Week 32 Overview
Over the last days, Russia’s natural gas giant Gazprom reported its worst ever half-year financial results. The news comes at a moment when geopolitical tension and violence in the MENA region continue making the headlines. Brussels is trying to react, but its decisions are probably coming not as fast as required. Europe should put its vision into practice as soon as possible. The EU Energy Diplomacy Action Plan seeks to initiate new synergies with EU partners and facilitate the diversification of energy connections and providers. The Council Conclusions on EU Energy Diplomacy point out that "diplomatic support should focus on the Southern Gas Corridor and the strategic potential of the Eastern-Mediterranean region”.
Brussels should engage in this mission as soon as possible to avoid the catastrophic consequences of the latest developments. The European Commission approved humanitarian funds for €6 million to be used to meet ‘the most urgent needs of the people who have been severely affected by the conflict in Libya’. Moves like this are highly welcomed, but they should probably come earlier.
RUSSIA: GAZPROM, GAZPROM, GAZPROM, BUT ALSO LUKOIL AND ROSNEFT
Contrary to what the proponents of liberalism would expect, closer ties in energy trade have not eased economic and political frictions between the EU and Russia. Instead, energy dependence between the two actors has increased mistrust and conflicts between them. Now, energy security relations have become an issue of national security for both sides.
Meanwhile, according to Bloomberg, one of Gazprom PJSC’s largest offshore oil and gas fields - potentially a supply source for the expansion of Russia’s only liquefied natural gas plant - has been added to a U.S. sanctions list.
In this sense, Gazprom is going through problems. At its peak in May 2008, the company’s market capitalisation reached $367.27 billion, making it one of world’s most valuable companies. A little over four years ago, in April 2011, the figure stood at $194.5 billion. As of August 3, it had a market capitalisation of $51.12 billion. No company among the planet’s Top 5,000 has suffered a bigger collapse in market capitalisation, according to Bloomberg Business News. Financial issues, production slowdown and export complexities aggravate the situation of the Russian company.
Moscow’s reactions are likely to come soon. The Russian Energy Ministry sent to Ankara two versions of an intergovernmental agreement on the Turkish Stream gas pipeline, proposing to construct either one or all four planned strings, a source in the ministry told RIA Novosti on Friday.
Moreover, Russian gas sales to Europe jumped to an all-time high in July, gas export monopoly Gazprom said on Monday, as European customers capitalised on a steep fall in prices.
Against this backdrop, it comes as little surprise that the number of companies possibly joining the Nord Stream II project has increased; France’s ENGIE is reportedly in talks with Russia’s Gazprom. According to several reports, the pipeline connecting Russia to Germany under the Baltic Sea could have a strong private backing despite the possible opposition of the European Commission.
Moscow knows that it has to engage with Brussels too. The Deputy Chairman of Gazprom Alexander Medvedev recently met with the EU Competition Commissioner Margrethe Vestager for the first time to discuss the antitrust case launched against the company. Following this meeting Medvedev made it clear that he hoped that the case could be ‘amicably settled’. The latest developments do indeed provide compelling incentives for Gazprom to file draft Commitments to the Commission to provide a basis for a deal.
Despite the focus on Gazprom, the Russian giant is not the only protagonist of the last days.
Despite the recent tightening of the American sanctions against Russia, Norway’s Statoil is also looking for ways to strengthen ties with Rosneft, following in the footsteps of ExxonMobil and Royal Dutch Shell. Statoil confirmed this intention on Tuesday.
It became clear early this week that Russia’s Lukoil is about to receive a $500m grant from the European Bank for Reconstruction and Development (EBRD) for the development of Azerbaijan’s offshore Shah Deniz project. The EBRD and ADB were appointed by Lukoil as the mandated lead arrangers for the transaction, the European bank wrote on its website.
A few days later, LUKoil signed a deal for a syndicated loan worth $1 billion with the Asian Development Bank (ADB) and the European Bank for Reconstruction and Development (EBRD), with the participation of the Black Sea Trade and Development Bank (BSTDB). The financing package is being arranged for the landmark offshore natural gas field project in Azerbaijan, Shah Deniz Stage.
RUSSIA AND THE DOMINO EFFECT: WHAT’S NEXT FOR UKRAINE AND TURKEY?
“Gazprom’s worsening situation is triggering calls for change,” Vidmantas Jankauskas, a Lithuanian gas expert said. Ukrainian players voiced their intentions to transit gas from the Baltic States through the territory of Belarus to Ukraine. “We are talking about the liquefied natural gas terminal in the Lithuanian seaport of Klaipeda” Michael Bno-Ayriyan, the Head of the European Integration Department at the Ukrainian Ministry of Energy and Coal Mining (MECI), recently explained.
Turkey expect no further delays in the 10.25% gas price discount agreement with Russia, Turkish Energy Minister Taner Yildiz said in a press conference in Ankara on Monday. Turkey and Russia agreed on gas price discount but both countries did not signed any agreement.
TURKEY AND THE SECURITY DILEMMA...
Iran resumed natural gas exports to Turkey on Sunday after the reparation of the pipeline connecting the two countries. Last week, the pipeline was attacked in Turkey's eastern province of Ağrı. The local government blamed the Kurdistan Workers' Party (PKK) for the attack. After Russia (27 bcm) a year, Iran is the second biggest natural gas supplier to Turkey (10-20 bcm).
A few hours after Iran resumed natural gas exports to Turkey, another attack hit a pipeline in its territory. Once more, Turkish officials blame that members of the Kurdistan Workers’ Party (PKK) for the early-Tuesday assault on the pipeline in Posof province near to the border with Georgia. According to Reuters, flow from Azerbaijan was not affected as supply was already suspended for planned works.
BP, operator of Azerbaijan's offshore Shah Deniz gas field, announced the unexpected event, adding that the production from the Shah Deniz platform was suspended on August 2nd and will last approximately 20 days.
All in all, something is clear: the security and political climate in the country gradually deteriorates, thus shifting the priorities of the Turkey’s government. If the North Stream 2 goes ahead, Turk Stream would become irrelevant since the bulk of Russian gas delivered to major EU markets would be shifted to Germany and not to Turkey.
Similarly, Egypt is in the doldrums too. Ardiseis Egypt, a subsidiary of French firm CGG, reported on Wednesday that one of its staff had been kidnapped on July 22 while traveling to Cairo. A few hours later, on Thursday, Egypt has unveiled a major expansion of the Suez Canal. The two news show how the central government in Cairo is trying to increase cooperation with the oil and gas industry, but equally proves that instability in the region could be on the rise.
… AZERBAIJAN, AND IRAN
The region is important for other players too. Japan is accelerating talks with Azerbaijan and Central Asian countries to increase its stake in local energy projects. Delegations from Azerbaijan and Turkmenistan visited Japan last week, while Tokyo and Tashkent announced on July 15th they are keen to boost economic ties.
Baku is actively negotiating with the EU too. Talks on the sale of DESFA, Greece's natural gas grid operator, to Azeri state-owned SOCAR, will re-start in August. The newly appointed Greek Minister for Production Reconstruction, Environment and Energy Panos Skourletis announced that he will soon meet with SOCAR officials to discuss the deal.
Finally, Iran will introduce its new oil and gas contracts during a conference to take place in London in December, Minister of Petroleum Bijan Zangeneh said. Under the new contracts, Iran will cede exploration, development and production operations on an oilfield exclusively to a foreign contractor. In exchange, foreign companies will have to transfer technology.
SHALE GAS, OFFSHORE PRODUCTION AND NEW FRONTIERS: UK, POLAND AND GERMANY IN THE BROADER PICTURE OF CLIMATE CHANGE AND OTHER REGIONAL ISSUES
Environmental organisations are likely to ride the wave of recent news depicting a gloomy scenario for the Arctic ice sheet. According to National Geographic’s updated ‘Atlas of the World’, the ice significantly melted over the last 15 years.
British public support for shale gas further fell to its lowest ever level, indicating that the United Kingdom could provisionally forget a shale rush and focus on offshore operations. According to the DECC Public Attitudes survey, public opinion gradually shifted from 'relative support' to 'relative opposition' over the last 19 months.
Oil & Gas UK launched on Thursday a new category for the sector’s ninth annual awards evening, indicating that the British industry is trying to join forces to cope with the current low price environment and trigger an increase in exploration in UK waters.
Poland is not moving in a similarly coordinated fashion. US-based FX Energy has commenced a process to explore a possible sale of the Company, also mulling other options to divest assets. The Poland-focused company holds assets in the Permian Basin. The local gas-bearing Rotliegend sandstone is a direct analog to the Southern Gas Basin offshore England.
Meanwhile, Polish Oil and Gas Company (PGNiG) signed an agreement with Central European Petroleum GmbH (CEP) for joint activities on the Lubben concession in eastern Germany. Poland’s PGNiG SA will acquire a 36% interest.
OTHER NEWS
UK-headquartered Sound Oil announced the signature of a gas sales agreement for the Casa Tonetto production concession, which includes the Nervesa gas field, with Shell Energy Italia, the local arm of Shell Energy Europe. The Mediterranean focused upstream gas company said that, in this way, it will 'manage its risk/reward balance'.
Apart from strictly European affairs, other news are likely to affect EU energy markets too. Since oil and gas prices are linked the collapse in oil prices led to an even sharper decline in LNG prices. LNG spot prices in Asia have recently fallen below $7/mmbtu, a level nearly one third of last year’s peak. This decreases the attractiveness of American gas exports to Asia. While at the well head U.S. gas price – below $3/mmbtu – is among the cheapest in the world, when slapped with liquefaction and tolling costs the price could reach $9/mmbtu, no longer competitive in many markets including Asia.
Halliburton’s acquisition of Baker Hughes could be delayed further by antitrust authorities’ request to provide additional information. The European Commission, which had previously set a August-27 deadline for its decision on the deal, will come up with a new schedule after receiving requested data, while the two companies continue working with American authorities.
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