Week 37 Overview
The 37th week in the gas industry can be summarised by one single note released by the US Government announcing the meetings of Victoria Nuland, Assistant Secretary for European and Eurasian Affairs, with senior Ukrainian and Cypriot officials.
Nuland went to Kiev on Thursday, and will be in Nicosia on Monday and Tuesday to discuss ‘a range of bilateral and regional issues.’ In the aftermath of ENI’s discovery off Egypt and as a consequence of the quick developments of the Nord Stream II project from Russia to Germany, the Eastern Mediterranean and Ukraine do indeed require an attentive eye. Fractions and divergent interests could further fracture Europe in a moment Eastern Europeans and Germany have a different approach to migration. For instance, over the last hours, Eastern Europeans took to the streets to voice their opposition to the migration quota conceived by large swathes of the political establishment in Brussels. Demonstrators in Warsaw also chanted 'Islam will be the death of Europe’.
Against this backdrop, European Commission Vice-President for the Energy Union Maroš Šefčovič met with Russia’s Minister for Energy Alexander Novak, and the CEO of Gazprom Alexei Miller. The European commission said that ‘the meeting created a solid basis for convening a trilateral meeting with Russia and Ukraine and to finalise a new package in the near future. The Commission will propose a date for the trilateral meeting to … Russia and Ukraine.’ Nonetheless, Šefčovič alone is likely to fail, as the crisis is more encompassing and complex, ranging from migration to geopolitics. Several Commissioners should join forces to find a common ground, a shared position.
UKRAINE, RUSSIA AND EU (GERMANY)
In a matter of days, Italy could overcome Ukraine in terms of gas stored in its facilities. That would be an unprecedented event in recent history. According to GSE data, Germany stored 15,514.32 mcm of gas, Ukraine 14,880.82, and Italy 14,736.93. Kiev really needs more gas in the coming weeks to avoid serious blackouts over the next winter.
As said by Natural Gas Europe in June, Germany might emerge as the winner of the Russian sanctions-spat, and now public opinion and Eastern politicians are putting pressure to avoid Brussels alluring Ukraine with the soft-powers card, while taking one of its main revenues away. From an “European perspective”, Ukraine needs funds and gas.
Ukraine's Naftogaz and some Eastern politicians are converging on the firm belief that a stronger gas alliance between Russia and Germany might be detrimental for Europe's energy security. Similarly, on Thursday, Slovakia’s Robert Fico and Ukraine's Arseniy Yatsenyuk basically said that the plan is a sellout.
Arseniy Yatsenyuk stressed that when the first Nord Stream gas pipeline had been built, "Ukraine was deprived of US $ 1.5 billion of revenue from gas transit”, reads a note released on Friday. He also said that the loss stemming from the expansion of the pipeline would amount to 140 billion cubic meters of gas, for a total of $2 billion in transit fees.
Kiev expects Russia to ship as much as 60 billion cubic meters of gas through its territory over 2015. It would bring about $1.8 billion of transit revenue for Ukraine, Energy Minister Volodymyr Demchyshyn said on Friday as reported by Bloomberg.
According to Judy Dempsey, the asset swap between Gazprom and Wintershall, ‘and other deals signed in Vladivostok on September 3-5 show how German as well as Austrian energy companies are loath to quit Russia.’
Speaking about the exchange of the assets of BASF-Gazprom and the shareholders' agreement on the Nord Stream 2 project signed by Gazprom, Engie, Shell, OMV, E.ON and BASF/Wintershall, Wojciech Jakóbik wrote that Poland should express clear opposition to such transaction and proceed to gather allies to block the Russian-German plan.
Similarly, former Czech Prime Minister Mirek Topolanek said that the shareholders' agreement for Nord Stream 2 is another threat that Europe now has to deal with. According to Eustream’s Topolanek, the deal could potentially scuttle the North-South Gas Corridor project.
Despite convergent declarations, though, “Eastern Europeans” are not that united.
A planned increase in eastbound pipeline capacity to flow natural gas from Slovakia to Ukraine may not happen this year, a source at the Slovak grid operator Eustream has told ICIS.
Meanwhile, Bulgaria voiced the need for regional infrastructure. “Our major priority is the intersystem connectivity with our neighbouring countries – Greece, Turkey, Romania and Serbia,” Bulgarian Minister of Energy Temenuzhka Petkova said.
The EPC Contractor – a consortium led by Italian company Saipem – committed to complete construction of the 5 bcm LNG Terminal in Świnoujście, Poland, and receive the first LNG cargo yet this year. The companies are also conducting a feasibility study for extension of the plant’s capacity by 50% (to 7.5 bcm per year).
Eastern European organisations are equally underlining the importance of regional projects. Central Europe Energy Partner (CEEP) said that a “piece-by-piece” approach is indispensable to the gas Corridor that would connect the Baltic to the Adriatic Sea. They also asked for some support from the European Commission (EC).
As said, European authorities are struggling to come up with a common position. Brussels could do something for Kiev, but it is increasingly clear that Ukraine has to roll up its sleeves.
In April 2015, the Ukrainian parliament passed an overhaul of the gas sector. The law will come into force on 1 October 2015 and involves the break-up of the state-owned company Naftogaz, the current monopolist. Wojciech Konończuk argues that it remains an open question whether the current government will have the necessary political will to continue gas sector reforms.
Meanwhile, Gazprom Export held biddings for 127 lots with the total volume of 3.24 bcm. The gas will be supplied during the Delivery Period Winter 2015/2016 to several delivery points in North-West Europe. This further sheds light on Russia’s strategy, which hinges on its ability to lure Germany.
Logically, Bulgaria is looking at alternatives to increase energy security, seeing in Iran a possible partner, but Teheran seems to prefer Madrid. "Talks between Iran and Spain on this topic will continue," Bijan Namdar Zangeneh, Iran's oil minister, oil ministry's news agency Shana wrote on Monday.
EAST MEDITERRANEAN: ENI, ISRAEL
Italy-headquartered ENI reportedly plans to start digging early next year in the "supergiant" Zohr gas field discovery off of Egypt. According to rumours and Italian reports, digging operations in the natural gas field would start in January 2016.
“The world is experiencing a glut of LNG, so Zohr could end up competing with Cypriot and Israeli gas especially if it is fast tracked. But Israel and Cyprus still have the option to pipe the gas through Turkey to southeast Europe, once the Cyprus problem is resolved” Charles Ellinas, former Chairman of the Cyprus National Hydrocarbons Company, told Natural Gas Europe. ENI’s recent announcement of a giant discovery in Egyptian waters raised concerns that deals to import gas from Israel’s largest offshore fields and Cyprus’ Aphrodite may be off the agenda.
Eni CEO Claudio Descalzi met in the Cypriot capital, Nicosia, with President Nicos Anastasiades cooperation opportunities. Eni said the republic of Cyprus could serve as a strategic energy hub and a possible conduit for future Egyptian natural gas supplies.
Egypt will pay Eni from $4 to $5.88 per mmbtu versus $2.65. The higher return for oil companies means new projects and delayed ones are back on the table. International oil companies probably will remain interested in Egypt because it is one of the few places where returns have increased over the past five years while global energy prices have dropped.
The latest developments indicate that ENI’s discovery offshore Egypt might change the cards on the table, not only in the region, but also among companies. Western firms seem interested in acquiring deep-water technologies, while reducing interests in more traditional businesses.
Meanwhile, the Israeli parliament approved the natural gas framework. However this approval is only symbolic and without any meaningful significance. A second draft resolution that was presented to the chamber, to convey the power of the Economy Minister to bypass the anti-trust regulator, to the government. This resolution was neither debated nor voted, since the government had no majority to pass it in the chamber.
DECOMMISSIONING IN UK, APA 2015 IN NORWAY, AND SHALE IN DENMARK
Concerted action by the UK industry to improve efficiency across the sector is leading to an estimated 22% – over £2 billion – reduction in the cost of operating existing assets by the end of 2016, reads a report by Oil & Gas UK released on Wednesday, adding that production in the first half of the year is about 3% higher than the same period in 2014.The British Association also asked the Government to further cut taxes on oil and gas activities, as problems are looming.
On Wednesday, Wood Mackenzie published a report indicating that 140 fields in the UKCS might cease over the next five years. Decommissioning spend is expected to increase by over 50% by 2019 and 'will overtake development spend in the same year.’
Things are going better in Norway.
Norwegian authorities received applications from 43 companies for awards in predefined areas (APA) 2015 on the Norwegian continental shelf. Despite the 2015 round registered less companies applying for licences with respect to the APA 2014, the Norwegian Petroleum Directorate said it is content with the interest demonstrated by companies.
GE Oil & Gas signed a framework agreement with Statoil Petroleum AS to provide subsea operations services for the company’s operated fields Tordis, Vigdis, Snorre and Troll, located north west off the coast of Stavanger. GE Oil & Gas will run the services from their Dusavik site, providing subsea operations services, including offshore installation and intervention.
Shell appointed a new head of the Human Resources & Corporate department on Friday. On the one hand, the move suggests that Shell wants to reassure investors about its intentions to proceed with the takeover. On the other hand, it is another proof of the fact that, in case of acquisition, Shell and BG will go through a period of intense restructuring. Amid low oil prices, some experts recently started doubting the feasibility of its $70 billion takeover of BG Group. The uncertainties over its projects in the Arctic coupled with some poor exploration results further aggravate its situation.
Wintershall awarded a $175 million rig contract for the Maria Field to Odfjell Drilling. The contract for the Deepsea Stavanger semi-submersible rig has been assigned in alignment with the other Maria license partners, Petoro and Centrica. Under the terms of the contract, the Deepsea Stavanger unit will drill six wells on the Maria Field starting from April 2017.
Expro has been awarded a $25m subsea contract in the Haltenbanken area of the Norwegian Continental Shelf (NCS) by Wintershall Norway. This will strengthen its operations in the North Sea.
Finally, in Denmark, work at the Vendsyssel-1 exploration well in Northern Jutland had been completed Total and Nordsøfonde. The end of exploration was welcomed by local residents, environmental groups, local municipalities and a number of politicians in Parliament. It is difficult to say whether this is the end for shale gas exploration in Denmark. Total and Nordsøfonden are undecided as to whether they will continue shale gas exploration in Northern Jutland.
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