Week 42 Overview
Russia is definitely able to outshine Europe, America and China in something: President Vladimir Putin’s declarations have the power to resonate on all the media, as a bolt from the blue. Other world leaders don’t have the same wide appeal.
It comes as no surprise that Russia made the headlines of many newspapers in the 42th week, despite many intergovernmental meetings in Washington and Milan. All eyes were on Putin, and many world leaders tried hard to speak with him. Germany’s Angela Merkel awaited him for a long afternoon in Milan, on the sidelines of the ASEAM summit. But, despite her perseverance, Europeans did not achieve their task. Kiev and Moscow did indeed agree on three principles, but did not come to a conclusive deal. Russian and Ukrainian authorities will meet in Brussels on October 21. Gas negotiations will continue.
Meanwhile, the TAP project registered some successes and some marginal problems.
RUSSIA: CHINA, ROSNEFT, SERBIA, UKRAINE
It is clear that Moscow seeks an acceleration of its business ties with China. On Monday, Russian Prime Minister Dmitry Medvedev suggested that the two countries could soon come to an agreement on a second pipeline.
“We would like to come to an agreement in the next year,” Medvedev commented during the 19th Regular Meeting of the Heads of Government of Russia and China.
Russia’s PM referred to the Western Route, which would be the second pipeline connecting the countries after the Power of Siberia. According to some reports, the second pipeline would deliver almost the same amount of gas - around 30 bcm, compared to 38 bcm to be delivered by the Power of Siberia.
While Russian authorities were holding negotiations and signing agreements with Chinese Prime Minister Li Keqiang, Russian companies sent out a clear message.
On Tuesday, Rosneft said that its subsidiary Rospan International performed hydraulic fracturing at the Urengoiskoe field which resulted in a significant increase in production rate.
A few hours later, Gazprom Neft announced additional investment in the Orenburg region.
‘Gazprom Neft Orenburg (a subsidiary of Gazprom Neft) has completed the 100% acquisition of OOO Yugra-Intek, which has a licence to search, explore and produce oil in the Kuvaisky licensing area in the Orenburg region,’ reads a note released by Gazprom Neft, adding that the company will continue the geological survey in the area close to the borders with Kazakhstan.
In this sense, Russian companies made clear that they will go on despite the sanctions and the difficulties. They will find a way to remain central in European gas markets.
One day later the announcements by Rosneft and Gazprom Neft, it became even clearer that negotiations about Ukraine is also an instrument in Moscow’s hands to obtain concessions from European authorities. The Kremlin will play hard to receive the green light for its South Stream project.
Construction works of the South Stream project in Serbia remain a big question mark, as Belgrade keeps swinging between an outspoken support and a more doubtful stance.
In this context, Putin met Serbian authorities on Wednesday.
‘Prime Minister Aleksandar Vucic announced today that concrete forms of cooperation between the two countries in the fields of economy, energy and agriculture will be considered during tomorrow's visit of Russian President Vladimir Putin to Belgrade,’ reads a note released by the Serbian Government on Wednesday.
As said, the arm-wrestling for the South Stream project will go hand in hand with the negotiations for an interim gas deal with Ukraine, which seemed more likely after the meetings in Milan.
“We agreed on basic parameters of the gas contract,” Poroshenko said in Milan on Friday, after a meeting with European authorities.
Similar declarations have been made by European Commissioner Günther Oettinger on September 26. In practice, those words did not lead anywhere. That is why, some skepticism about a deal before the winter is more than reasonable.
EUROPEAN PROBLEMS: DIVERGENT POSITIONS, STRESS TEST
The last days clearly suggested that gas price volatility shows no sign of abating over the the coming winter. Prices will indeed change quite fast in the coming months, indicating that Europe’s energy security cannot be taken for granted.
There are some new projects - mainly electricity interconnectors. Last week, for example, the parts clinched a deal for a project connecting Norway to Germany and the UK.
Despite the attempts, Norway’s interconnection capacity, which is expected to increase by 50% in the coming years, will not be enough.
In this context, some new local gas reserves would be much welcome, but the situation does not seem to be evolving.
Energy heavy weights like France did not change its mind and don’t consider to support unconventional resources. Paris remained strongly against shale gas. According to a recent report, there is indeed a broad cross-party opposition to unconventional operations in the country.
‘Recent survey by pollsters BVA for the journal 20 Minutes found that 62% of French citizens are hostile to shale gas operations, 31% somewhat opposed and as many again are strongly opposed,’ reads a post of the blog Schiste Happens.
This legitimate position indicates that there is little room for a well-orchestrated strategy to cope with eventual shortages of gas. It also prove British authorities right: there are significant divergencies across the continent when it comes down to energy policies.
As UK’s Edward Davey wrote on Thursday, European leaders have different interests.
“A number of Member States wanted to ensure that energy security was discussed in tandem with the 2030 framework for climate and energy policies and others had concerns over interconnection targets. I broadly supported the report as a useful contribution to the debate on energy security,” Davey said on Thursday referring to the Informal Energy and Environment Council in Milan on 6 October.
And the statement is not reassuring, considering the result of the Gas Stress Test published on Thursday.
‘A prolonged supply disruption would have a substantial impact in the EU, with the Eastern Member States and the Energy Community countries being affected most. Altogether, the EU and the Energy Community Contracting Parties, excluding Ukraine, could be missing between 5-9 bcm, even after reshuffling their supply mix,’ the European Commission wrote in a memo released on Thursday evening.
The note explained that a cooperative approach could and should help Eastern European countries, which are the ones more likely to suffer the consequences of the stall.
‘In general, the Stress Tests showed that a market-based approach should be the guiding principle, with non-market measures (i.e. the release of strategic stocks, forced fuels switching and demand curtailment) only kicking in when the market fails.’
WAYS OUT?
The 42th week stressed the relevance of two possible ways out - Azeri and Algerian gas.
On Monday, Norway’s Statoil sold its 15.5% participating interest in the Shah Deniz production sharing agreement and other related assets to Malaysia’s Petronas for $ 2.25 billion.
The Shah Deniz field, which was discovered in 1999, is operated by BP (28.8%), TPAO (19%), SOCAR (16.7%), Lukoil (10%), Nico (10%) are the other partners.
Despite the sale, the project connecting Azerbaijan to Europe seems to proceed at full steam.
Turkey and Azerbaijan clinched deals to progress with the TANAP pipeline, awarding contracts for pipes supply to three Turkish companies.
"Despite the economic crisis in many countries, Azerbaijan and Turkey were able to implement major economic projects," Turkish Prime Minister Ahmet Davutoglu commented as reported by Azernews.
Additionally, on Wednesday, Trans Adriatic Pipeline AG (TAP) issued the first major Invitation to Tender (ITT) for the construction of the onshore section of the pipeline, asking engineering companies to present their projects for the 760 km onshore pipeline in Greece and Albania.
TAP’s Procurement Director Knut Steinar Kvindesland said it is the largest contract that the company intends to award.
In this context, the main risk stems from a possible confrontation between Ankara and Brussels. As demonstrated by recent declarations of European authorities, tensions between Cyprus and Turkey remain a threat to Turkey’s integration process, a possible hurdle endangering better ties between Ankara and the European Union.
ALGERIA
Algeria announced its intention to move forward with its exploration plans in the North of the country, adding it plans to begin shale gas production by 2022.
"We have a great hydrocarbon exploration potential in the country's North and we seek to encourage energy investment through partnership," Energy Minister Youcef Yousfi said on Sunday as reported by Algeria Press Service.
Yousfi made clear that Algeri will try to promote a modernisation of the current infrastructures, trying to optimise the investments and avoiding wastes. Yousfi sees 5 foreign companies to help Sonatrach in this difficult process.
This rationalisation is expected to go hand in hand with a production growth. Algerian authorities also see a strong hike in unconventional gas production.
“By 2025, we could also achieve a production level of about 10 bcm of shale gas,” Sonatrach’s interim CEO Said Sahnoune commented.
SO WHAT?
The last days indicated some ways out that are medium/long term solutions. But the problem is that Europe also needs short term solutions to avoid the worst case scenario depicted by European authorities in the results of the Gas Stress Test.
Investing in infrastructure is the main card in European hands, but this has been well known for years. What happened in Georgia bodes well for the future. The country did indeed move forward with its plan to complete the Gori-Kareli section of the gas pipeline connecting Gori to Kutaisi.
‘Construction of DN 700 Gori-Kareli 20 km section of the main gas pipeline continues and 73% of construction works are already completed,’ reads a note released by Georgian Oil & Gas Corporation on Thursday.
Georgia is a good example, but it is unlikely that the Gori-Kareli pipeline will be soon followed by similar constructions in other neighbouring countries. Political uncertainties in Romania and Bulgaria do indeed remain a stumbling block to European integration, confirming once more that the main problem of Europe rests in its political class. Short-term solutions do indeed require speed and knee-jerk reactions, something that politicians of the Old Continent visibly lack.
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci