Week 31 Overview
The 31st week witnessed two significant events: majors reported bad results for their second quarter and Wintershall signed a Memorandum of Intent with Gazprom for the expansion of the Nord Stream natural gas pipeline.
Repsol and Novatek were the two companies registering some positive developments, while Saipem was the one coming up with really scary news: accusations from Brazil, a plunge in new contracts and the intention to significantly cut workforce were announced over the last days. As said, other energy companies performed bad too.
Meanwhile, the Russian strategy stumbled, as it is emerging clear that divergences between Ankara and Moscow will require additional effort from the two sides in order to proceed with the Turkish Stream. This came in a moment Wintershall voiced its intention to further increase its ties with Gazprom.
POOR RESULTS
Despite increasing production, BG Group reported a y-o-y 39% decrease in the Upstream EBITDA and an even worse result for its LNG Shipping & Marketing business. However, the British-headquartered company registered a 19% increase in production to 703 kboed, moving full year guidance to the upper half of 650 - 690 kboed range. On the other hand, earnings per share for the first 6 months of the year fell 58% from $2,361 million to $994 million. Capital investment decreased too.
Statoil and BP continue suffering current market conditions, but both managed to decrease net debt in the second quarter. In their second quarter results, the two majors reported lower profits and revenues with respect to the second quarter of 2014. In particular, BP bore the brunt of geopolitical complexities.
Following Statoil, BP and Total, also Shell and Eni communicated serious difficulties in the first half of the year, while Repsol’s results confirmed how central the downstream businesses can be for oil companies in moments of distress. Anglo-Dutch Shell published a note with its unaudited results, reporting that cash flow from operating activities fell from $ 22,625 million to $ 13,156 million. The upstream reported a drastic fall from $ 10,432 million to $ 1,712 million (-83%), while the downstream jumped from $ 2,922 million to $ 5,607 million. Similarly, Italy’s ENI suffered despite an increase in production.
ENI and its subsidiary Saipem suffered the entire week, with share prices losing ground. Saipem, in particular, made the headlines. Italian authorities cleared US investment firm BlackRock of any wrongdoing over its sale of a 2% stake in Saipem in 2013.
Italy’s Saipem took another blow on Wednesday. Its stocks suffered a decline around 5% after the results reported total write-downs of €929 million of net current and capital assets, and a plan to reposition the company towards higher value core business segments. The real problem has to do with the new contracts that plunged from €13,132 million in the first half of 2014 to €3,500 million.
Logically, in its second quarter results, the already stressed Italian energy firm Saipem announced that it will likely cut its workforce by about 8,800 over the next two years.
Moreover, on Wednesday, Brazilian authorities accused Saipem of being involved in a corruption scheme involving Brazil’s state-run oil company Petróleo Brasileiro.
On the other hand, there are some companies doing ok. Russia’s Novatek reported a 27% increase in oil and gas sales and a simultaneous 43% operating expenses jump in the second quarter of 2015 with respect to the same period in 2014. Profit from operations registered a slight decrease, but normalised profit attributable to Novatek shareholders increased over good results of its joint ventures.
THE RUSSIAN SAGA: TURKEY AND GERMANY
Gazprom confirmed its interest to invest in new pipelines. Meanwhile, Russia’s Economy Ministry contradicted previous declarations, saying that it expected Gazprom’s gas production to go down to 414 billion cubic metres (bcm) per year. In other words, officials suggested that the Russian gas giant will decrease gas production to an all-time low.
In its attempt to replace Ukrainian gas transit, Gazprom’s situation is not easy. It may be improved only by European energy companies, which may make Nord Stream II real. But European Commission could have a say. According to Wojciech Jakóbik, Brussels could stand against the project, as it ‘supports only those projects which may provide alternative sources and not a supply route.’
Despite the skepticism, Wintershall, a unit of chemicals group BASF, signed a Memorandum of Intent with Gazprom for the expansion of the Nord Stream natural gas pipeline. The agreement announced on Friday in Berlin, sees the German company join in the addition of Lines 3 and 4 will enable the pipeline to deliver up to 55 billion cubic meters of Russian gas annually to Germany via the Baltic Sea.
Moscow knows that, at least for the coming winter, it needs to play some other cards. It comes as little surprise that Russia’s Gazprom Export said on Friday it would hold auctions in September for winter gas supplies to northwest Europe. Gazprom said that it is a way to test a new mechanism of gas sales to Europe, while confirming its resolve to keep long-term contracts in place.
Against this backdrop, negotiations between Turkey and Russia on the Turkish Stream project have been suspended as the two parties did not apparently agree on the 10.25% gas price discount. The deal reported by Turkish Energy Minister Taner Yıldız in February was not signed by Russian authorities.
A personal meeting between the two countries’ leaders may now be needed to kick-start the stalled process, wrote Sputnik.
OTHER GEOPOLITICAL COMPLEXITIES: TURKEY, NORTH AFRICA AND ISRAEL
A natural gas pipeline connecting Turkey and Iran has been halted after an attack in Turkey’s Agri province for which the local government blamed the Kurdistan Workers' Party (PKK). Turkish news agency Anadolu wrote that the blaze at the pipeline was shortly extinguished and that natural gas will flow again after repairs.
Explosions, which damaged pipelines in Turkey twice in two days, could undermine its role as a transit country for oil and gas but will not affect the future of the EU-backed Southern Gas Corridor, an ex-CEO of Turkey’s Botas told New Europe on July 31.
Despite security issues and geopolitical uncertainties, companies confirmed their interest in North Africa, both in Tunisia and Egypt. PA Resources submitted an updated Zarat Field Plan of Development to the Tunisian authorities, proposing a two-phase development, with the first oil expected in 2020 and the second phase meant to double the capacity of the production facilities. At the same time, Norway-based Subsea 7 informed it was awarded a contract by BP, and partner DEA for the development of the Taurus and Libra subsea fields offshore Alexandria, Egypt. The contract has a value of approximately USD 500 million.
Canada-based Serinus Energy resumed production at the Sabria Field in Tunisia, after more than a month-long break due to local protests. According to Serinus Energy, the ‘orderly’ protests, which were not directed at the company, led several key players to discuss measures to develop the area around the field known as Governate of Kebeli.
This focus on Tunisia is coherent with the European focus. The EU adopted the first part of its annual assistance package in favour of the North African country for a total amount of €116.8 million. Brussels aims to strengthen the security sector and to support socio-economic and regional development.
Meanwhile, Israel’s Prime minister Benjamin Netanyahu visited Cyprus on Tuesday where he met with President Nicos Anastasiades. Israel and Cyprus agreed on strengthening energy ties and merging infrastructures to reach the European markets. Netanyahu and Anastasiades discussed the use of pipelines and energy grids to link to Europe as both countries develop their export strategy.
TECHNOLOGY AND UK: FRACKING REMAINS UNLIKELY, CONVENTIONAL GOES ON
The UK government's plans to roll out fracking across Britain face delays of up to two years following a surprise decision to reject exploration for shale gas in Lancashire, wrote the Independent.
The British announced 41 new licences and providing fresh information about the Electricity Market Reform. Oil majors ENI and Shell were awarded a total of four licences and 43 blocks. Italy’s ENI was awarded three licences covering 23 blocks, while Anglo-Dutch Shell received one licence to explore 10 blocks.
Statoil and Total remain committed to the region. While Statoil is eying an increase in oil production from the Gullfaks South, Total is moving closer to divesting from the West of Shetland area. The two projects, which are relatively close, indicate how companies in the North Sea are trying to monetise assets, while increasing production.
Finally, ABTOG Ltd, the joint venture between Enegi Oil Plc and ABTechnology Ltd, signed a collaboration agreement with global engineering and design consultancy Arup. The Consortium will have a focus on the North Sea.
VIEWPOINTS AND INTERVIEWS:
Speech by Rob Franklin, President, Gas & Power, ExxonMobil
Speech by Laurent Vivier, Senior Vice President, Strategy, Markets and LNG, TOTAL
Policy paper by Nikos Tsafos on Egypt
Anca Elena Mihalache on the Azerbaijan-Georgia-Romania Interconnector
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