Week 28 Overview
Last week proved, again, that recently is all about Russia and Ukraine. The gas industry and geopolitics have focused heavily on the event in Donetsk and Crimea.
Western countries and companies are enjoying the beginning of a bizarre summer, spending their time in front of the screen to watch the World Cup or going to the beaches. But Kiev and Moscow don’t have much time to waste. The Black Sea is the real shore in the spotlight and this attention has little to do with beaches and holidays. It is the moment to work hard and take knee-jerk decisions.
UKRAINE - RUSSIA - EUROPE
The confrontation between Ukraine and Russia is moving from Eastern Ukraine, where the rebels are on the back foot, to the Black Sea.
The Ukrainian Ministry of Infrastructure released a note on Monday morning, saying that the country is about to close the ports located on the territory of the Autonomous Republic of Crimea (Evpatoria, Kerch, Sevastopol, Feodosia, Yalta and Sevastopol) for international shipping.
‘The corresponding decree of 16 June, 2014 № 255 "On closing of the seaports", registered in the Ministry of Justice on 24 June, 2014, № 690/25467, will come into force after its official publication,’ Kiev said.
Meanwhile, the country led by Petro Poroshenko wants its energy system to become part of the European market by 2017, with Deputy Minister of Energy and Coal Industry Vadym Ulyda confirming that the integration of the Ukrainian Integrated Power System into the EU energy system is their priority.
"This is the integration of the Ukraine’s Integrated Power System into the European power systems, as well as the integration of the GTS into the European power systems. These projects should ensure that in 2017 to be established technical and economic conditions which would allow Ukrainian energy to become part of the European energy market", the Deputy Minister said on Tuesday.
Coherently, Kiev is trying to open its borders to international investors, voicing its intention to grant more space to Italian experts and technicians.
‘Arseniy Yatseniuk has stated Ukraine's intention to further intensify the dialogue with the European Union in the context of the implementation of the Association Agreement,’ reads a separate press release, after Yatseniuk’s meeting with Minister of Foreign Affairs of Italy Federica Mogherini on Monday.
The country is indeed trying to strengthen its business ties with European companies in several ways. According to Ukrtransgaz, the country registered in June a 20% year-on-year increase in gas import from Europe.
‘During June 2014 total gas flow to Ukrainian transmission system from Poland and Hungary was 329.3 mcm, which is 20% (67 mcm) more than in the same period of year 2013,’ the company said on its website.
But to be effective, Kiev’s strategy has to become faster and gas has to flow more consistently. That is why Naftogaz announced bid solicitation from companies willing to supply gas to Ukraine from Hungary.
‘Shipment is to take place using free transmission capacity at the entry point Beregdaróc, Hungary. Naftogaz invites gas suppliers to turn in their bids stipulating payment after 10 days delivery period,’ the company said on its website.
Kiev has to be fast to avoid Moscow’s declarations to come true. A Russian official said on Tuesday that he expected Kiev to start stealing gas when its own supplies emptied out, but Ukraine’s Energy Minister Yuri Prodan firmly rejected the accusation.
"We are not taking such gas today and have no plans to take it," Prodan said on Wednesday.
A few hours later, the confrontation between the two countries took a mild twist. Rather than on open-faced accusations, the two countries focused on their growth strategy to get the upper hand.
"We are going to announce the most ambitious privatisation for all 20 years. State-owned companies, which are a subject of corruption rather than development, should be privatised," Ukrainian PM Arseniy Yatsenyuk said on Thursday, as reported by a note published on Thursday.
On the other hand, Russia renewed its commitment to invest in oil and gas projects to maintain the current level of production.
‘It is obvious that the era of cheap and easily accessible resources is over: the country has been developing natural resources for centuries. We have started developing resources which have always been considered hard to access and thus not profitable, especially with regard to the equipment that was used, say, 100 or even 50 years ago. That is why investment and the technology used in the extraction industry are constantly improving. As a result, more effort and money are needed to maintain current volumes,’ Prime Minister Dmitry Medvedev said on Thursday
AZERBAIJAN
In this backdrop, Azerbaijan has the clear opportunity to capitalise on the arm-wrestling between Russia and Ukraine. Baku can now prove to be a reliable partner and sell its resources at better conditions.
According to a press release released on Tuesday, TAP is progressing as scheduled, with the construction of the pipeline confirmed to begin in 2016.
‘TAP continues to make progress in preparing for construction of the pipeline, which is due to begin in 2016, with the building of access roads and bridges in Albania scheduled to commence in 2015.’
Azerbaijan is also moving closer to Western institutions.
‘AGH University of Science and Technology and Baku Higher Oil School signed Memorandum of Understanding… Welcoming the guests, Rector Elmar Gasimov expressed his delight and noted that the relations between Azerbaijan and Poland had deep historical roots,’ Socar wrote on its website.
This deal is probably marginal, but it gives a good insight into the kind of cooperation Baku is trying to develop. Brussels, Paris and Warsaw are the most likely partners.
Last year, Socar President Rovnag Abdullayev reinforced the company’s ties with the Institute of French Petroleum (IFP School), proving it gives importance to cooperation with international universities and academies. It also showed Baku’s strategy to focus on the European country with the best potential in the energy sector. After France, Poland does indeed seem the most promising one.
But, as usual, the United Kingdom does not like to be left aside. London is trying to get Baku’s attentions as well.
‘Discussions about the progress of the Southern Corridor (SC) gas pipeline route will be on the agenda when Business and Energy Minister Michael Fallon visits Azerbaijan this week (9-11 July),’ the Department of Energy & Climate Change wrote on Wednesday.
While having potential problems with indigenous production, the UK is increasingly voicing the need to diversify European gas sources.
“This visit is an important opportunity to reinforce the importance of the Southern Corridor pipeline and the significant role it will play in ensuring Britain’s security of energy supply. Increasing the diversity of the European energy mix is particularly important in the context of current events in Ukraine. The recent series of UK ministerial visits to the region underline the value we place on pushing ahead with this key infrastructure project,” Fallon commented.
Despite the wording, the intentions seem clear. Rather than an ideological endorsement, the meeting will be an attempt to reassert British centrality. Given BP’s stake in the TAP project, Fallon can probably make it.
OTHER EVENTS: DONG ENERGY, DELEK GROUP, TECHNIP, LUNDIN
Last week, two oil and gas companies voiced their intention to sell non-core assets. DONG Energy has decided to sell an area previously used by unit 2 of the Ensted Power Station, while Delek Group announced it signed a non-binding MoU to sell its 47% stake in Israeli insurer Phoenix Holdings to US-based Kushner Funding.
Delek’s decision has to do with a law passed by Israeli authorities in December. The law, which prohibits companies from having stakes in both financial services companies and other industrial businesses, is likely to lead to a strategic split of the Group.
A few hours later, France-based Technip reinforced its business ties with Norway’s Statoil, signing a new framework agreement for diving, subsea intervention and repair contingency services.
‘Technip was awarded a new framework agreement by Statoil, Exxon Mobil and Gassco for diving, subsea intervention and repair contingency services. Under the terms of this framework agreement, a replacement of an existing frame agreement held for eight years, Technip will provide these services for the next four years. This contract, effective from December 1st 2014, also includes an option for additional periods up to seven years,’ reads a note released on Tuesday.
On Thursday, Lundin Petroleum signed a deal with Arawak Energy Russia BV (Arawak) to sell its interests in the Sotchemyu-Talyu and the North Irael Fields, Komi Region, Russia.
‘Lundin Petroleum holds a 50% interest in each of the two fields, with Arawak holding the other 50% interest and acting as the operator.’ reads a communiqué.
SO WHAT?
The coming weeks will probably define the future of the gas industry, with significant consequences on geopolitics. Moscow and Kiev perfectly know it. On the other hand, European countries are too sluggish and are reacting too slowly.
That is why, Angela Merkel should not spend too much time satisfying her nationalistic spirit and her passion for football. If she really believes in European integration, this is the moment to prove it. Germans could soon lift the World Cup, but Europe is by far a harder game.
Sergio Matalucci