Week 16 Overview
The 16th week might have seemed dominated by diplomatic efforts to solve the standoff in Ukraine, but the last days have shed light on something probably more important and concrete. If confusion was evident in Brussels and Kiev, it was equally clear that Russia is moving closer to China. Without a shadow of a doubt, Beijing could be the main winner of the on-going situation and Turkey could follow in its footsteps. As Europe needs to find new gas, Moscow needs to find new buyers and possibly new commercial partners. Beijing and Ankara are at the top of the list.
CONFUSION ABOUT UKRAINE
Industry participants and investors expressed opposed views on future relations between Moscow and Brussels. Over the week, several analysts released research notes.
“The escalation sharply increases risks of an all-out civil war in Ukraine," said Bank of America Merrill Lynch, sounding more alarmed about the current situation than its peers.
On the opposite side of the spectrum, Goldman Sachs Group and Citigroup dismissed the possibility of further worsening of diplomatic ties.
The two financial services firms suggested that the interdependence between Russia and Europe would stop any further tension.
Confusion continued also at the end of the week, when anti-government groups in Donetsk said that they would not withdraw from municipal buildings, as defined on Thursday by Russia, Ukraine, the EU and the United States after their 7-hour meeting in Geneva. It seems clear that nobody knows the outcome of the current standoff.
CHINA AND RUSSIA: FORESEEABLE NEWS
Despite these uncertainties, there is something crystal clear. The intensification of business ties between China and Russia will continue. In a sense, economic relations between the two countries have steadily progressed for almost ten years. Nonetheless, recent developments are still remarkable and quite new, as the cooperation is now assuming a new all-encompassing connotation. A Damocles’ sword is hanging over Moscow to secure long-term partners and Russia cannot do anything but move closer to Beijing.
“We will certainly continue to develop relations with China. We have never had such trust-based relations in the military industry. We began holding joint drills at sea and on land, in both China and the Russian Federation. This gives us reason to assume that Russian-Chinese relations will be a significant factor in global policy and will substantially influence modern international relations,” Russia’s President Vladimir Putin said during its annual speech Direct Line.
In this context, it comes as no surprise that Russia’s Lukoil sold its 50% stake in Kazakhstan’s Caspian Investment Resources to China’s Sinopec for around USD 1.2 billion, suggesting that Chinese firms could easily buy Russian assets in case of further escalations.
RUSSIA AND TURKEY
As said, the Kremlin also paved the way to a stronger cooperation with Turkey, which could soon become Russia’s second-biggest gas market in Europe after Germany, overcoming Italy. After years of vague hypothesis, this could be the right moment for Russia and Turkey to meet halfway.
Russia’s annexation of Crimea and tensions between Moscow and Kiev did indeed create a risk for Ankara, as one eight of its gas supplies does pass through Ukraine. Coherently, the two parts will meet up to discuss their cooperation. Turkish politicians will receive a Gazprom’s delegation to speak about their business ties. The meeting, which should be held in Ankara on April 21, will be a good opportunity for open-faced negotiations. In particular, Ankara is expected to ask for an increase in the annual capacity of the Blue Stream pipeline from 16 to 19.5 bcm. Chances are that the two delegations would also speak about eventual new projects and pipelines already under construction.
"We are open to assessing any request for the line to pass through Turkey's territory. It is said that there could be such a demand. If there is a request, we will consider it," Energy Minister Taner Yildiz said on Wednesday, referring to the South Stream project.
In this sense, the cooperation between the two countries is gaining momentum. Another proof came on Wednesday, when Rosneft subsidiary RN-Aero won the tender for fuelling Turkish Airlines aircrafts at Vnukovo airport in Moscow until May 2015.
‘RN-Aero is strengthening cooperation with Turkish Airlines and Lufthansa, members of Star Alliance,’ reads the note released by the Russian company.
… AND THE (W)REST
Gazprom’s Alexey Miller met European Commissioner Guenther Oettinger on Tuesday. According to a note released by the Russian giant, the two sides agreed on most of the points raised during the meeting. Despite the moderate tones, their handshakes resemble more a civil salutation between two former lovers, rather than being full of hope.
As said, Russia is moving eastwards and European companies are logically trying to foster indigenous production to gradually decrease their reliance on Russian gas.
Europe is also trying to find ways to ship gas to Ukraine. Germany’s RWE and Slovakia’s Eustream are the two main options. In particular, the German company was the first to commence gas deliveries in 2014, after shipping about 1 bcm in 2013.
‘These supplies are governed by the existing 5 year framework agreement between Naftogaz and RWE Supply & Trading signed in May 2012, which foresees deliveries of up to 10 billion cubic meter (bcm) of natural gas per year subject to individually agreed contracts,’ reads a note released on Tuesday.
A few hours later, Slovakia’s Eustream signed a Memorandum of Understanding for reverse flow of gas supplies to Ukraine, saying that it could happen as soon as October 2014. At the beginning, the volume would reach 3.2 bcm a year.
‘Later on, in March 2015, this capacity could be increased to as much as 8-10 billion m3 a year, which would greatly help Ukraine in its efforts to diversify gas transmission routes from the west,’ reads a note released by the company on Wednesday.
But uncertainties remain.
‘The Ukrainian partners postponed the signing of the Memorandum, whereby they will return to the issue on 28.4.2014 at the next meeting, which will take place in Bratislava. The Ukrainian side would prefer to use the main transit pipeline, which is employed for transporting gas to the European Union,’ adds the communiqué.
“MINOR” EVENTS
In this backdrop, other events have raised hope for European projects.
On Monday, Ireland-based San Leon decided not to proceed with the Share Purchase Agreement with Aplay/Server Fatih Alpay relating to 75% of Alpay in Turkey, explaining that it prefers to invest in Poland.
‘The company has determined that its capital will be better spent in Poland, particularly in the Baltic Basin where San Leon’s Lewino-1G2 well shows great promise for shale gas production in the northern Baltic Basin of Poland,’ reads a note released on Monday.
Also on Monday, the Trans Adriatic Pipeline (TAP) announced it would re-launch its procurement process, mentioning a review of its strategy as the reason for the decision.
TAP will re-launch the process to procure goods and services in two main areas: Engineering Procurement Construction and Supply Contracts.
Two days later, France’s EDF inaugurated West Burton Combined Cycle Gas Turbine Power Station in Nottinghamshire, which is EDF Group’s largest single capital investment project in the UK so far. According to a note released on Wednesday, the power station has a capacity of 1,300 MW, enough electricity to supply 1.5 homes.
‘West Burton gas power station is designed to be an integral part of a balanced energy mix, which can flexibly generate electricity when needed, in conjunction with low carbon energy generation like nuclear power and renewables,’ reads the communiqué.
In the same occasion, EDF launched also Teesside Offshore Wind Farm.
Some other good news Great Britain came on Thursday, when the European Union confirmed it intends to fund CCS demonstration plants to be built by 2020, paying particular attention to the UK’s White Rose development in North Yorkshire.
In line with a report released in December 2013, European institutions said they would fund the 0.4478 GW net-capacity project. Brussels is reportedly willing to grant €300 million to the carbon capture and storage project in England.
WHAT’S NEXT?
Russian President Vladimir Putin said that Moscow is ready to wait for a month, calling on Europe to provide aid to Ukraine, to ensure uninterrupted gas deliveries. Putin also said that if there were no payments, Russia would move to prepayment terms, which could lead to disruptions in Russian shipments to Europe.
In this sense, the attention of investors and analysts will remain focused on Ukraine’s ability to pay back its debt. At the same time, the spotlight will also be on the negotiations between Turkey and Russia. Eventual changes in the South Stream’s route would intensify the present tremors. Geopolitical earthquakes outside Ukraine are more than possible.
Sergio Matalucci