Week 42 Overview
While Egypt holds Parliamentary elections and Ukraine continues to receive praise for the EBRD-facilitated corporate governance reform of Naftogaz, Turkey and Iran remain under the spotlight for their roles in the ever-changing ties between Russia and the European Union. According to Reuters, the United States is issuing conditional sanction waivers for Iran.
This comes in a moment that European leaders are discussing how to achieve their energy security targets while coordinating to fight climate change. The 42nd week of the year also suggested that Merger&Acquisition operations will continue over the next months.
MERGER AND ACQUISITION OPERATIONS, AND “NEW” PROJECTS
The Polish transmission system operator Gas Transmission Operator GAZ-SYSTEM S.A and the Lithuanian transmission system operator AB Amber Grid inked a trilateral agreement with the EU Innovation Network Executive Agency – INEA. Under the EU’s Connecting Europe Facility (CEF), €295.4 million has been awarded towards GIPL, the gas pipeline between Lithuania and Poland.
Poland's Świnoujście LNG terminal will have a capacity of 5 bcm in the context of Poland's 15 bcm gas demand, which translates into more flexibility. At the same time, Warsaw remains interested in new infrastructure projects to mitigate the risks stemming from complex geopolitical developments. “Out of Spain's 230 bcm of LNG regasification capacity, more than one-fourth is in Spain. But it doesn't matter, because there is no pipeline connection between Spain and Poland, so in case of any crisis we cannot move any gas from Spain to Poland,” Jakub Jaworowski, Poland’s Secretary of State, recently said.
Not all the prospects are rosy. Finnish gas transmission network operator Gasum decided to scrap plans to build a regional LNG terminal in the Gulf of Finland as well as an undersea gas pipeline with Estonia, the Balticconnector. Estonia, however, made great efforts for both, especially the Balticconnector, and says it is not distracted and will continue pursuing them - through other entities or, if needed, on its own.
Meanwhile, it is increasingly clear that companies will sell and buy assets to rebalance their portfolios.
Petrochemicals company INEOS agreed to buy all of the UK North Sea gas fields controlled by the LetterOne, the investment vehicle owned by Russian Businessman Mikhail Fridman. Jim Ratcliffe, INEOS chairman, said that the acquisition will be followed by other similar investments. INEOS is a new entrant to the North Sea.
This is related to another operations that had LetterOne as a protagonist. DEA Deutsche Erdoel (DEA), a company based in Germany controlled by Russian billionaire Mikhail Fridman’s investment firm LetterOne, signed an agreement to buy 100% of E.ON’s shares in E.ON E&P Norge for $1.6 billion, explaining that the transaction will allow DEA to double its current production in Norway. E.ON placed its North Sea E&P business under strategic review in November 2014. Its E.ON’s UK E&P business remains on sale.
Also in Norway, Det norske oljeselskap entered into an agreement to acquire Svenska Petroleum Exploration AS for a cash consideration of USD 75million. ‘This transaction states our ambition of growth on the Norwegian Continental Shelf,’ Karl Johnny Hersvik, Chief Executive Officer of Det norske, commented on Wednesday.
Also Poland’s PKN Orlen continues expansion of its exploration and production portfolio, entering into an agreement to acquire all outstanding shares of FX Energy for USD 119 million, and acquiring an upstream company in Canada for USD 273 million. “In line with our strategy in the upstream segment we strive to achieve potential production of 6 mln boe/y in 2017” Jacek Krawiec, President & CEO of PKN Orlen, said in a note released on Tuesday.
Against this backdrop, new oil&gas assets might become available soon.
Spain’s Repsol said it plans to sell non-strategic assets for €6.2 billion, adding it will cut spending by 38% in the next four years with respect to 2014, as part of a strategy aimed at reducing its debt and doubling EBITDA (at CCS) to 11.5 billion euros. ‘Following the Talisman acquisition, Repsol’s Exploration and Production unit will focus on three strategic regions: North America, Latin America, and South-East Asia, with high potential for organic development’ Repsol added, referring to the $8.3 billion take-over of Canada’s Talisman Energy completed in May.
US-headquartered Schlumberger reported a 33% decrease in revenues in the first three quarters of the year with respect to the same period in 2014. Despite the problems, according to some reports, Schlumberger is still trying to buy a stake in Russia’s EDC stake.
NEGOTIATIONS IN EUROPE AND THE NEED OF A CLEAR ENERGY STRATEGY WITH RESPECT TO KEY STAKEHOLDERS
The CEOs of the ten companies formalised their support for a deal meant to limit global average temperature rise to 2 degrees centigrade. The main points raised in Paris are efficiency, natural gas, long-term investments in R&D, and long-term partnerships.
Meanwhile, in Madrid, European gas market regulators, EU countries and stakeholders discussed Europe’s internal gas market. According to the Commission, the focus is on cross-border gas tariffs, and rules for allocating new gas transmission capacity.
There seems to be a need for more coordination at European level. Norway, the European Union's second largest gas supplier after Russia, has told the bloc it lacked a clear strategy on gas and was therefore cooling willingness to invest in new fields and pipelines, documents published on Tuesday showed, as reported by Reuters.
Similarly, while Italy, Belgium and Bulgaria are trying to mend ties between Azerbaijan and the European Union, several experts asked for more clarity on the European side with respect to Baku. “The European Commission should come up with a proposal and a plan. Where is the clarity dealing with the Southern Gas Corridor? There is a possibility to work together with Azerbaijan to better understand each other and possibly, at some point, to be in the position to help stabilise the Caucasus. We are not at that stage at the moment. Inconsistencies remain” Marc Verwilghen, Director of The European Azerbaijan Society (TEAS) Benelux, told Natural Gas Europe.
European and Azeri authorities were in unison speaking in favour of the Southern Gas Corridor at a conference Wednesday, but minor divergences between Baku and Brussels indicate that continuing efforts from both sides are needed: Europe has to avoid cases of double-standard when considering countries out of its reach, and Azerbaijan should promote transparency in order to attract more European investment.
Despite these difficulties in fostering relations with other countries, French oil company Total S.A.'s (TOT) chief executive Patrick Pouyanne said Thursday he expects competition on the European gas market to increase in the coming years as U.S. producers will eventually supply the market with liquefied natural gas.
MIDDLE EAST (1): TURKEY, AND IRAN
The future of the Russian-backed Turkish Stream gas pipeline is currently uncertain, the US Energy Information Administration (EIA) said in its report.
The developments on the Syrian front are forcing Turkey to re-examine its reliance on Russia, but Ankara’s position remains complicated. Apart from the wider geopolitical change of balances that are observed, there are consequent micro-trends that directly affect the natural gas sector in the region, involving Azerbaijan, Georgia, and possibly other countries.
To cope with the current difficulties, as reported by the International Business Times, Turkey is increasing gas imports from Nigeria. At the same time, the meeting between Germany's Angela Merkel and Turkey's President Recep Tayyip Erdoğan indicate there is still room for a EU-Turkey rapprochement.
Meanwhile, Iran’s Deputy Petroleum Minister for Planning and Monitoring of Hydrocarbon Resources Mansour Moazzami said that Teheran will give priority to export gas to neighbouring countries, while projects to export gas to Europe should be more the result of private investments. “FLNGs are opportunities for the private sector” he explained, as reported by Shana, a news agency linked to Iran's Oil Ministry.
MIDDLE EAST (2): EGYPT
Eni has been awarded two new exploration licenses offshore Egypt, North El Hammad and North Ras El Esh, as a result of a competitive bid round. Eni has been awarded a 37.5% participating interest and operatorship in North El Hammad, where it partners with BP (37.5%) and Total (25%), and a 50% participating interest in North Ras El Esh, where it partners with BP (50%) which will act as operator. The new concessions strengthen ENI’s presence in the Eastern Mediterranean.
The Minister of Energy of the Republic of Cyprus Yiorgos Lakkotrypis visited Cairo on Monday where he met with his Egyptian counterpart Petroleum Minister Tarek El-Molla and Prime Minister Sherif Ismail. The purpose of the visit was to discuss important matters related to energy.
UKRAINE PASSES CORPORATE GOVERNANCE REFORM FOR NAFTOGAZ, PUTIN SPEAKS OF RECOVERY, EUROPEAN COMMISSION CAUTIOUS ON NORD STREAM II
The Cabinet of Ministers of Ukraine approved Naftogaz' governance reform plan facilitated by the European Bank for Reconstruction and Development (EBRD), which will introduce an independent supervisory board with ‘wide authority and responsibility.’ After “a transition period”, Naftogaz is expected to turn into a commercial-like company, with a more finance-based rationale.
A few hours before, on Thursday, Ukrainian Prime Minister Arseny Yatseniuk said that the country has enough funds to buy gas for the coming winter. Yatseniuk also spoke of a partial reduction and restructuring of the country’s debts, explaining that Russia and Ukraine would end up in a “legal war” should Moscow not agree with the terms proposed to its creditors.
At the beginning of the month, Ukraine’s Energy Minister Volodymyr Demchyshyn said that the country will significantly increase the amount of gas stored in its facilities in the coming weeks, also confirming that Russian gas started to flow to Ukraine. “The reserves will be increased from 15.8 bcm to 17-18 bcm” Demchyshyn said in a note released on Monday.
On the other hand, Russia’s President Vladimir Putin said that the country has reached the peak of its economic crisis, adding that the situation is becoming more stable. Meanwhile, Rosneft’s subsidiary in Brasil closed a transaction to acquire PetroRio’s 55% stake in the Solimões project, indicating Russian companies’ intention to diversify their portfolio and to invest in South America.
Renewed ties with traditional partners could be a way out of Russia’s financial impasse. Georgia will consider gas supplies from Gazprom on top of what the country is already receiving from the Russia’s state-controlled energy giant if the proposal is commercially viable, Georgia’s Energy Minister, Kakha Kaladze, said.
Moscow did not give up all its plans in Eastern Europe either, and some projects are bearing good fruit. Russia’s Lukoil announced the discovery of a gas field in the Lira offshore structure at the Trident block (EX-30) in Romania’s deep-sea. ‘According to seismic data, the area of the gas field can reach up to 39 km2, reserves can exceed 30 bln cubic meters of gas, which is to be confirmed during evaluation drilling,’ reads a note released on Wednesday.
Speaking about Russia-EU ties, Reuters wrote on Tuesday that Gazprom is preparing to offer to sell more natural gas to Europe at spot prices to ensure European companies' support for a planned pipeline bypassing Ukraine.
Ambassador Matthew Bryza told Natural Gas Europe that when Gazprom knows it's got to behave like a normal market actor, you will see healthier relations between the Russian gas giant ant the European Union. “I’m getting more and more involved in helping US investors scope out ways to make LNG exports, especially from the northeast US, economically attractive. We all understand the geopolitical attractiveness, meaning Eastern Europe and the US government, but the challenge is to make sure those projects are commercially attractive.”
In conclusion, the European Commission said it is not working on a competition case on Nord Stream II, as the project connecting Russia with Germany is now on the desks of European Commissioner for Energy Miguel Arias Cañete and European Commission Vice President Maroš Šefčovič. Vestager probably wanted to defuse accusations of countries seeing in her position a strong political tool in the hands of the European Union.
SHALE GAS: SCOTLAND, POLAND
Petrochemicals company INEOS take part in a Scottish National Party (SNP)’s conference in Aberdeen, making the case for shale gas in Scotland. The Swiss company’s intervention is part of its ongoing shale gas information programme, which started earlier this year.
Scotland is not the only country where politicians speak about shale.
Today, not much is heard about Poland's shale gas sector following a period of wild speculation and, just a couple of years later, highly publicized abandonment of exploration concessions by players both big and small. “We have 40 concessions for exploration of shale gas resources, 13 new concessions are now being processed – quite new applicants – and those companies are very prepared; there are applications under the old law” Slawomir Brodzinski, Vice Minister of Environment, said.
TAJIKISTAN, AND TURKMENISTAN
UK-based Tethys Petroleum said that it received a notice to withdraw from the Joint Operating Agreement and Shareholders Agreement relating to the Bokhtar PSC in Tajikistan. Total and CNPC asked Tethys to handle over its participating interest to Total and CNP in proportion to their respective interest, but Tethys said it is considering ways to maintain its share in the project.
The possibility of delivering Turkmen energy resources to Europe is under discussion and the Trans-Caspian gas pipeline is a promising project in this regard, Turkmenistan’s President Gurbanguly Berdimuhammadov said during the last government meeting, as reported by Trend.
According to some reports and analysis, Turkmenistan could soon revise its “positive neutrality” position.
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