Week 38 Overview
There are many rumours in the oil and gas industry, though some are more plausible than others. Speaking about the realistic ones, some experts told Natural Gas Europe that European companies could announce new discoveries in the Eastern Mediterranean.
Apart from these rumours, minor announcements indicated that Italy’s ENI and France’s Total might join forces. The two companies did indeed enter into a special license and R&D Cooperation Agreement for ENI Slurry Technology (EST). The two companies started on Monday to work together to evaluate and tailor the technology to Total’s requirements. If the deal is nothing major, it still indicates that ENI and Total are able to coordinate and maintain good ties. That’s important.
ENI’s newly discovered reservoir is located only 6 kilometers away from Block 11 of Cyprus’ EEZ, licensed to France's Total. The Cypriot government announced on Tuesday through its Minister of Energy Yiorgos Lakkotrypis that it is currently investigating if the Zohr field extends into Cyprus’ EEZ.
In this sense, the deal reached by the two companies over the last days could open the doors for more relevant partnerships in the upstream business.
Apart from the Eastern Mediterranean, ties between Russia and Europe have been the main focus of experts and companies. The whole debate about Nord Stream II - and Turkish Stream - reached another level during the 38th week.
Against this backdrop, one has to keep in mind that difficulties for the oil and gas industry are set to remain at least for other two years, Moody’s said on Monday, adding that drillers could be the first to suffer the low oil price environment and the decrease in day rates, which is the amount oil companies pay drillers per day to operate an oil rig. In its "The Worst Is Yet To Come For Offshore Drillers” report, Moody’s said it expects oil prices to remain low through 2017 because of a combination of strong US dollar and slowing growth in China.
NEW PIPELINES FROM RUSSIA TO EUROPE: RUSSIA-LED PROJECTS
The Council of the European Union extended by 6 months the application of EU restrictive measures targeting Russian companies and people. ‘The asset freeze and travel bans against 149 persons and 37 entities have been extended until 15 March 2016’ reads a note released on Monday, arguing that the restrictive measures ‘target actions against Ukraine's territorial integrity, sovereignty and independence.’
TheNord Stream I project managed to secure its status as part of the Trans-European Networks (TEN). This exempted Nord Stream and its associated projects from several Third Energy Package stipulations, including requirements for guaranteeing third-party access and unbundling ownership from supplies, enabling Gazprom to reserve pipeline capacity for itself that it otherwise would have had to auction off to other companies.
But this does not seem likely for Nord Stream II. European Commissioner for Energy Miguel Arias Cañete, who was just back in Brussels from a short trip to Rome, said that he does not know whether ENI is set to announce other discoveries in the Eastern Mediterranean. In a interview made on the sidelines of a conference on Wednesday, Cañete confirmed that the executive body of the European Union does not intend to allow further concessions to the project.
Despite Cañete’s declarations, Gazprom’s five partners in the Nord Stream II project remain united. On Thursday, E.ON made the case for third-party access (TPA) exemption for OPAL extension. Indeed, the European companies that recently signed the Shareholders’ Agreement on the implementation of the Nord Stream II with Gazprom continue their tour through Brussels, intervening in several conferences in the European capital to voice their interest and deliver their message.
The agreement concerning Nord Stream II represents itself a success for Russia. It indicates the consent of Berlin and other Western European capitals to reviving cooperation with Russia in the gas sector, Szymon Kardaś, Agata Łoskot-Strachota and Konrad Popławski wrote. However, there are currently no established sources of funding for the project.
On the other hand, Eastern European countries seem more reticent to increase ties with Moscow. As a result, if nothing changes, Gazprom is set to lose ground there.
“EU “unbundling" regulation already implemented in Lithuania and Estonia and due to be implemented in Latvia in the future will split up Gazprom’s ownership in key energy companies, reducing its monopolistic advantage” Agnia Grigas, non-resident Senior Fellow at the Atlantic Council, told Natural Gas Europe.
Romania's intention to stop importing Russian gas will not affect export revenue of Gazprom, said Ivan Grachev, head of the RF State Duma Energy Committee. "Russian gas consumption in Romania is lower than random fluctuations of Gazprom exports to Europe", added Mr. Grachev. According to Mikhail Korchemkin, there still is a significant gas demand in Romania but it is beyond the reach of Gazprom at the current contract terms.
Acting as an intermediary for gas supplies to the Świnoujście LNG terminal, Polish Oil and Gas Company (PGNiG) reached an agreement with Qatargas for LNG for cool-down and start-up operations. 'In addition to these, the EPC Contractor - under the Annex of 9 September 2015 to the EPC Contract - is financially liable for the process of unloading and receipt of LNG for the purposes of Terminal’s start-up,' reads an emailed note.
Alongside gas from Qatar, coal remains important for Poland, and its dominance as a fuel for power generation does not look to diminish. “Today, the best way to reduce CO2 emissions is to replace the old power plants with new ones which generate many fewer greenhouse gasses per energy unit – this is the best way to decrease those levels and maintain the competitive advantage of the European Union's industry” Jerzy Podsliado, President of the Board, Weglokoks S.A., said.
Bulgaria might be the only exception in Eastern Europe, the only place where Russia has still an open door. “As of today, we have no written text to inform us the South Stream [gas pipeline project] has been terminated; the pipes are in Varna and Burgas […],” Bulgarian Prime Minister Boyko Borisov said, as reported by FOCUS News Agency.
TURKISH STREAM: ONE STRING FOR SURE, SECOND POSSIBLE, THIRD AND FOURTH UNREALISTIC
Turkey’s gas demand is even more of a certainty, but geopolitics and politics play a major role in the region.
The lack of any formal agreement between Ankara and Moscow about the Gazprom-led Turkish Stream comes along with likely delays and certain doubts over the project’s future. According to Gazprom, the delays of the 63 bcm pipeline connecting Russia with Turkey have to do with political difficulties in Turkey.
Feridun Sinirlioğlu, Minister of Foreign Affairs of the Republic of Turkey, payed a working visit to Russia. The meeting with Russian Minister Sergei Lavrov, which took place on Wednesday and Thursday in Sochi, was designed to discuss bilateral ties and regional issues, Syria included. This came in a moment several Turkish reports wrote that Ankara cannot be held responsible for the delays registered by Turkish Stream.
All in all, it seems clear that the first string of Turkish Stream will come true, experts agreed on Friday, explaining that the pipes to build the project can be easily transported from Varna (Bulgaria), and that the internal corridor within Russia bringing gas from Siberia to the Russkaya compressor station near Anapa is already in place. The second string is in doubt, while the third and the fourth seem completely unrealistic.
SOUTHERN CORRIDOR, AND IRAN
Despite the political and security threats, Turkey continues to implement energy projects in the country’s southeast, the Turkish Ministry of Energy and Natural Resources told Trend Sept. 14.
Experts agree that there is not a reason for Ankara to stop energy projects connecting Turkey to Azerbaijan.
Should it manage to acquire the 66% stake negotiated since 2013, Azerbaijan’s SOCAR said it could sell 16% of Greek gas grid operator DESFA to a European company. President Rovnag Abdullayev also confirmed what Greek authorities said in August - the parties could reach a deal by the end of the year.
While it is reasonable to imagine a larger clout of Azerbaijan, Iranian potentials are more difficult to read.
Brenda Shaffer, Visiting Researcher and Adjunct Professor at Georgetown University, predicted that while much energy diplomacy is likely to be seen between Europe and Iran, there is no doubt that the country becoming a major supplier to the old continent is a long way down the road. Sara Vakhshouri, President of SVB Energy International, opined that the production of Iran's South Pars gas field is very likely to double by 2018.
RUSSIA’S SITUATION, UKRAINE’S INTENTIONS
The last days showed how market consolidation has to face both financial and political hurdles, as Moscow reportedly said it could set additional conditions before giving its green light to Schlumberger's bid for a stake in Russia's Eurasia Drilling.
Explorations might slow down too.
Despite voicing its interest to work with Dutch shipbuilding Damen Shipyards on vessels for the Arctic region, Rosneft’s Far North mission is set to be slowed down by Western sanctions in relation to the ongoing arm wrestling over Ukraine. ‘Drilling in the Barents and Pechora seas could begin in 2017-2021,... while in the Kara Sea could begin in 2020-2021’ reads a note released by Russia’s Ministry of Energy, explaining that exploratory drilling in the Laptev Sea should start in 2022, while production in 2029-2031.
Finally, discussions on the terms of a new Winter Package for Ukraine will continue next week. Kiev announced it will soon come up with a clear position on gas talks with Russia.
Kiev is willing to pay an average European price for Russian natural gas deliveries, but it should not include transit fees, Ukrainian Energy Minister Volodymyr Demchyshyn said Tuesday, as reported by Sputnik.
EUROPEAN NEWS: NORWAY, ENGIE, SHALE IN UK
While Norway’s monthly gas production exceeded forecasts for the third month in a row and Statoil continued awarding contracts for Johan Sverdrup, a small Norwegian company - North Energy ASA - announced its intention to lay off personnel a few hours after the Petroleum Safety Authority Norway thrashed the Norwegian company for non conformities in connection with its Sleipner gas field in North Sea. These developments perfectly explain the current complexities of the gas industry in these tough market conditions.
Despite difficulties, Statoil intends to maintain its centrality in Europe, putting the first subsea gas compression facility on line at Åsgard in the Norwegian Sea. Speaking about the subsea technology, the company said it is a game changer in deep waters.
France-headquartered ENGIE is diversifying its portfolio with a series of investments in the last hours ranging from Australia to the Netherlands. On Thursday, GDF SUEZ E&P Nederland completed a farm-in with Hansa Hydrocarbons Limited for a 30% interest in its 4Quads licences (blocks G18, H16, M3 and N1) in the Dutch North Sea.
The third report of the Task Force on Shale Gas argues that shale gas has a role to play in the UK energy mix over the medium term, adding that the unconventional hydrocarbon industry could help developing Carbon Capture and Storage (CCS) technologies, which are considered crucial in the long run. The Task Force will publish its final report in December 2015 covering economics, together with its final conclusions and recommendations.
NEW DISCOVERIES IN EASTERN MEDITERRANEAN?
Eni's Zohr discovery, and those that will follow, may push to modify certain terms and conditions of future regional gas supply contracts, including gas prices and contracts duration, Shaul Zemach, Former Director General of Israel's Ministry of Energy and Water Resources, told Natural Gas Europe. With two Majors substantially investing in the Egyptian offshore gas targets it would be reasonable to anticipate results in new discoveries, Zemach added.
The European Commission is trying to come up with a gas strategy, turning the spotlight on Italy’s ENI and on storage capacity. ‘Mr Descalzi and Mr Cañete … underlined that ENI’s super giant gas discovery offshore Egypt, along with other important discoveries made in recent years offshore Israel and Cyprus, will allow the East Mediterranean gas hub to contribute significantly to European energy security,’ reads a note released by ENI on Wednesday.
It comes as no surprise that Israel and Cyprus are expected to coordinate to find a common way to sell their offshore riches. For Israel, an option would be to export the gas via Turkey to Europe. The ongoing peace talks to solve the Cypriot problem may lead to a settlement of the dispute that would allow Israel and Cyprus to reach the European market via Turkey.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci