Business As Usual Despite Russia's Growing Tensions with Ukraine, Turkey
The last few days witnessed two major developments that could affect the European gas market: the decision of Kiev to stop purchases of Russian gas, and Ankara’s tensions with Moscow in the aftermath of the downing of a Russian fighter jet close to Turkish borders. Geopolitics gained the upper hand over commercial developments.
However, it seems that all the parties have a interest in avoiding escalations. Russian and Turkish comments about energy after the event were rather cautious. Similarly, Naftogaz explained that Ukraine will continue to transport Russian gas to Europe.
UKRAINE, RUSSIA AND KAZAKHSTAN: SITUATION DIFFICULT TO READ
Ukraine decided to stop purchases of Russian gas, with Prime Minister Arseniy Yatsenyuk saying that Russia “must have misunderstood; they did not cut off gas supplies to us, we are the ones who are not buying it.” Naftogaz said it expects to receive all prepaid volumes of Russian gas today, adding it the existing gas transportation contracts will be fully respected.
After saying that Ukraine reduced gas consumption by 20%, Prime Minister Arseniy Yatsenyuk confirmed his country remains critical of Russian positions despite the recent offer made by Russian President Vladimir Putin. Last week, Vladimir Putin said that Moscow was open to restructuring Ukraine's $3-billion (USD) debt. However, Yatsenyuk’s declaration this week seems to indicate there is little room for convergence on the debt issue in the near future.
Vice-President for the European Commission's Energy Union Maroš Šefčovič this week also argued that Ukraine will not pay the price of prolonged gas negotiations and delays in filling its gas storage given Kiev’s successful efforts to improve energy efficiency and diversify gas supplies. "I believe they will get through the winter without any major problems,” Mr. Šefčovič said in Bratislava on November 23.
Russian Energy Minister Alexander Novak is speaking in a similar fashion of Crimea, saying on Tuesday that the region can cope with the current energy issues related to the sabotage of electricity pylons supplying electricity from Ukraine to the peninsula.
Despite tensions with Ukraine and Turkey, Russia is not drifting away from Europe. It seems it is trying a rapprochement.
Gazprom PJSC, the supplier of about 30% of Europe’s natural gas, may sell its stake in one of the two pipelines connecting the UK to mainland Europe after more than two decades, Bloomberg wrote.
Several Russian companies are doing well financially at present and might do even better in the near future.
Russia’s Rosneft reported a 16.1% increase in net income in the first nine months of the year with respect to the same period in 2014, despite a 7.8% decrease in revenue. As unveiled on November 25, Rosneft’s gross debt decreased by 21.5% since the beginning of the year in USD terms.
Russian President Vladimir Putin said that his country plans to increase its natural gas output over the coming decades while also aiming for a 13% share of the global LNG market. "Russia has made huge investments in exploration, refining, and transportation of gas and holds a great share of supplying security. The country plans to increase its output to 855 billion cubic metres per year by 2035," he said, adding that Russia plans to export 128 billion cubic metres per year of gas to Asia in future.
KazTransGas officially launched Kazakhstan's newest gas pipeline, the Beineu-Shymkent-Bozoi gas pipeline. The commissioning, which comes five months ahead of the project's scheduled date, makes it possible to transit a stable supply of gas from the country's western gas fields to the south of the country.
TURKEY: RUSSIA AND IRAQ
The Turkish Air Force shot down a Russian fighter jet after an alleged airspace violation on its southern border with Syria, which could seriously affect energy relations between Turkey and Russia.
The aftermath of Turkey’s shooting down of the Russian plane close to the Turkish-Syrian border on Tuesday morning could well have profound consequences for one of Europe’s most strategic energy relationships.
However, Aaron Stein, Nonresident Senior Fellow at the Atlantic Council's Rafik Hariri Center for the Middle East, also told Natural Gas Europe that “the very initial statements seen from Gazprom [indicate] that, on the Russian side, this will not affect their natural gas supplied to Turkey. Turkey is dependent on upwards of 60% of its natural gas, so it has very little flexibility in terms of how it can play the energy card itself.”
Genel Energy, the Anglo-Turkish listed oil producer in Iraq's northern province, has announced its plans to set-up a joint venture to develop a gas field in the region to export natural gas to Turkey. "With this JV [joint venture] and other companies production, KRG will able to post more than 20BCM [billion cubic metres] of gas to the Turkish market, and beyond Europe, by early 2020," Tony Hayward, chairman of Genel Energy said.
In general, Turkish Energy Minister Ali Rıza Alaboyun said that Turkey's location can bring about a key role in regional energy. "Turkey is showing how important geo-strategic location between consumers and suppliers is. The Trans-Anatolian Gas Pipeline (TANAP) is a great example. Potential gas from Iraq, Iran and the Eastern Mediterranean will contribute both to Turkey and to diversifying the sources of gas to Europe."
ISRAEL, CYPRUS: BG BUYS 50% OF NOBLE’S STAKE IN APHRODITE
British oil and gas company BG Group announced on November 23 it has taken a 35% holding in Block 12 offshore Cyprus. The block includes the Aphrodite gas discovery, which is estimated to have gas reserves of four trillion cubic feet.
Noble Energy is selling the stake to BG Group for a total cash consideration of $165 million (USD). The deal signed between Noble and BG is considered by some to be a great boost to Cyprus’s efforts.
Conversely, according to other commentators, the British company (from next year it will be taken over by Shell), is moving forward with its global LNG plans, which could influence the decision to delay development of the field. The company's moves will bear implications for the Israeli natural gas industry.
Against this backdrop, Israeli Prime Minister Benjamin Netanyahu and Greek Prime Minister Alexis Tsipras met on Wednesday in Jerusalem to discuss a number of bilateral issues, including energy. The meeting took place on the heels of Netanyahu's meeting 10 days ago with the Cypriot president, Nicos Anastasiades.
Meanwhile, Delek Group announced on November 24 that it intends to supply natural gas to Egypt from the yet to be developed Leviathan gas field. The LoI was signed with Dolphinus Holdings Limited, a group of private Egyptian businesses, for a maximum of 4 billion cubic metres (bcm) annually for a period of 10-15 years.
In other news, Israeli Treasury Minister Moshe Kahlon weighed in on the debate surrounding the natural gas regulatory framework. According to some commentators, his intervention might rattle Israeli politics and delay the framework's approval.
Though Israeli politics remain intricate, Tel Aviv seems to be doing well on a commercial level.
Israel’s Energy Ministry recently declared the Yishai license as a "natural gas discovery". The Yishai license borders with Aphrodite, the 4 trillion cubic feet gas field in Cyprus's block 12, and is also close to the Israeli gas field Leviathan.
Gideon Tadmor, chairman of Delek Drilling and the CEO of Avner, said he sees a production target of 40 bcm, most of it for export, from Israeli assets. Delek Drilling and Avner, both controlled by Delek Group, a partner in the monopoly in Israel's natural gas market, reported a surge of 66% in net earnings for the 3rd quarter 2015 to $76 million.
Nonetheless, complexities remain. International companies are not entering the Israeli market.
For example, Italy-headquartered energy company Edison is not currently interested in acquiring Noble Energy/Delek Group's two Israeli natural gas fields, Tanin, and Karish. Edison’s branch manager in Israel, Ottavio Viglione, said that the Israeli government will have to think of new and different incentives, perhaps fiscal incentives, in order to attract energy investment to those gas fields.
THE BALKANS: MANY PROJECTS, TAP MOVES FORWARD
The Projects of Common Interest (PCI) as envisaged by the European Commission in Brussels, clearly aim to interconnect the Balkans and the surrounding regions to facilitate the emergence of hubs and new transit routes. Whether that strategy could be practical in the long run remains to be seen.
Some developments are underway.
“The final investment agreement on the construction of a gas interconnector with Greece will be inked on December 10,” Bulgarian Minister of Energy Temenuzhka Petkova said, as reported by Focus.
The process to construct the Trans Adriatic Pipeline (TAP) is moving forward too, top-level sources at Greece’s Energy and Environment Ministry said on November 23, as reported by New Europe.
The Trans Adriatic Pipeline consortium has indeed awarded a contract to Corinth Pipeworks to provide approximately 495 kilometres of 48” diameter line pipes for the pipeline, which will run across Greece. The Viotia-headquartered company will be the major supplier of line pipe required for TAP in Greece.
NORWAY DECREASES INVESTMENTS, BUT LESS THAN GLOBAL TRENDS?
Norway is expected to decrease investments in oil and gas activities by 9.3% in 2016, Statistics Norway wrote on November 24, adding that the country should increase investments in electricity. Investments in oil and gas extraction and pipeline transport for 2016 are now estimated at NOK 171 billion (about €18.6 billion). The decrease has to do with lower investments in exploration, fields on stream and pipeline transport.
Globally, investments might be cut even more.
Statoil CEO Eldar Sætre said on November 23 that global upstream investments are estimated to fall by 20% in 2015. In a speech at the company's annual Autumn Conference, Sætre also recognised the role of renewable energy, but said that oil and gas still maintain an important role in the energy mix as energy demand increases.
A couple of days before, the Norwegian Petroleum Directorate (NPD) said that Statoil has made a minor gas/oil/condensate discovery on the eastern flank of Statoil's Visund field. The discovery was 140 kilometres off the Norwegian city of Bergen.
BALTIC REGION AND POLAND: MAINLY LNG
Lithuania has decided to lease an LNG bunker supply vessel to cater to gas marine customers in order to address a current surplus of gas at the Klaipeda LNG terminal. Klaipedos Nafta (20%) and Germany’s Bomin Linde LNG GmbH&Co (80%) have established a joint venture, called Blue LNG, to implement the €27 million LNG Bunker Supply Vessel project. The vessel, which has a capacity of 6,500 cubic metres (cbm), is expected to become operational in 2017.
Concurrently, Lithuania’s Vice-Minister of Energy Aleksandras Spruogis contends that since the dawn of the LNG terminal at Klaipeda, the security of his country's gas supply has changed dramatically. While it can cover the gas needs of 80% of consumers in the Baltic states, he said it's no “silver bullet.” He commented, “Without other infrastructure, it cannot change the game in the region.” An entire package of connected infrastructure projects is needed, he said.
The week also saw a touch of scandal and drama between Lithuania and a Russian hoaxer. An apparently fictitious Russian oil company has made claims on its website, volgaoil-tankfarm.ru, that the Klaipeda LNG terminal and floating storage and re-gasification unit Independence, off Lithuania's Baltic coast, are in fact owned and run by it. “We see it as an attempt to discredit activities that Klaipedos Nafta carries out," Klaipedos Nafta says in its statement.
LNG is key for Poland as well. Polish authorities expect the first liquefied natural gas (LNG) tanker to arrive to the Polish Świnoujście terminal on December 11 or December 12. "The first supply of liquid natural gas (LNG) to the LNG terminal in Świnoujście will be delivered by Q-Flex vessel Al Nuaman. The LNG tanker was loaded in the Qatari port of Ras Laffan on November 19th 2015 and left for Poland during the night," Polskie LNG wrote on its website.
Poland may next year remove controls it imposes on the price paid for natural gas by the biggest industrial consumers, in order to meet European Union requirements, energy market regulator URE was quoted as saying by Reuters on November 25.
GAS EXPORTING COUNTRIES FORUM AND AZERBAIJAN
The summit meeting of the Gas Exporting Countries Forum (GECF) is an apt occasion to improve the position of the forum in the global energy scene, Iranian Oil Minister Bijan Namdar Zanganeh said on November 21 in Tehran.
The GECF’s 12 member countries account for 67% of the world’s gas reserves, for 64% of global LNG exports and for 42% of cross-border pipeline trade. According to Iran's deputy oil minister for international affairs, Amir-Hossein Zamaninia, other member states may join.
However, the entry of the U.S, to the global gas market could be a threat to the Gas Exporting Countries Forum (GECF), Nigerian Minister of Petroleum Resources Emmanuel Ibe Kachikwu said. “Certainly, any rise in production will be a threat. We should wait and see how long can the U.S. remain in the market,” Mehr news agency quoted the Nigerian minister as saying.
Azerbaijan joined the Gas Exporting Countries Forum (GECF) as an observer member. The country’s observer status was declared in the 17th ordinary ministerial meeting of the GECF.
SOCAR exported its gas at an average price of $160.46 per 1,000 cubic metres from January to October 2015. Azerbaijan exported a little more than 6.76 billion cubic metres of gas, down 2.7% against the same period in 2014, the State Customs Committee of Azerbaijan Republic said.
OTHER NEWS: UK, FRANCE, ITALY, ALBANIA
The UK government has set out its latest oil and gas strategy for the UK Continental Shelf, which it says aims to maximise the sector’s economic recovery. The strategy is now out for consultation. A final version will be presented to the parliament early next year. Consultation will run until January 8th 2016.
A new government report from France's energy and environment ministry released earlier this month suggests that developing liquefied natural gas (LNG) as a road fuel may be the most effective way to meet the new environmental standards set by national and European legislation. The change could also assist in achieving greenhouse gas reduction targets that may come out of the climate change conference in Paris (COP 21).
France-headquartered Total said on Wednesday it will raise new debt financing for “general corporate purposes.” The 7-year bonds will be offered only to institutional investors outside the United States, Australia, Canada and Japan.
Italy’s Eni completed the sale of its remaining 4% stake in Portugal’s Galp Energia for approximately €325 million. Eni sold the Galp stake to “qualified” institutional investors at €9.81 a share, 2.6% below Thursday's closing share price.
Petromanas said that, together with Shell, it expects to use the new rig to spud the Shpirag-3 well in Albania by June 2016. “We continue to advance our appraisal plan around the discovery at Shpirag-2, even in the face of lower commodity prices, as we look to assess the longer term value of our assets," Glenn McNamara, CEO of Petromanas, said on November 23.
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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