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    Weekly Overview: Russia-Turkey Escalation Outshines Other Recent Developments

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Summary

On December 3, Moscow said that preparatory works on the Turkish Stream have been halted as a consequence of Turkish downing of a Russian warplane last week

by: Sergio

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Top Stories, Weekly Overviews

Weekly Overview: Russia-Turkey Escalation Outshines Other Recent Developments

While international delegations at the 2015 United Nations Climate Change Conference (November 30- December 11) are mounting pressure on coal despite the risks of declarations not turning into practice, the spotlight remains on Russian President Vladimir Putin and Turkish President Tayyip Erdogan, whose war of words looks to be spiraling out of control. 

The two politicians are being called upon to maintain their strong image at home in order to maintain their grip on domestic politics. As a result of this mix of domestic and international politics, the situation is getting more complicated, affecting energy projects previously meant to promote ties between the two countries. On December 3, for instance, Moscow said that preparatory works on the Turkish Stream have been halted as a consequence of the Turkish downing of a Russian fighter jet last week.  

TURKEY AND RUSSIA: ESCALATION STILL TO COME? 

At the beginning of the week, Russia’s ambitious project for its Turkish Stream gas pipeline across the Black Sea looked set to become the next casualty of the tensions between Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan. The tensions achieved little more than confirming that Russia has already concluded that its priority in developing new gas connections to Europe is the planned Nordstream 2 pipeline 

Russian Prime Minister Dmitry Medvedev then ratified on November 30 the sanctions which prohibit the import of Turkish food products to Russia, including poultry, fruit and vegetables. The decree is also meant to take a toll on tourism in Turkey, but it does not include the energy sector.

A few days after those sanctions were imposed, on December 3, Russia’s Energy Minister Alexander Novak said that preparatory work on the Turkish Stream pipeline project has been temporarily suspended. "Currently work on Turkish Stream has been halted," he said in Moscow.

RUSSIA’S STRATEGY: EUROPE, IRAN

Rosneft, Russia’s third-biggest gas producer, is intensifying its efforts to rebalance its portfolio and strengthen cooperation with European companies, closing a purchase transaction with France’s Total for a 66.67% share in AET-Raffineriebeteiligungsgesellschaft mbH and announcing the completion of the transaction to sell a 20% share of Taas-Yuryakh Neftegazodobycha LLC to UK-headquartered BP 

Novatek, which is the second-largest gas producer in Russia, announced the start of commercial production at the major Yarudeyskoye oil field. The Yarudeyskoye field can “significantly contribute” to Novatek’s free cash flow generation.  

OMV and Gazprom, two of the shareholders in the Nord Stream-2 project, met on December 1 to discuss the Nord Stream-2 expansion project. The parties also discussed an asset swap and oil supplies to OMV from the Gazprom Group portfolio. 

Gazprom is not looking just to Europe, but is also considering its options in Iran.

The Russian gas giant has been negotiating with some Iranian companies to buy oil and gas equipment, Reza Padidar, head of the Society of Iranian Petroleum Industries Equipment Manufacturers (SIPIEM), told TASS. He explained that Gazprom is interested, first of all, in buying pressure and temperature control valves on pipelines as well as automatic control systems

At the same time, it is clear that Russia is ready to invest in Iran’s gas exploration and production projects, a senior official of the company said.

Moscow is particularly interested in implementing gas storage projects in Iran, Hamid-Reza Araqi, managing director of the National Iranian Gas Company (NIGC), said on November 27.

If commercial ties are clearly important, diplomacy plays a significant role too. 

Russian Energy Minister Novak  said his country is ready to cooperate with Saudi Arabia in a number of areas, including energy. "From our side, we are ready at the governmental level to review and, where possible, remove obstacles arising in the way of expansion of trade-economic ties,” he said on November 26. 

Minister Novak also met with Greece’s Energy Minister Panos Skourletis in Moscow on December 2. “The sides discussed cooperation in the energy sector. In particular, they talked about cooperation in the gas sphere,” the Russian Energy Ministry wrote in a statement.  

Additionally, a Russian jet fighter entered Israel's airspace and was safely diverted without incident, possibly signalling a new East-Med coalition. The cooperation between Israel and Russia is part of a broader coalition in the Middle East. Its probable members are Israel, Cyprus, Greece, Egypt, Jordan and Russia. 

UKRAINE, EASTERN EUROPE AND NORD STREAM II

On November 26, several EU Member States forwarded a letter to the European Commission objecting to the proposed Nord Stream 2. The project is considered by many a threat to Ukraine too.  Professor of Law at City Law School, City University, London Alan Riley advocates that Ukraine has to move rapidly to fully reform its gas market, complying with the EU energy acquis, and to decrease the consumption of Russian directly supplied gas.

However, the Bulgarian government said recently that it will not oppose the Nord Stream pipeline connecting Russia with Germany via the Baltic Sea, confirming that Sofia did not sign a letter promoted by Eastern European countries against the project. “I will defend the position for the construction of Nord Stream II and (a) gas hub in Bulgaria” Prime Minister Boiko Borisov said November 30

Pressure in the gas pipeline to Bulgaria allegedly dropped after Russia suspended gas deliveries to Ukraine. However, according to the government, the pressure remains within the contractual parameters. 

However, Ukraine transmitted 203.6 million cubic metres (mcm) of gas to the EU and Moldova on November 26, Ukrtransgas and Naftogaz revealed, adding that the orders were satisfied in full. "In response to constant Gazprom claims about instability of Ukrainian transit after Ukraine’s decision to stop procuring gas from Gazprom, our company started publishing daily information on the volumes of transmitted gas," Ukrtransgas' press office wrote in an email statement on November 30.

GAS PRODUCERS IN EUROPE: NETHERLANDS, NORWAY

The Netherlands imported more natural gas than it exported in May, July, August and September 2015, showing how the cap on production from the Groningen gas field is having an effect on the European Union’s main gas producer. According to data released by Statistics Netherlands, the country’s gas consumption is mainly stable, but indigenous production decreased.

Nonetheless, Dutch companies and experts are trying not to miss out on other opportunities, capitalising on their expertise. Lithuania and the Netherlands recently held the two countries’ first-ever forum on liquefied natural gas (LNG). A good deal of attention in the event was paid to LNG use as a fuel in road transport and off-grid gas supply to isolated settlements 

Royal Dutch Shell announced on December 3 that its recommended takeover of BG Group has received approval from the Australian Foreign Investment Review Board (FIRB). The FIRB's decision leaves China as the last regulatory hurdle to the deal. 

In pure production terms, especially in light of recent Dutch decisions, Norway is increasingly important for Europe’s energy security.

Elsewhere in company news, Norway's North Energy signed a sale and purchase agreement with Lime Petroleum to sell its 10% stake in production licence (PL) 707 in the Norwegian Barents Sea. The effective date of the agreement is set at 1 January 2016, and the transaction is conditional on the approval of the Norwegian authorities.

Additionally, the Norwegian Petroleum Directorate (NPD) granted Lundin Norway a drilling permit for well 16/4-10 on the Fosen prospect in the prospective Utsira High area of the Norwegian North Sea, at a moment when the Swedish company is trying to increase its assets off Norway. 

In the past week, Statoil delivered its application for the 23rd licensing round on the Norwegian continental shelf (NCS), the first opening of new acreage on the NCS since 1994. Norway’s Ministry of Petroleum and Energy is expected to announce the awards within 7 months.

Statoil also agreed to sell its 20% interest in Trans Adriatic Pipeline AG to the Italian gas infrastructure company Snam SpA for a total consideration of €208 million. This amount is for both Statoil’s shares in TAP and its pro-quota portion of the loans currently granted to TAP by its shareholders. 

ALTERNATIVE GAS SUPPLIERS: IRAN, AZERBAIJAN, EAST MED

Over the last days, Iran introduced several oil and gas fields in central and southern parts of the country to foreign investors, two senior company officials recently said. The nine oilfields are currently producing 100,000 barrels per day (bpd), but their output can be reportedly increased by 170,000-200,000 bpd.

On November 28, Tehran hosted 137 companies from 45 countries for a two-day conference, during which legal generalities of Iran’s new model of oil and gas contracts were introduced.However, it is unclear how the output percentage system will work in gas projects

Remaining in the same region, a new production sharing agreement that will enable expansion of the Azeri-Chirag-Guneshli (ACG) mega-structure in the Caspian Sea, offshore Azerbaijan, is due to be signed.

Over 50% of planned work has been completed within the second stage of development of the giant Shah Deniz gas and condensate field in the Caspian Sea, offshore Azerbaijan. The project is on target for production of first gas in late 2018, operator BP has said.

Saying it has been working with Azerbaijan, the U.S. confirmed its support of the Southern Corridor. “Today, pipe is being welded–it's something that's actually taking place,” Robert Cekuta, U.S. Ambassador to the Republic of Azerbaijan, said in a recent conference.

The Mediterranean could potentially be an alternative gas supplier as well, despite an increase in regional domestic consumption. 

After the meeting of its CEO Claudio Descalzi with Egypt’s President Abdel Fattah el-Sisi in Cairo on November 26, Italy’s Eni announced it will commence the development of the Zohr field in January. 

Edison, a subsidiary of France's EDF, is expected to announce in the near future the discovery of a new big gas field in Egyptian territorial waters, Zvi Mazel, a former Israeli diplomat and a former ambassador to Egypt said, though that assertion was challenged in the Knesset (Israeli parliament).

In other Eastern Mediterranean news, Cyprus’s Minister of Energy, Commerce, Industry and Tourism said in an interview to CNA that he was awaiting a decision by France’s TOTAL regarding the company’s involvement in Cyprus’ Exclusive Economic Zone (EEZ). The company’s exploration licence in Block 11 expires in February 2016 but the French giant is believed to be interested in renewing its contract. 

In light of that statement, it came as little surprise that, on December 3, the Government of the Mediterranean island then approved a two-year renewal of TOTAL’s exploration rights in Cyprus’ Exclusive Economic Zone (EEZ). 

OTHER EUROPEAN ISSUES: FRANCE, EUROPEAN INTERNAL MARKET 

Residential consumers throughout Europe did not fully benefit from the decrease in wholesale energy prices in 2014, the Agency for Cooperation of Energy Regulators (ACER) and the Council of European Energy Regulators (CEER) wrote on November 30. On the other hand, ACER and CEER wrote that, concerning gas, there is an increasing price convergence among EU hubs as well as a narrowing gap between hub and long-term contract prices.

At the same time, France does not want to be sidelined by the new "Ostpolitik" of Berlin which now promotes stronger energy ties with Gazprom via its Nord Stream-2 project. Germany and France are vying on who is going to take the bulk of Russian gas supply, thus raising either country's position as the main re-distributor of gas to the rest of Europe, writes Ioannis Michaletos for Natural Gas Europe, referring to EDF’s strong interest in supporting the ITGI project.  

The fiscal gift of gasoline (petrol) price discounts, announced in October by the French government, will be nullified by the effects of the long anticipated carbon tax. The decrease of gasoline prices at the pump, intended to encourage car drivers to change their habits, is not going to happen any time soon 

UK, SHALE GAS AND ENVIRONMENTAL ISSUES 

Chemical giant INEOS announced on December 2 that it completed a transaction to acquire all of DEA Deutsche Erdoel's UK North Sea gas field assets, including the Breagh and Clipper South fields. The gas from the fields is enough to provide up to 8% of the UK’s gas, INEOS said. 

Despite a difficult year for the industry, UK Continental Shelf oil and gas production rose in the period of July to September 2015, statistics from the Department of Energy and Climate Change (DECC) show. In its Energy Trends and Prices report released on November 26, the DECC said that indigenous energy production rose by a record 14.2%, a figure that was contributed massively to by increased UK Continental Shelf production.

In an unusual move, UK Secretary of State, Greg Clark, sent a letter to Lancashire County Council on November 27, saying that he will now be stepping in to make a decision about whether a search for shale gas can go ahead. Lancashire County Council has been instructed that the secretary, not an inspector who would usually be tasked with the decision, will decide on two appeals in front of the council. 

In other unconventional resource news in Europe, recent research confirmed the 2012 estimations about the size of the shale gas deposits in Poland, Radio Poland reported on November 27.

Finally, climate change and greenhouse emissions were big news in Europe in the past week, thanks to the Paris Climate Summit which took place. One body said that, in meeting targets, coal would present a major challenge. Current coal plant plans drastically threaten global warming goals, a climate change group said a few days later. In a statement released on December 3 at the Paris Climate Summit, the Climate Action Tracker group says that if all planned coal plants are built, by 2030, emissions from coal power would be 400% higher than what is consistent with a 2°C pathway.

INTERVIEWS AND OTHER CONTRIBUTIONS:

Malcolm Keay, David Buchan on Europe’s Energy Union 

Interview with Azerbaijan's Energy Minister Natig Aliyev 

Interview with Homayoun Falakshahi, and Ann-Louise Hittle on Iranian petroleum contracts

Interview with former Israeli Navy Chief about marine infrastructure security

Aura Sabadus on Turkey-Russia stand-off

Georg Zachmann on Ukraine’s efforts to reform Naftogaz

Alan Riley on Nord Stream 2 project

Six views on Russia-Ukraine gas ties for coming winter

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