Week 6 Overview
The spotlight remained on Russia and Ukraine also in the 6th week of the year, with the nexus of political moves and economic decisions partially unravelling over the last days.
The leaders of Russia, Ukraine, Germany and France will meet in Belarus on Wednesday to avoid further escalation. Energy strategies in Russia and the EU are strongly related to the upcoming diplomatic activities. These meetings will influence the future role of gas in Europe.
In this uncertain context, the only clear trend is a progressive development of competitive trading in continental Europe. PEGAS announced it will launch Spot and Future products for the UK’s National Balancing Point (NBP) and for Belgium’s Zeebrugge Beach (ZEE) on March 26.
RUSSIA - UKRAINE - EU
Last months showed that it is almost impossible to de-politicise natural gas. It's very difficult for Russia and Ukraine to even talk to each other about gas, let alone agree anything with each other.
As a result, in January, Ukraine imported the majority of its 2.0 billion cubic meters (bcm) of gas from Europe. Gas imports from Europe totalled 1.1 bcm, with 1.0 bcm coming via Slovakia and 0.1 bcm via Hungary.
Kiev also said it is ready to negotiate a summer package on market conditions, adding that the price in the summer should be in the $250-300 range.
On the other side of the border, Russia perfectly knows that it has many cards left. Moscow knows that it can even increase its clout on Europe’s gas markets, through a mix of changes in its financial strategy and a strong attention to the upstream.
Still, changes are necessary, and Gazprom is proceeding with a restructuring. Part of the gas volumes for European consumers might be sold in the spot market within Russia, in order to reduce Ukraine-related transit risks.
On a political level, at the moment, Moscow is trying to defuse tensions, sending reassuring messages. Energy Minister Alexander Novak said on Friday that the Russia’s gas price for Ukraine can be lowered from its current level of $329 per 1,000 cubic meters.
Despite this superficially relaxed spirit, European political statements betray tensions. For instance, EU Commissioner Cañete said on Wednesday: “When it comes to energy, don't put your fate in the hands of autocratic regimes.”
In this context, Vice-President Maroš Šefčovič reiterated the focus on South-East Europe, confirming his theoretical support for Sofia’s plans to become a gas hub. On the same occasion, he said that the Turkish Stream does not make sense on a financial level.
ALTERNATIVE GAS USAGES
Amid the current tensions with Russia and the fresh focus on renewables, the gas industry is trying to secure alternatives. Romania, Finland and Croatia are likely to be testing grounds.
Romania is the only European country with a mature gas market and well-developed pipeline infrastructure, which does not have natural gas vehicles. Small-scale LNG/CNG as fuel is competitive with diesel prices even if oil prices were to stabilise at a level of $60/bbl, but making the fuel shift from diesel to natural gas requires strong collaboration.
Finland’s Gasum stressed that natural gas could play a significant role in the transportation sector. Decreasing its price of natural gas and biogas in its filling stations, the company tried to give new impetus to gas, stressing it is compatible with climate targets.
In this sense, it is increasingly clear that, rather than burning it in power stations, gas’ biggest contributions could be to generate electricity in private buildings (with the heat as a by-product) or in car transport (replacing petrol and oil imports). If home and car owners have incentives to adapt their energy usage in these ways, gas will prove the transition fuel that many seek.
SHALE GAS: UK, POLAND, DENMARK - A "LOCAL" ISSUE
Wales moved on Wednesday to join with Scotland in the movement against the use of fracking in unconventional gas extraction. The Welsh Assembly voted through a proposal banning fracking in Wales until 2021 to allow health and climate risks to be investigated more extensively.
After the recent change in the political stance on shale gas, the British public opinion followed suit. The flurry of polls about shale gas in the United Kingdom suggests that the majority of British people don’t want fracking in their country.
Despite this trend, the British trade association asked commitment to fracking, advocating that the onshore unconventionals remain a good opportunity to consider.
At the end of the week, on Friday, the UK’s Environment Agency has granted the environmental permits Cuadrilla needs to carry out operations at its proposed shale gas exploration site at Roseacre Wood near Elswick in Lancashire.
In continental Europe, shale prospects remain challenging. In Denmark, Total SA has delayed by several months its plans to drill for shale gas, due to a delay in the manufacturing of the drilling rig.
Poland, which just a couple of years ago was seeing itself as the Kuwait of Europe, has shown that shale gas developments in Europe will have a rather national, and local nature. Polish Prime Minister Ewa Kopacz said that Poland will continue drilling for shale gas despite Chevron withdrawal.
NORDIC COUNTRIES AND THEIR PROBLEMS
Statoil appointed a new CEO with strong financial background. This is a proof of a progressive change toward a new business models.
The company does indeed continue its rationalisation efforts. It mothballed its plans in the Arctic Barents Sea and proceeded with divestments in North America.
At the same time, two Nordic players registered setbacks: Dong booked $1billion in impairment charges; GC Rieber Shipping ASA wrote that two companies owned by private equity fund HitecVision V, LP, had defaulted on debt obligations.
Given the current financial problems, politics will play a key role. The future of the Nordic gas industry will also depend on Norway’s decisions on climate change.
To maintain its clout, the Norwegian gas industry will have to increase cooperation with Baltic countries. For instance, Latvia looks to Norway for the construction of its own LNG terminal.
GREECE, CYPRUS
The new Greek government is reviewing the country’s energy strategy. According to the Minister of Energy, the privatization process of the DEPA natural gas supply company will not move on.
On the other hand, the government endorsed the TAP project, which confirmed it should deliver first gas from the Shah Deniz in 2020.
On Friday, companies submitted their bids for three oil and gas blocks in the west of the country.
Meanwhile, Cyprus had launched a tender stipulating that the first supply from the Leviathan to Cyprus must happen between January 2016 and June 2017. The time frame is unlikely to coincide with production from the Leviathan.
OTHER ARTICLES
Reaching the EU gas entry point: race for hitting Greece border speeds up
Iran’s proposal to deliver Caspian gas to Turkey
Noble Energy reportedly holds negotiations with Egypt
Saipem awarded E&C contract for Kashagan
Reorganisation of state gas utility a problem between Serbia and the EU
LNG Croatia moves toward to prepare for Adriatic terminal
2015 - a year of opportunities for Romania
Oil and gas projects in the Black Sea in light of the global oil price slump
Sergio Matalucci
Sergio Matalucci is an Associate Partner at Natural Gas Europe. Follow him on Twitter: @SergioMatalucci