Week 44 Overview
It is a period of confusion. The recent financial results for the third quarter of 2015 are heaping pressure on oil and gas companies in a moment when European, American and Russian politicians are actively intervening in the debate about the Nord Stream II project and Ukraine is going through challenges related to internal wrangling, and gas stored in its UGS facilities.
The possible tensions between North and East Europe (especially after last week’s Polish elections gave the majority to the national-conservative Law and Justice party), the politicisation of the gas industry, and the current market difficulties are a dangerous mix for Brussels.
European institutions are also called to defuse tensions in the Balkans, trying to temper further unrest around its borders.
Against this background, Italian companies are making the headlines for their resolve to restructure their business and promote new projects, in an attempt to bring about some much-needed optimism.
NORD STREAM II PROJECT: RESEARCHERS, COMPANIES AND POLITICIANS STATE THEIR CLAIMS
The debate on the project connecting directly Russia with Germany remains heated.
One should consider a scenario in which Gazprom will want to cease supplies to Poland through the Yamal pipeline in order to reduce Poland’s importance as a gas transit route, wrote Wojciech Jakóbik. According to the Polish analyst, the agreement for gas supplies from the Russians terminates in 2022, and then it will be possible to change the reception points. ‘Gazprom could want to supply Poland with the raw material through Germany, increasing the transit importance of our western neighbour, and decreasing ours.’
But not all the parties agree with Jakóbik.
Although the pipeline expansion may not benefit some individual member states, the project is—on aggregate—beneficial for Europe, wrote Tim Boersma. According to the Dutch Acting Director of the Energy Security and Climate Initiative at the Brookings Institution, Nord Stream 2 is a good idea provided that EU member states continue their so far successful efforts to further integrate energy markets.
Apart from analysts’ declarations, involved companies are working to achieve progress.
Alexey Miller, Chairman of the Gazprom Management Committee, went to Austria to meet with Rainer Seele, Chairman of the OMV Executive Board. The two signed a Memorandum of Understanding on oil supply, and discussed further cooperation opportunities on October 23.
Politicians are equally active.
Germany’s Federal Minister for Economic Affairs and Energy Sigmar Gabriel travelled to the Russian Federation on October 28-29, his office wrote.
The Kremlin released a transcript of the conversation between Gabriel and Russia’s President Vladimir Putin. The two politicians addressed the complexities surrounding the Nord Stream II project. “What’s most important as far as legal issues are concerned is that we strive to ensure that all this remains under the competence of the German authorities, if possible. So if we can do this, then opportunities for external meddling will be limited. And we are in a good negotiating position on this matter” Gabriel said, adding that the EU and Russia have to agree on Ukraine’s role as a transit country after 2019.
Putin also met with ex-president of the French Republic Nicolas Sarkozy. France did indeed confirm its interest in the Nord Stream-2 project, Russia’s Energy Minister Alexander Novak told journalists, as reported by TASS.
BALKANS: THE NEXT BATTLEGROUND?
The European Union and Kosovo signed a Stabilisation and Association Agreement (SAA) on October 27. "This agreement is a milestone for the EU-Kosovo relationship. It will help Kosovo make much needed reforms and will create trade and investment opportunities” Johannes Hahn, Commissioner for European Neighbourhood Policy and Enlargement Negotiations, commented in a note published by the European Council.
Analysts and researchers are trying to prop up the work of European institutions, through conferences on the topic.
Meanwhile, Serbia continues rounds of negotiations with Moscow - Serbia’s PM Aleksandar Vucic met with Russian counterpart Dmitry Medvedev on October 27, and Putin on October 28.
The Kremlin gave great visibility to the meetings, underlining the role of Belgrade in Russian plans in the Balkans.
ITALY, ENI-RELATED DEVELOPMENTS: TAP, SNAM, SAIPEM AND THE MEDITERRANEAN GAS HUB
The Trans Adriatic Pipeline project is moving forward with the award of a contract for pipes to Salzgitter Mannesmann International GmbH. The management of the TAP AG, the company established to develop the pipeline, welcomed the news and repeated that the construction should start in 2016. The project should connect Greece to Italy, representing the last leg of the Southern Gas Corridor.
Snam is considering new investments in transport, distribution and storage, explaining it will pour 5.1 billion euro into Italy in the 2015-2018 period, while working together with Fluxys in order to maximise the value of its international assets. On an international level, Snam said it will focus on two main European gas corridors: the East-West and the North-South. Despite not mentioning the project, investments in the TAP projects should not be excluded.
Meanwhile, another Italian company - Eni - is trying to find new resources to increase production and promote a regional gas hub in the Mediterranean.
Firstly, it executed a Sale and Purchase Agreement to sell a 12% stake in Saipem to Fondo Strategico Italiano, as part of a plan designed to collect €6.5 billion.
Eni is also trying to find common ground for a project comprising Cyprus, Egypt and Israel.
Eni met with the Israeli government. Eni’s CEO Claudio Descalzi is showcasing the company’s plans to create a regional gas hub, reportedly asking Israel to export gas from Tamar through Union Fenosa Gas's LNG facility in Damietta, Egypt. During their meeting on October 28, Israel Minister of Energy Yuval Steinitz also offered Eni to invest in two small off shore Israeli reservoirs, Karish (50 bcm) and Tanin (20bcm).
The meeting with the Eni delegation, although being the initial stage in possible commercial negotiations, might help Prime Minister Benjamin Netanyahu to pass the natural gas regulatory framework. In the last few days Netanyahu increased his efforts to get an approval for the new rules.
Meanwhile, Israel’s Delek Group has announced that its gas subsidiaries have postponed the schedule for an additional test drilling well in block 12 offshore Cyprus from October 23, 2015 to May 23, 2016. The date coincides with the expiry of the company’s license, writes Cyprus Mail.
FINANCIAL CONSTRAINTS: TOUGH MARKET ENVIRONMENT TO IMPACT ON CAPEX IN 2015, 2016
Eni’s grand plans did not come without complexities. Eni did indeed swing to a net loss of € 0.95 billion for the third quarter, which negatively impacted the result for the nine months. In the first three quarters of 2015, Eni registered a € 0.36 billion net loss.
In general, majors are cutting and restructuring their businesses, and they are right. Several pundits told Natural Gas Europe that oil and gas prices are not expected to go up any time soon. “The shale revolution is the new status quo” one source recently conceded.
In a presentation on October 26, Fatih Birol said that CAPEX fell for the first time in 2015 after five years of growth. According to the Executive Director of the International Energy Agency, more cuts are expected in 2016 if low prices continue. It would be the first time in two decades that upstream investments would fall for two consecutive years.
Ironically, this would happen in a moment of increased demand in Europe. Worse weather conditions and national circumstances are likely to push gas demand across the European Union up by 7% in 2015 with respect to last year, Eurogas wrote on October 23. Eurogas explained that the drop in hydropower production in Germany and Italy, along with an increase in gas demand for power generation in France and Austria, more than offset competition from coal.
Despite this, BP said that its capital expenditure in the next two years should be lower than in 2015. ‘Compared with a year earlier, the result primarily showed the impact of sharply lower oil and gas prices but also the benefits of a continuing strong downstream environment and performance and steadily lower cash costs throughout the Group’ reads a note released by the British company on Tuesday. Other energy-related companies posted similar results. BASF and Maersk Oil are likely to find themselves missing their 2015 targets.
Significant financial differences among companies remain, but there is a common thread: European supermajors are all suffering. In this context, France’s Total seems to be the best performer.
Current market conditions will also delay start-ups.
Norway’s Statoil reported a third-quarter operating profit below market forecasts, adding it decided to delay production from the Aasta Hansteen and Mariner fields. Adjusted operating profit for the third quarter fell to 16.7 billion Norwegian crowns, representing a 46% decrease with respect to the same period in 2014.
As repeated several times over the last months, the market environment is likely taking a toll on smaller companies as well.
For instance, Austria’s OMV (64.25%), EVN (16.51%), Wien Energie (16.51%) and Energie Burgenland (2.73%), agreed to change the shareholder structure of EconGas GmbH. The Austrian company led by Rainer Seele will buy all shares currently held by its partners.
The devaluation of the rouble could help Russian companies survive current market conditions. However, Moscow-based firms might run into similar problems, especially when they have to make payments on debts denominated in other currencies.
For instance, according to TASS, Russian independent gas producer Novatek may face difficulties financing the Yamal LNG project.
UKRAINE (AND RUSSIA): COMPLEXITIES ON ALL FRONTS
On October 23, Bloomberg wrote that Gazprom is drafting its budget for 2016 with preliminary estimates for gas prices outside the former Soviet Union of about $200 per 1,000 cubic meters.
Some Ukrainian media outlets said that the average natural gas price for Ukraine in 2016 should reach $146.47 per thousand cubic meter. Ukraine’s Ukrinform reported an analysis by RIA Novosti saying that the estimate of $146 per thousand cubic meter was inferred from Russia’s draft federal budget for the coming year.
Meanwhile, in August, Ukraine imported natural gas at an average price of $268.80 per thousand cubic meter. Kiev imported the majority of this gas from Germany and Hungary.
Despite the effort, Ukraine’s Minister of Energy and Coal Industry Volodymyr Demchyshyn reportedly said the country will not be able to store 19 billion cubic meters of gas by the end of the year, adding that Gazprom could take part in a tender to supply natural gas to Ukraine from Europe, KyivPost and TASS wrote. According to data published by GIE, Ukraine stored 16.9 bcm of gas in its facilities.
Kyivpost also wrote that Naftogaz will try to attract $500 million from the World Bank to buy gas before the end of the year. This would follow a similar deal with European institutions.
The Minister of Finance of Ukraine Natalie Jaresko and the First Vice President of the European Bank for Reconstruction and Development (EBRD) Phil Bennett signed the sovereign guarantee agreement for the loan from the EBRD to finance gas purchases by Naftogaz of Ukraine. The US$ 300 million loan, which is a 3-year revolving facility, was then signed on October 23 by Naftogaz CEO Andriy Kobolyev and the EBRD Managing Director for Energy and Natural Resources Riccardo Puliti.
The latest gas developments come at a moment when Ukrainian politics are taking unexpected twists.
The Atlantic Council wrote that Ihor Kolomoyskyi, who was dismissed in March by Ukrainian President Petro Poroshenko, came out on top of the regional elections. ‘(He) backed candidates who look set to win in Dnipropetrovsk, Kharkiv, and Odesa’ reads a post published on October 26.
These latest political developments might be the recipe for internal tensions. The Ukrainian government has now to cement its international ties.
On October 27, Petro Poroshenko met with President of Latvia Raimonds Vējonis. Both said that the sanctions should not be removed in case the Minsk agreements will not be implemented in full.
A sense of hope is equally needed, and Kiev is trying to play the nationalistic card.
“The time will come when Ukrainian forces return to the eastern border of Ukraine and the territorial integrity of the Ukrainian state will be fully restored. Donetsk, Luhansk and Crimea will return to Ukraine, as it is part of the Ukrainian state” Prime Minister of Ukraine Arseniy Yatsenyuk said on October 28.
Finally, Russia’s Interfax reported that ‘trilateral consultations of Russia, EU, Ukraine on problems of Association to take place on December 1.’
TURKEY - RUSSIA: ARBITRATION COURT
Turkey's state-owned gas importer Botas has appealed to arbitration court after gas price discount talks with Russia's OAO Gazprom have stalled. Russian President Vladimir Putin has promised a 10% price discount to Botas prior to talks on the Turk Stream pipeline being halted in the summer.
Some diplomats said that the arbitration on the Ankara-Moscow case over Russian gas prices is not expected to escalate in a diplomatic stalemate.
SHALE: DOMESTIC PRODUCTION UNLIKELY TO INCREASE
Whatever happened to the much-heralded eastern European shale gas boom? The answer is that, for now at least, it has quietly become a bust, the Financial Times wrote.
This is the case for many Eastern European countries and Ukraine.
On October 28, Ukraine’s Energy and Coal Minister Vladimir Demchishin reportedly said that Royal Dutch Shell withdrew from a shale gas exploration in Kharkiv and Donetsk regions, confirming the news emerged in June 2015. According to Ukrainian newspapers, Kiev will hold a tender to select a new investor taking Shell’s place in the Yuzivska gas bearing site.
The “failure” comes despite some efforts to make the case for shale developments in Europe.
The UK-based Centre for Policy Studies released a report claiming that previous estimates of methane leakage in shale gas production have been seriously over-estimated. The two researchers - Elizabeth and Richard Muller - said that the current estimate for the average leakage across the whole supply chain are below 3%.
LNG: SOUTHEAST EUROPE, US, IRAN
The ever changing dynamic in the Southeast European natural gas sector is seeing a shift in strategy by the Greek government, which is pressing hard for the introduction of prospective supplies of US LNG moving into Europe via the Balkans. Following on this initiative, the Bulgarian government is also stepping closer to establish a mini-diversification route in the Balkans. Greece’s GasTrade and DEPA, together with US-based Cheniere, are expected to establish a mutual holding corporation that would manage the installation of a new floating LNG in the Alexandroupolis region, and the import of LNG sourced from US shale gas.
A few days later, France’s ENGIE announced on October 28 the execution of a 5-year Sales and Purchase Agreement (SPA) with Cheniere. Under the agreement, ENGIE will purchase up to 12 cargoes of liquefied natural gas (LNG) per year from Cheniere.
Despite the significant achievements, CNBC reported on October 26 that U.S.-based Cheniere Energy doesn't believe it will become Europe's leading liquefied natural gas (LNG) player.
The Head of the National Iranian Oil Company (NIOC) expects Iran joining the elite club of LNG exporters in the next two years, which would crucially strengthen the resource-rich country’s clout in the energy market.
On October 28, after accepting an invitation to participate in international talks on Syria, Iran said that the detailed plan to assign the foreign contractor of the South Pars gas field’s last development phase would be presented in Tehran on November 28-29, officials in the Ministry of Petroleum said as reported by Shana, the news agency linked to the Ministry. Iran also referred to Oman, which is expected to be the country helping Teheran to export LNG to far reaching countries.
This comes a few days after the Egyptian Government reportedly endorsed an agreement between EGAS and Russia’s Rosneft for the supply of LNG. The ratification comes after the two companies signed the agreement in summer 2015.
OTHER DEVELOPMENTS: NORTH SEA, IRELAND
Swiss chemical company INEOS acquired a 25% interest in the Clipper South Gas Field from Fairfield Energy Holdings, confirming its intention to expand its Upstream portfolio in the North Sea. INEOS sees in the Upstream investments a good opportunity to produce part of the natural gas, ethane, propane, and condensates it needs for its operations.
Europa Oil & Gas reported that its three prospects on Frontier Exploration Licence 3/13 in the Porcupine Basin, offshore Ireland, could be valued between US$1.1 billion and US$7bn. The note is likely intended to lure new investors to take a stake in explorations off Ireland, after Kosmos Energy Ireland announced its intention to withdraw from Ireland in September 2015.
Providence released a note on October 27 saying it commenced a farm out process for part of a 32% interest in FEL 2/04 and FEL 4/08 in the Spanish Point Area, in the northern Porcupine Basin, offshore west of Ireland.
INTERVIEWS AND OTHER CONTRIBUTIONS:
Mühdan Sağlam on Russian-Turkish relations
Vasile Iuga, SEE Cluster Leader at PwC, on the Energy Union and Romania
Interview with Guy Broggi, Senior Advisor LNG at TOTAL, about LNG dynamics
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci