Eurasian Energy Games

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Wednesday, November 14, 2012

BP May Open Britain to Russian Gas

Additional ramifications of the BP-Rosneft deal are now coming to light.  With the purchase of TNK-BP by Rosneft, BP’s Russian partners have agreed to end their legal battles with British Petroleum.  Sources claim that the two sides agreed to settle all their disputes after BP  made a $325 million payment to the Russian consortium AAR.  Supposedly, this move has been taken to give BP the freedom to pursue the development of Arctic oil.  “BP is not taking an equity position in Rosneft as a portfolio investor,” said chief strategist at Sberbank CIB Chris Weafer.  “they are looking at a future relationship through which they can grow production and reserves in Russia.”

It appears, however, that this deal has also cleared the boards for BP to work with Gazprom to bring Russian natural gas to Great Britain.  AAR had previously taken the position that their partnership with BP mandated all BP business opportunities in Russia be run through TNK-BP.  With all claims settled, sources report that the consortium has relinquished all claims on BP’s future Russian activities.  That could include moving into the natural gas market.  Gazprom’s  Chief Executive Alexi Miller reported in June that BP was interested in participating in an expanded Nord Stream pipeline, one that would carry product to Britain.

Such a move is a  questionable investment decision by the British company, given the plummeting price natural gas is commanding, and the large quantities of liquified natural gas (LNG) coming on the market to compete with pipeline gas.

Friday, November 2, 2012

Reprecussions from the sale of TNK-BP

With the recent decision of OAO Rosneft to purchase TNK-BP from its various owners, one of the most strained partnerships in Russian economic history comes to an end.  Rosneft has agreed to pay a total of $54.8 billion to BP plc and the Alfa-Access-Renova consortum (AAR) controlled by four Russian billionaires.  These oligarchs–Mikhail Fridman, German Khan, Viktor Vekeselberg and Len Blavatnik– defied the stated policy of the Kremlin last year to prohibit BP from entering into an artic exploration agreement with Rosneft.  With ill feelings all around, it was apparent that this business union was headed for a divorce.

Initially, AAR offered to buy BP’s 50% ownership in TNK-BP, but this offer was withdrawn when Rosneft offered to purchase AAR’s shares instead.  AAR is slated to receive $28 billion for it’s half of the company.  Rosneft then offered BP the chance to sell its shares, as well.  Anxious to raise capital to pay its Gulf spill-related expenses, BP agreed to accept $10-$15 billion in cash,and a 12.5% share in Rosneft.  BP plans to use part of the cash payment to purchase an additional 5.66% of Rosneft which, combined with the 1.5% share they already hold, will bring their share of ownership to approximately 19.75%.  75% of Rosneft is owned by the Russian state, while the remainder is sold in the market.

Analysts believe that the majority stock holder Russian state will help finance the purchase.  “For Rosneft to buy both AAR and BP to form a fully state-owned oil champion would be the cleaner solution for the Russian state, and is likely to require further state injection into Rosneft, given that the company had previously been sounding out the market for a loan to buy part of BP’s share,” said RBC Capital Markets Corporation’s Peter Hutton.  Not as much cash is required for the deal as the original figures would indicate, since BP and AAR are owed about $2.5 billion in dividends from TNK-BP.  According to journalist Paul Whitfield, this means the cash proceeds from the two deals are actually $26.75 billion for AAR and $15.85 billion for BP, falling to $11.05 billion for BP after its acquisition of Rosneft stock.

Russian President Vladimir Putin appears happy with the deal.  “This is a very good signal for the Russian market.  It is a good, large deal.  I would like to thank you for this work,” he told Rosneft CEO and longtime ally Igor Sechin.  Putin should be happy:  the deal gives Rosneft a seat on BP’s board.  This will give Russia a voice in BP operations outside of Russian territory such as in the Caspian where BP is the lead oil company.

The deal puts Rosneft ahead of Gazprom as the leading energy producer in Russia.  After the deal is consummated, Rosneft will produce 4 million barrels of crude oil a day.  This does not appear to be the result of any inside-Kremlin politics, but economics.  As the price of natural gas declines in the face of the shale revolution, it should be anticipated that Gazprom’s importance would also decline.  Moscow needs revenues, however, and the price of oil remains high.  Igor Sechin, driven out of the cabinet by former President Medvedev, is back in the cat bird seat.

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Bulgaria Playing Both Sides

Against all expectations, Bulgaria has emerged as a key player in the battle for control of the Southern Energy Corridor.  This Black Sea country is astride the most logical route between the gas fields and European markets for both South Stream and TANAP.  Bulgaria has agreed to cooperate with both consortiums, while playing for maximum advantage.
In August 2012, Bulgaria and Gazprom announced they would conclude an investment contract in November for the construction of South Stream.  Simultaneously, Bulgarian Minister of Energy and Economy Delyan Dobrev announced a new gas-supply contract that featured an 11% price in gas for the remainder of 2012.
Once having achieved its goal of obtaining Bulgarian cooperation, however, the Russians appear to have upped the ante.  For construction of South Stream to begin, the Russians declared they wanted $1.3 billion in compensation for the Belene nuclear plant.  This was a project that the former Bulgarian government had contracted with Russia, but that current Prime Minister Boiko Borisov cancelled when he took office last year.  Borisov was outraged.  “We are observing all our commitments on South Stream.  For Belene we continue to negotiate…That is why I think we have been absolutely treacherously surprised by that claim.”  Bulgarian observers pushed back, threatening that the government would be forced to cancel South Stream.  Ilian Vassilev of Innovative Energy Solutions said, “There is no way Bulgaria can pay both the claim and let South Stream happen.”
The dispute has led to a delay in a visit by Russian President Vladimir Putin, who was supposed to be present in Sofia on November 9 for the signing of the South Stream papers.  Instead, Putin has postponed his trip until December, possibly signalling his unhappiness with Bulgaria’s recalcitrance.
Meanwhile, in September 2012 the European Union criticized Bulgaria for  supporting South Stream while lacking sufficient commitment to the EU’s version of a Southern Energy Corridor.  The EU’s concern was that South Stream only diversifies supply routes from Russia, but does not diversify the ultimate, Russian source of supply.  “Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey…Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources,” said a leaked document.

EC Report Slams Bulgaria’s Failure to Commit to Southern Energy Corridor

Energy | September 18, 2012, Tuesday| 1215 views

Bulgaria: EC Report Slams Bulgaria's Failure to Commit to Southern Energy Corridor
Мap of the so called Southern Energy Corridor from REEE

Bulgaria must commit more thoroughly to the development of the EU-sponsored Southern Energy Corridor (also known as Southern Gas Corridor) aimed at diversifying natural gas suppliers to Europe, according to a leaked report of the European Commission.

The draft report of the EC, which is still to be released, criticizes Bulgaria for throwing its weight mostly behind the Russian-sponsored South Stream gas transit pipeline, while lacking sufficient commitment to EU’s attempts to develop the Southern Energy Corridor, EurActiv reported Tuesday citing the leaked report.

Bulgaria needs to complete the ongoing investment projects on gas interconnectors with Romania, Serbia and Greece, and make reverse flows possible on its interconnector with Turkey, the EU executive says.

“Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources,” the paper reads.

The Southern Gas Corridor is a key element of competing projects to bring natural gas to Europe from the offshore Shah Deniz II field in Azerbaijan.

Up to now, Bulgaria has made commitments to South Stream, a Gazprom-favoured project widely seen as a competitor to the Southern Gas Corridor.

The South Stream pipeline is intended to transport up to 63 billion cubic meters of natural gas to central and southern Europe, diversifying Russian gas routes away from transit countries such as Ukraine.

The pipes will go from Russia to Bulgaria via the Black Sea; in Bulgaria it will split in two – with the northern leg going through Serbia, Croatia, Hungary, and Slovenia to Austria and Northern Italy, and the southern leg going through Greece to Southern Italy. Recent reports have indicated, however, that Russian energy giant Gazprom may give up on the construction of the offshore section of the South Stream gas pipeline to Austria.

The Black Sea underwater section of South Stream between Russia and Bulgaria will be 900 km long, and will be constructed at a maximum depth of 2 km.

The construction of the South Stream gas pipeline will begin in December 2012, and the first supplies for Europe are scheduled for December 2015.

The pipeline’s core shareholders include Gazprom with 50%, Italy’s Eni with 20% and Germany’s Wintershall Holding and France’s EDF with 15% each.

Gazprom has already established national joint ventures with companies from Austria, Bulgaria, Croatia, Slovenia, Greece, Hungary and Serbia to manage the onshore section of the South Stream pipeline.

Bulgaria has committed itself to speeding up the construction of the Russian-sponsored pipeline on its territory, since on January 1, 2013, the EU is introducing new requirements for the access to energy networks.

In the draft gas supply report of the EC, Bulgaria is also urged to increase cross-border network capacity.

Regardless of its more favorable geographic location, Bulgaria is also singled out as one of the energy infrastructure black spots on the EU map.

The Bulgarian Prime Minister was non-plussed.  In an interview with Euronews, Borisov said he was commited to the European vision.  “It is very important that the Turkish Tanap-pipeline reaches Bulgaria and that Nabucco-West and the South East Europe Pipeline move closer to Europe…Regarding the Nabucco project, Bulgaria has done all it can:  the parliament approved its construction.  We have signed all the documents that are required and we can start construction work tomorrow if necessary.  I am looking forward to the launch of the Nabucco project.”
Despite any agreement with Nabucco, however, as of 30 September 2012 there was no agreement between Bulgartransgaz and Turkey’s Botas to connect with the Turkish pipeline network.  Without such a connection, any discussion of Tanap or Nabucco is moot.  To give the country some negotiating room, Bularia delayed its plans one year to connect its gas network with neighboring Balkan countries.  Bulgartransgaz announced the connection would take place in 2014, instead of the originally-planned 2013.

Wednesday, September 5, 2012

Transcaspian Back on the Board

Recent armed spats between Azerbaijan and Turkmenistan in the Caspian Sea placed the future of the Trans Caspian Pipeline in doubt, but European Union-backed talks in Ashkabat appear to have put things back on track.  According to EU spokeswoman Marlene Holzner, the Turkmenistan Energy Minister Myrat Artykow and Azerbaijan Minister for Industry and Energy agreed with EU Energy Commissioner Gunther Oettinger that the project could be an important part of efforts to reduce Europe’s dependence on Russian gas supplies.
Holzner said both Azerbaijan and Turkmenistan had expressed a desire to supply Turkmen gas to Europe, but neither country was willing to make any firm commitments.  “Turkmenistan said it continues to be interested in delivering gas to Europe.  Azerbaijan also confirmed its interest in being an ‘enabler’, meaning it would also be a transit country for gas.”

Despite the expressions of good intentions, who moves first to make the pipeline a reality remains in doubt.  Holzner said that the EU was waiting for a gurantee from Turkmenistan on supply (despite the fact that Turkmenistan President Gurbangulu Berdimuhammedov is on record as promising 40 bcm per year for the project).  At the same time, she said that the EU would neither own the pipeline nor pay for it.  For his part, Berdimuhammedov has previously said that while he would sell the gas to Europe, it would be up to the Europeans to figure how to get it from Turkmenistan.  So, all good wishes aside, no progress appears to have been made other than to get the parties talking again.

Turkmenistan appears to have turned its attention east, with most of its gas sales going by pipeline to China.  For Azerbaijan’s part, the pipeline could be seen as either competition for its own future gas production, or for Gazprom’s South Stream.  In either case, the benefits of a Trans Caspian Pipeline do not appear to be overwhelming.  The one country that would benefit is Turkey, who would like to see Turkmen gas made available to expand the proposed TANAP pipeline.

“With the TANAP project we have created a structure that will allow gas to transit across Azerbaijan and facilitate trade.  This structure is also targeting Turkmen gas.  We are seeking Turkmen gas,” said Turkish Energy Minister Taner Yilmaz.

According to Gulmira Rzayeva of the Center for Strategic Studies of Azerbaijan, an expanded TANAP could increase Turkey’s chances of joining the European Union.  “Turkey can achieve political gains with this pipeline; it can be an ace in terms of its European Union membership negotiations.  With the finalization of this project, Turkey will have a whole new position within the region.”  Whether Turkey wants to join Europe is, of course, an open question.  Turkey’s annual growth continues at around 7%, while Europe continues to stagnate and — possibly–sink back into recession.

Tuesday, August 28, 2012

Potential Backers Lose Interest in TAPI

Despite support from both the United States and the Asian Development Bank, potential investors are backing away from the proposed Turkmenistan-Afghanistan-Pakistan-India (TAPI) natural gas pipeline.  This proposal has been beset with concerns over security of the pipeline route, which passes through some of the most violent prone provinces in Afghanistan.

In the latest development, China has expressed new interest in Turkmen gas.  First, Chinese President Hu Jintao has proposed a new pipeline route that would bring Turkmen gas to China via Afghanistan.  The benefit of this latest proposal is that the pipeline route would traverse a safer route in Northern Afghanistan.  Second, China also signed in May 2012 an agreement with Turkmenistan to increase deliveries through the East-West Gas Pipeline from 30 bcm  per year to 65 bcm.  This pipeline does not pass through Afghanistan, has no security isues, and has been relatively trouble free since it opened in 2009.  Finally, China has assured Turkmenistan that its demand for natural gas will constantly increase over the next five years.  As a result, Turkmenistan’s enthusiasm has “softened” for TAPI, according to Pakistani correspondent Iqrar Haroon.

The Russian National Energy Institute has recommended the Russian government should avoid investing in TAPI because of security concerns, and questions over the viability of the project.  According to the Indian Institute for Defence Studies and Analyses, the proposed increases in Chinese purchases of Turkmen gas will have a negative impact on Russia.  Turkmenistan offers lower-priced gas to China, bringing downward pressure on Russian gas prices.  Russia and China have been in talks since at least June 2009 to import 68 bcm of gas per year, but have not been able to agree on a price.

Monday, August 27

Trans Adriatic Pipeline Receives Funding Commitment

The Trans Adriatic Pipeline (TAP), the southern competitor for carrying Caspian gas from the Turkish border to Europe, has received an economic boost.  British Petroleum and Total have signed an agreement with the State Oil Company of Azerbaijan (Socar) to fund the pipeline, designed to bring natural gas to Italy.   (The proposed Nabucco West would carry gas from the Turkish border to Baumgarten, Austria).  “These funds will contribute toward continued work in several important areas during the period running up to the final routing decision, expected in 2013,” said a TAP spokesman.

Kjetil Tungland, TAP’s managing director, issued a statement, “The signing of this agreement is a significant vote of confidence in the quality of TAP’s technical and commercial solutions from key industrial players, and underpins the cooperation agreement that was signed between TAP and Shah Deniz in June.”

While the Shah Deniz consortium has not yet decided between TAP and Nabucco West, TAP’s chances have been improved by both the funding, and by the pipeline obtaining government support.  Both the Greek and Italian governments have agreed to support the pipeline, something they previously had not done.  According to the Greek Foreign Ministry, Greek Deputy Energy Minister Makis Papagergiou and his Italian counterpart reached a “close cooperation agreement” to support the pipeline.  The Italian Foreign Ministry added, “Athens and Rome have decided to back the project after Aszerbaijan’s Shah Deniz 2 consortium chose TAP to transport gas to western Europe.  Nabucco West remains an alternative…”

With the Shah Deniz consortium sitting on the fence, other interested parties are also trying to cover all their bets.  the European Commission, which had previously said that Nabucco was a priority European project, has backed away.  It now says that it does not favor any project or route over another, as long as it carries Azeri gas, would diversify EU supplies, and would reduce EU dependence on Russian resources.  Similarly, BP is trying to support both TAP and its rival, Nabucco West.  “Our aim is to be involved in all aspects of the project so the aim is to be involved in Nabucco and TAP as well, and this is still being negotiated,” BP spokesman Toby Odone said.

Wednesday, August 22

Gazprom May Punish Hungary for Supporting Nabucco

Faced with Hungary’s approval of an environmental permit for the construction of the Nabucco pipeline, Gazprom may be considering moving west the route for the rival South Stream pipeline.
Reinhard Mitschek, managing director of Nabucco, announced on August 14 that Hungary was the first country to issue the project all its permits.  “The granting of this permit is a substantial step forward in Hungary and signifies the advanced stage of development of Nabucco West,” he said.
Within a week, Gazprom announced they were in talks with Croatia over the South Stream pipeline route.  “An intergovernmental agreement between Russia and Croatia on joint participation in the South Stream project was signed in 2010,” a spokesman commented.  “Currently, based on the results of a pre-investment stage, Gazprom and Plinacro Ltd. are discussing the terms of a shareholder agreement for a joint compnay project with a view to its subsequent establishment.”
The Croatian side is optimistic.  “At the moment the chances are 50:50 that we get the transit route of South Stream,” said a source involved in the Gazprom negotiations.  The reasons for changing the route are uncertain.    According to the Voice of Russia, a Croatian list serve, Jutarnji, listed a number of possible concerns:  lower costs, differences between Gazprom and the Hungarian leadership, uncertainty over ownership shares of various Hungarian companies, and slow work on the Hungarian economic feasibility stateement.  Gazprom’s board chairman Alexei Miller minimized these reasons, however, calling them “not significant.”  An unnamed Plinacro source added that there could be no official confirmation on the status of the talks, as both sides are bound by a mutual confidentiality pledge.
Timing would indicate the talks are retribution for Hungary’s cooperation with South Stream’s rival, Nabucco.  Whether the talks will result in the route change, or are merely a pressure tactic on Hungary by Gazprom officials, is yet to be seen.

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