European natural gas market wrap-up for Week 12

Week 12 Overview

The way Brussels will handle energy issues and its ties with Moscow will depend on two woman who grew up in the Eastern Block - Germany’s Angela Merkel and Lithuania’s Dalia Grybauskaitė. It comes as little surprise that the focus of the two-day negotiations between EU leaders has been on energy, and on communication instruments to counter Russian narratives over the conflict in Ukraine. On Thursday, the EU also reached a deal to extend sanctions on Russia.

This increase in Cold War rhetoric did not translate into drastic changes in the gas industry over the last days. The Middle East - Cyprus and Egypt - kept making the headlines.

On the other hand, Western companies like Wintershall, Statoil, and ExxonMobil continued negotiations to step up operations in Russia. In this sense, the industry voiced its opposition to a deterioration of ties with the Kremlin.

MIDDLE EAST: CYPRUS EXPORTING GAS TO EGYPT VIA PIPELINE, TOTAL SIGNS NEW DEAL WITH NICOSIA

Cyprus and Egypt have been the most active countries of the 12th week.

On Wednesday, Cyprus signed a deal with Total E&P Cyprus for further exploration activities in Block 11. A few hours before, the Tamar Project partners clinched a contract with Dolphinus Holdings Limited for export of Cyprus’ gas to Egypt. At the same time, Cairo also finalised a deal with Gazprom to import 35 LNG cargoes.

Egypt is looking for energy sources, and Nicosia is ready to step in.

Noble intends to declare that the Aphrodite offshore field is commercially viable, Cyprus’ Minister of Energy Yiorgos Lakkotrypis said on Tuesday, adding that the company should make its announcement within weeks.

Despite this enthusiasm, it became clear over the last days that the Cyprus’ onshore LNG terminal is off the agenda. As Atlantic Council’s Eurasian Energy Future Initiative Director David Koranyi said, the change in priority is due to the hitherto modest quantities of gas discovered in Cypriot waters.

It is yet unclear whether Cypriot or Israeli gas will reach Egypt first. All in all, given that Israel is already producing gas from the Tamar field, and despite the regulatory hurdles that may impede regional deals, it is expected that Israeli gas will be delivered to the Egyptian neighbour before the development of Aphrodite.

Like for Cyprus and Israel, timing is important also for Beirut - these countries are competing to gain the first-mover advantage. However, the political complexities within Lebanon are the major factors likely to postpone offshore gas production to at least 2025.

Iran, known as the elephant in the room, is moving too. Teheran has launched the main phase of its offshore South Pars gas field. President Hassan Rouhani, who attended the ceremony for Phase 12, said that it is the country’s biggest gas industry project.

NORTH AFRICA: LIBYA

There are not many people who want to speaking about possible consequences for their business in case of a second round of the so-called Arab Spring. The interests at stake are quite significant, and Italy is the country that could lose the most. As written by the Italian daily Republica, it is not just a matter of oil and gas. It is also a matter of underwater data cables, which are right in front of Libya and Tunisia.

It comes as little surprise that, over the last days, the European Union increased its focus on the crisis in North African country. European Commission Vice-President Federica Mogherini met with the Secretary-General of the United Nations Bank Ki-moon. A few days after, European leaders spoke about the issue during the European Council.

Against this backdrop, ENI announced a discovery of gas and condensates offshore Libya in the Bahr Essalam South exploration prospect in Area D, adding that the proximity to existing infrastructures will accelerate developments despite the current geopolitical complexities.

AZERBAIJAN, TURKEY: (FOR NOW) TANAP BEFORE TURKISH STREAM

Ankara may decide to leave Turkish Stream altogether and stick only with the TANAP plan, if it believes that this will benefit Baku, Matthew Bryza, director of the International Centre for Defence Studies and former US Ambassador said in a recent conference.

According to Magsud Mammadov, Director for External Relations of TANAP, the project from Azerbaijan to Turkey will be the first lane of the complex nexus of highway linking gas-rich countries and Europe.

Azerbaijan keeps the momentum. Baku intends to capitalise on Europe’s struggle to diversify its energy routes.

According to Khoshbakht Yusifzaheh Vice-President of SOCAR, some 60 billion cubic meters (bcm) of natural gas has been extracted from the Shah Deniz Stage 1 (SD1) since 2006, explaining that one third of SD1 gas reserves has been extracted.

Europe is paying close attention to these developments. Vice-President for Energy Union Maroš Šefčovič attended the opening ceremony for the Trans-Anatolian natural gas pipeline (TANAP) with Azeri President Aliyev. On this occasion, he also met with Turkish Energy Minister Yildiz to discuss energy cooperation between Brussels and Ankara.

Europe is ready to support and help the realisation of the TANAP project, Šefčovič said in a speech at the ceremony.

According to a joint statement from Turkey and the EU, both parties have signed an agreement to set-up a High Level Energy Dialogue mechanism for expanding cooperation in the energy sector.

However, future supply beyond Shah Deniz will take time to develop and the project will have to face up to Gazprom's clear intent to retain its market share in Europe through the Turkish Stream project, Samuel Lussac, Caspian Upstream research manager at Wood Mackenzie, commented.

EU-RUSSIA-UKRAINE: NEW ROUNDS OF NEGOTIATION, CONVOLUTED TIES

During the European Council, EU leaders forged one front against Russia and toward the creation of the Energy Union. They agreed that the duration of economic sanctions will be linked to the complete implementation of the Minsk agreement. They extended sanctions to the end of 2015.

Amid constant tensions between Kiev and Moscow, European authorities started on Friday the series of trilateral talks with Russia and Ukraine to reach a deal on a winter package. Brussels hopes to clinch a deal by June. The working group will present a draft proposal for the next trilateral meeting, foreseen to be held in April 2015.

According to Ariel Cohen, the occupation of the Eastern Ukraine by pro-Russian separatists is a temporary phenomenon and sooner or later there will be enough pressure to restore Ukrainian sovereignty over the Donbas. Still, Ukraine could not seize the day given the royalty tax passed by Rada - the tax for domestic oil and gas production is probably too high.

While Europe is better positioned compared to 2009, Ukraine is currently not able to obtain sustainable gas supplies without external financing or drastic reductions of its demand.

In its standoff against Kiev, Russia is well aware of the importance of maintaining a strong grip on national resources. Companies are appointing new managers with strong expertise in the oil and gas sector. The shake-ups could also bring along more powers for Energy Minister Alexander Novak.

Moscow is also increasing efforts to lure international investments. Novak continues negotiations and diplomatic meetings with oil and gas companies, promoting their investments in domestic fields. On Wednesday, he met with Rex Tillerson, ExxonMobil’s CEO.

Presenting its financial results for 2014, BASF’s subsidiary Wintershall said it wants to increase production from Siberia (Achimgaz), Norway (Edvard Grieg, Maria, and Aasta Hansteen) and Argentina (Tierra del Fuego).

SOUTH-EASTERN EUROPE: BULGARIA NEGOTIATES WITH BRUSSELS, FOCUS ON TRANSPARENCY

ENTSOG intervened in the debate saying that the lack of implementation of European regulation prevented a well-functioning market. The organisation called on European decision-makers to send appropriate signals to promote investments and avoid further delays.

Bulgaria’s Prime Minister Boyko Borrisov said it received the support of the European Commission. Reporting that Brussels committed to financing a gas pipeline connecting Bulgaria and Greece, he concluded that his country - “unlike others” - is ready to find a compromise on Europe's intention to increase its control over member states’ negotiations with external suppliers.

Montenegrin Minister of Economy, Vladimir Kavaric, said that transparency should be exercised to the maximum extent possible. Explaining he is aware of the competition coming from other countries, he stated the country is striving to encourage competition in this business.

UK: IN ITS BUDGET SPEECH, GOVERNMENT COMMITS TO £1.3 BILLION SUPPORT

The oil and gas industry welcomed the £1.3 billion support announced by UK Chancellor George Osborne during his 2015 Budget Speech on Wednesday. In his politically-driven plans, he said the the governments aim at supporting domestic production can help offsetting the consequences of low oil prices.

According to the British trade association, a reduction in taxes and a simplification of the Investment Allowance would bring along £4-5 billion worth of investments.