European natural gas market wrap-up for Week 13

Week 13 Overview

The 13th week of the year has been characterised by slow developments in the gas industry with potentially significant geopolitical ramifications. The decisions taken in Kiev, Cairo and Beijing are likely to affect the evolution of geopolitics in Europe and beyond. At the moment, the spotlight is on Yemen, but European news is equally important.

1. Under western pressure, Ukraine’s President Petro Poroshenko is trying to create a state with a stronger central government able to keep oligarchs under control. Implications on security in Eastern Europe and the prospects of a stable central government remain unclear.

2. At the same time, Total Chief Executive Patrick Pouyanne made a remark in his interview to The Wall Street Journal. He said that the France-headquartered company is now seeking Chinese financing - up to $15 billion - to fund its $27 billion LNG project in Russia.

3. Finally, Egypt is trying to increase domestic production. Cairo signed several deals to increase the purchase price of gas extracted from new developments by around 40%. This could have an impact in gas production over the next 5 years.

Against this backdrop, the political campaign in the United Kingdom gained momentum. After a strongly politicised Budget Speech earlier this month, the Conservatives position, should they win, their support the gas industry.

UKRAINE: BETWEEN A TORMENTED PAST AND AN UNCERTAIN FUTURE

The Government of Ukraine said on Wednesday that the country will start investigation on Serhii Bochkovsky, Chairman of the State Emergency Service of Ukraine, and his first deputy Vasyl Stoyetsky. While Europe is committing to new measures to support Kiev, the Cabinet of Ministers informed Bochkovsky and Stoyetsky they are suspected of organisation of criminal schemes and transferring funds through offshore companies.

A few hours later, Ukraine confirmed its interest in restoring gas supplies from Turkmenistan during President’s Petro Poroshenko’s meeting with Turkmenistan’s Minister of Foreign Affairs Rasit Meredow on Friday.

However, those are long-term plans, and Kiev is called to take more urgent decisions. Ukraine will decide whether it will buy Russian gas from April 1. It will do so considering the conditions, the price and the need for fuel, said Ukraine’s Minister of Energy Vladimir Demchsyshyn at the end of the Cabinet of Ministers on Monday.

It comes as little surprise that Naftogaz is still hopeful about the prospect of signing another gas deal with Gazprom when the the current “Winter Package” arrangement expires at the end of March. Any temporary agreement is expected to be subject to the arbitral award in the on-going arbitration between Naftogaz and Gazprom, Naftogaz CEO Andriy Kobolyev commented.

Meanwhile, Naftogaz reports that Ukraine holds the largest volume of stored gas in Europe. Ukrainian reserves amounted to 7.74 billion cubic meters (bcm) as of March 22.

The storage facilities are depleted gas fields which were originally produced in the 1950s and they are all in Western Ukraine. According to Alan Riley, these “safe” facilities are close to all the Central European consumers, and could come in handy to store eventual shale gas produced in Western Ukraine.

NORTH AFRICA AND MIDDLE EAST: EGYPT, ALGERIA, LEBANON, CYPRUS

Egypt’s Minister of Petroleum and Mineral Resources Sherif Ismail signed a deal to increase the purchase price of gas extracted from onshore Nile Delta Disouq by 40%. RWE Dea has pledged to raise production.

Algeria made the headlines too.The development program designed by Sonatrach for the period 2015-2019 encompasses about thirty treatment projects, 18 for natural gas and 11 for crude oil. The Algerian company expects to be drilling 260 wells per year.

On the other hand, the commercial development of Lebanon’s hydrocarbon reserves faces many internal and external challenges. Lebanon’s hydrocarbon sector and its institutional and regulatory framework are still in their infancy, Bassam Fattouh, director of the Oxford Institute for Energy Studies, says in an interview.

Italy-based Eni and Korea Gas Corp (KOGAS) came up dry in Cyprus’ waters for the second time in recent months. Nicosia said that the “disappointing” result does not change the prospects of Cyprus’ gas.

TURKEY AND THE SOUTHERN CORRIDOR

As mentioned, the prospects of the Trans-Caspian pipeline are getting brighter, as recent diplomatic meetings hint at a growing focus on Ashgabat’s role in Europe’s energy security. After European officials confirmed on Wednesday that Maroš Šefčovič will visit Turkmenistan in the coming months, Ukraine’s Prime Minister Arseniy Yatsenyuk met with Rashid Meredov, Turkmenistan's Minister of Foreign Affairs.

The Southern Corridor moved on several fronts: Turkey stressed its commitment to realise the TANAP, while Tirana and Rome throw their weight to back the TAP pipeline.

Turkey's Energy Minister Taner Yildiz said that TANAP project will expand the EU's demand for Azeri natural gas. In a press briefing in Istanbul with International Energy Agency's Chief Economist Fatih Birol, Yildiz said that the European Union demand will increase gradually with increasing need of diversification and energy supply security.

Meanwhile, Azerbaijan has re-started development of the Umid gas field. On March 19, SOCAR drilled an appraisal well. Khoshbakht Yusifzaheh, Vice-President of Azerbaijan’s state oil and gas company (SOCAR), told Natural Gas Europe that the firm has announced a tender.

Despite this progress, the Southern Gas Corridor remains unfinished business, writes Manfred Hafner. ‘On the basis of the past experience we can expect this story to be complicated, under certain perspectives even byzantine, but certainly also fascinating and full of twists.’

Alternative projects from Turkmenistan are suffering too. A combination of factors such as the oil price fall and uncertainty about transit via Afghanistan is likely to further delay the launch of the Asian Development Bank-backed TAPI. The estimated cost of the gas pipeline has increased from $7.6 billion to $10 billion, and the estimated price based on oil-linked formula dropped from $10-$11 per MMBtu ($360-$380 per 1,000cm) to $7 per MMBtu ($250 per 1,000cm).

Albanian government officials have gone on record to promote the Trans Adriatic Pipeline (TAP), stating it will be a good investment for Albania and its economy.

Amidst regional opposition in the Apulia region, Trans Adriatic Pipeline AG (TAP) issued a contract notice for the construction of the Pipeline Receiving Terminal (PRT) and the installation of an onshore pipeline in Italy. On Wednesday, TAP explained that the work will cover engineering, procurement and construction of the terminal and the 8-kilometre long pipeline connecting the terminal to the first dry weld at landfall in Italy.

EUROPE: GERMANY, INTERCONNECTORS, AND UK BEFORE THE ELECTIONS

In line with a consolidated trend, Germany further increased its focus on the energy sector and the related geopolitics, signing a declaration of intent with Algeria and meeting with Cyprus’ officials.

Brussels is less focused on foreign affairs, and is paying more attention to internal developments. European institutions declared their interest in starting the construction of the North-South Corridor of energy, transportation and telecommunications, the Central Europe Energy Partners (CEEP) said on Tuesday, after a high-level conference in Brussels with Maroš Šefčovič, European Commission Vice-President for Energy Union. According to CEEP, the cost of these projects equals €50.5 billion, with the majority going to finance energy (€27 billion) and transport projects (€20 billion).

Several countries are trying to lure investments, also to increase domestic production. Zagreb is planning to sign production sharing contracts for oil and gas exploration at the end of May, the first of such kind in the country's history. ''Croatia will surely be an exporter of natural gas,” Ivan Vrdoljak, Croatian Minister of Economy told Natural Gas Europe in an interview.

Private interests across Europe are emerging too. Vermillion obtained a one year extension of an exclusive drilling license in Saint-Just-en-Brie, 50 miles south east of Paris. The top oil producer in France, which holds 70,000 hectares in an area with potential shale gas reserves, could take advantage of eventual political twists in the country.

But these plans are not going to translate into production in the coming months. The oil and gas industry is cutting its 2015 exploration budget by 30%, Wood Mackenzie wrote on Thursday, adding that drilling activity in 2016 is set to recover given a simultaneous 33% decrease in exploration costs.

All in all, it seems clear that Europe’s energy security will come from interconnectors rather than from domestic production. On Thursday, two announcements made this even clearer. Shell UK plans to reduce the number of staff and agency contractors who support the company's operations in British waters by at least 250 in 2015. Meanwhile, National Grid and Statnett announced the final investment decision for a 730-kilometre interconnector between Norway and the UK that should be completed by 2021.

The United Kingdom continues investments in the energy sector, On Friday, it reiterated its commitment to support Carbon-Capture-Storage (CCS) technologies.

London also continues in its effort to support domestic oil and gas production, launching on Monday a consultation on the design of the levy to fund the new Oil and Gas Authority (OGA).

Meanwhile, the debate over shale gas is increasingly regaining footing in England, with shale enthusiasts putting new proposals on the table, and shale skeptics equally voicing their opinions. In this context, Task Force on Shale Gas proposed a single regulator in charge of both permitting and oversight.

BALTIC STATES ASK FOR LNG, MORE TRANSPARENCY

As said earlier this year, Lithuania is trying to be the first European country to receive US LNG deliveries, as early as 2016. Vilnius will have to compete with Spain to achieve this goal.

Baltic states, Poland, and other countries are seeking more transparency and security in Europe’s energy sector. Brussels wants to end secrecy of deals like the one signed by Hungary’s prime minister and Russia’s Vladimir Putin in January. The Hungarian parliament voted to ban for thirty years the release of any details of the deal to finance and build a second nuclear power plant in Paks.