The
European
Geopolitical
Forum
www.gpf-europe.com
EGF Gazprom Monitor
Issue 51: August 2015A Snapshot of Key Developments in the External Relations of the Russian Gas Sector
By Dr Jack Sharples, EGF Associate Researcher on the external dimensions of Russian gas and Lecturer in Energy
Politics at the European University of St Petersburg
Key points:
Gazprom and the EU: Gazprom-PGNiG gas price talks at ‘an advanced stage’; Gazprom and Eni pledge to
continue close cooperation; Calm before the storm: Gazprom Deputy Chairman meets EU Competition
Commissioner, with Gazprom due to reply to EU antimonopoly ‘Statement of Objections’ by the 28th of
September
Nord Stream: OMV CEO Seele confident of EU approval for Nord Stream II, meets with Gazprom CEO Miller to
discuss joint venture for the project
Turkish Stream: Stop and go – Russia and Turkey continue trading proposals, but real progress not expected
until formation of new Turkish government in November; SE European Foreign Ministers could meet in
September to discuss the ‘Tesla’ extension to Turkish Stream
Ukraine: EU Commissioner for Energy Union meets with Ukrainian Energy Minister and Naftogaz CEO, and
plans meeting with Russian Energy Minister in September ahead of next round of trilateral talks;Gazprom
CEO expresses concerns over Naftogaz winter gas storage
Belarus: Gazprom begins construction of Gazprom Centre in Minsk, set to be ‘the tallest building in Belarus’
Asia: Shell participation in Sakhalin-III in doubt as US imposes sanctions on the project; Gazprom reports
‘good dynamics’ in ongoing negotiations with PetroChina and CNPC over pipeline deliveries of Russian gas to China, despite concerns over the commercial viability of the projects
Other: Gazprom’s annual gas production could reach record low in 2015, as the company also cuts its sales
EGF Gazprom Monitor
www.gpf-europe.comGazprom and the EU
Gazprom-PGNiG gas price talks at ‘an advanced stage’
Gazprom’s negotiations with PGNiG remain ongoing, despite PGNiG’s request for arbitration. Negotiations over the gas price formula in the Gazprom-PNGiG gas supply contract began in November. After six months of talks, PGNiG requested arbitration, as they were entitled to do in accordance with their contractual agreement with Gazprom. However, upon the initiation of arbitration proceedings, PGNiG refused to rule out continued negotiations.
In August, the President of the PGNiG Management Board, Mariusz Zawisza, told a news conference: "The talks are of a quite advanced nature, but I can say nothing more at the moment".
Gazprom and Eni pledge to continue close cooperation
At a meeting in Moscow the Gazprom CEO, Alexei Miller, and the Chief Operating Officer of Eni, Claudio Descalzi, discussed the current dynamics of the European gas market, and pledged to continue their close cooperation on the Italian and broader European gas markets with regard to existing contracts and infrastructure projects.
It is notable that the pipeline-laying company, Saipem, is a subsidiary of Eni. Saipem was scheduled to lay the offshore section of South Stream before the project was cancelled in favour of Turkish Stream. Saipem continued to hold its pipe-laying vessels in place for seven months, before Gazprom cancelled the contract in July 2015. However, Gazprom continues to insist that Saipem remains a key partner for Gazprom. In the meeting with Descalzi, Miller stated, “We can
already see the great potential of the further cooperation with Saipem under Gazprom’s current and future projects”.
Despite the difficulties Gazprom currently faces on the European gas market, it is clear that Eni (and its Saipem subsidiary) remain key partners for Gazprom.
Calm before the storm: Gazprom Deputy Chairman
meets EU Competition Commissioner, with Gazprom
due to reply to EU antimonopoly ‘Statement of
Objections’ by the 28th of September
It has been a relatively quiet month for Gazprom on the European gas market. However, that may just be the ‘calm before the storm’, given that Gazprom has until the 28th of September to submit a written
response to the ‘Statement of Objections’ issued by the European Commission, as part of its antitrust investigation into Gazprom’s practices in Central, Baltic, and South-Eastern Europe.
There is still time for the two sides to reach an agreement, before the case is settled in court. With this in mind, negotiations between Gazprom and the EU remain ongoing, with Gazprom Deputy Chairman Alexander Medvedev meeting the EU Competition Commissioner, Margrethe Vestager, on the 23rd of
July. The meeting was their first since the European Commission issued its ‘Statement of Objections’ in April. Following the meeting, Medvedev announced:
As I have stated in the past, we prefer to settle this case amicably and will continue to engage with DG Competition… Today’s meeting provided a good framework for future discussions and we hope to make swift progress toward a mutually acceptable solution.
EGF Gazprom Monitor
www.gpf-europe.comMedvedev rejected claims that Gazprom had over-charged its customers, arguing that Gazprom’s “prices are nearing a record low for our customers across Europe”.
For its part, a European Commission spokesperson stated that the meeting was an “informal exchange on Gazprom’s preliminary views”, but declined to comment further.
In the coming month Gazprom will most likely continue its talks with the EU Competition Commission, whilst simultaneously preparing its written response to the Statement of Objections.
Nord Stream
OMV CEO Seele confident of EU approval for Nord
Stream II, meets with Gazprom CEO Miller to discuss
joint venture for the project
On the 12th of August, the OMV CEO, Rainer Seele,
gave a live web conference, in which he discussed the proposed expansion of the Nord Stream pipeline. Seele announced his confidence that the European Commission would approve the capacity expansion. He also referred to Nord Stream as a European project with “fascinating prospects” for OMV, which could secure supplies of natural gas in all of Europe and increase the capacity of the Baumgarten hub by 20%:
For OMV… this also means securing supply flows to the Central European gas hub, Baumgarten, which already handles 40 bcm/year – approximately one-third of the gas transported to Europe.
Two weeks later, Seele travelled to Moscow, where he met with the Gazprom CEO, Alexei Miller, and discussed preparations for setting up a joint venture
to undertake the Nord Stream expansion.
From the 11th to the 20th of August, the Nord Stream
pipeline was shut down for annual maintenance. However, this only had a minor impact on European hub prices, as Gazprom and its Nord Stream consortium partners had communicated the maintenance plans well in advance, allowing their European partners to ‘price in’ the adjusted flows.
Turkish Stream
Stop and go – Russia and Turkey continue trading
proposals, but real progress not expected until
formation of new Turkish government in November
Nine months after its high profile conception – in a press conference on the 1st of December 2014 – the
Turkish Stream pipeline has yet to be born.
In an interview with local media on the 4th of August,
one of the midwives of the project - the Turkish Energy Minister, Taner Yildiz – explained the reasons for delays in Turkish Stream into the world:
[The delay] was caused because the Russian side was late in delivering the coordinates for the construction route, and because of talks to form a new coalition government in Turkey… The delivery date for the route coordinates had been extended until June 10, or to a later date. Turkey could not begin any construction without these coordinates… The inter-governmental agreement for the project should be ratified in parliament, and Turkey must first form a new government through either a coalition or a snap election.
EGF Gazprom Monitor
www.gpf-europe.comrelease issued by the Russian Energy Ministry did not specify when those proposals had been sent.
Finally, on the 19th of August, Yildiz confirmed that the
Turkish Energy Ministry had sent its proposals to Moscow, and was awaiting a response, adding: "It will not be us who delays the project".
Turkey currently has an interim government, and is set to hold a snap election on the 1st of November. It
therefore seems unlikely that we will witness any major developments until the new government is formed.
SE European Foreign Ministers could meet in
September to discuss the ‘Tesla’ extension to Turkish
Stream
Meanwhile, sources also report that the foreign ministers of Greece, Macedonia, Serbia, and Hungary could meet in September to discuss an extension of Turkish Stream from the Greek-Turkish border to Central Europe, with a proposed pipeline named ‘Tesla’. Russian sources suggest that the first meeting of a working group examining the potential for the project took place on the 25th of June. Initial
indications are that the project could be ‘finalised’ by 2019, with a capacity of 27 bcm and a cost of EUR 4-5bn.
However, Tesla faces competition from another proposed pipeline project. The ‘Eastring’ project proposes bringing gas from Veljke Kapuscany on the Slovak-Ukrainian border south to Bulgaria, via Hungary and Romania. The rationale behind such a project appears to be about bringing gas from Central Europe to South-Eastern Europe, as an alternative to
Russian gas delivered via Ukraine. However, in June, the Slovakian Prime Minister, Robert Fico, suggested that Eastring be connected to Turkish Stream, thus enabling the partner countries to bypass Ukraine in receiving Russian gas deliveries.
If history teaches us anything, it is that it is far, far easier to plan a pipeline than it is to actually build it. News archives and academic literature are littered with discussions of now-defunct pipeline projects for bringing gas to South-Eastern Europe, such as South Stream, White Stream, and Nabucco.
Gazprom and Ukraine
Gazprom and Naftogaz CEOs meet to discuss winter
gas supplies
On the 21st of August Gazprom CEO Alexei Miller met
with his Naftogaz counterpart, Andriy Kobelyev, in Minsk to discuss preparations for the autumn-winter period. It was reportedly the first bilateral meeting between the two CEOs since May 2014.
The EU Commissioner for Energy Union meets with
Ukrainian Energy Minister and Naftogaz CEO, and
plans meeting with Russian Energy Minister in
September ahead of next round of trilateral talks
Six days later, the European Commission Vice-President for the Energy Union, Maroš Šefčovič, met with Ukraine's Minister for Energy and Coal Industries, Vladimir Demchyshyn and Naftogaz CEO, Andriy Kobolyev, in Vienna. Šefcovic will also meet with the Russian Energy Minister, Alexander Novak, in Vienna on the 11th of September. Both of these meetings
EGF Gazprom Monitor
www.gpf-europe.comUkraine and the EU this winter. Indeed, the two meetings can be seen as a precursor to the next trilateral meeting between representatives of Russia, Ukraine, and the EU, as the sides try to reach agreement on a new ‘winter package’.
Conflicting reports on whether Naftogaz asked
Gazprom for an ‘advance’ on winter deliveries
Following the Miller-Kobelev meeting, the Russian business daily, Kommersant, reported that the Naftogaz CEO had requested advance payment for winter gas transit. This would give Naftogaz the cash it needs to buy the Russian gas it needs to fill its storage systems, ready for the winter. This report was then quoted and reposted by a number of other media outlets. However, the Head of PR at Naftogaz, Alena Osmolovsky, then gave a statement to Interfax Ukraine, stating categorically that Naftogaz had not requested advance payment.
The debate over whether Naftogaz did or did not request advance payment from Gazprom was preceded by an official announcement from Naftogaz on the 10th of August that it would use $300m of its
loan from the European Bank of Reconstruction and Development (EBRD) to pay for winter gas supplies during Q3 2015.
The issue of Ukraine’s gas storage is a crucial one, as the gas Ukraine has in storage at the beginning of the winter heating season (October) ensures stable supplies to domestic Ukrainian consumers and stable transit of Russian gas onward to the EU. Ukraine currently has 14.3 bcm in storage, up from its low point of 7.6 bcm in April. Naftogaz representatives claim that the company aims to have 17-19 bcm in
storage by the beginning of the winter heating season.
In an official press release on the 17th of August, With the $300m from the EBRD covering less than half Naftogaz’s needs, the question remains of where Naftogaz could find the remaining $442.5m.
Gazprom CEO expresses concerns over Naftogaz
winter gas storage
In an interview with the Russian news agency, TASS, on the 21st of August, the Gazprom CEO, Alexei Miller,
expressed his concerns over the situation, but denied that Gazprom was prepared to place its own gas in Ukrainian storage to ensure stability of winter supplies:
EGF Gazprom Monitor
www.gpf-europe.comGazprom in Belarus
Gazprom begins construction of Gazprom Centre in
Minsk, set to be ‘the tallest building in Belarus’
On the 21st of August, the Gazprom CEO, Alexei Miller,
and the Belarusian President, Aleksandr Lukashenka, laid a time capsule to mark the beginning of the construction of the ‘Gazprom Centre’ in Minsk – a multi-purpose complex. At 36 floors (189 metres), the building is set to become the tallest in Belarus when it is completed in 2018.
The Gazprom press release states that it “will be occupied by the Gazprom Transgaz Belarus staff and other Gazprom Group-owned companies in Minsk”. The press release also emphasised the benefits for local residents, who will have access to the complex:
In addition, four class A office buildings will welcome up to 5.5 thousand workers. A hotel, a congress centre, a shopping area, 11 restaurants and cafes as well as spacious underground parking will be incorporated into the modern office area. Great attention will be paid to public amenities. Thus, a multi-specialist medical centre, a state-of-the-art sports centre as well as a children’s education and learning centre capable to host 200 visitors at the same time – all these facilities will open their doors to city residents.
A park area featuring a unique landscape between the complex and Nezavisimosti Avenue will offer both locals and metropolitan visitors to take advantage of leisure activities. An outdoor amphitheatre fenced by fountains will be built, to host concerts and festivals in summer. A public ice skating rink may be available within the recreation area in winter. In highlighting the value of the new office to the citizens of Minsk, Gazprom is taking steps to ensure the support of the Belarusian government and local residents, whilst simultaneously providing high quality facilities for its own personnel.
Gazprom in Asia
Shell participation in Sakhalin-III in doubt as US
imposes sanctions on the project
At the beginning of August, Shell reportedly agreed to swap ‘a stake in one of its international energy assets’ for a stake in Gazprom’s Sakhalin-III project. The two sides declined to give further details at that stage. The Sakhalin-III project is aimed primarily at developing the Yuzhno-Kirinskoye sub-sea gas field, located off the coast of Sakhalin, in Russia’s Far East. Gas from Yuzhno-Kirinskoye has been earmarked as a source for the Sakhalin-II LNG export terminal, in which Gazprom and Shell are both shareholders. In June, Gazprom and Shell agreed to add a third LNG train to Sakhalin-II, raising its LNG production capacity from 10 to 15m tonnes of LNG per year.
However, within days of the Gazprom-Shell announcement in early August, the US government added the Yuzhno-Kirinskoye project to its sanctions list. This not only prevents the use of American equipment on the project, but more importantly, sends a clear symbolic message to Shell to back away from participation in the project. For its part, Shell responded with a written statement:
We engage with the relevant authorities and take action to ensure we comply with all applicable sanctions or related measures… Shell remains committed to working in Russia and we value working with our Russian partners.
EGF Gazprom Monitor
www.gpf-europe.comGazprom reports ‘good dynamics’ in ongoing negotiations with PetroChina and CNPC over pipeline
deliveries of Russian gas to China, despite concerns
over the commercial viability of the projects
On the 18th of August, the Gazprom CEO, Alexei Miller,
hosted a meeting with the Vice President of PetroChina, Huang Weihe. The Gazprom press release notes that negotiations over the ‘Western Route’ showed “very good dynamics”, adding that:
The main terms and conditions of supply had already been specified, for instance, a Russian-Chinese border crossing corridor for the future gas pipeline.
With regard to the Eastern Route, also known as the Power of Siberia pipeline, the press release noted that “project operations in Russia and China are running according to the schedule”.
Eight days later, Miller visited Beijing, where he met with Zhang Gaoli, First Vice-Premier of China’s State Council, and Wang Yilin, Chairman of the Board of Directors of CNPC. At the meeting:
The participants addressed the issues of bilateral cooperation, particularly the preparations for the contract on Russian natural gas supply to China via the western route. The parties highlighted that they aimed for the successful conclusion of negotiations which were progressing steadily.
However, experts have expressed concerns that both projects could be undermined by a continuation of lower oil prices, which would render both pipeline projects non-commercially viable for Gazprom. When the contract for the ‘Eastern Route’ was signed in May 2014, Gazprom’s average gas export price was $387 per thousand cubic metres, indexed to a Brent Crude oil price of $110 per barrel. Although the ‘base price’
of the Gazprom-CNPC contract was not revealed, experts calculated it to be approximately $350 per thousand cubic metres – a level that would be barely profitable, given the expenditure necessary to make the project a reality.
With Brent Crude now at a level of $50 per barrel, and Gazprom’s 2015 gas export price predicted to average out at $235-242 per thousand cubic metres (see
Gazprom’s annual gas production could reach record
low in 2015, as the company also cuts its sales price
forecast
2015 could be a year to forget for Gazprom, if predictions from the Russia’s Ministry of Economic Development prove accurate. The Ministry predicts that Gazprom’s gas production could fall to just 414
EGF Gazprom Monitor
www.gpf-europe.comRussian gas consumption, from 425 bcm in 2011 to 414-416 bcm in 2012-13, and 409 bcm in 2014. In a shrinking domestic market, Gazprom faces increasingly stiff competition from Novatek and Rosneft. Gazprom’s domestic sales fell from 265 bcm to 217 bcm between 2011 and 2014, and are expected to fall again in 2015. In terms of exports, Gazprom’s gas sales beyond the former Soviet Union (FSU) fluctuated between 150 bcm ad 175 bcm in 2010-14 (159 bcm in 2014), but sales in the FSU fell every year between 2011 and 2014, from 82 bcm to 48 bcm.
In terms of developments in 2014-15, the Russian Central Bank reports that Russian (i.e. Gazprom) gas exports fell from 103.5 bcm in H2 2013 to 72.6 bcm in H2 2014, and that Q1 exports fell 10 bcm year-on-year from 54 bcm in Q1 2014 to 43.5 bcm in Q1 2015. In short, the period from July 2014 to March 2015 was a disappointing one for Gazprom, and the rest of 2015 does not look promising.
Gazprom has also reduced its sales-price forecast for 2015 for gas sales outside the former Soviet Union, from its April prediction of $242 per thousand cubic metres to an August prediction of $235-242 per thousand metres. The decline in Gazprom’s export prices is due to its oil-indexed pricing formula, which has suffered from the dramatic decline in oil prices over the past year.
The
European
Geopolitical
Forum
www.gpf-europe.com
EGF Gazprom Monitor
Issue 51: August 2015
Disclaimer
The information presented in this report is believed to be correct at the time of publication. Please note that the contents of the report are based on materials gathered in good faith from both primary and secondary sources, the accuracy of which we are not always in a position to guarantee. EGF does not accept any liability for subsequent actions taken by third parties based on any of the information provided in our reports, if such information may subsequently be proven to be inaccurate.
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Issue 51: August 2015 - Page 9 of 9
Fig. 1. Model of the Gazprom Centre in Minsk (construction launched on the 21st of August)
