Week 36 Overview
The 36th week of the year has been dominated by the (shaky) ceasefire struck on Friday by Ukrainian officials and pro-Russian separatists.
But the dazzling news of a truce might have overshadowed some events that, in the long run, could have even more significant consequences. In the last days, the strategies of Europe and Russia did indeed become increasingly clear. Brussels wants to vie on an economic ground and Moscow intends to play the diplomatic trump card. Nonetheless, for once, the European Union is really paying attention to the events and it is trying to halt a Russian expansion in Northern Africa and Mongolia. Brussels is ready to wear its best suit to go on diplomatic missions around the word to weaken Russian blueprints.
For instance, two days after the deal signed by Rosneft and Mongolia, the European Commission renewed its interest to cooperate with Ulan Bator. In this sense, geopolitical reasons are set to influence European decisions not only on a political level. As a result, oil and gas companies might be pushed to consider long term geopolitical risks and opt for strategies in line with their governments’ measures.
At this point, keeping in mind the recent messages sent by the Dutch government indicating its willingness to strengthen ties with Ukraine, the main question mark is about Shell’s future in Russia. Will the multinational based in The Hague continue its ambitious offshore projects? Time will tell.
ONE STEP BACK: UKRAINE, RUSSIA, NATO AND THE EU
A few hours after Gazprom’s launch of construction works for the Power of Siberia gas transmission system (GTS), Ukraine’s PM Arseniy Yatsenyuk inaugurated the Vojany-Uzhgorod gas pipeline in Veľké Kapušany, Slovakia.
"Of course, this is not the final solution, but this is a huge step forward. Ukraine today can say that together with our Slovak friends and the Commission, we have taken the first step towards the diversification of energy supply and reduction in energy dependence," Yatsenyuk said in a note published Tuesday on the Government’s website.
Ukraine, which recently ratified the Third Energy Package, is definitely drifting away from Russian gas. The reverse flow does clearly decrease its reliance on Russia.
The other significant changes for the country occurred on Friday. In a few hours, Naftogaz announced a significant increase of energy prices for national consumers and officials then unveiled a ceasefire between Kiev and the pro-Russian separatists.
Representatives of the Donetsk People's Republic (DPR), the Luhansk People's Republic (LPR), and Ukraine signed a ceasefire protocol in the afternoon, as said by DPR on Twitter.
The ceasefire, which has been agreed during talks in Minks, came into effect on Friday at 6 pm (15:00 GMT).
The news comes after NATO and Western countries put pressure on Russia’s President Vladimir Putin to facilitate a deescalation. But the truce does not automatically imply better relations between the West and Russia, said the UK government.
‘Responding to reports that ceasefire talks would take place between Russia and Ukraine later today, (Foreign Secretary) Philip Hammond said that the West would not be deterred from pursuing further sanctions against Russia,’ reads a note released by the UK Government earlier on Friday.
In other words, Hammond basically said that the ceasefire was somehow unreliable. And events proved Hammond right. Shelling erupted in Mariupol on Sunday, clearly putting at risk the truce.
In this sense, uncertainties keep hanging over Ukraine, as the confrontation inexorably sounds alarm bells also in Eastern Europe.
Bulgaria, which is the third to last in Europe in terms of gas stored as a percentage of the total storage capacity according to GSE data, might be the first to bear the brunt of the arm-wrestling between Russia and the European Union. The country in Southeastern Europe is called to take steps, as it just stored around 400 mcm gas. In comparison, Denmark, which has less inhabitants then Bulgaria, stored more than double the gas. In this sense, the urgency and the need of a knee-jerk reaction are clear.
Accordingly, the government started working on measure to increase energy security, speaking about renegotiations and mulling investments in renewable. The country also pushed forward with its plans, launching the Energy Board this week.
“The main task of the Energy Board is to stabilise the energy sector and ensure predictability in the sector. The Board’s work should be effective, we should see problems for what they really are and discuss even unconventional solutions”, Shtonov commented.
That is why, taking the anti-Russian narrative aside, Gazprom is right.
Gazprom’s spokesman Sergey Kupriyanov said that the European Union is not carefully considering the interests of its southern EU member states. And, to a certain extent, there is some truth in it.
According to the Russian official, the EU’s attempt to slow down the South Stream project is groundless in economic terms.
“Yet the European Commission is trying to delay the project on the basis of strictly political considerations. So far, the EU seems ready to shoot itself in the foot by blocking a project that will increase its energy security and help Europe satisfy increasing energy import needs, at no cost to European taxpayers,” Gazprom’s Kupriyanov said in a letter to the Financial Times.
It comes as no surprise that, in this geopolitical war, European leaders did not give up their plans to introduce new measures against Moscow.
‘Following the request of the European Council of 30 August regarding the situation in Ukraine, the European Commission has adopted today for consideration by Member States proposals for the EU to take significant further steps,’ the European Commission wrote in a statement published on Wednesday.
RUSSIA: COOPERATION WITH ALGERIA, VIETNAM
Despite not being related to gas activities, the energy co-operation deal between Algeria and Russia is an important indication: Moscow is trying to get a foothold in Northern Africa. The cooperation agreement on peaceful use of nuclear energy inked by Algeri and Moscow suggests that President Vladimir Putin is trying to decrease European influence in the area.
All in all, his strategy is way more all-encompassing. It is not that trivial and based on Northern Africa.
On Wednesday, for example, Gazprom hosted a working meeting with Nguyen Xuan Son, Chairman of the PetroVietnam National Oil and Gas Group Board of Directors.
‘The parties addressed the bilateral cooperation in the gas sector, particularly the joint development of hydrocarbon resources in Vietnam and Russia. The participants praised the joint gas production from Moc Tinh and Hai Thach located on the Vietnamese shelf and noted that the fields would reach their full capacity in 2016,’ reads a communiqué released on Wednesday.
EUROPE: LIMITING RUSSIA AND FOCUSING ON TECHNOLOGY
As said, the main aim of Brussels is to impede Russian diplomatic efforts. At the same time, Europe and its companies are also focusing on technology.
On Monday, E.ON said that its power-to-gas (P2G) pilot unit in Falkenhagen delivered a positive performance, paving the way for more experimentation and more projects.
‘E.ON’s power-to-gas (P2G) pilot unit in Falkenhagen in eastern Germany has delivered a positive performance in its first year of operation, injecting more than two million kilowatt-hours of hydrogen into the gas transmission system,’ reads a note released on Monday.
On Tuesday, Statoil entered into an agreement with DNV GL to develop an international industry standard for subsea process technology.
‘DNV GL will lead a joint industry project (JIP) with important subsea operators to find industrial standards which will make it more profitable to develop larger projects with subsea processing technology,’ said the company.
On Thursday, Norway-based Aker Solutions and US-headquartered Baker Hughes received the necessary regulatory approvals to form an alliance to develop technology for production solutions designed to boost output and reduce costs.
‘The alliance combines Aker Solutions' strengths in subsea production and processing systems with Baker Hughes' expertise in well completions and artificial-lift technology to deliver reliable, integrated in-well and subsea production solutions that will help mitigate risk, accelerate output and extend the life of subsea fields,’ reads a note released by Aker Solutions.
WHAT TO EXPECT?
As the West is moving towards a more orchestrated geopolitical strategy to cope with Russia and IS, it is likely that next weeks will witness additional deals between Western companies. Along with this possible common front, investments decisions could be heavily influenced by geopolitical factors.
Given this likely politicisation of economic decisions across the continent, it is worth to carefully watch Western companies’ moves in Russia and in the Middle East. As the Western response gains ground, changes are progressively likely.
Sergio Matalucci