Week 25 Overview
While Ukraine moves closer to declare the state of emergency over Gazprom’s decision to cut off natural gas supplies to the country and Europe implicitly admits that an increase in coal usage is more than likely, Russia collects some achievements that would have been difficult to envisage six months ago. And, unlike earlier progress, these achievements don’t come from China, but from Europe. Moscow is bending over backwards, Austria and Hungary simply bend down. In the while, BP and ENI are trying to emulate Gazprom in China, signing energy contracts to secure their position in the main booming gas market.
RUSSIA, AUSTRIA AND HUNGARY
Wien initially thought to cooperate with Gazprom for the South Stream project, but then it redirected its attentions towards the Nabucco pipeline. This Austrian decision translated into a new South Stream’s route, which was meant to end up in Italy.
But this week changed the cards on the table. Russia’s Presidential Aide Yury Ushakov said on Friday that President Vladimir Putin would visit Austria at the invitation of President Heinz Fischer on June 24.
“Putin and Fischer will discuss a wide range of bilateral and international issues,” he said, adding that the two leaders will sign a contract to lay the South Stream pipeline across Austria.
The segment to Baumgarten is expected to have a capacity of 32 bcm annually, with full capacity to be reached by January 2018, according to the Memorandum of Intent signed by Gazprom and OMV in April.
In a moment Brussels is questioning the contracts signed by Bulgaria and Serbia with Russia, it will be interesting to see the final agreement. It will equally be intriguing to witness European reactions. What will Italy’s Prime Minister Matteo Renzi say? Will Germany’s Angela Merkel avoid any comment, preferring to watch some football matches in Brazil? Will Gunther Oettinger intervene?
Next week is set to be thrilling, no doubts on this. It will be worth paying attention to events in Wien, as it will be necessary to dig deeper in the new Hungarian approach to Russia.
Budapest and Moscow traditionally have a really complex relation. But last week has been even more tangled, based on a mix of economic and political messages.
On an economic level, Hungary’s MOL Group said it is looking for new investment opportunities in Russia, while continuing exploration in its existing assets.
“For MOL Group, the Russian upstream market is a great place to invest and we are actively looking for new opportunities to meet our growth targets,” József Molnár, Chief Executive Officer, MOL Group said on Thursday.
At the same time, political intercourse took place on Wednesday, when Hungary’s Jobbik party held talks in Russia with the intention of securing support for Hungarian-Ruthenian autonomy in Transcarpathia. Jobbik is a radical nationalist party willing to capitalise on the existing confusion in Europe and Ukraine. Hungary’s Marton Gyongyos, deputy head of parliament’s foreign affairs committee, even blamed on Europe for the standoff in Ukraine, praising the referendum in Crimea.
“(The referendum in Ukraine) raised a glimmer of hope of autonomy for Hungarians and Ruthenians as well,” Gyongyos said as reported by Politics.Hu.
RUSSIA (PART 2)
Rosneft signed agreements with companies from Mozambique, Japan and Russia during the 21st World Petroleum Congress in Moscow. The flurry of deals seems to back Russian hard line on Ukraine, adding further pressure on Europe.
Rosneft President Igor Sechin signed a Memorandum of Understanding with JSC Zarubezhneft in the field of geological exploration in Vietnamese shelf.
The company also clinched an Strategic Cooperation Agreement with Yokogawa Electric Corporation for information technology and measurement systems and a MoU with Mozambique’s ENH.
In this sense, Russian position seems to improve week after week. The normalisation of the relations of the international community with Iran further increases its hopes to get the upper hand. As reported by Eustream, Russian gas continues to flow to European markets and new opportunities are opening up for Moscow.
Some other good news for Moscow did indeed come on Monday, when a report published by BP clearly indicated that LNG’s share of global gas trade declined to 31.4% in 2013.
‘Global energy demand accelerated in 2013 but, reflecting the weakness of the global economy, growth of 2.3% remained slightly below the historical average. Within this global picture, however, shifts in energy consumption mirrored those in the world’s economic patterns,’ wrote the company.
LNG is the worst threat for Russian leadership in European gas markets and the decrease weight of LNG is the cherry on top. Moscow enjoyed a really nice week in Europe and some progress of its pipeline to China. What more?
EUROPE? DID YOU SAY EUROPE?
Three European stories well illustrate the current situation of the Old Continent, which is significantly different from Russian one.
Firstly, Norway averted a possible strike of oil and gas workers in extremis. After Lederne Union (Norwegian Organisation for Managers and Executives) accepted the solution proposed by mediator Wenche Elizabeth Arntzen on June 18, the Safe Union (Norwegian Union of Energy Workers) finally reached a wage deal with employers on Saturday. This first story illustrates that Europe is often on the brink of a crisis, but often finds its way out.
Secondly, European authorities made the headlines last week, proving that the European Union depends on slow processes mainly based on long-term investments.
The European Investment Bank supported the extension of Poland’s gas transmission network, lending PLN 410 million (EUR 98 million) to Gaz-System S.A. The long-term financing scheme is designed to push forward the pipeline project from Lwówek to Odolanów in Western Poland. The loan covers 82% of the total approved budget.
‘This project, with total approved financing of PLN 500 million (EUR 120 million), will reinforce the EU North-South gas corridor and the connection to alternative sources of gas supply,’ reads a note released by the European Investment Bank on Tuesday.
On Wednesday, the European Commission opened the doors to funds for the Balticconnector, declining a Finnish application for a LNG terminal.
The EC said that proposal by Finland’s Gasum and Estonia’s Alexela for a liquefied natural gas import terminal in the Gulf of Finland is not eligible for funding under Projects of Common Interest (PCI).
On the other hand, the gas pipeline between the two countries can be ‘considered for the maximum amount of EU grants in the application round for PCIs,’ reads a press release published by the Finnish Government.
This second story shows that European mechanisms are slow, but quite attentive.
Thirdly, there are business opportunities for European companies in China.
On Tuesday, BP and the China National Offshore Oil Corporation (CNOOC) announced a heads of agreement for the supply of up to 1.5 million tonnes of LNG annually over 20 years starting in 2019.
On Friday, ENI clinched a new contract with CNOOC for exploration in the South China Sea.
‘This new PSC confirms the interest of ENI to continue and consolidate its presence in China, particularly in the South China Sea, where the company cooperates with the Chinese NOCs since middle 80’s, both for exploration and production,’ the company explains in a communique.
OTHER EVENTS
On Monday, Germany-based RWE Dea and Canada’s Sterling Resources said they successfully completed the fracture stimulation and production testing of Breagh well A07, in the Southern North Sea, 65-km north-east of the UK.
Also on Monday, UK’s Cuadrilla Resources confirmed it submitted a planning application to Lancashire County Council (LCC) for its proposed Roseacre Wood shale gas exploration site, following a similar move for the Preston New Road site.
On Tuesday, Royal Dutch Shell announced the sale of 19% of Woodside’s issues share capital, for an estimated value of around US$5.0 billion on an after tax basis.
On Wednesday, Canada-headquartered Serinus Energy announced that the North Makeevskoye-4 (“NM-4”) exploration well commenced drilling on Monday, despite the political tensions in the area around Lugansk.
SO WHAT?
It is clear that the difference between Russia and Europe is that Moscow has short-term alternatives, while Brussels has almost none. The only possibility hinges on an increase in coal usage.
Günther Oettinger, European Commissioner for Energy, did indeed say on Thursday that European gas strategy hinges on stress tests and related short term solutions.
“In the short term, our Strategy proposes to launch stress tests that simulate supply disruption, as a worst case scenario. On the basis of these we will detail emergency plans and backup mechanisms. These may include increased gas stocks, reverse flow pipelines, fuel switching to decrease gas demand, or other very short term measures to reduce demand,” Oettinger said, implicitly admitting that coal usage could soon increase.
That is not good for the European gas industry, but not even for Europe. The most important thing now is to build on previous mistakes to come up with long-term solutions, which need to be in line with short-term opportunities and immediate interests of all European countries. Brussels can easily point the way to Serbia and Bulgaria, but it could have a difficult time telling Austria what to do. This moment requires a strong attention from Brussels and Berlin, as (eventual) internal arm-wrestlings are more dangerous than confrontations with Russia.
Sergio Matalucci