Week 10 Overview
While the end of a mild winter gladdens the hearts of Europeans, the on-going war of tug between Moscow and the West is pushing energy issues higher on several countries’ agenda. Nevertheless, what seems clear is that Russia’s exports will remain the backbone of the European energy mix. The reticence of Germany’s Angela Merkel to end up in an open confrontation points towards this remaining the status quo.
And in a sense she is right. Despite the transit through Ukraine keeps decreasing as a percentage of the total imports, Russian gas to Europe totalled 167.2 billion cubic meters in 2013, registering a 12% year-on-year increase. As said by the International Energy Agency on Wednesday, Russia’s hydrocarbon will maintain its centrality in the coming years.
Nonetheless, the risks are still there and no European country can turn a blind eye on the developments. Slovakia, Hungary, Czech Republic and Poland top the list. Warsaw will probably be the EU member state paying the higher price for the crisis in the short-term, but indigenous production and LNG opportunities are likely to temper the long-term consequences.
EASTERN EUROPE
On Monday, Polskie Gornictwo Naftowe i Gazownictwo (PGNiG) fell the most on record, with investors concerned for its pipeline route via Ukraine and lower-than expected earnings.
A few hours later, US-based FX Energy announced it started production at the Komorze-3 well in the Fences concession in Poland, registering a 1.1 million cubic feet of gas per day gross in this phase.
“With the additional production from Komorze-3, our company-wide net production is now approximately 14 million cubic feet of gas equivalent per day, with two more wells yet to come on line,” David Pierce, president of FX Energy, said in a press release.
Almost simultaneously, Ireland-based Falcon Oil& Gas announced the beginning of the well testing operations on the Kútvölgy-1 well in Hungary.
“We are pleased to confirm that well testing operations on our Kútvölgy-1 well have commenced. Technical evaluation of the well results obtained so far indicate possible gas pay zones in the Algyő formation that will be tested in the coming weeks,” Philip O’Quigley, CEO of Falcon, commented in a note released on Monday.
Two days after, the arm-wrestling between Moscow and Kiev became even more evident. Russia’s Gazprom decided to discontinue gas price discount for Ukraine starting from April.
“Ukraine hasn't settled the gas debt of the last year and today the country's outstanding debt for current gas supplies is increasing. Gazprom hasn't received any payments for the gas supplied in January, and our Ukrainian partners informed us yesterday that they would not be able to pay in full for the gas supplied in February, ” Gazprom Management Committee Chairman Alexey Miller told Russia’s Prime Minister Dmitry Medvedev, as reported by a note released by Gazprom on Wednesday.
The confrontation goes on, but it seems clear the room for profit will not fade away that easily. Despite increasing uncertainty, some business opportunities for companies remained in Russian territories, especially for American and British companies.
On Monday, a British civil servant was caught with a document addressed to Prime Minister David Cameron, recommending that London should “not support, for now, trade sanctions,” nor should it “close London’s financial centre to Russians.”
On Thursday, US-based ExxonMobil confirmed its intention to proceed with its offshore project in Russia, adding that the schedule did not change.
“A liquefied natural gas project in Papua New Guinea and the largest offshore oil and gas platform in Russia are among significant projects scheduled for startup this year,” reads a press release.
LIQUEFIED NATURAL GAS
The second aspect that clearly emerged last week was the enthusiasm over LNG projects.
Finland’s Gasum has chosen Tahkoluoto, Pori as the location of its first LNG import terminal, with the intention to serve LNG to the entire western coast of the Scandinavian country, from Hanko to Kokkola.
‘The 30,000 cubic metre terminal will improve the availability of LNG in Finland and reduce emissions,’ reads a note published on the company's website on Tuesday.
A few hours later, Portugal’s Galp Energia reported its plan to significantly increase its LNG and FPSO investments, anticipating it would deploy 14 additional FPSO in Brazil and Angola.
‘In the Gas & Power business, the goal is to continue to exploit LNG trading opportunities and maintaining a material natural gas outlet in Iberia, coupled with a flexible sourcing of natural gas and LNG,’ reads a note released on Tuesday.
But Russia did not lose the opportunity to remind everybody about its reserves and strength.
Gazprom and Gazprombank signed an agreement to increase cooperation on LNG projects on Thursday. Gazprom’s Alexey Miller and Gazprombank’s Andrey Akimov conveyed that the Russian bank will have a voice in the Baltic LNG and in the Vladivostok LNG projects.
‘Gazprombank jointly with Gazprom will hold negotiations with international and Russian financial institutions to obtain equity and external financing for the project companies,’ reads the press communiqué released on Thursday.
The bank will have also the opportunity to acquire a stake in the project companies set up to implement the two projects.
SO WHAT?
In conclusion, as the standoff between West and Russia continues over Crimea, Europe possibly will need more LNG from Russia and elsewhere to decrease its reliance on the wobbly transit through Ukraine. Indifference of the international community on Kiev’s future could simply exclude the country, while the ties between Europe and Russia are unlikely to crumble on an ideological ground. Kiev could be the main (if not only) loser of the chess game.
Indeed, if it is not anymore true that all roads lead to Rome, what is certain is that most of the pipelines will lead to Russia for many years to come. The only uncertainties remain the future of LNG and the role of Ukraine in this big international jigsaw.
Sergio Matalucci