Weekly analytical report November 12 – 18, 2012
1. Despite the restrained forecasts of shale gas production in Europe, the success of the United States makes other countries to continue unconventional gas projects. According to the OPEC, projects in Europe are unlikely to repeat the U.S. experience. However, Polish Orlen, Lotos and PGNiG created a consortium to develop extracting technologies; citizens of Lithuania opposed cancellation of strategic projects; and even Algeria plans to develop shale gas. In Ukraine, where unconventional gas reserves – according to the IEA – can amount 4.2 tcm, a seminar on unconventional gas development on the Oleska field was held. In particular, the local government has promised to focus on Polish experience, and the U.S. Ambassador emphasized the benefits of gaining energy independence through shale gas production in Ukraine.
2. While speeding up projects on gas supply diversification, the government simultaneously increases fiscal pressure on investors. Although gas production from January to October increased by only 0.6%, the Ministry of Environment and Natural Resources will announce next tenders to conclude production sharing agreements in the coming months; the Nadra Ukrayny NJSC postponed the deadline for applications to develop the Mizhrichynska field; the Naftogaz NJSC chose the supplier of two floating drilling rigs – in addition to those already working offshore. According to the Minister E.Stavytskyi, the Cabinet of Ministers plans to sign PSAs with Shell, Chevron and the ExxonMobil-led consortium, as well as to sign a settlement agreement with Vanco in December. The State Agency for Investment and National Projects reported on receiving a legal conclusion on the free passage of LNG tankers through the Black Sea straits as well as confirmed information of the Ministry of Energy and Coal Industry on the start of construction of the LNG-terminal (first stage), scheduled for November 26. At the same time, according to market participants, the new tax legislation increases fiscal burden on mining companies. However, both the Energy Minister Y.Boyko and the Head of the State Service for Geology and Mineral Resources O.Proskuryakov are optimistic about investments in the sector.
3. Russian Gazprom came close to the start of construction of the South Stream pipeline by entering into agreements with each of the participating countries. Investment decisions were signed with Slovenia and Bulgaria, and Macedonia was involved in the project. In Bulgaria, the signing of the South Stream agreement was associated not that much with the reduction of risks in gas supply, but with the signing of a new, more lucrative deal with Gazprom. As a result, documents were signed in exchange for a 20% discount on Russian gas DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
for the next 10 years. Gazprom also adopted final investment decision on the maritime part of the South Stream and called the date when the construction will start – December 7. However, the restrained position of the European Commission keeps the chances of the South Stream low. First, the Commission questioned Gazprom’s announcement on the final investment decision. Also, the Commissioner G.Oettinger stressed that the project has to comply with the EU energy regulations, particularly with the Third Energy Package. Simultaneously, the European Commission increased pressure on the EU member states. demanding quicker liberalization of energy markets and cancelling price regulation. It is possible that the announced exchange of assets between Gazprom and BASF, as well as the prospects for expanding the Nord Stream pipeline, which means strengthening Russia's position on European markets, did also contribute to such a reaction. According to media reports, European companies are also executing pressure on gas suppliers.
4. In European countries, there is a continued support to the projects on diversification of gas sources. The development of the Southern Gas Corridor was supported by Germany and the U.S.; Greece and Cyprus will present their own energy projects to the EU; Croatia agreed with Qatar on LNG supplies. Trying to contribute to the EU’s diversification policy, Ukraine is negotiating to participate in the construction of the TANAP pipeline. Having gained the support of Azerbaijan, the Energy Minister Y.Boyko called to support the Ukrainian gas transportation system and use its underground gas storage facilities while implementing the project. In addition to the political rationale, Ukraine has also strong economic interest: in the recent 9 months, Kyiv earned 2.2 bln USD on gas transit.
5. Ukraine seeks to reduce purchases of Russian gas, but opportunities to get "reverse gas" from the EU are limited. According to the President V.Yanukovych, Ukraine continues to negotiate with Russia on gas prices – the cost of Russian gas amounted 430 USD in Q3, and Ukraine remains one of the largest consumers of Gazprom. For this purpose, it is planned to reduce gas supplies from Russia in 2013, importing only 20 bcm and increasing supply from alternative sources. However, the technical limitations of the gas pipeline from Poland do not allow to import more than 1.46 bcm. Meanwhile, the Naftogaz NJSC recorded 4.6 bln UAH of losses; the Energy Minister Y.Boyko explained it by the difference between the tariffs for communal heating enterprises and the import price.
6. On the background of fluctuating world prices caused by political events, the restructuring of the global "oil map" is happening. First, oil prices plunged on the news from Japan and Greece; however, at the end of the week they increased after Israel started military operation in the Gaza Strip. According to a new survey by the International Energy Agency, despite oil consumption in Q4 will decrease, global demand will increase by 14% and production will increase in OPEC countries, although the cartel will not revise its quotas. By 2020, the U.S. will become the first producing country in the world, which will be also caused by expected decline in production on the available oil fields in Russia. The Americans are already hitting records of average daily production. Kazakhstan and Iraq, which plans to DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org
increase production to 12 mln bpd, will become key oil suppliers to China. Iran, despite the October decrease in oil production, embraces exploration works in the Persian Gulf. Central and Eastern European countries want to become independent from Russia in terms of oil supply. Czech network operator Mero seeks to get a stake in the Transalpine pipeline. Local authorities in Poland have included the route of the Odessa-Brody-Plock pipeline to their construction plans. Belarus has no plans to pay Russia 1.5 bln USD losses for the "solvents’ scheme" – despite the conflict is officially over.
7. In Ukraine, problems of the oil industry are old, but the risks caused by them are high. Despite generally stable prices at the filling stations and basic level of the excise rates, there is a slight decrease in petroleum prices, which, according to expert calculations, can reach 0.1-0.2 UAH by the end of the year. However, there is also growing consumption of diesel fuel and higher prices for LPG. Shadow market remains to be a problem: more than 90% of petrol at non-branded filling stations does not meet quality standards. Smugglers were arrested in the Kerch strait, and a criminal group which stole oil from pipelines was caught in the Lviv region. Factor of instability on the oil products’ market is also imports of the Rompetrol company being blocked at customs; such actions are explained as laboratory inspections. According to the media, other market participants also report about such problems. At the same time, current production levels do not satisfy the needs of the market: supply of crude to refineries decreased by 41.6% year-to-date. In particular, the problematic Lysychansk refinery is still not in operation.
DiXi Group, 2012 Energy information ● Analysis ● Consulting www.ua-energy.org/en author@dixigroup.org