Week 5 Overview
The fifth week of the year simply confirmed the European gas industry’s agenda: shale gas in the UK and Eastern Europe, South Stream’s progress and the need for new LNG terminals in Europe. In this sense, there is nothing new under the winter sun, but some good indications for significant future developments emerged. The last week did indeed underline some difficulties. And if the industry will make the most out of these problems, it will learn important lessons.
LESSON 1: PROFITABILITY WILL INCREASINGLY BE THE KEY DRIVER IN EUROPE
On Wednesday, Canada-based Sterling Resources sold its 65% interest in a portion of Midia Block in the Romanian Black Sea to OMV Petrom and ExxonMobil Exploration and Production. The transaction is part of its process to sell down all equity interests in Romania.
The day after, divestment plans emerged clear also in the UK.
BP Gas Marketing (BPGM) has decided to relinquish its option to acquire 50.495% interest in the gas storage project at Islandmagee, Northern Ireland. BP, which helped securing land rights and planning permission for the project, leaves InfraStrata alone.
But the real turnaround came on Thursday, when Royal Dutch Shell announced it would focus on assets sale and spending cuts to mend profitability. Divestment proceeds totalled $0.5 billion in the fourth quarter of 2013. The company foresee to sell 15 billion worth of assets in 2014-15.
These three events showed that euphoria belongs more to a legendary past than to the present and the future. Companies acquiring new stakes in Europe will clearly be very selective. They will take decisions surgically.
Shell’s U-turn demonstrates that also oil and gas major would give preference to the bottom line. And the increased privatisation of European oil majors will inevitably bring to stronger focus on profits. Strategic and geopolitical factors are logically bound to wane in the near future, with some obvious exceptions in Russia.
LESSON 2: NO SHALE GAS WITHOUT POPULATION CONSENT
Project selection is equally a key factor in the shale gas industry.
While Spain’s central government plans to challenge a fracking ban imposed by the region of Cantabria, the European gas industry had to acknowledge once more that public acceptance is pivotal for future developments. Political commitment is just a part of the story. Projects will be successful only in case of a population’s green light.
It comes as no surprise that the public support to shale gas continues to diminish, with the indicator designed by the University of Nottingham falling from +26.3% in September to 22.7%. The results of the long-running survey on UK’s attitudes towards unconventional gas suggest that local opposition grows, despite the attempts of the British government to increase the interests at stake. Even increasing the economic benefits for the communities, money will not buy people consent. Population endorsement has to come from somewhere else.
Cuadrilla’s chairman Lord Browne of Madingley was right when he said that it would take five years to have a deeper understanding of British shale gas potential. It will be central to test if the industry can produce economically. Different operators have to work together and join efforts in order to understand if it will be economically feasible. But they cannot underestimate the public opposition. Local communities’ acceptance is the trickiest side, at least in the UK. Operators have to keep this in mind.
On the opposite side of Europe, population seems more favourable. Situation in Romania does indeed seem quite different. For example, a recent debate about shale gas in the Bacesti Commune registered the consent of villagers.
It seems obvious that Total E&P UK hopes to replicate the same public endorsement in the UK. After increasing its interests on the other side of the English Channel, the oil major has to be even more cautious.
Total perfectly knows that public support is central. Back in 2011, the company saw its shale gas permit in Southern France withdrawn, because of the strong opposition from local communities that forced the then-president Francois Sarkozy to ban fracking in order not to lose the elections.
In this sense, the second lesson might be trivial, but not less serious: population matters.
The agreement signed by Total with Edgon, Blackland and Stelinmatvic for an option on a 64 square kilometres licence in Licolnshire could be completely unuseful without local acceptance.
LESSON 3: PRACTICALITIES ARE KEY, BUT NOT EASY - SOUTH STREAM & UKRAINE
Tuesday and Wednesday were glorious days for the South Stream project.
On Tuesday, the High Expert Ecological Council of Bulgaria’s Ministry of Environment and Waters has given its unanimous consent for the construction of gas pipeline South Stream on Bulgarian soil.
The day after the South Stream moved forward also in the offshore section, with the signing of contracts about gas pipeline construction. The South Stream Transport clinched a €1 billion agreement with Germany’s Europipe (50% of the whole volume), United Metallurgical Company (35%) and Severstal (15%). Construction works are expected to start in autumn 2014.
In a moment of geopolitical tensions, this is not straightforward. The industry can easily fall short of expectations.
Ukraine is the clear example. On Monday, Kiev postponed for the second time a gas production-sharing agreement with a consortium led by Exxon Mobil. Delays like this can let industry scepticism rise fast. In this sense, the third lesson from the week is that ‘logistical’ risks and “practicalities” cannot be underestimated.
LESSON 4: COMPETITION IS TOUGH - LNG PROJECTS AND INVESTMENTS
Novatek, Total and CNPC are working to select a terminal for transhipping LNG from the $26.9 billion Yamal project to Europe. Ports in Belgium, France and Spain are the main contenders.
“Zeebrugge is in the race. There are also opportunities for Spain,” Philippe Sauquet, president of Total Gas & Power, said on Wednesday.
The port that will win the race is likely to contribute to its region's economic development. In a moment of major divestments, projects like the transhipping LNG terminal are clearly valuable for ports and regions. But this is obvious. The real lesson here is that new business segments can change the equilibrium of mature markets. And that European competition is though. Opportunities are out there, but competitors are even more numerous.
This is exactly the case in a moment of shrinking margins and a stronger focus on profitability, which is doomed to remain the lesson number 1 for many years to come.
Sergio Matalucci