Week 23 Overview
The 23rd week has been all about Russia. Moscow is stepping efforts to further increase its clout in Europe and, logically, its decisions are having significant knock-on effects. The Kremlin is moving fast and some reactions are on their way. For instance, an American support to Eastern European countries is relentlessly emerging. Nonetheless, the Kremlin keeps the upper hand. Its decisions are making alternative gas projects quite uncompetitive. E.ON and Total are set to withdraw from the TAP project, and this is not a coincidence. In the 21st week of the year, Gazprom granted a lower gas prices to Italy’s Eni. The pipeline from Azerbaijan, that is expected to reach Souther Italy, would inevitably lead to a price war and everybody knows that, at least for now, Russian gas is cheaper. In this sense, the future of pipelines from the Caucasus region and American LNG is strictly related to the Russian pricing strategy. A strong political support to expensive projects would be required to keep the pace of Russian projects.
RUSSIA
Russia is increasingly looking at the Arctic and it is trying to say it loud and clear. It is flexing its muscle and it is not trying to hide it. Not at all. Probably it is not a form of exhibitionism, but it is for sure a resounding message. Russia is saying that it could soon have more and more gas to export, making US LNG and Azeri gas projects difficult to go ahead. But Moscow is doing even more than this.
On Thursday, Rosneft President Igor Sechin suggested to Russia’s President Vladimir Putin to invest in the domestic market and in infrastructures to further increase the country’s clout in the Asia-Pacific region.
‘The main priorities stated in Sechin’s report must be the development of the domestic market, primarily in the Eastern Siberia and Far East, diversification of export supplies to developing markets of the Asia-Pacific region, and also continuation of oil companies’ efforts to develop their own competencies to cut dependence on services of foreign partners regarding the oil service sector as well,’ reads a note presenting the results of a report.
Sechin, Executive Secretary of Russia’s Presidential Commission on Strategic Development of the Fuel and Energy Sector and Ecological Safety, also said to Putin that the ESPO pipeline is a key development for Russia’s future. He proposed to finance the project with a mix of financial deposits of state and non-State pension funds. The pipeline would export Russian crude oil to Japan, China and Korea.
For what concerns gas, Eastern Siberia has the best potential, Sechin said, claiming that those fields could provide a output of 200 bln cubic meters a year.
“It is obvious that we should sell this gas at the market. If oil and gas companies have an opportunity to enter gas transport system which is being created by Gazprom on economically justified conditions, it will optimise investments.”
In the following hours, Putin clearly said that he bought Sechin’s argument.
“Unfortunately, there has also been a lot of speculation and even provocations. However, you and I, we understand that humanity has to work in the Arctic; it is forced to develop these territories.” Putin said on Thursday, as reported by the Kremlin.
Also on Thursday, Gazprom made clear its interest for an international expansion of its Natural Gas Vehicles sector, meeting a delegation from Czech Republic.
‘In particular, the meeting evaluated the prospects for partnership development in the NGV sector,’ reads a note released on Thursday.
The participants also spoke about other projects.
The Russian company is indeed intentioned to work on Underground gas storage capacities in Eastern Europe and it used the meeting to address the cooperation to build up UGS capacities.
On Friday, Rosneft equally proved its strength.
Its subsidiary Yuganskneftegaz officially opened two new oil and gas production units at the Priobskoye field, with the intention of completing 535 new wells during 2014.
‘Production gain is provided not only by increased number of producing wells. The enterprise also applies new technologies of mechanized extraction,’ reads a note released on Friday.
UKRAINE
On Monday, Gazprom confirmed it received 786 mln USD from Naftogaz, which paid for the gas Ukraine imported in February and March. The Ukrainian company said the price was 268.5 USD/1000 cm.
‘Real progress has been made. Intensive discussions led to a bilateral meeting between the CEOs of Gazprom and Naftogaz who discussed key commercial issues for a settlement of the ongoing gas supply questions,’ reads a press release.
Berlin hosted then a working meeting between Gazprom’s Alexey Miller and Naftogaz’ Kobolev on Wednesday, with the parties moving closer to an agreement. The Russian giant did some concessions.
‘On request of the Ukrainian party, the debt settlement deadline was postponed until June 10, due to June 9 being a holiday in Ukraine,’ reads a note released on Wednesday.
Some more good news for Kiev came on Tuesday.
Canada-based Serinus Energy announced it found multiple gas zones in Ukraine, with drilling activities expected to commence by the end of June.
‘Logging is now complete and has identified net pay in four zones of Bashkirian or Serpukhovian age, three of which have been established as productive within the company’s Ukrainian Licences,’ the company wrote on Tuesday.
But that is not enough to change the assessment of the current situation. The country is still at risk.
It comes as no surprise that Naftogaz is mulling plans for a radical restructuring. The company is expected to be splitting in three separate entities. This move would allow it to comply with EU’s Third Energy package and boost profitability in order to meet its financial obligations on time.
Ukrtransgaz disposed to move the families of its workers based in Donetsk and Luhansk to other regions of the country, explaining the decision in light of a ‘real threat to life’ due to the military confrontation.
According to a note released on Monday, a total of 200 people will move to Odessa and Lviv.
Similarly, Royal Dutch Shell said on Tuesday that it has halted drilling for shale gas in Eastern Ukraine to decrease risks for its personnel. The company signed an agreement with Ukraine to explore the Yuzivska block, with gas extraction activities previously estimated to start in 2015.
UNITED STATES AND EASTERN EUROPE
The United States committed to helping Poland to develop its shale gas industry, President Barack Obama said on Tuesday during a joint press conference with Poland's President Bronislaw Komorowski. At the same, Washington confirmed its attention for other Eastern European countries.
‘The United States supports Poland’s efforts to increase its energy security by diversifying its energy supply and strengthening its energy infrastructure,’ reads a note released by the White House on Tuesday.
Washington also offered military support to ‘enhance the security of the entire Alliance and particularly that of Central and Eastern European allies,’ Obama’s intentions seemed clear and they are not limited to Poland.
‘The United States is working with countries in the region and the entire European Union to help strengthen energy security,’ reads another press release.
Obama referred to Romania and Moldova, underlining the importance of interconnections to increase the efficiency of the gas system.
‘Under the auspices of the U.S.-EU Energy Council, we have begun critical discussions on the infrastructure, legal, and financial requirements necessary to increase regional gas interconnections. The United States is working with Romania and Moldova to support the extension of an energy pipeline network into Moldova and is engaged with the EU Commission and the Baltic states to advance the construction of projects to connect the Baltic countries to the EU energy market.’
OTHER EVENTS
On Monday, London-based consultancy firm Molten released the results of a technical review on the northern section of PEDL201, raising hopes for significant oil and gas reserves, according to Union Jack Oil and Egdon Resources.
‘The results of this work indicate that the mean gross unrisked deterministic in place volumetric estimates approximate to 5.4 billion barrels of oil and over 2.7 trillion standard cubic feet (scf) of gas,’ the company the wrote on Monday, adding that the report contains no valuation and no risk factors.
Also on Monday, Det norske oljeselskap ASA entered into an agreement to acquire Marathon Oil Norge for a cash consideration of USD 2.1 billion (NOK 12.6 billion).
“Marathon Norway is an excellent fit for Det norske, given the operational expertise, access to cash flow and the production profile it brings. The acquisition is important when it comes to meeting our funding requirements for Ivar Aasen and Johan Sverdrup, and to reducing Det norske’s overall risk profile,” Karl Johnny Hersvik, Chief Executive Officer of Det norske, commented in a communique released on Monday.
Marathon’s decision is part of its strategy to increase capital spending and selling its North Sea operations to focus on North American fields.
In the while, the Scandinavian country registered mixed fortune.
Faroe Petroleum announced the spudding of the Centrica-operated Butch Shout West exploration well 8/10-6S in the Norwegian North Sea, while Noreco said that it would plug and abandon the well 6608/10-16 (PL484) in Norway.
These mixed fortunes confirm oil and gas industry’s difficulties, but also Norway’s centrality for European energy security. That is why Norwegian politics are so relevant for Brussels.
On Wednesday, the parliament agreed on Statoil’s Johan Sverdrup project, deciding that the company will have to start electrification of three North Sea fields by 2022.
“We’re happy that the parliamentary majority has found common ground with the government parties and contributed to an agreement that will ensure that the Sverdrup development can proceed as planned,” Oil and Energy Minister Tord Lien commented on Thursday.
What remains to be seen now is the Norwegian interest and how this will translate into foreign policies. Will Oslo capitalise on its gas avoiding a price war with Russia? Or, conversely, will it try to take a more active role in Europe? The government elected in September said it wants to decrease its reliance on hydrocarbon exports. Since the United Kingdom, Sweden, Germany, the Netherlands and France are Oslo’s main commercial partners, this decision might point at increased ties with Brussels. Time will tell.
Sergio Matalucci