Week 21 Overview
European newspapers focused their attention on the Russian deal with China. Gazprom called it the “biggest contract in the entire history” of the company, and European newspapers got it right. The 21st week of the year is somehow revolutionary and it is paving the way to significant changes over the next decades. It is giving Russia an edge, while Europe’s strategy – if any – is turning out to be quite weak and inconsistent. It comes as no surprise that analysts see an increased European dependence on Russia.
“With the events in Ukraine, Europe is facing a threat to its peace, stability and security the likes of which we have not seen since the fall of the Iron Curtain,” José Manuel Durão Barroso, President of the European Commission, recently said.
Poland, the Baltic countries and the United Kingdom are the only three regions where some progresses have been registered. In many other areas, the European elections stole the show and energy security has been relegated to the background.
RUSSIA
After failing clinching an agreement on Tuesday, Moscow finally signed 400-billion deal with Beijing to supply the second world economy with gas via the Eastern Route for 30 years, opening a new market for the Kremlin in a moment of tensions with the West over Ukraine.
‘The 30-year contract stipulates that 38 billion cubic meters of Russian gas will be annually supplied to China. The mutually beneficial contract contains such major provisions as the price formula linked to oil prices and the 'take-or-pay' clause,’ reads a note released by Gazprom on Wednesday.
Russian authorities let the dust settle. They did not brag about the new achievement. They confirmed European centrality for their long-term plans, suggesting that Chinese prices will be similar to the European ones.
“I am absolutely certain that these prices will be comparable. But clearly, delivering to Europe is one thing and delivering to a new market is another. To attract a new market and to agree on all terms of collaboration, a variety of means is used to stimulate deliveries, including advance payments, bonuses and so on… I believe that in the long run the price will be fair and totally comparable to the price of European supplies,” Russian Prime Minister Dmitry Medvedev told Bloomberg TV on Tuesday, as reported on the website of the Russian Government.
The focus on Europe has been confirmed also by the agreement signed by Gazprom and Italy’s Eni for a reduction in supply prices. The agreement also involves a change in the price indexation ‘to fully align it with the market.'
That is quite important as Eni holds a 15% stake in South Stream Transport, a joint project company focused on the construction of South Stream's offshore section. Some concessions from Gazprom to strategic partners seem obvious in this moment; they seem instrumental to push the gas pipeline ahead.
At the same time, Moscow is flexing the muscle to prove the West wrong. The Kremlin is trying to minimize the effects of sanctions on Putin’s close allies.
A consortium of institutional Russian investors and ‘foreign investors’ has unveiled its intention to invest over US$700mln to ‘gain complete control’ of a LPG and light oil products transhipment terminal, suggesting that the country could somehow find its way out of Western sanctions.
‘As part of the transaction, the consortium will gain complete control over the terminal, which is not only the largest in the CIS but also the only LPG transhipment terminal in the Russian North-West. It is also one of the most modern port infrastructure facilities on the Baltic Sea,’ reads a note released by Russian Direct Investment Fund, which is one of the investors.
Sibur, which currently owns the terminal, is mainly owned by Gennady Timchenko and Novatek’s shareholder Leonid Mikhelson. The US placed sanctions on Timchenko in March.
The communiqué does not shed light on the amount invested by the different investors, simply mentioning Gazprombank as one of them. Gazprombank is the third Russian bank.
"Investment in Russian infrastructure is a core area of Gazprombank's activity. The LPG and light oil products terminal in Ust-Luga is an attractive investment opportunity due to its fundamental competitive advantages and significant potential for value appreciation in future," Alexey Matveev, Deputy Chairman of the Board of Gazprombank, commented on Thursday.
In this sense, Russian authorities are taking an active role. They are getting closer to the major oil and gas companies of the country. And another example came on Friday, when Rosneft signed an agreement with the Ministry of Emergency Situations for cooperation during exploration activities in the continental shelf of Russia in the Artic.
“The agreement with Ministry of Emergency Situations is an important part of the Company group of actions aimed at environment protection and conservation of biological diversity, also at the Arctic coast,” Rosneft President Igor Sechin said in a note released on Friday.
The agreement is a sign of Russia’s clear interests in the Arctic.
UNITED KINGDOM
The week started with a bad news for shale enthusiasts in the United Kingdom.
Environmental concerns are increasingly concerning British public, which ‘remains skeptical about community payments,’ according to the University of Nottingham poll about public attitudes.
‘The May 2014 survey confirms that the turn against fracking for shale gas in the UK has deepened. The prospect of the contamination of drinking water has been a key issue highlighted by protestors, and the negative rating for shale gas on water contamination, which increased after the Balcombe protests, has been maintained,’ reads the report Public Perception of Shale Gas Extraction in the UK.
Also on Monday, Cuadrilla Resources announced it would submit a planning application to hydraulically fracture at its exploration site at Preston New Road in Lancashire. The company plans to do so by the end of the month.
This intense week ended with two main game changers. British authorities are indeed playing some heavy cards to pave the way to shale gas developments. They published a proposal to simplify deep underground access for shale gas. They also released new estimate for the amount of shale gas and shale oil in south-east England.
‘The new proposals would simplify procedures which are costly time-consuming and disproportionate for new methods of underground drilling. Oil, gas and deep geothermal companies will be able to explore their potential, and will in return provide a voluntary community payment for access,’ reads a note released by the UK’s Department of Energy & Climate Change about underground access.
DECC added that the proposals comprise a £20,000 voluntary community payment per lateral well, a clear notification system to alert local people and underground right of access for shale gas only below 300m.
‘A company looking to develop shale or geothermal will still need to obtain all the necessary permissions. There are controls in place to regulate seismicity, environmental impacts and planning impacts and there are numerous opportunities for local communities to engage ahead of any development.’
Also on Friday, the British Geological Survey (BGS) published an estimate for in the Weald Basin in south-east England.
‘The estimate is in the form of a range to reflect geological uncertainty. The range of shale oil in place is estimated to be between 2.20 and 8.57 billion barrels (bbl) or 293 and 1,143 million tonnes, but the central estimate for the resource is 4.4 billion bbl or 591 million tonnes. No significant gas resource is recognised using the current geological model. This is mainly because the shale is not thought to have reached the geological maturity required to generate gas,’ explains the press release.
BALTIC AREA
While Lithuania is expected to announce its LNG supplier in the near future, Helsinki and Tallinn moved closer to an agreement on gas facilities in the Gulf of Finland, with Estonia’s Alexela and Finland’s Gasum reporting progresses in the negotiations for a LNG terminal.
According to a note released by Gasum on Thursday, the negotiations are expected to come to a conclusion in early June, when the two countries will present their solution to the European Commission for a financial support. The two parties intend to have their project listed among the Projects of Common Interest (PCI).
If implemented, the 15 European Commission’s projects in the BEMIP region would ‘significantly change the picture of the gas markets in the region,’ reads the second Gas Regional Investment Plan (GRIP) of the Baltic Energy Market Interconnection Plan (BEMIP) region released on Monday.
‘For the countries in the region that rely, either fully or to a large extent, on a single supplier this would be a major shift, bringing from one side more choices and opportunities for the gas market players, and from another side requiring adequate changes in legislation and commercial practices of gas companies to accommodate an increased market complexity.’
According to the report prepared by Transmission System Operators (TSO) of Denmark, Estonia, Finland, Latvia, Lithuania, Poland and Sweden, some of the ‘projects of common interest’ would interconnect currently separate sub-regions and provide access to LNG markets.
‘With respect to the role of the gas in energy market, the expected paths differ with- in the region – despite that the total gas demand is expected to increase by 33% in 2023 compared to 2014 when average daily demand will be at the level of 870 GWh. The increase is mainly driven by expected soaring demand in the biggest market of the region – Poland which forecasts decreasing coal-fired power production.’
POLAND
Polish authorities met American representatives to start a series of training session for shale gas exploration and production.
‘The training will take three days and will take place in the Ministry of the Environment in Warsaw. It will concern experiences and good practices related to shale gas exploration and production. Administrative structure, legal framework and concession granting procedures will also be discussed,’ reads a note released by Poland’s Ministry of the Environment.
The meeting with representatives of the Pennsylvania Department of Environmental Protection will be followed by future training session. In these occasions, the American delegation will share additional knowledge on geological and environmental conditions, with an eye on legal regulations and monitoring practices.
‘Training participants will also familiarise themselves with data on the attitudes of local communities in America towards shale gas exploration and production and the communication of public administration bodies with citizens in this regard.’
A few days later, FX Energy completed the flow portion of the dynamic reservoir test on the Tuchola-4K well located in north central Poland, saying that they found additional reasons to further explore the area.
“The Tuchola-4K well performed beautifully, with flowing volume and flowing wellhead pressure remaining essentially flat throughout,” David Pierce, CEO of FX Energy, said in a note released on Friday.
According to the company, the well produced at a steady rate of approximately 15 million cubic feet of gas per day (Mmcf/d) and flared a total of 60 Mmcf over a four-day period.
SO WHAT TO EXPECT?
The European elections will be the number one concern for everybody, for any country. That is why next weeks are going to be dominated by Russian efforts to gaining the upper hand amid relatively low coverage. The only major European news could be coming from the UK and some more excitement could stem from licencing rounds across the continent.
Other then the British onshore licencing round expected by mid-July, offshore blocks in the Adriatic Sea could deserve some attention.
At the same time, the Leviathan will probably be the main supporting actor of the coming weeks. It will not be Brussels' focus, but it is likely to remain in the spotlight. The interests are clearly there, but the recent pull-out of Australia’s Woodside from Israeli water will probably push national authorities to adjust their strategy to attract investors.
A similar trend is likely to happen also in the rest of Europe - some more effort from national governments to push forward indigenous exploration and production projects. But, again, much depends on the result of the European elections. In this sense, the gas industry perfectly depicts the Old Continent: good potentials covered with uncertainties and conflicting interests.
Sergio Matalucci