Week 13 Overview
With a predictable turn of events, the standoff in Ukraine prompted a flurry of debates about energy security across Europe. Some governments even see room for beneficial changes. UK’s Prime Minister David Cameron, for example, was on the front line of these for-the-moment-confused attempts to reap the benefit of the on-going tensions.
“I think something positive should come out of this for Europe, which is to take a long hard look at its energy resilience,” UK Prime Minister David Cameron recently said on the sidelines of the Nuclear Security Summit in The Hague.
Despite the negotiations in Brussels, it seems increasingly clear that Russia will remain an important partner for European countries. According to Germany’s Minister Sigmar Gabriel, there is “no sensible alternatives” to Russian gas. In this context, Hungary's opposition to economic sanctions against Moscow sounds logical.
These difficulties do emerge clear when looking at the alternatives. Europe’s natural gas prices would have to double if the Old Continent wanted to lure LNG to replace Russian supplies, wrote Bloomberg on Friday. In this sense, Russian gas remains necessary to maintain what remains of the European competitiveness. This is especially the case in a moment when many energy companies are increasingly prone to differentiate their assets, looking for investment opportunities in South America and Asia.
ENERGY SECURITY IN EUROPE
On Monday, the Spanish government was reported to consider an increased support to indigenous under-used gas-fired power plants in order to avoid closures around the country.
According to Bloomberg, the government is playing its cards to convince Iberdrola and Gas Natural refraining from mothballing their facilities.
Also the UK is trying to maintain gas as a central part of its energy strategy. On Friday, INEOS signed a Heads of Terms with TGE for the delivery of a new ethane import facility in Scotland, aimed at saving the Grangemouth plant and importing US shale gas.
As part of the £300 million survival plan announced last year, Grangemouth will host a new ethane thank.
“The ethane tank will be the biggest in Europe. It is a crucial part of our survival plan that will enable us to import shale gas from the USA. By 2016 Grangemouth will be a shale gas based facility, essential for it to become a profitable business again,” Harry Deans, CEO INEOS O&P UK, said on a note released on Friday.
While Spain and the UK are playing their cards, other European governments are calling on the North America for an intervention. For instance, Lithuania pressed the United States to sign into law the LNG exports liberalization, voicing widespread cry for help to decrease European reliance on Russia’s gas.
‘On March 25, during its visit to Washington, Minister of Energy Jaroslav Neverovič attended the U.S. Senate Energy and Natural Resources Committee hearings and spoke about the urgency of the liberalization of the liquefied natural gas exports from the U.S. to NATO allies,’ reads a note released on Wednesday.
WOBBLY UKRAINE IN DESPERATE SEEK OF HELP
Ukraine’s authorities are holding a corruption investigation in the energy sector that led to the detention of Naftogaz’s Chief Executive Yevhen Bakulin. The police arrested Bakulin as part of the investigation, which also brought Ukraine’s former Energy Minister Eduard Stavytsky behind the bars.
At the same time, Kiev is moving closer to Europe and the West. While clinching a deal $14-18 billion loan with the IMF, it also started talks on importing natural gas from the European Union via Slovakia.
Ukraine’s Urtansgas and Slovakia’s Eustream failed to reach an agreement last week, but the EU intervened to broker the deal. Energy Commissioner Guenther Oettinger said he expects a memorandum between Ukraine and Slovakia to be signed before the end of April.
All in all, Ukraine’s 13th week of the year has been better than expected. Some good news for its energy security came also from its borders. UK-based JKX renewed its interest for shale gas developments the country, suggesting an upbeat outlook for the unconventional industry in the country.
“We are refocusing our investment on Ukraine. We have made an important step forward in the development of our largest untapped gas resource with the successful multi-frac in the Rudenkovskoye field. We have also brought on- stream our Elizavetovskoye development which is performing above expectations,” JKX Chief Executive Dr Paul Davies commented in a note released on Thursday.
RUSSIA GOES ON
Meanwhile, Russia and Gazprom continued their strategy. As in the previous week, they kept working to differentiate their investments and maintain good relationships with European partners.
On Monday, Moscow-based Rosneft bought assets in Brazil for $96 million.
‘Rosneft announces that its subsidiary Rosneft Brazil today signed final agreements with HRT subsidiary HRT O&G to acquire additional 6% in the Solimoes project. This will lead to Rosneft Brazil receiving 51% control and taking over the operatorship in the joint venture in the Solimoes basin,’ reads a note released by the company led by Igor Sechin.
A few hours later, Prime Minister Dmitry Medvedev said that Crimea could double its gas production and it could be connected to Russia’s unified power grid via the Kerch Strait Bridge, or by building its own electricity generation facilities on the peninsula.
“We must resolve this task in the near future and also increase gas output by 1.5-2 times. According to experts, this will be enough to cover Crimea’s electricity requirements. I understand Gazprom has an initiative on this score,” Medvedev said on Monday at the Government House, Moscow.
The day after, on Tuesday, Gazprom confirmed that the South Stream project is a ‘high priority’ for the company. It clearly stated that it has no intention to stop construction activities across Russia.
‘Nowadays, the company is intensely laying a line pipe section of South Stream's western route and is building the Shakhtinskaya compressor station,’ reads a note released by the Gazprom after a meeting with Vasily Golubev, Governon of the Rostov Region.
At the same time, it is not losing time also on an international level. The main global gas producer is indeed strengthening its ties with Siemens and France, in the attempt to maintain its clout in the European gas markets.
On Wednesday, Alexey Miller, Chairman of the Company's Management Committee, met French diplomats and the President of Siemens. Through the first meeting, the Moscow-based company tried to increase the number of European countries adverse to possible escalations. The meeting with the German company was also functional to deepen technological cooperation.
The cherry on the Russian cake came a few hours later, when Novatek’s CEO Leonid Mikhelson said that the present standoff between Russia and the West would not take its toll on Novatek’s $27 billion Yamal LNG project.
"I do not see any potential impact on Yamal LNG," Mikhelson said to Reuters on Wednesday.
WHAT’S NEXT? DIVESTMENTS, DIVERSIFICATION
The most interesting developments in the coming weeks could be related not only to Russia, but also to major divestments and in general to changes of investment strategies. Some examples came last week as well.
On Monday, Ireland-based San Leon strengthened its cooperation with Horizon General to evaluate the commerciality of the unconventional Main Dolomite play in Poland.
On Tuesday, UK-based Centrica clinched an agreement with Ireland’s Bord Gáis Éireann to acquire Bord Gáis Energy (BGE), the vertically integrated energy business, for €1.1 billion (£920 million).
San Leon confirmed its intention to increase cooperation to explore for Polish resources. Bermuda-registered TransAtlantic Petroleum did indeed join shale gas hunt in Poland, signing a farm-in agreement with the Irish company on Thursday.
On Friday, Eni completed the sale of 7% of the share capital of Portugal’s Galp Energia for a total of € 702.4 million.
In this sense, despite escalations remain unlikely, the standoff is still changing many cards on the table. It seems obvious that the industry will go through a significant shakeup. The players understanding the situation before will easily benefit from the on-going externalities.
This is an important moment for the future of the industry.
Sergio Matalucci