Week 24 Overview
Political posturing on the European and Russian side is making way for more subtle confrontation. As counterintuitive as it might seem, the main battleground for the confrontation might be China. European experts came up with downward revisions for Chinese gas consumptions, indicating that lower economic growth and a balanced energy mix could reduce the size of the market for Russian gas. That would be another serious blow to Moscow’s strategy. In this sense, if Ukraine logically keeps suffering, Russia could join soon.
Meanwhile, European officials are trying to diversify gas supply sources, focusing on the Mediterranean countries. On June 11, Brussels launched a Euro-Mediterranean gas platform to increase regional cooperation, and to take advantage of Algerian (and Egyptian) potentials.
Finally, Italy is trying to increase its geopolitical profile, holding negotiations with Russia’s President Vladimir Putin. The question here is: Can Rome find its leeway to design an apt geopolitical strategy, decreasing its reliance on European/German positions? As a result of the way other European countries - France and Germany - are not putting much efforts to help Italy coping with the flow of migrants, the growing skepticism for European institutions in Rome and Milan could pave the way for some geopolitical experimentation, where Brussels would play a more marginal role. Italian Prime Minister Matteo Renzi could easily find consensus for finding his own way of relating to Russia, and Mediterranean countries.
RUSSIA, UKRAINE: DIFFICULTIES ON BOTH SIDE
As Lithuania is looking forward to the opening of the hearings this month over the possible Gazprom gas price overcharge at the Stockholm Arbitration Court, other countries could follow suit in the Swedish capital. Poland also lodged a complaint against the Russian gas giant in May. More EU countries are likely to get tagged.
Things could get even more complicated not only for Gazprom, but also for other Russian companies. For instance, Lukoil reported a 35% decrease in sales revenues to $23,190 million, explaining that revenue, EBITDA and net income suffered because of the decrease in the oil prices. The company also confirmed a deal with China’s Sinopec for the sale of its interest in Caspian Investment Resources Ltd, which controls assets in Kazakhstan.
Russia now has to understand how to prioritise its projects and its investment decisions, striking a good balance between Asian and European markets. As said, lower Chinese economic growth combined with a shift from fossil fuels is likely to significantly reduce the size of the market for Russian gas. Meanwhile there are opportunities for Moscow in Europe, as the EU redesigns its climate change and supply security policies. An antitrust deal over the concerns raised by DG Competition could also move toward settlement.
While experts were coming up with a downward revision of Chinese gas demand, Gazprom confirmed its commitment to its main projects and historic partners. On Wednesday, Russia’s President Vladimir Putin was in Milan, where he met Italy’s Prime Minister Matteo Renzi. Officials of Russian energy companies also took part in the meeting.
Gazprom and Shell met in Milan on Wednesday. A few hours later, several media reported that Shell might be willing to leave Ukraine, withdrawing from its last exploration well in the Eastern part of the country. The Anglo-Dutch firm clinched a deal with Kiev in early 2013 to explore the Yuzivska unconventional field.
Conversely, Serinus Energy announced on Monday that KUB-Gas, Serinus’ indirectly 70% owned subsidiary, has been granted a new concession in eastern Ukraine. The West Olgovskoye block was awarded to KUB-Gas Borova LLC (a newly incorporated subsidiary of KUB-Gas) by way of a Special Permit by the State Service of Geology and Minerals of Ukraine.
But that was not enough to change the mood in Ukraine. Confrontations in Eastern part of the country took its toll on gas infrastructures on Friday. Given the current circumstances, Kiev’s strategy is to get even closer to the United States. Prime Minister Arseniy Yatsenyuk reported that the US confirmed their support to the President and the Government, praising their efforts to promote “reforms”.
As a result of the military and geopolitical confrontation, experts claim that recent events in Ukraine and Russia force European energy consumers to look for alternatives. One of the possible suppliers of both oil and gas could be Kazakhstan, which boast the largest hydrocarbon resources in the oil-rich Caspian basin.
Generally, though, Azerbaijan remains the safest bet, while Iran seems an option too. Teheran is willing to open up to Europeans - French, and Spanish oil and gas companies are mulling investments there.
AZERBAIJAN, TAP, AND IRAN
Azerbaijan made an almost 7-hold decrease in gas deliveries to Russia last year. Most recently, an official told Natural Gas Europe that Baku will not export any natural gas to Russia in 2015. A government official reported that the decision of suspending gas delivery to Russia in 2015 was due to the increase of domestic gas consumption level.
At the same time, Baku is trying to capitalise on the 2015 European Games and use the event to increase ties with international companies. While BP was saying that it completed planned maintenance at West Azeri platform, SOCAR met with European and American companies.
Meanwhile, the Trans Adriatic Pipeline (TAP) issued an Invitation to Tender (ITT) for Engineering, Procurement, Construction and Installation (EPCI) for the offshore section of the project. The ITT is open to the companies who have pre-qualified following the contract notice TAP launched in February 2015.
Iran’s NIGC wrote that France-based firms are considering investments in the country, reporting on Monday comments made during the recent World Gas Conference in Paris. According to a note released by the Iranian company, the chief executives of 15 French companies including Total, Technip, Schneider and Vinci Energy held direct talks with the managing director of National Iranian Gas Company Hamidreza Araqi to discuss opportunities in Iran.
As already mentioned, Iran increased gas production from the South Pars by 15 million cubic meters per day (mcm/a) in early June. It is also preparing to launch two new phases by the end of the current month. The country is not only eager to increase cooperation with French companies, but also promote additional gas exports to Turkey. Teheran also said it plans to join the Turkish Stream.
NORWAY STRUGGLES TOO
Norway’s Statoil announced on Tuesday a minor discovery, a plan to recover 282 million extra barrels from the Åsgard field, and other deals to increase cash to invest despite difficult market conditions due to relatively low oil prices. Experts, lobbyist and think tanks called on government to adjust upstream fiscal terms in response to the current market conditions.
Statoil also signed a contract with a joint venture consisting of Kvaerner and KBR for construction of the topside for the utility and living quarters platform. The contract has a value of NOK 6.7 billion (€760 million).
Despite this progress, confidence in the Norwegian oil and gas industry decreased over the last months, after two-thirds of North Sea operators abandoned projects over low oil prices. At the same time, Norway might perform a spectacular U-turn on exploration in the Arctic after the parliament decided not to back the government’s proposal to reassess oil drilling boundaries.
While forecasts indicate that total investments in Norwegian oil and gas activity should flatten out in 2016, local companies continue their activities in the Barents Sea and in the North Sea. Lundin Norway, operator of production licence 609 (PL609), completed drilling of two appraisal wells, and Statoil reportedly filed an application to drill a new wildcat off Norway targeting the Gasol/Gretel prospect in the North Sea.
MENA REGION: NEW EURO-MEDITERRANEAN PLATFORM, CYPRUS MOVES ON
European and Jordanian officials launched a Euro-Mediterranean gas platform to increase cooperation between countries in the region. ‘The platform, launched on 11 June in Brussels, aims to incentivise dialogue, facilitate partnerships between stakeholders and strengthen cooperation between the Members of the Union for the Mediterranean’ reads a note released on Thursday.
The current economic and geological situation could pave the way for stronger ties between Algeria and the EU in the natural gas sector, Simone Tagliapietra and Georg Zachman wrote in a report published on Tuesday. Using 2013 data, the two Bruegel analysts reported that Algeria’s under-utilised natural gas export infrastructure would allow for additional 54 bcm of export, mainly through pipeline (29 bcm) and the remaining through LNG facilities (24 bcm).
Meanwhile, four and a half years after its initial discovery, Leviathan’s development is still at the crossroads. The latest version of the proposed agreement allows both Noble and Delek to keep their stakes in Leviathan, but production will begin in 2019 at the earliest, according to the companies.
Similarly, many gas opportunities in Northern Africa are elusive: failed license rounds in Algeria, political turmoil in Libya, Egypt importing gas are a proof of difficulties in the region. “There's plenty of reserves in all these countries – nothing to do with the existence of gas. The problem is, can this gas be developed and do we have the political and commercial conditions in these countries?” commented Jonathan Stern, Director of Gas Research, Oxford Institute of Energy Studies.
On the other hand, Noble Energy, Delek Drilling and Avner Oil Exploration have declared the commerciality of the Aphrodite field located in Block 12 of Cyprus' Exclusive Economic Zone (EEZ) and estimated at 4.54 trillion cubic feet (Tcf). The announcement is an important milestone for Cyprus towards the monetisation of its offshore riches.
The partners in Cyprus’ Aphrodite field submitted the development plan to the Cypriot government. Texan Noble Energy (70% share), Avner Oil and Gas and Delek Drilling (15% each) plan to build an independent floating production installation in the Aphrodite field, which will have the capacity to produce up to 800 million cubic feet of natural gas per day. An undersea natural gas pipeline would then ship the gas from the Cypriot field to neighbouring Egypt.
OTHER NEWS: US, G7 DECLARATION, NEW INTERCONNECTORS IN IRELAND, PROJECTS IN ITALY
One advantage that America currently has in its fleet is the ability to substitute between natural gas and coal. Richard McMahon, Vice President, Energy Supply and Finance, Edison Electric Institute, reported that there are 60-70 gigawatts of coal plants that will eventually go offline.
While G7 leaders were discussing climate policies, committing to renewed efforts in preparation for the UN Climate Change Conference in Paris in December, European officials signed on Monday a flurry of deals to advance the integration of European energy markets. Twelve European countries signed a declaration for regional cooperation on security of electricity supply within the European internal market.
Simultaneously, the oil and gas industry is increasingly speaking out in favour of gas, arguing that it should play a major role. “We believe that the share of gas with its very low CO2 emissions and its flexibility should also progress to become the second, if not the first, global energy source” CEO of French E&P Total, Patrick Pouyanne.
The Corrib gas project will be a milestone for Ireland when it comes on stream later this year, the Managing Director of Shell Ireland, Ronan Deasy, said. Since its announcement, the project has proven controversial and has been marred by protesters that have helped to significantly delay its development. Shell argues that, once Corrib comes on stream, the country will decrease its reliance on gas imported from the UK (it accounts for over 90% of Irish gas needs).
Indeed, interconnections remained under the spotlight over the last days. Italian gas transport group Snam said it plans to more than double gas pipeline capacity between Spain and France to reduce Europe's dependence on Russian gas.
Finally, junior companies focused in Italy are reporting progress too, both on a geological and political ground. Italian authorities authorised UK-based Northern Petroleum to acquire 3D seismic data across the Giove undeveloped oil discovery (off the coasts of Abruzzo region) and the Cygnus exploration prospect in the southern Adriatic. Other companies are progressing too.
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