Gauging the Energy at SPIEF 2016

Gauging the Energy at SPIEF 2016

The state of the global oil market and the future of Russian gas-sector projects were the focus of the discussions at the 20th St. Petersburg International Economic Forum 2016 (SPIEF 2016). The substance of the discussions once again suggested that Russia will continue to remain a key player in the global oil industry and in Europe’s energy security.

The most important energy issues at the forum were addressed at a special session, «The World Oil Market at a Crossroads: Investing in Uncertainty or Managing Risk?» hosted by Rosneft. The leaders of the world’s largest oil and gas companies took part in the session – Robert Dudley (BP), Patrick Pouyanné (Total), Lorenzo Simonelli (GE Oil & Gas), Eulogio Antonio Del Pino Diaz (Venezuela’s oil minister and the head of PDVSA), and Rex Tillerson (Exxon).

«Oil production in Russia will remain stable until 2035», was the prediction by the chairman of the Rosneft oil company, Igor Sechin. He claims that the crisis caused by global oil prices has pushed three major oil-producing countries with the necessary resources and geological potential to center stage – Saudi Arabia, the US and Russia. But, even if current oil prices lead to a recovery in US shale production, that will no longer be a sector of explosive growth. Russia’s industry has great potential and at low prices, Sechin stressed.

In recent years, two ideas on the world oil market have gradually been abandoned, one of which focused on the crucial regulatory role of OPEC and the other on the prospects for a fundamental reshaping of the oil market as a result of the American «shale revolution». Neither of those concepts remains credible in today’s environment, due to the fact that the oil market has become more multipolar.

It’s symptomatic that last year one of the most imposing and active delegations at SPIEF came from Saudi Arabia, but now that country’s leaders have turned their attention to domestic issues. «Today, faced with the collapse in oil prices, Saudi Arabia is experiencing financial difficulties and can no longer affect to be a welfare state, generously redistributing its oil revenues», states Roland Lombardi, an analyst at JFC-Conseil. «According to the IMF, the Saudis’ reserves are evaporating and the kingdom can’t hang on even another five years at this rate», writes Mr Lombardi, concluding gravely, «Personally I think that Turkey and Saudi Arabia are now the «two sick men» of the Middle East».

In the near future we can expect Saudi Arabia to take new steps to reach agreements with Russia on joint oil-production limits. Riyadh is pointing to the new deliveries of Iranian oil to Europe as evidence of a threat to both Saudi and Russian interests. In turn, Venezuela’s oil minister has suggested that if OPEC countries do not take immediate action, global oil prices for winter 2017 could plummet to $20 per barrel.

Some specific projects have emerged as an important signal of new trends in the energy sector. In particular, according to information from Russian Novatek, China’s CNPC and France’s Total have expressed interest in taking part in the Arctic LNG-2 project. According to the chairman of the board of Novatek, Leonid Mikhelson, the company intends to finalize the conceptual design behind Arctic LNG-2’s technology this year. Production lines with a capacity of six million tons per year are being studied. Earlier it was reported that the project might have a yield similar to that of the Yamal LNG plant currently under construction (which boasts three production lines, each with an annual capacity of 5.5 million tons). The new plant will draw on deposits that have total reserves of 385 billion cubic meters of gas. India, Pakistan, and Southeast Asia represent a promising market for the new plant’s output, as they currently consume over 75% of the world’s LNG and continue to lead the way in terms of growth in demand. It is estimated that by 2025 the region’s LNG needs will expand by an additional 120 million tons per year.

Non-OPEC countries are exerting increasing influence on the global oil market. Declining oil production in those countries, along with continued stable demand for oil, could become a key factor in stabilizing the global market.

According to the latest report by the International Energy Agency (IEA), total world oil production decreased in May 2016 by 800,000 bbl/d. This was the first significant reduction in oil output since the beginning of 2013, and the drop in oil production in the US and Canada – non-OPEC countries – played a key role in this.

The outcome of the last OPEC summit did not in itself have any real influence on price behavior. Both before and after the cartel’s forum, July futures for Brent crude continued to trade at around $50 a barrel – the highest level since November 2015.

IEA analysts emphasize that «[U]nexpected supply cuts and outages in North America, Africa, and South America dampen global production forecasts», in part referring to production problems at American and Canadian oil companies.

Given the close link between the production/pricing indexes for oil and gas, new developments on the global oil market will inevitably have a rapid and significant impact on the future of gas projects, including those that affect Europe’s energy security.

With the rally in global oil prices and the growing uncertainty on the oil markets, long-term contracts to supply gas to Europe are becoming particularly significant. Those allow Europeans to secure additional guarantees of gas delivery, while also allowing them to negotiate routine price discounts.

Calculations of the financial and economic efficiency of the Nord Stream 2 project indicate that gas shipped through this pipeline will be 20% cheaper for Europeans than the current supplies that arrive via Ukraine. And let us not forget that it is precisely in northwestern Europe where we are currently seeing increased demand for Russian gas, i.e., in the target region for the Nord Stream 2 project. This makes it possible to create a unified, efficient transportation infrastructure that will connect the yield of the Bovanenkovo – Ukhta and the Ukhta – Torzhok pipelines to that future gas line.

Long-term calculations also suggest that the downward trend in domestic gas production in Europe will persist despite growing demand.

Speaking about the status of the Nord Steam 2 project, Gazprom CEO Alexey Miller stated that the work is proceeding «according to plan» and that the task of laying the pipeline will begin in early 2018.

And while on this subject, special mention should be made of one factor that is key for all European consumers. Nord Stream 2 in no way threatens the energy security of Central and Eastern European countries that currently use the existing transit routes for obtaining Russian gas. Moreover, the expansion of transit capacity will allow those countries to offset any supply shortages if gas transit through Ukraine is cut off or reduced.

One such country is Slovakia, which gets almost 100% of the gas it needs from Russia (Estonia, Hungary, Bulgaria, the Czech Republic, Latvia, Lithuania, and Poland are in a similar situation). In 2015, Gazprom supplied 3.8 billion cubic meters of gas to Slovakia, plus the Slovaks take in approximately 700-800 million euros each year in transit fees.

And Russia has already confirmed its readiness to hook Slovakia up to the new European gas transportation infrastructure. According to Russia’s minister of economic development, Alexei Ulyukayev, Moscow is prepared to eliminate Slovakia’s risk of lost income from gas transit, by supplying gas to that country via the Nord Stream 2 system. He claims that it is possible for gas from Nord Stream 2 to travel south after leaving Germany, through Austria and Slovakia, and then onward to Hungary and the Balkans. In addition, the Russian minister has stated that no one is preparing to abandon the transit route through Ukraine: all existing transit agreements will be honored – the contract is valid until 2028 and is incontestable.

In addition to Slovakia, Hungary could hold an important place in the new gas pipeline structure. Pal Sagvari, Ambassador-at-Large for Energy Security at the Hungarian Ministry of Foreign Affairs, has already stated that Budapest views Nord Stream 2 as «a very powerful project».

Finally, another important component of Europe’s new architecture of energy security is the development of projects in the Mediterranean that include Russian input. Russian President Vladimir Putin was clear about this in an interview with journalists from the leading foreign news agencies. «Regarding our interest in Mediterranean projects, it is still there. As you know, Gazprom signed a memorandum with an Italian company and a Greek one to look for cooperation options. We are considering this opportunity as well», noted President Putin. At the St. Petersburg forum, Italian Prime Minister Matteo Renzi confirmed, «I am prepared to bet that the energy vector will remain a top priority and that with common sense, solutions will be found».

Thus, the general trends on the global oil and gas markets – despite their complexity – suggest a gradual recovery in oil quotes and a corresponding increase in world gas prices, as well as the advantages of long-term gas contracts and the cost-effectiveness of the new architecture for gas lines as proposed by Russia. And the Nord Stream 2 pipeline system should play a central role in ensuring Europe’s energy security, along with the simultaneous development of projects in the Mediterranean.