Week 43 Overview
If the weather in Europe remains mild, the climate for the gas industry will turn calm. This equation, which characterised the warm Autumn so far, could soon be over. Forecasts see a really cold winter, bringing about some new ferment in the gas industry.
Indeed, the 43rd week of the year is likely to be the last to witness the Old Continent putting gas into storage. The heating season has started in Ukraine and will start soon follow elsewhere, as weather forecasts see a gradual worsening of the weather across the continent from Thursday onwards.
Despite the looming winter, though, gas prices kept falling last week and there is little room for an increase. This is for two reasons. Firstly, the competition from coal forces European gas prices down in the middle-term. Secondly, joint diplomatic efforts might defuse tensions stemming from the crisis in Ukraine. Europe (to read Germany) really needs to play all its heavy cards to broker a deal between Ukraine and Russia. The meeting in Brussels on Wednesday will be the last one led by Günther Oettinger. Angela Merkel does not want her countryman to register such a blow: a missed deal would be a risky diplomatic failure for Berlin and for Mr. Oettinger's post EU Commissioner prospects.
That is probably why, German authorities have not flexed their muscles to delay Russian acquisitions in Europe. - Berlin gave the green light to LetterOne plan to acquire RWE AG’s Dea unit.
This was possibly the most important event of the last week, along with Turkey abandoning ‘take-or-pay’ clauses and Russian companies clinching deals to promote investments in technology.
RUSSIA: SOFT EUROPEAN APPROACH DESPITE SANCTIONS
At the beginning of the week, Russian companies teamed up to promote investments in technology, with Gazprom Neft and Rusnano Group joining efforts to develop nanotechnologies and nano-materials ‘superior to those currently available for import.’
‘The aim of the agreement is to support the search for innovative Russian technologies directed at improving effectiveness in field development and exploitation, in oil refining, and in reducing environmental impacts,’ reads a note released by Gazprom Neft on Monday evening.
In this sense, Western sanctions on technology are pushing companies to find a way to internally develop similar goods. It is now clear that the sanctions are not really changing the course of the Russian industry.
Another proof came on Wednesday, when Russian tycoon Mikhail Fridman’s LetterOne received the green light from the German government to buy RWE AG’s Dea unit.
Berlin said it does not see any risk for the country, dispelling fears of possible threats to the national energy security.
“We don’t expect any disruptions to energy security,” spokeswoman Tanja Alemany commented.
The decision resemble Norway’s stance. According to the Norwegian Ministry of Petroleum, the restrictive measures concern activities in Russia and are not relevant to activities of Russian companies in other regions.
Despite this soft approach to Moscow, the European Union said on Friday it will keep in place the sanctions against Russia, adding it expects Moscow to respect Ukraine’s national sovereignty and territorial integrity. It also asked the Russian Federation to support the political stabilisation and economic recovery of Kiev in order to lift the sanctions.
‘The European Council recalled previous EU decisions on restrictive measures. It will remain seized with the situation in Ukraine in order to provide further direction as required,’ reads the document reporting the conclusions adopted by the European Council on Thursday and Friday.
Brussels also welcomed progress in the resolution of the crisis in Ukraine, saying it expects the finalisation of ongoing trilateral negotiations.
Finally, on Friday, Germany’s Angela Merkel had a telephone conversation with Russia’s President Vladimir Putin. The parts expressed the ‘hope’ to come to an agreement in Brussels on October 29.
UKRAINE
On the other side of the border, Ukraine is trying to promote a reorganisation of the local gas industry. The mission is not trivial.
“If in 2012 we have covered 80% of the payments, in 2014 we have hardly completed 50%,” Prime Minister of Ukraine Arseniy Yatsenyuk commented on Wednesday.
According to the Government, public subsidies would not be enough to compensate for the current difference in gas rates.
“We are to fund directly from the Budget the difference in the tariffs. Currently the payments are being made through the local budgets,” Yatsenyuk explained, adding that Donetsk and Luhansk are the regions with the largest debt to Naftogaz, UAH 4 billion and UAH 1.2 billion respectively.
Kiev asked local governments to take full responsibility, making payments for the natural gas provided by utility companies.
"Each hryvnia that is paid for gas must get to Naftogaz. Naftogaz has to convert it and purchase new amounts of natural gas," Yatsenyuk concluded.
In case the trilateral negotiations on Wednesday did not lead anywhere, Kiev can only rely on stored gas and on the pipeline from Slovakia.
‘The pipeline, with current capacity of 27mcm/day (nearly 10bcm/year), was officially launched in early September 2014 to supply natural gas to Ukraine from the EU via Slovakia. Naftogaz hopes that the Slovakian operator will support prompt implementation of the proposed solution,’ reads a separate statement.
EAST MED, TURKEY, NORTH AFRICA
The Tamar Partners and Dolphinus Holdings started negotiations to export gas produced in Israel to Egypt through the existing gas pipeline operated by East Mediterranean Gas.
‘The Letter of Intent includes several commercial conditions for the proposed transaction, which will serve as a basis for negotiating the Binding Agreement. Supply under the Binding Agreement will be of 250,000 MMBtu per day for a period of 7 years,’ reads a note released by Delek Group on Monday.
According to the document, the gas supply will be on an interruptible basis, but Tamar Partners committed to a minimum of 5 bcm over a period of 3 years, expecting Dolphinus Holdings to buy a significant share of the minimum quantity.
The negotiations foresee a more market-oriented approach in this area. It comes as no surprise that Ankara said it will abandon the “take or pay” principle for Azerbaijani gas in the next 14 months. The country is also intentioned to scrap similar clauses for gas from Iran in the next two months.
"Turkey will abandon the "take or pay" principle in gas supplies from Azerbaijan in 2015," Minister of Energy and Natural Resources Taner Yildiz said on Tuesday.
Changes in the area could also bring about new energies in Northern Africa.
Italy’s Enel unveiled its plans to expand in the upstream sector, after been awarded two gas exploration blocks in Algeria (Msari Akabli and Tinrhert).
‘Enel has been awarded, alongside oil and gas multinational Dragon Oil, two gas exploration blocks in Algeria in a bid round launched in January by Algeria’s oil licensing body ALNAFT, which is in charge of awarding contracts for the exploration and utilisation of hydrocarbons in the country,’ reads a note released on Thursday.
Algeria is increasingly coming under the spotlight.
“The areas involved have huge exploration potential and are spread across the country,” Ruggero Aricò, Enel’s Director of External Relations in Algeria, commented.
In this backdrop, several countries are trying to intensify business ties with the North African country.
On Thursday, Cyprus said it is trying to profit from Algeria’s experience in the gas sector. Cypriot Foreign Ministry Ioannis Kasoulides met with Algeria’s Youcef Yousfi to discuss cooperation opportunities.
NORWAY
Several oil and gas projects to be developed in Norway in the next two years could be delayed on high costs and technological difficulties, Oil Minister Tord Lien said on Tuesday.
Lien explained that the private sector, not the government, has to find ways to limit the negative consequences of high costs.
Another reason for delays could come from the low oil prices.
‘Near-term uncertainty in exploration spending has been increased by a negative oil price development with the price of Brent dropping close to 25% during the last four months. While it is still too early to conclude how this trend will impact seismic spending, it is likely that energy companies will continue their efforts to reduce capital expenditures and become more selective when prioritizing investments such as seismic programs,’ reads the third quarter results released by Norway-based TGS.
SO WHAT?
Near-term prospects remain bleak. The future depends on the ability of the gas industry to bring prices down, remaining profitable.
As Russian companies demonstrated with their deal for nanotechnologies and nano-materials, crisis often leads to innovation. This is the only cure, a cure the private sector has to find as soon as possible.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci