Week 26 Overview
While foreign workers return to Algeria’s In Amenas gas plant after the hostage crisis in January 2013, the European Union finally signed a free-trade agreement with Ukraine, Georgia, and the Republic of Moldova. In this backdrop, analysts continued looking for a solution to the big jigsaw of the European gas industry: what will happen to the South Stream project and to the European ties with Russia?
Some analysts also tried to explore the reasons of Royal Dutch Shell’s diminished interest for Ukraine’s shale formations and the Norwegian attempts to increase its clout in Europe. As usual in the European gas industry, all these facts are somehow connected.
EUROPEAN UNION SIGNS AGREEMENT WITH UKRAINE, KIEV RECKONS RISKS
European leaders signed the Association Agreements with Ukraine, Georgia and Moldova on Friday.
‘When the reforms following from the Association Agreements are completed, it is expected that Georgia will see 4.3% growth per year (€292 million in national income), Moldova’s GDP will be boosted by 5.4% annually, and Ukraine’s income will increase by €1.2 billion per year,’ reads a note released by the British government.
Despite a clear commitment to honour the agreement, Kiev is perfectly aware of the underlying risks.
“We pursue this path not due to certain risks but because we can receive more than lose. Entering a highly competitive European market (and there is certain risk here) we are forced to improve quality of our goods and services, innovation, marketing. If you have an ability to win on the European market, you can practically win everywhere,” the Minister of Economic Development and Trade of Ukraine Pavlo Sheremeta commented.
Russia is indeed ready to fight back. Deputy Foreign Minister Grigory Karasin said the signing would have “grave consequences” for Ukraine, while Kremlin spokesperson Dmitry Peskov said that his country will take measures to protect its economy.
Moscow’s decisions could indeed have hefty consequences on the country, as it is Ukraine’s main trading partner by far. Russian goods represent 34% of total Ukrainian imports; Moscow buys 27% of total Ukrainian exports. As such, consequences are just around the corner. What remains to be seen is how extensive these backlashes will be.
SOUTH STREAM
Much depends also on the negotiations between Russia and Brussels.
European Commissioner for Energy Günther H. Oettinger reiterated his conviction that the South Stream project should be mothballed and that Europe should rather intensify cooperation with the United States, Canada and Japan, while also promoting a more integrated energy market.
“New infrastructure investments promoted by dominant suppliers must adhere to all internal market and competition rules. This is why we said that the South stream project should be suspended until full compliance with EU legislation is ensured and re-evaluated in light of the EU's energy security priorities,” Oettinger said in Brussels on Wednesday.
Oettinger said that Europe has to include Ukraine, Moldova and the Western Balkans in its energy security strategy, supporting reverse flows. At the same time, Europe looks at Norway and to Southern Europe to increase energy security.
“In the coming years, LNG will be an important flexibility element and we need to better use our existing and future regasification capacities. We will also need a reinforced partnership with Norway, the acceleration of the Southern Gas Corridor and the promotion of a new gas hub in Southern Europe.”
But Oettinger’s message does not dispel all the doubts. On the other side of the spectrum, Wien did prove its firm intention to support the Russian pipeline. On Tuesday, Austria’s OMV formally joined the project, signing an agreement with Gazprom.
The deal includes the final investment decision based on approved criteria for the pipeline construction in Austria. The parties expect all the construction permits to be obtained by late 2015. South Stream in Austria is scheduled for commissioning in late 2016.
“Europe needs Russian gas and it will need more Russian gas as its own supply dwindles,” OMV CEO Gerhard Roiss commented.
Also President Vladimir Putin remarked the cooperation between the countries.
“As you may know, today Gazprom and OMV signed the Shareholders’ Agreement of the joint Russian-Austrian company, which is a very important practical step towards the implementation of the South Stream project,” he said as written on the Kremlin’s website.
But uncertainties remain. Would South Stream go on in case European Union approved the sanctions it threatened to impose on Russian companies? Would that EU’s decision have a domino effect, with consequences on Ukraine as well?
Despite these question marks, Western companies continue to cooperate with Russian firms. They are not scaling back their significant interests in Russia. Not at all.
Spain-headquartered Repsol made two discoveries in the Russia’s Karabashsky blocks, in the West-Siberian Ouriyinskoye field, branding them as ‘Russia’s largest hydrocarbons discovery in the last two years.’
‘The recoverable resources from the Gabi-1 and Gabi-3 wells are estimated by the Ministry of Natural Resources and Environment of the Russian Federation at 240 million barrels of oil equivalent, a considerable addition to the resources Repsol currently holds in Russia,’ reads a note released on Monday evening.
RUSSIA SEES NORMALISATION IN UKRAINE
A factor in favour of the normalisation of Ukraine could come from the mounting pressure of Western countries on Russia, after US Secretary of State John Kerry’s strongly called on the Kremlin to disarm separatists in Eastern Ukraine.
"We are in full agreement that it is critical for Russia to show in the next hours, literally, that they're moving to help disarm the separatists, to encourage them to disarm, to call on them to lay down their weapons and to begin to become part of a legitimate process," Kerry said on Thursday.
In the meantime, Putin also spoke with German Chancellor Angela Merkel.
‘The two leaders continued their exchange on the issue of international assistance in the resolution of the acute crisis in Ukraine. In particular, they discussed control over the compliance by the conflicting parties with the ceasefire terms and conditions, and the need to extend the truce, to organise a regular contact group and to release the individuals held by force,’ the Kremlin wrote on Thursday.
It comes as little surprise that things are moving slowly and precaution is the principle leading the talks. Poroshenko announced that Ukraine extended its ceasefire, refraining from opening fire on separatists in Eastern Ukraine until 10pm on Monday. The ceasefire was supposed to end on Friday.
UKRAINE? LOST OPPORTUNITY?
According to a recent article by Igor Alexeev, Shell decided to halt its shale oil projects in the taut Ukrainian regions because of a revised assessment of the potentials of the area. Will this have consequences on shale gas exploration as well? Probably not, but the enthusiasm for Ukraine’s shales seems on the wane.
SCANDINAVIA TO LEAD THE WAY
Conversely, prospects of Norway’s oil and gas companies significantly improved in the last days. Last week did indeed witness the final steps of the negotiations between local Unions.
The Norwegian Union of Energy Workers (Safe) agreed on a solution on Thursday, implying that the strike in ExxonMobil has been called off.
“We are pleased that the Norwegian Union of Energy Workers (Safe) has chosen to accept the National Mediator’s proposed solution for the offshore agreements,” Jan Hodneland, chief negotiator at Norwegian Oil and Gas, commented in a note released in the evening.
Along the way, on Monday, Stockholm-headquartered Lundin Petroleum confirmed its interest for the Luno II discovery.
‘Lundin Petroleum AB (Lundin Petroleum), through its wholly owned subsidiary Lundin Norway AS (Lundin Norway), is pleased to announce that drilling of appraisal well 16/4- 8 S on the Luno II discovery has commenced… The main objective of well 16/4-8 S is to test the reservoir properties and verify the petroleum potential. The reservoir is expected to be of Jurassic/Triassic age,’ reads a communiqué published by the company.
In this context, it is worth remembering that Norway clearly intends to take an active role in European politics. Statoil organised a conference in Berlin, where it will soon open a new office. During the conference, Statoil’s CEO argued that natural gas is the main option for Germany to cut emissions, given that 45% of the country’s power is generated by burning coal, with gas representing just 10%.
“I think it is both timely and necessary for German to develop a plan for how natural gas can contribute to fulfilling the ambitions of the Energiewende (energy transition). Increasing the use of natural gas will be beneficial both for the German economy and for the climate,” Statoil CEO Helge Lund said at the joint Statoil/Wintershall event in Berlin on 24 June.
At the same time, energy is increasingly in the spotlight also in Southern Scandinavia.
A city council in northern Denmark did indeed grant a permit to the Danish unit of Total SA for some preliminary analysis.
The municipality of Frederikshavn in Jutland approved test-drilling for shale gas reserves in nearby Dybvad. The decision follows deliberations that commenced in 2012 and involved 1,500 man hours of investigations including the commissioning of a report to evaluate potential environmental ramifications.
A few hours before, on Tuesday, an agreement between Technip and Maersk Oil equally suggested an increase in oil and gas activities in Denmark.
‘Technip was awarded two contracts, worth an important(1) total value, by Maersk Oil for the Valdemar & Roar Gas Lift project as well as the Rolf Replacement Pipeline project, located on the Danish Continental Shelf, approximately 250 kilometers offshore Esbjerg, Denmark,’ reads a note released by the company on Tuesday.
ALGERIA COULD FOLLOW SUIT
In this sense, Scandinavia could lead the way, but Algeria could play even a more important role. Foreign workers are going back to the In Amenas gas plant after more than 15 months and the country approved new licences.
At the same time, Italy’s Eni has been granted three permits by Sonatrach for joint prospection activities in the basins of Timimoun and Oued Mya, in onshore southern Algeria.
‘The initiative strengthens the already excellent relations between Eni and Sonatrach and Eni's strong presence in the country,’ reads a note released by Eni on Wednesday.
Algeria’s Energy Minister also stated the country’s firm intention to push for shale gas explorations.
“(The) attempts to demonize shale production target countries that advocate energy nationalism to assert sovereignty over their natural resources," Youcef Yousfi said as reported by the official press agency.
In this context, Europe is now under pressure to promote a stabilisation of the MENA region. That is because, in case of strong confrontations with Moscow, Brussels would clearly need oil and gas from hydrocarbon-rich MENA countries.
European ability to pursue this interest will be a key tile in securing energy and stabilising prices. Norway and marginally Denmark could help, but will not be enough.
Sergio Matalucci