By Charles Ellinas
This article is based on meetings and discussions in Norway between October 30 and November 2. They were organised by German think-tank Friedrich Ebert Stiftung (FES) and the Peace Research Institute Oslo (PRIO). The meetings included Statoil, the Ministry of Foreign Affairs, Norges (the central bank of Norway) and PRIO.
These helped better understand Norway’s approach to oil and gas, values, transparency, business model and views about European markets and Eastern Mediterranean (East Med) prospects.
Statoil
Statoil became a listed company in 2001, with state ownership now down to 67%. After a decade of transformation, it became a global energy company. Its success is based on a corporate culture built on technology, competence, competitiveness, collaboration and engagement with society.
Sustainability is at the core of Statoil’s business. In this respect, it promotes transparency, anti-corruption, management of expectations and building local content. It participates in the Extractive Industries Transparency Initiative (EITI), which promotes public awareness about oil and gas management. Good reputation is important to Statoil’s operations. It is also the world’s most carbon-efficient oil company.
Statoil’s strategy is to contribute to local development through investment, development and capacity-building, local industry, local education and workforce development. These would be offered in Cyprus should Statoil be successful in the third licensing round.
Statoil sees the East Med as an area with a large resource potential that is close to Europe, thus offering multiple market options, including subsea development, pipelines, liquefied natural gas (LNG) and scope to develop any gas discoveries profitably.
Ministry of Foreign Affairs
The strong assessment of senior staff at the Ministry’s Energy Section was that global energy markets are difficult and competitive, prices are low and expectations must be managed.
The game-changer in the East Med was the Zohr gas-field discovery last year, with 850 billion cubic metres (bcm) of gas, destined to feed the internal Egyptian energy market. This has spurred additional interest in the East Med and in Cyprus’ third licensing round.
Gas exports from Israel to Turkey and through Turkey to Europe are not unthinkable. But there are strong competitors to East Med gas, particularly Russia. In addition, regional geopolitics are extremely challenging.
The agreement between Russia and Turkey on October 10 to proceed with the TurkStream pipeline is another game-changer. It may involve two strings: one to supply gas to Turkey and the other partly to Turkey, but also to Europe, potentially through the Trans-Adriatic Pipeline (TAP). This makes gas imports to Turkey from other sources much more difficult. TurkStream consolidates Russia’s position as a key supplier to Turkey by creating flexibility and offering cost advantages. It also fits into the new geopolitical realities. But there are still political differences between Turkey and Russia that may pose challenges.
Turkey also wants to diversify its energy sources in the medium- to long-term. Does this create an opportunity for East Med gas? Turkey may become the key to exporting East Med gas.
The Trans-Anatolian Natural Gas Pipeline (TANAP), the first leg of the Southern Gas Corridor, is on track to deliver 6 bcm/year to Turkey by 2019 and another 10 bcm/y to Europe by 2021 through TAP. Iran gas to Europe through Turkey has a cost disadvantage. It will cost $9 per million British thermal units (mmBTU) by the time it reaches central Europe.
Turkey consumes 49 bcm/y, which is expected to rise at about 2% per year, according to the International Energy Agency (IEA). Gazprom supplies 27 bcm/y of this gas, through Blue Stream and Ukraine, and it is Gazprom’s second-biggest gas market in Europe after Germany. It is planning to replace the Ukraine route with the first leg of TurkStream, probably by 2019.
Gas may be important to the world in future, but not in Europe. There is no clear outlook for gas in the European markets. Gas is under pressure between increasing energy efficiency, use of renewables and clean energy and cheap coal. There is no clear direction as to where the EU markets are going, making investment decisions difficult. But indigenous production in Europe is declining, creating some additional import demand.
However, Russia is a formidable competitor. Never underestimate the Russian gas sector: it is and will be very difficult to compete with Russian gas. Not only does it have the world’s largest gas resources, but it intends to remain the largest supplier to Europe in the foreseeable future and, in order to support this, it is slowly adjusting to and adhering to EU regulations.
Russian gas is not only cheap, now at $4/mmBTU, but Gazprom can reduce the price further. It also has over 100bcm/y spare production capacity at marginal cost. This gives Gazprom flexibility to supply more and reduce prices to defend this market, especially as its attempt to sell to the east is progressing slowly.
We need to be realistic. There is plenty of gas and LNG available globally, keeping prices low till at least 2025 and probably beyond. LNG is becoming a commodity: those who produce it cheaply can sell, while those who do not, fail.
The game-changer in the East Med was the Zohr gas-field discovery last year, with 850 billion cubic metres (bcm) of gas, destined to feed the internal Egyptian energy market. This has spurred additional interest in the East Med and in Cyprus’ third licensing round.
Gas exports from Israel to Turkey and through Turkey to Europe are not unthinkable. But there are strong competitors to East Med gas, particularly Russia. In addition, regional geopolitics are extremely challenging.
The agreement between Russia and Turkey on October 10 to proceed with the TurkStream pipeline is another game-changer. It may involve two strings: one to supply gas to Turkey and the other partly to Turkey, but also to Europe, potentially through the Trans-Adriatic Pipeline (TAP). This makes gas imports to Turkey from other sources much more difficult. TurkStream consolidates Russia’s position as a key supplier to Turkey by creating flexibility and offering cost advantages. It also fits into the new geopolitical realities. But there are still political differences between Turkey and Russia that may pose challenges.
Turkey also wants to diversify its energy sources in the medium- to long-term. Does this create an opportunity for East Med gas? Turkey may become the key to exporting East Med gas.
The Trans-Anatolian Natural Gas Pipeline (TANAP), the first leg of the Southern Gas Corridor, is on track to deliver 6 bcm/year to Turkey by 2019 and another 10 bcm/y to Europe by 2021 through TAP. Iran gas to Europe through Turkey has a cost disadvantage. It will cost $9 per million British thermal units (mmBTU) by the time it reaches central Europe.
Turkey consumes 49 bcm/y, which is expected to rise at about 2% per year, according to the International Energy Agency (IEA). Gazprom supplies 27 bcm/y of this gas, through Blue Stream and Ukraine, and it is Gazprom’s second-biggest gas market in Europe after Germany. It is planning to replace the Ukraine route with the first leg of TurkStream, probably by 2019.
Gas may be important to the world in future, but not in Europe. There is no clear outlook for gas in the European markets. Gas is under pressure between increasing energy efficiency, use of renewables and clean energy and cheap coal. There is no clear direction as to where the EU markets are going, making investment decisions difficult. But indigenous production in Europe is declining, creating some additional import demand.
However, Russia is a formidable competitor. Never underestimate the Russian gas sector: it is and will be very difficult to compete with Russian gas. Not only does it have the world’s largest gas resources, but it intends to remain the largest supplier to Europe in the foreseeable future and, in order to support this, it is slowly adjusting to and adhering to EU regulations.
Russian gas is not only cheap, now at $4/mmBTU, but Gazprom can reduce the price further. It also has over 100bcm/y spare production capacity at marginal cost. This gives Gazprom flexibility to supply more and reduce prices to defend this market, especially as its attempt to sell to the east is progressing slowly.
We need to be realistic. There is plenty of gas and LNG available globally, keeping prices low till at least 2025 and probably beyond. LNG is becoming a commodity: those who produce it cheaply can sell, while those who do not, fail.
The Paris climate change agreement has completely changed the outlook for fossil fuels, including gas. Its impact is not yet fully understood by governments or industry. And this is before the COP22 conference this month. These lead to increased uncertainties and insecurity, affecting investment planning and decisions.
There are no easy markets for East Med gas. It is extremely challenging for this gas to get market share in Europe – US LNG is its competitor and it is cheaper. Without regional solutions, East Med is in an even weaker position.
Meetings at PRIO
There was an interesting presentation on ‘Natural Resources: A blessing or a curse’. Inefficient management, lack of transparency and corruption can lead to a poor economic performance from natural resources and, history shows, weaker states. Challenges include environmental and social conflicts, something that Cyprus has already experienced, often caused by lack of openness and transparency. Adoption of the EITI, which Cyprus has yet to join, can help overcome such problems through increased accountability, inclusion of civil society in this process and management of expectations.
Professors Henrik Syse, Head of Corporate Governance at the Norges Bank investment management unit, and Egil Matsen, Deputy Governor, talked about Norway’s sovereign wealth fund, the country’s main tool for public saving. They explained how it was set up, how it is managed, how it ensures responsible and ethical investment and how it achieves growth. Given the relevance of this subject to how Cyprus sets up its own fund, I will describe the outcome of these meetings in next week’s edition.
Dr Charles Ellinas is a non-resident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council
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