Week 30 Overview
Energy and security issues grew more connected over the 30th week, with Iran and Northern Africa making the headlines both for their gas potentials and their role in reshaping diplomatic equilibria. Meanwhile, Turkey’s air force attacked Islamic State (IS) positions in Syria and Kurdish PKK militants in northern Iraq. At the same time, Tunisia is reportedly planning to restore diplomatic ties with Syria, possibly opening a consulate in Damascus. Finally, Italy reported that two ISIS sympathisers were arrested after they threatened to attack an US military base near Brescia, Italy.
Nonetheless, these uncertainties are unlikely to translate into higher gas prices in the short term, as key actors like ENI - which is a key element of Italian foreign affairs strategy - sounded optimistic about their prospects in the region, especially in Egypt. Also Iran is in a good position to meet the growing gas needs of the European Union. As a consequence, as far as there won’t be major geopolitical shocks, gas prices in Europe are likely to go down. ‘Natural gas prices are expected to decline across all three main markets—U.S., Europe, and Asia’ the World Bank wrote in its Quarterly Report released this week. Against this backdrop, it comes as no surprise that Japan’s average price for imported LNG fell to the lowest since September 2009 in June.
EUROPEAN ENERGY, EUROPEAN DIPLOMACY
European authorities acknowledged the importance of diplomacy for the realisation of its Energy Union project, reporting on Monday that the Council of the European Union is in favour of seeing a growing role of the High Representative Federica Mogherini. The focus of the new document is mainly on general ideas, with little reference to specific countries. While not mentioning Libya or Egypt, the document briefly discussed the next moves with its Eastern partners.
This comes in a central moment, as Energy Union’s strategic deficiencies are increasingly emerging. Diverging interests and geopolitical considerations indicate that countries are not willing to compromise on their industrial and diplomatic interests. Germany, Greece and Romania are three examples.
In this context, the private sector is likely to play a key role.
Italy’s ENI wrote on Monday it made a gas discovery in the Abu Madi West license in the Nile Delta, Egypt. It said that the preliminary estimates of the discovery indicate a potential of 15 billion cubic meters of gas in place with upside, plus associated condensates.
A few days later, the Egyptian Minister of Petroleum Sherif Ismail and Eni’s CEO Claudio Descalzi, in the presence of the Prime Minister of Egypt and the Italian Prime Minister, signed an update to the Head of Agreement agreed last March. ‘The investment will lead to the realization of projects to be implemented in the next 4 years and directed to the development of 200 million barrels of oil and 1.3 TCF of gas. These investments will also contribute effectively to the increasing energy needs of local demand’ Eni wrote on Friday.
But European spotlights remain on Iran, and Russia.
During the Iran-EU Conference, signs of strong cooperation emerged, with Iranian leaders making the case for European investments in the country. According to officials, Iran has completed negotiations with some European companies approving more than $2 billion in projects. Additionally, Iranian LNG could possibly reach Europe in 5-10 years.
Finally, Russian gas monopoly OAO Gazprom still aims for an amicable settlement of the European Union’s antitrust case against the company. This is the messaged delivered by Deputy Chairman Alexander Medvedev on Thursday following a meeting with the EU’s competition commissioner.
UKRAINE - SLOVAKIA - POLAND: KIEV KEEPS SUFFERING
Ukrainian energy companies, which are trying to increase efficiency and decrease corruption, are likely to stumble upon fresh problems.
On Wednesday, shareholders of Ukrnafta, Ukraine's largest oil producer, held a general shareholders meeting in the company's headquarters in Kyiv. The performance of the company's Management in 2014 was recognized as unsatisfactory; the shareholders decided to remove Peter Vanhecke from his office as the company's Chairman of the Management Board before time, giving the helm of the company to Mark Rollins.
The companies owned by billionaire Ihor Kolomoisky initiated proceedings against Ukraine over gas supplies at the Arbitration Institute of the Stockholm Chamber of Commerce seeking payment on debt worth about $5 billion, RIA Novosti reported on Wednesday.
It seems clear that Ukraine keeps suffering and pins its hope on Europe. Kiev increased its requests for reverse flow gas from Slovakia by 34.6% - to 23.833 mcm - from the 1st of July. Reports said that Uktransgaz would import 24 million cubic metres (mcm) of Slovakian gas on Tuesday, up from 17 mcm in previous days.
Meanwhile, Slovakia's gas transmission company Eustream transported 46.5 billion cubic metres of natural gas last year, a drop from 58.5 billion transported in 2013. This means that its capacity was used at about one half of its capacity.
Poland could be a positive addition to Ukraine’s energy security too, but the situation is difficult to read. San Leon Energy announced a reduction in its licences in Poland, in line with its new long-term strategy to reduce the exploration component of its portfolio and focus on appraisal, development and production. The blocks have been taken on by Polish PKN Orlen, who have assumed past and future benefits and liabilities.
LNG AND AZERBAIJAN: SECURE SOURCE OF ENERGY SECURITY
The latest industry developments proved that Engie’s new gas strategy relies on LNG projects - in collaboration with Russian, American and Japanese players - and a renewed focus on services. On Wednesday, the France-based company (formerly GDF Suez) completed the purchase of IMA Chile.
Logically, companies focused on FLNG report some achievements. For instance, Golar LNG executed agreements for conversion of the 126,000 m3 LNG carrier Gandria to a Golar floating liquefaction facility (FLNG branded GoFLNG), giving the green light to the third conversion project. The third FLNG will be the result of a cooperation with Singapore's Keppel Shipyard and Black & Veatch.
If LNG potentials remain good, the prospects of Azeri gas remain positive too. Azerbaijan’s gas export increased by almost 7 percent in the first half of 2015, despite the country having stopped gas deliveries to Russia during the current year. In total, Azerbaijan has planned to increase gas production level from 29.7 bcm in 2014 to 30.2 bcm in 2015.
Meanwhile, TAP selected Technip for a Project Management Consultancy (PMC) Services contract for the onshore section of the pipeline designed to transport gas from the Shah Deniz field to the European market. The services will be mainly performed at TAP’s headquarters in Baar, Switzerland, and Technip’s office in Rome, Italy.
NORWAY - UK: EUROPEAN PRODUCERS MAKING THE HEADLINES
Operator Statoil and its PL146/PL333 partner Total E&P Norge announced on Thursday they have made a gas and condensate discovery in the Julius prospect in the King Lear area in Norway’s North Sea. They confirmed that the King Lear volumes will stay within the previously communicated range of 70-200 million barrels of recoverable oil equivalent.
On the other hand, Edison Norge AS failed to discover any exploitable gas reserves after drilling seven kilometres southwest of the Valhall field and about five kilometres west of the Hod field in Norway’s North Sea. ‘This is the first exploration well in production licence 616. The licence was awarded in APA 2011’ reads the note released by Edison on Wednesday.
The UK is trying its cards too.
The British Government published some updates about the offshore environmental legislation for oil and gas activities, in another effort to support the hydrocarbon industry. The update, which includes only technical aspects, reflects the attention paid in the UK for domestic production.
A few hours later, Oil & Gas UK released updated guidelines for the abandonment of wells together with accompanying guidance on generating cost estimates to support this activity. The purpose of the publications is to lower costs and make UK operations more efficient.
ARE EAST MED, ESTONIA POSSIBLE ALTERNATIVES?
European energy strategy could also hinge on East Med gas, and oil shale production, too.
Prime Minister Benjamin Netanyahu is working on upping the export quota to allow additional exports from Israel’s 10 trillion cubic feet Tamar field to Egypt’s liquefied natural gas plant. Exporting to Egypt’s export terminal would allow Israeli gas to reach the European market.
The owners of the Tanin and Karish fields, two natural gas fields located off the Israeli coast and estimated at a combined 3 trillion cubic feet of gas (Tcf) are set to proceed with the sale of the two gas fields as part of a plan proposed by the Israeli government. The sale of Tanin and Karish is part of an effort to break a cartel.
Meanwhile, Estonia set to ramp up oil shale production after the country’s parliament has passed legislative amendments allowing to retroactively tap unused oil shale production quotas from the past seven years. The Eesti Energia strategy calls for the share of oil shale used by the oil industry to increase in the future and the share of electricity produced by direct burning of oil shale to be cut. Meanwhile, the significant drop in oil prices has had a big impact on companies’ performance. Alexela Group’s biggest challenge in 2015 being to maintain the profitability of the company.
In general the energy sector is paying the price of the current market conditions. This is a global phenomenon. Halliburton reported weak results for the trimester. Q2 revenues dropped from $8,051 million in 2014 to $5,919 million, with total operating income plunging by 78%. Similarly, Shell could soon revise its plan and decrease its capital expenditures.
SPEECHES AND INTERVIEWS:
Dimitri Schildmeijer, Partner in WPNT Communications Europe, on public acceptance
John V. Mitchell - an associate research fellow at Chatham House - on oil and gas mismatches
Joseph Paritzky, Former Minister of Energy & National Infrastructure, on Israel and the region
Mehmet Öğütçü, chairman at Global Resources Partnership, on Turkish needs and ties with the EU
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