European natural gas market wrap-up for Week 14

Week 14 Overview

Seeing potential U-turns on the horizon, companies and countries are stalling long-term decisions. Diplomacy and politics are making the headlines, taking the attention away from developments in the gas industry. Before investing, companies need to understand what’s going on.

The 14th week did witness the extension of the “winter package” for Russian gas supplies to Ukraine, and the preliminary deal on Iran’s nuclear program. Theoretically, the two agreements seem to suggest a convergence, but the devil is in the detail.

The agreements share not only the same deadline (June 30), but also a similar future - in case of serious standoffs between the US and Russia, Ukraine could be further destabilised and the reconcilation process with Iran could easily crumble. The two deals could easily fail in the next months.

It is also worth reminding that the two agreements are equally relevant for the gas industry - if the international community lifts the sanctions on Iran, the country could export its oil and gas resources to Europe in around 10 years, increasing competition for Russia and dwarfing domestic projects across the Old Continent.

Adding to the diplomatic whirlwind, the US Department of the Interior issued final approval of an oil and gas lease sale in the Arctic Ocean that could clear the path for Royal Dutch Shell PLC to drill in the Chukchi Sea over the coming summer.

Against this backdrop, it is clear that the Foreign Ministers and Heads of State will outshine the Upstream divisions of the oil and gas majors. The future of the industry heavily depends on political decisions. That is why the visit of Greece’s Prime Minister Alexis Tsipras to Moscow on April 8 is expected to have significant ramifications.

RUSSIA-UKRAINE: DEAL EXTENSION, DOMESTIC PRODUCTION, AND THE ROLE OF THE US

On Thursday, Naftogaz and Gazprom signed a 3-month extension for the so-called “winter package”. According to Naftogaz, Ukrainian consumers will pay $248 per thousand cubic meters over the coming three months.

Naftogaz made two advance payments for a total of $30 million to cover Russian gas supplies for the next weeks. Russia’s top natural gas producer Gazprom confirmed it received the transfers, adding that the two payments from Naftogaz would cover supplies until mid-April.

The Ukrainian government expects to sign an agreement for Russian gas supplies for the next 12 months during the negotiations with Russia to be brokered by the European Union on 13-14 April. According to Minister of Energy and Coal Industry Volodymyr Demchyshyn, the price of Russian gas could fall even more, touching $220 per thousand cubic metres in the third quarter.

Ukraine still appears to have significant conventional resources potential, which could be tapped relatively quickly under the right circumstances. Ukraine’s official gas reserves stand at around 1 trillion cm. Given today’s production rates of 20 billion cm/y, this gives Ukraine a reserves-to-production (R/P) ratio of more than 50 years.

Meanwhile, the confrontation between the US and Russia continues on several levels. The situation is difficult to read, also in the gas industry.

On the one hand, Russia’s Eurasia Drilling agreed to extend a deadline on a proposed deal to sell a stake to international oilfield services firm Schlumberger from March 31 to April 30.

On the other hand, Exxon Mobil filed a claim against Russia at the Stockholm arbitration institute (SCC), after failing to converge on a common position in the context of the tax dispute with Moscow over the Sakhalin-1 oil and gas project.

The role of American companies in the standoff between Washington and Moscow remains unclear. The next weeks will help unveiling interests.

GREECE: TORN BETWEEN POLITICS AND ECONOMICS

As said, Greece is an important piece of the jigsaw. It is not only determinant for geopolitical and political reasons. It could also draw new interest in the Mediterranean. Regional companies like OMV and MOL could be interested in exploration and production in the Ionian Sea and South of Crete.

If the Greek Government wants to attract these kind of foreign investment, it has to make sure that it adapts to this competitive international market environment. The legislation and tax packages on offer have to be internationally competitive in order to attract capital.

At the moment, the Greek Government is paying more attention to its ties with Russia. Panagiotis Lafazanis, Minister of Energy, met with Gazprom’s Alexey Miller and Russian Energy Minister Alexander Novak. Lafazinis spoke about Moscow’s role in Greek energy security, and an eventual role of Russian companies in the 2nd Offshore Licensing Round.

The meeting with Russian President Vladimir Putin will be central for Greek Prime Minister Alexis Tsipras. He could go back to Athens with political trophies like a lift of Russia’s counter-sanctions on Greek agriculture and possibly a plan for a Russian-led bailout.

CYPRUS: NEGOTIATIONS WITH TURKEY TO RESTART SOON?

Gas explorations had triggered renewed tensions between the Cypriot government and Turkey that led to the disruption of the talks in October last year. The recent disappointing exploration results and the following break in offshore activities off Cyprus could allow for progress with Ankara towards achieving a sustainable settlement for the island.

Cyprus made a cautious remark on Thursday stating that recent progress in its relations with Turkey does not automatically imply an easing of tensions. The last message sent by Cyprus on Thursday seems to indicate that there are increasingly convergent interests, but historically divergent positions.

GERMANY FOCUSES ON DOMESTIC ISSUES

E.ON and its partners decided to close the Irsching 4 and 5 gas-fired power stations in Southern Germany from April 1, 2016. If the network operator prohibits the shutdowns, the units would be subject to the provisions of the German Ordinance on Reserve Power Plants.

A few hours later, on Wednesday, German Chancellor Angela Merkel’s cabinet signed a draft law that define rules on fracking. The law would allow commercial shale gas fracking at depths of over 3,000 metres.