurisdiction Division.
Norway’s natural gas production in October 2015 was higher than both forecasts and October 2014 production. Apart from June 2014, the country consistently reported a year-on-year increase in monthly gas production throughout 2015.
Nonetheless, Norway’s Statoil decided to exit Alaska following recent exploration results in neighbouring leases, in a moment of increasing scepticism about Arctic oil and gas potentials.
The coming weeks will shed some more light on European domestic production. On December 8, the administrative court of Cergy-Pontoise, located in the Paris region, will rule on the repeal of three permits in Southern France. “If the court rules in favour of this American company, it would create a dangerous precedent”, José Bové, Co-Leader of the European Greens, commented.
MARKET CONDITIONS TAKE TOLL ON ENERGY COMPANIES
Energy recruiter Swift Worldwide Resources wrote that the oil and gas industry registered over 233,000 job losses since the slump in crude prices took hold late last year.
Along the same lines, according to an article published by Reuters on November 17, the top 10 investment banks paid the price of sluggish turnover from metals and investor products. As a result, their commodities-related revenues dropped by 17% in the first nine months of the year after.
Also this week, several companies showed signs of operational struggle.
InfraStrata announced on November 16 that it has agreed to sell exploration-based assets to focus on its gas storage project in Northern Ireland. "This will involve several steps through which if they all complete will result in the Company divesting itself of most of its exploration assets in exchange for £540,000 cash and retained interests in each of the assets without obligations for future investment in respect of those assets," the company wrote.
Similarly, Stockholm-based PA Resources announced its intention to divest its oil and gas assets, adding it will also apply to delist its shares from the Nasdaq Stockholm exchange in the coming days. "The board of directors has found no viable alternatives with regards to long-term financing or M&A, leaving the third alternative, a sale of its assets and subsidiaries, as the company’s remaining option," the company wrote in a press release on November 17.
The decision of several companies to sell assets allows competitors to enlarge.
Det norske oljeselskap ASA agreed to acquire all UK-based Premier Oil’s Norwegian assets for a cash consideration of USD $120 million on a cash-free, debt-free basis. The transaction is subject to the receipt of government approval, and is expected to complete by year-end.
London-listed Urals Energy acquired the entire issued share capital of two private Russian companies, RK-Oil Limited and BVN Oil Limited, from businessman Ilya Glebov, Urals announced on November 19.
Royal Dutch Shell announced on November 19 its recommended merger with BG Group has received unconditional clearance from the Australian Competition and Consumer Commission. According to Australia’s competition watchdog, the $70 billion takeover of BG Group will not have significant consequences on the competitiveness of the domestic market.
In such challenging times, it perhaps comes as little surprise that companies are asking Brussels to commit to promoting gas. Christopher Delbruck, CEO of E.ON Global Commodities, said on November 18 that clear signals are needed to avoid losing new investments.
Some gas analysts remain positive. “I believe that if natural gas is valued correctly, and then monetised through the use of gas prepay credits, then any resulting surplus over production costs may be shared within a new settlement between gas producers and consumers,” Chris Cook wrote. He added that “new and efficient energy infrastructure could then be funded by investors via Gas Loans of gas credits and operated by gas market service providers with very low needs for conventional finance capita.”
UK UNVEILS ITS PLANS TO DRIFT AWAY FROM COAL
Australia, Canada, Korea, Japan, New Zealand, Norway, the United States, Switzerland and the European Union agreed new rules on official support for coal-fired power plants, including restrictions on official export credits for the least efficient coal-fired power plants, the OECD announced on November 18, after two years of negotiations.
Concurrently, the British Government announced on November 18 its plans to close all coal-fired power stations by 2025 and restrict their use by 2023. “We are tackling a legacy of underinvestment and ageing power stations which we need to replace with alternatives that are reliable, good value for money, and help to reduce our emissions,” Energy and Climate Change Secretary Amber Rudd said. Doing so, Rudd backed nuclear power and gas.
The Department of Energy and Climate Change (DECC) also set out a strategy to maximise the economic recovery of offshore oil and gas in the UK on November 18. "The strategy is now out for consultation and a final version will be laid before Parliament in early 2016. The consultation will run until 8 January 2016," DECC wrote in a statement.
MEDITERRANEAN DEVELOPMENTS
Turkey's state-owned pipeline company Botas is negotiating with the European Investment Bank (EIB) and the World Bank (WB) to draw loans worth $2 billion to finance its stake in the Trans-Anatolian pipeline (TANAP), Bloomberg reported on November 12.
A well-placed source in the energy private gas sector in Athens informed Natural Gas Europe that the probability of sending Russian gas to Southern Italy, even if Turkish Stream is constructed, are slim. According to the source, the Russian political elite has placed heavy political capital on establishing the central Balkan route, also known as the Tesla pipeline.
Meanwhile, Rome and Valletta agreed "informally" to suspend oil drilling in the Southeastern area of Sicily where the respective claims overlap. The agreement must be followed by the formal delimitation of the maritime boundary.
In general, Israel was the most active country in the region for what concerns the gas debate.
Cyprus' President Nicos Anastasiades and Israel's Prime Minister Benjamin Netanyahu met on November 13 in Jerusalem for the third time in six months in another effort to advance an agreement between Cyprus and Israel. According to a report by Cyprus News Agency (CNA), progress has been achieved. However, agreement has yet to be concluded.
Meanwhile, a new regulatory framework for the natural gas industry in Israel is set to be approved by mid-December following a series of hearings. The schedule for the hearings was published on November 16 by the committee chairman, Eitan Cabel.
Yuval Steinitz, the Israeli Energy Minister, sees the light at the end of the tunnel when it comes to the approval of the long-awaited natural gas regulatory framework in Israel. "I believe that in the middle of December this [the framework's approval process] will be over and 2016 will start with the natural gas framework fully in place, which means that immediately at the beginning or 2016 the sale of Karish-Tanin [gas fields] will go ahead,” he said on Tuesday.
Noble Energy will grant the rights for the sale of its part in two small natural gas fields offshore Israel, Tanin and Karish (49.1%), to Delek Drilling and Avner, two entities that are controlled by Delek Group. Delek Group will pay $67 million for the rights. Noble Energy will not be entitled to any further payment following the expected sale. The agreement is contingent upon the final approval of the regulatory framework that is expected during the next few weeks.
Hutchison Whampoa, the business conglomerate controlled by Chinese billionaire Li Ka-Shing, might seize on the opportunity. The company is reportedly interested in buying the Karish and Tanin gas fields.
However, public opinion might be a hurdle for the plans of the Israeli government. Over 10,000 people rallied on November 14 in Tel Aviv and thousands more elsewhere around Israel, in protest of the proposed natural gas regulatory framework. It was the second Saturday running that demonstrations took place.
LNG: US AND QATAR
Some 50% of Cheniere's future LNG supply from the US is likely to go to Europe, but the low cost of the gas would also give European buyers the option to send cargoes onward to other markets, a senior company official said Wednesday as reported by Platts.
US Ambassador Matthew Bryza said that Washington’s push toward an increased diversification in Europe has to do with its own interests, both on an economic and security level. “What I'm talking about is purely a strategic set of interests–it's not philanthropy, it's US self interests” he said.
“The interest in Washington now is to advance the development of spot market trading in the short run, or longer term contracts, but free market trading of gas into the Baltic market,” Byrza added.
EASTERN EUROPEAN AND THE BALTICS
Poland’s Świnoujście LNG terminal was given the green light to commence the process of installation cool-down and start-up using liquefied natural gas supplied from Qatar. "At present, the remaining preparatory works at the LNG Terminal site in Świnoujście are being finalised before the arrival of the first methane carrier," Polskie LNG’s Maciej Mazur said in a statement.
Also this week, on November 16, Lithuania’s Klaipedos Nafta signed a Memorandum of Understanding (MoU) with the Spanish Association of Natural Gas for Mobility, aimed at developing standards for the use of liquefied natural gas (LNG). “We can share our experience with international market players and standardise certain processes,” Mantas Bartuška, CEO of Klaipedos Nafta, said in a statement.
Estonia is moving in the same direction. Since the launch of the liberalisation process of the gas market at the turn of the year, the price of imported natural gas has been continually decreasing and is approaching European gas market prices, wrote Estonian Transmission System Operator Elergin on November 17.
But not all countries are reporting such a quick transition.
Alexandru Maximescu, Director of Corporate Affairs, OMV Petrom, said he agreed with the sentiment, expressed by MEP Norica Nicolai, that Romania's voice is too soft in Brussels. “In this respect, a first, decisive step was done last year when the potential of the Black Sea was mentioned in the Energy Security Strategy of the European Union. This is the first recognition of the potential of Romania,” he recently said.
RUSSIA: DIPLOMATIC AND COMMERCIAL ACHIEVEMENTS
Moscow has been extremely active on a diplomatic level.
Russia’s President Vladimir Putin met with his Turkish counterpart, Recep Tayyip Erdogan, on the sidelines of the G20 summit. The two leaders spoke about the Turkish Stream pipeline project. They will re-address the question of its development after the formation of a new government in Turkey.
Russian President Vladimir Putin also said on November 16 that Moscow is open to restructuring Ukraine’s $3-billion debt, adding that it is waiting for guarantees from the U.S., the EU or international financial organisations to proceed. Putin told journalists at a news conference at the G-20 summit in Antalya that the Kremlin’s proposal offers “better” terms than the ones sought by the International Monetary Fund.
Russia also reported some developments on a commercial level.
Russian producer Lukoil will start development of the Yuri Kuvykin field in the northern part of the Caspian Sea in 2024, Gennady Ordenov, Deputy General Director of Lukoil Nizhnevolzhskneft, said at a Russian-Norwegian oil and gas seminar on Wednesday. “It is planned to start development of the gas condensate field Kuvykin in 2024. Gas will be transported to the Filanovsky field,” he said.
The Yamal liquefied natural gas (LNG) project will be signed next month; provisional terms have already been agreed to, Russian Deputy Prime Minister Arkady Dvorkovich said on November 16 as reported by Sputnik.
Moscow also appears to be strengthening its strategic partnerships with other countries this week. For instance, Iran’s Oil Minister Bijan Namdar Zanganeh said the country will be negotiating natural gas swap projects with Russia, Turkmenistan, and Azerbaijan. “[It's] true that we have not played a key role so far in the gas export market, but the trend will change,” ISNA news agency quoted Zanganeh as saying on November 17.
However, some Russian energy companies are likely to face internal power rebalancing. Gazprom reported a likely reduction in natural gas output for the year, while Rosneft revealed that its gas production for the first nine months of the year increased by 12.3% with respect to the same period in 2014.
OTHER NEWS: AZERBAIJAN, BELARUS
Belarus is intensifying its diplomatic activities, with two significant missions taking place on Thursday. While Deputy Minister of Foreign Affairs of Belarus Valentin Rybakov was speaking with the Ambassador of Iran to Belarus, Mohammad Reza Saburi, Belarus’ President, Alexander Lukashenko, met with his Serbian counterpart, Tomislav Nikolic, in Minsk.
Azerbaijan’s commercial gas production increased by 6.2% in the first 10 months of 2015, compared to the same period in last year, the State Statistical Committee of Azerbaijan reported on November 17. The analysis says that the country produced 16.392 billion cubic meters (bcm) of commercial gas over 10 months.
NEXT WEEK: TWO DEVELOPMENTS TO KEEP IN MIND
Finland’s Fortum and Lithuanian state-owned energy group Lietuvos Energija are expected to set up a joint venture.
On November 23, Russian President Vladimir Putin will visit Tehran to attend a summit of gas exporting countries.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci