Weekly Overview: A Slow Start to the New Year for European Gas; William Powell, Editor in Chief
Natural Gas Europe is pleased to bring you today’s round-up of the last few weeks’ news of political, corporate, market and other developments in the region. We look forward to reading any comments you have.
Bearish sentiment prevails
Mild weather, the absence of any actual "gas wars" in the east of Europe and weak commodity prices ensured that the new year of 2016 got off to an uneventful start. Poor economic performance by at least three of the four once-touted high-growth BRIC countries—Brazil, Russia and China—contributed to low oil prices, feeding in turn into lower gas export prices in many markets, including liquefied natural gas destined for Asia.
Partly owing to that, and continuing strong production, crude prices hit a 12-year low on January 6th, as Iran-Saudi tensions that initially pushed the price up to almost $39/barrel on January 4th rapidly mutated into weary acceptance of yet more crude—perhaps 2 million barrels/day more than could be consumed—landing on the market. Storage inventories are accordingly rising, for oil products as well as crude.
U.S. Henry Hub gas prices also hit a low around that day, which could be good news for would-be LNG exporters from Louisiana, where Cheniere Energy’s Sabine Pass starts up in the coming weeks—possibly with a new CEO for the pioneering terminal operator as well, following last December’s ouster of Charif Souki by activist shareholder, Carl Icahn.
Wholesale gas prices in Europe have been low too, with retailers advising customers of cuts in direct debit bills where the monthly standing order was based on much higher forecast consumption. Industrial demand remains weak; and mild weather across much of the continent is leaving utilities holding more gas contracted to buy—and in many cases at a higher price, including the cost of storage for the peak demand day—than they may now expect to be able to sell.
One such utility, E.ON, decided over a year ago to move its eggs into the more profitable basket of renewables, networks and the greener agenda, splitting into two as planned at the start of this year. Its conventional generation and trading assets are now grouped under Uniper, in another German city. An initial public offering is to be approved this year with the rest of the shares to be sold in the medium term.
UK Output up
Against that background, there has been little positive news. It is true that oil and gas production from the UK Continental Shelf rose in 2015, according to preliminary figures released in early January, ending a 14-year run of declines. But this rise reflects the money that was invested in projects in past years when oil was trading above $100/b. Investments in this high-cost region have tailed off sharply since July 2014.
This year will also see new gas coming into the market, with the long-awaited arrival of gas from the Shell-operated Corrib field, offshore Ireland. It just made it ashore in the closing hours of 2015, meeting the company’s commitment to deliver it in the fourth quarter. Long held up by environmental concerns and local residents, the gas will boost Ireland’s security of supply and allow more North Sea and other gas to remain on the UK mainland.
However, not easily beaten, the local residents were quick to spot a lot of flaring—a normal part of the initial phases of the start-up process, Shell said—and quickly reported this potential licence breach to the relevant authorities.
Eastern Front
Most of the rest of the developments revolved around politics: specifically, Ukraine. Still unhappy with the Nord Stream 2 proposal, its complaint on competition law grounds has now reached the European Commission, it announced January 6th. It is one of a number of countries feeling aggrieved by the loss of transit tariffs from its arch-enemy, Gazprom. On the other hand it has been doing what it can to hurt Gazprom, mainly buying gas from its western European partners. Short-term supply tenders have been filled by Engie and Noble Clean Fuels, and more tenders are to come.
Last decade, Poland’s then state-run gas monopoly was similarly hurt by the loss of transit fees, when the Russian gas exporter decided that it would build further strands of the Yamal pipeline underwater in the Baltic Sea, whereas Poland had been counting on the line running from the Yamal Peninsula, across Russia and Belarus, crossing its own territory, and exiting into Germany.
But it could not bring any pressure to bear and Russia progressed with plans to build the first two lines of Nord Stream, each carrying 27.5 bcm/yr but collectively called Nord Stream 1. The difference now is that energy unions, the third energy package and other features of the contemporary gas landscape make official complaints possible.
Gazprom is also under investigation by the European Commission, following allegations of gas market abuse in central and eastern Europe. An oral hearing last December may or may not lead to a series of penalties being imposed on it. Some of Gazprom’s activities may be classed as standard commercial practice but the EC said early January that there was no timetable for its decision, leaving the matter open perhaps for some Moscow-Brussels horse-trading over pipeline access in Europe.
Back on Ukraine’s home patch, relationships between the various groupings of shareholders in UK producer JKX, which now include the little-known Russian bank Proxima with 19.6%, could lead to the company’s board of directors being sacked, if the motion secures half the votes required. Proxima has called for an extraordinary general meeting.
This would benefit the government in Ukraine, potentially, as it is being sued for hundreds of millions of dollars in back-tax overpayments which a Dutch court has ruled were illegally collected from JKX’s production. A further court hearing later this year will require the evidence of board members, so having them unavailable to testify would save Kiev having to pay money it does not have.
William Powell, Editor in Chief