Week 27 Overview
While the industry is trying to get its head around its own difficulties, tensions between Ukraine and Russia keep simmering. According to several experts, Kiev and Moscow would like to increase cooperation, but the decisions announced over the last days seem to indicate the opposite.
On the European front, key political players - German parliament, European institutions - are getting ready for their summer break, sharing (sometimes superficial) opinions on Greece. On Sunday, the Mediterranean country voted on whether to accept the terms of an international bailout program. Greeks voted to reject terms of the bailout offer.
Looking at the events, it seems that Brussels and Berlin are playing a simple game in the region. They are resorting to the good cop/bad cop tactic, holding their ground vis-a-vis Athens, and making concessions to countries in the region.
More generally, the complexities related to the gas industry - which are both regional and global - cannot do anything but pave the way for the development of the small-scale LNG market in Europe. More uncertainties - including doubts over European positions on shale gas - require more flexibility. In this sense, it comes as no surprise that major companies are investing in LNG, clinching deals and exploring cooperation opportunities in the segment of the gas industry most suitable to mitigate risks and cope with these geopolitical complexities.
UKRAINE, BULGARIA AND BALKANS: MAJOR EUROPEAN FOCUS
Ukraine's Naftogaz suspended purchases of natural gas from Gazprom starting from Wednesday, as the 3-month extension for the so-called “winter package” signed in April expired on Tuesday. The Ukrainian company stated that delivery of Russian gas via Ukraine to Gazprom's clients in the EU and Turkey will continue in accordance with the existing transit contract, adding it is ready to take part in trilateral negotiations 'at any time suitable to all parties.’
A few hours before, the European Commission launched on Tuesday a call for proposals under the Connecting Europe Facility (CEF) to help finance key trans-European energy infrastructure projects already on the list of 'projects of common interest'. According to European institutions, these funds will stimulate additional financing from private and public investors.
European institutions launched a new file on energy connectivity in Western Balkans to increase physical interconnection and react to the cancellation of the South Stream project. According to Johannnes Hahn, Commissioner for European Neighbourhood Policy and Enlargement Negotiations, Brussels can be of great help for “particular sections” of the gas network, supporting the development of cross-border links.
The main winner could be Sofia.
Bulgaria’s Council of Ministers announced on Wednesday the establishment of a new Energy Security Council which will be aimed at coordinating the national policies in the energy sector and determine the priorities of the country within the European Energy Union. Vice PM Tomislav Dontchev will be heading the new entity which will gather key ministries and, when needed, representatives of major employers.
SHALE GAS: WITHERING HOPES IN UK, GERMANY POSTPONES DECISION
On Monday, Lancashire County Council turned down Cuadrilla's application to drill, fracture and flow test up to four wells at Preston New Road. The decision represents a setback for the Government and its hopes to trigger a full-fledged shale gas industry in the United Kingdom.
The British government could need some time before intervening. “The debate on the merits of centralising these planning decisions for fracking has been in the background of the Lancashire applications, although not advocated by the Government. It may be that the debate now gains momentum, although it seems unlikely that the Government will want to take action before it sees the outcome of any appeal” Hamish McArdle, London-based partner in the energy & technology focused international law firm Baker Botts, commented in an emailed note on Monday.
However, according to Andrew Watterson, Lancashire councillors’ decisions to reject planning applications by Cuadrilla at Roseacre Wood (June 25) and Little Plumpton (June 29) is not a game changer.
A few days later, the UK’s Department for Environment, Food and Rural Affairs wrote in an “early draft” released on Wednesday that shale gas will have both positive and negative impacts on different groups within rural communities close to developments. According to the report, vehicle movements to shale sites could have an adverse impact on traffic congestion, noise or air quality depending on existing roads, traffic and air quality.
Finally, Germany delayed a parliamentary vote on a new legislative framework for fracking, as parties in Chancellor Angela Merkel's coalition did not find common ground on final details. The draft law passed by Cabinet in April apparently had paved the way for a vote in the Lower House of Parliament on Friday.
LNG: MAJORS BET ON SMALL-SCALE MARKET IN EUROPE
The European Bank for Reconstruction and Development (EBRD) is taking a more active role in Europe’s gas industry, taking part in a €20 million loan to energy distributor Bulmarket DM to support the development of liquefied natural gas (LNG) to Bulgaria. Half will be targeted to expand Bulmarket DM’s network of LPG terminals, while the rest will allow the company to become the first importer and distributor of LNG in Bulgaria.
Meanwhile, Gazprom and Dutch gas grid operator Gasunie signed a deal to cooperate on the small-scale liquefied natural gas (LNG) market in Europe, the Russian company wrote on Thursday.
Also Norway's Statoil and Lithuania's Lietuvos Energija plan to join forces to develop a small-scale liquefied natural gas (LNG) supply operation. The two companies would mainly compete with Finnish gas utility Gasum.
All in all, despite a slowdown of imports in the United States and Europe, these developments show that the global liquefied natural gas (LNG) market will keep growing. This will come with difficulties. European large-scale LNG projects are likely to meet fierce global competition on the way.
Global opportunities require capital and know-how. Following this simple reasoning, Norwegian-born shipping magnate John Fredriksen and Belgium-based Exmar jointly create Flex LNG, a company with interests in 6 LNG carriers, 5 Floating Storage and Regasification Units, and 2 Floating Liquefaction Units. The intention is to pursue further growth within the LNG value chain, tapping the opportunities stemming from the fast growing LNG market.
CASPIAN, TURKEY: THE NEW FRONTIER
Despite the likely record-high $18.7 billion settlement for the 2010 Gulf of Mexico oil spill, BP continues making investments in the Caspian Sea and China. BP Exploration (Caspian Sea) awarded a 12-month extension of a five-year cranes and lifting contract to Aberdeen-based EnerMech.
Meanwhile, Italy’s Eni finalised a deal with KazMunayGas about subsoil use rights in the Isatay block, which paves the way for joint exploration of the Kazakh Caspian Sea. According to Eni, the Isatay block is estimated to have significant potential oil resources. The block will be operated by a joint operating company established by KMG and Eni on a 50/50 basis.
The region remains the most promising for the gas industry at the moment. Turkey and the European Union can work together to reap the benefit, but cooperation opportunities might easily fade away in the event of a sustained low-trust environment, where a weak engagement strategy and slow decision processes might reduce the scope for the Southern Gas Corridor (SGC). European energy diplomacy is called to embark on a hard mission to mend ties with Ankara, while safeguarding its interests.
The EU should establish a dedicated energy diplomacy task-force with Turkey and each potential supplier in the region (Azerbaijan, Turkmenistan, Iran, Kurdistan Region of Iraq), Simone Tagliapietra and Georg Zachmann of Bruegel wrote. The initiative would allow the EU and Turkey to make use of their complementary diplomatic leverages to overcome barriers to regional gas trade.
NORTH AFRICA: WILL EFFORTS PAY OFF?
Egypt is multiplying efforts in its quest to reduce its dependence on expensive natural gas imports. Cairo is also looking to import natural gas from its Eastern Mediterranean neighbours.
Meanwhile, San Leon Energy announced the signing of a rig contract for the drilling of the El Aaiun-4 well on the Tarfaya conventional licence, onshore Morocco. “We look forward to the near-term drilling of the El Aaiun-4 well, with its structural location updip of gas encountered in an older well, as well as its proximity to the gas market and other nearby similar channel targets for follow-on wells” Oisin Fanning, San Leon Executive Chairman, commented.
NORWAY: COST CUTTINGS AND CONTROVERSIES
Norway’s Ministry of Petroleum and Energy (MPE), called to resolve the dispute about stakes in the giant Johan Sverdrup field, cut the shares of Det Norske Oljeselskap and Petoro. Det Norske, controlled by billionaire Kjell Inge Roekke, was the company that questioned the proposed split in the development plan presented in February.
Norway’s Statoil said on Wednesday it suspended the Saipem’s Scarabeo 5 drilling rig, as a consequence of overcapacity in its rig portfolio. The Norwegian company continues in its attempt to cut costs, adjusting to the current low oil price environment.
INTERVIEWS AND OTHER CONTRIBUTIONS:
Ariel Cohen, Institute for the Analysis of Global Security, about China’s New Silk Road
Szymon Kardaś, Agata Łoskot-Strachota, Centre for Eastern Studies, about Gazprom’s pipeline strategy
Samuele Furfari, Brussels Free University, about Russia and Energy Union
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