NEWS. ANALYSIS. OPINION.

Vol 2, Issue 4

A NEW ERA FOR IRAQ LNG SHIPPING EYES

TIGHT MARKET

AUSTRALIA
TRIGGERS
TAX ROW

GAS EARNINGS
TO EQUAL OIL BY MID 2020s:
SOCAR CEO

ENAGAS EXPANSION: A CAUTIONARY TALE

04 An age of abundance

05 Feature Articles

05 Australia triggers tax row
Australia has some of the most progressive fiscal regimes
for oil and gas but the government thinks LNG exports
could bring it a bigger return.
14 Gas earnings to equal oil by mid 2020s:
Socar CEO
While Azerbaijan has been known for more than a century as a petroleum
pioneer, revenues from gas sales are now catching up with oil exports. 

08 A new era for Iraq 17 Europe’s east-west supply-demand gap

The parliament of Iraq approved Jabbar Ali al-Luaibi as oil March sees capacity auctions for Eugal, where shippers’ bids
minister six months ago. NGW looks at the difficulties he will start the process of planning and building one onshore
faces. branch for Nord Stream.

12 Iran to lose $135bn from 18 Baltics slow to shrug off Russia

A new report by the Iranian parliament’s research centre Latvia’s gas market is supposed to be fully liberalised from
shows that maximizing the economic recovery of the oil April 1, but Russian export monopoly Gazprom will continue
reserves means sacrificing more gas. to play a substantial role in supply and transmission.
 Table of Contents

21 Book review: The new geopolitics of gas 28 BP Energy Outlook to 2035

Detailed analysis of how the US, European and Asian gas Companies need scenarios in order to plan, although there
markets have reached their present state. are more moving parts than ever nowadays, not least in
technology, policy and the engines of economic growth.

22 Enagas expansion: a cautionary tale 32 LNG shipping eyes tight market

Spanish gas grid Enagas has discovered the hard way
Losses have been rife in the LNG transport business,
that an overseas expansion strategy is not without risk.
but the market is due to tighten and the FSRU business
Sometimes it pays to focus on matters at home.
remains strong.

27 Gas Natural says Qatargas dispute on-

going, shrugs off Colombia
At its full year results, fellow Spanish utility Gas Natural
(GN) said an arbitration case involving Nigeria LNG is over,
but that an arbitration case with Qatar remains ongoing.

34 News Articles 35 Europe, Middle East & Africa

-UK Atlantic Margin beckons
-Leviathan: new date for FID
34 Americas -Maersk more hopeful for Tyra
-Petrobras’ $5.2 bn sale to Brookfield
hits legal barrier 37 LNG
-LNG Oversupply Not Here Yet: Shell
34 Companies
-Enbridge Goes for Oil and Wind

Cover image © Chevron 2016

AN AGE OF ABUNDANCE
There is a sense of urgency in the air as gas producing countries
particularly in Europe – if not The Netherlands – try to extract
as much oil and gas as they can. Analysis by BP suggests that
there is far more oil and gas than can find a market (see inside).
Prices may have risen a little but the secretary-general of
Opec Mohammad Barkindo told the IP Week conference in
London February 21 that despite “unprecedented restraint” in
production seen from Opec states since November, “we’re still
far away from the equilibrium price – and stocks are still high.”
This low price is bad news for host governments, who want to
make it easy for producers, while public opinion believes that
means a subsidy for fat cats whose profits from fossil fuel
production should be ended.
But as Shell points out as it launched its Brent decommissioning
consultation February 8, the costlier it is to dismantle platforms in
the UK, the more taxpayers will suffer. It wants some derogation
from the rules that require total removal.
It has long been accepted that a lot of oil and gas, even some
booked as reserves, is condemned to the category of stranded
assets. The Stone Age did not end because man ran out of
stones, as the joke has it. But there is a wealth of LNG and
pipeline gas coming into Europe later this decade, likely to be
sold in fierce competition, so time is of the essence for domestic
upstream projects.
“We have a window to push out decommissioning,” Maersk CEO
Gretchen Watkins told the same IP Week event. Collaborating
to cut costs and improve efficiency can mean the difference
between extending or shutting production hubs, she argued.
The UK has found some promising reserves that it overlooked
in the past, in the Atlantic Margins thanks to a survey it funded;
its work on deal-making, even for late-life assets, is bearing
fruit; and across the North Sea, Denmark is now in talks with the
leading producer on extending the life of the Tyra gas field and
its associated network of gathering lines, which handle 90% of
Danish gas production, in order to avert an early closure (see
inside). And in the middle, Norway continues to attract merger
and takeover deals and stimulate exploration activity, despite its
high costs.
Operators of LNG projects also have to exercise caution though.
While the majors say that they do not look at yesterday’s price
when taking investment decisions but take a view on where
prices could be five years out, their view of a robust future
for gas demand is compatible with the need to work on the
cheapest projects first.
One land-based project that might have been considered for
shelving had the final investment decision been taken just a few
years later is the Southern Gas Corridor – a scheme to bring
Caspian Sea gas to markets thousands of miles away.
Work is progressing, expanding gas transportation capacity in
time for the start of the second phase of the giant Shah Deniz
gas field. And yet nothing can quite disguise how antiquated it
all seems, compared with what is going on in the world of LNG.
The politicians in Europe and the US, with at least half an eye on
weakening Russia’s grip on markets and who in the last decade
gave the project the impetus needed to reach the point it is at
now, had no idea that it could be overtaken by events – the shale
boom and new kinds of LNG trade – even before it starts.
As Atlantic Council Senior Fellow Agnia Grigas notes in her book
(see review inside): “By the time Azerbaijan launches significant
exports, the strategic importance of natural gas and Azeri gas
may have diminished for Europe.”
Unstoppable work is going on, erecting compressor stations and
pipelines. They snake their permanent way across unstable and
more than merely undulating parts of the world, at the cost of
$45bn from well-head to southern Italy – it has still four years
to get there – while the world of LNG supply becomes ever
easier, quicker and short-term, thanks to the abundance of gas
reserves within reach of almost every market and delivered by
better technology tailored to customer’s needs.
This is typified by the short term leasing nature of floating
regasification and storage vessels. A government or private
investor can hook one up to a power plant in a year, if there is
some coastline nearby.
What if the gas from the Caspian fails to flow into Greece
for some reason, or if it is not needed by the time it arrives,
perhaps because new LNG import terminals can source gas
more cheaply, or Gazprom can undercut it with its 125+ bn m³/
yr Nord Stream /TurkStream pipelines, or the shift to renewables
and advances in energy storage and efficiency reduce EU gas
demand still further?
On the other hand, there seems to be nothing much else to do
with the gas: with Iran to the south, Turkmenistan to the east
and Russia to the north, there are no handy export markets
nearby. It would be a shame to let it go to waste. But from
the perspective of early 2017, it will have its work cut out for it
finding a reasonable rate of return.
NGW
 5

AUSTRALIA TRIGGERS TAX ROW

Australia has some of the most progressive fiscal regimes for oil and gas but the
government thinks LNG exports could bring it a bigger return.

While its booming LNG industry is likely to deliver enormous Qatar Royalties vs Australian PRRT revenue (A$bn)
export earnings, there have been claims that the Australian
government benefits least from oil and gas production,
compared with other LNG producers such as Qatar; and that
multinationals are claiming excessive deductions under the
Petroleum Resource Rent Tax (PRRT) regime, which is payable
on net profits.

As a result, the Turnbull government has announced a formal

review of the PRRT and associated commonwealth royalties
ahead of the May federal budget. An initiative aimed at ensuring
both local and international companies are paying the right
amount of tax on their activities in Australia, the review is led
by former finance ministry official Michael Callaghan, with the Source: International Transport Workers’ Federation

support of the commonwealth finance ministry.

The probe comes after the federal government raised concerns

over plunging oil and gas revenue. Finance minister Scott
Morrison said that since 2013, revenue from the PRRT had halved
to A$800mn ($614mn) and crude oil excise collections had also
fallen by more than half. He said there have been no changes to
the PRRT since 2012 and it was time to address these matters.

A revenue comparison done for the International Transport Photo credit: North West Shelf Gas
Workers’ Federation by the Tax Justice Network (TJN) found
that by 2021, Australia’s LNG export volumes are predicted to
exceed those of Qatar, reaching 103.72bn m³ while Qatar’s output
falls to 101.7bn m³. The Australian government is expected to
receive only $800mn in PRRT revenues in 2019 20, or 1.97% of
LNG export sales. At the same time, the government of Qatar
is forecast to collect $26.6bn in royalties from LNG exports,
equivalent to a share of 23.35%.

Photo credit: North West Shelf Gas

Moreover, the government’s announcement also comes days
after the Australia National Audit Office (ANAO) published its
finding indicating that the country’s first LNG export project
North West Shelf (NWS) joint venture, comprising operator
Woodside and partners BP, Shell, BHP Billiton, Japan Australia
LNG and Chevron, may have underpaid millions of dollars in
royalties. It began exports in 1989.
More than A$5bn of deductions were claimed against the
petroleum revenues in the 18 months to December 2015 which
were deemed not legitimate. The deductions were claimed
under broad categories such as operating costs, cost of capital,
and joint venture participating costs.

According to ANAO, revenue reported by producers from NWS
petroleum sales between July 2014 and December 2015 was
A$19.7bn, yielding royalties of A$1.9bn, of which A$600mn were
retained by the federal government and the remaining A$1.3bn
went to Western Australia.
Woodside, however, has argued that all the claimed deductions
were allowable. It said the NWS project has carried a significant
taxation burden since the project started, paying in excess of
A$26bn through royalties and excise, greatly benefiting the
Australian community.
Policy changes can kill confidence: Appea
The Australian Petroleum Production & Exploration Association
(Appea) believes that the PRRT regime is a major reason
why Australia has attracted more than A$200bn of new gas
investment in recent years.
Chief executive Malcolm Roberts said much of the debate about
PRRT has been characterised by grossly misleading information,
distortion and a willingness to ignore the facts. “Appea’s latest
financial survey of its members shows that – despite the industry
recording its first ever net loss in 2014-15 – it paid more than
A$5bn worth of taxes during the same period,” he said.
“The continued payment of taxes at a time when the industry
is under severe pressure debunks critics’ suggestions that the
industry is not somehow paying its way. A fact-based review of
the PRRT by treasury would show the super-profits based tax
was working as intended,” he added.
Introduced in 1988, the PRRT is levied at the rate of 40% and it
applies to the recovery of all petroleum products from Australian
waters. Unlike royalty and excise regimes, the PRRT applies to
the profits derived from a petroleum project and not the volume
or value of the petroleum produced.
This means Australia’s tax take rises for more profitable projects,
but falls when they are less profitable. The PRRT also taxes the
economic rent generated from a petroleum project by providing
deductions for allowable expenditure and uplifts for carry
forward expenditure.
According to Roberts, Australia is not the most attractive
destination for global investors as reserves are costly to develop,
corporate tax rates are higher than in many of its competitors,
and the country has high cost structures. In fact, Australia’s
costs of supplying LNG to Japan, Roberts said, are 30% higher
than those of other countries.
Oil and gas industry tax payments
and net profits ($mn)
Source: APPEA Financial Survey
“Without the natural advantages of countries such as Qatar,
Australia has relied on stable policy settings to attract investors,”
he said. “Policy stability is vital for high-risk, long-lived LNG
projects. Australian projects typically take more than 10 years to
recover upfront capital costs and begin to make a profit.
“With such a delay before projects become profitable, investors
must be confident that policy is stable and that, eventually, there
will be adequate returns to justify their long-term commitment.
Over the last decade, the industry has paid on average A$7.5bn/
yr in taxes to governments – it is one of the most highly taxed
industries in Australia.
“When investors have recovered their costs and begin to earn
solid profits, the PRRT is triggered to ensure that most of that
profit, up to 58 cents in the dollar, is collected by governments.
Our tax system maximises investment and maximises the return
to the community,” he explained.
What the industry had to say
The PRRT review which will address the reasons for the rapid
decline in government revenue attracted about 58 submissions
from both local and international entities, including Anglo-
Dutch Shell, BHP Billiton, Santos, Chevron, Inpex, Origin Energy,
Eni, TJN, Jera Australia, Arrow Energy, Greenpeace, and the
Australian Taxation Office (ATO).
While several industry players in their proposals opposed any
changes to the current fiscal settings that could jeopardise
existing and future investments; a number of companies insisted
that the resource tax regime needed significant reform.
Submission by the ATO showed that firms exploring LNG in
Australia have accumulated AU$50mn in tax credits over the
past financial year, the Brisbane Times reported. The LNG
sector’s combined tax credits grew to A$238bn in 2015-16, from
A$187bn the previous year.
TJN noted in its submission that the industry has pushed for and
won changes to the tax regime that benefit large multinational
corporations at the expense of the Australian people. Offshore
gas resources are only subject to the PRRT and not any other
state or commonwealth royalty regimes, while every other
resource project in Australia pays at least some state or
commonwealth royalty.
Analysis by the Western Australian finance department suggests
that Chevron’s Gorgon LNG project for example will not pay any
PRRT for two decades or longer. Therefore, TJN has proposed
to the federal government to immediately introduce a new
10% commonwealth royalty on all current and future offshore
projects that are now only subject to the PRRT. This could
potentially generate A$4-$6bn in government revenue.

Similarly, the Australian Council of Trade Unions’ president,
Ged Kearney, in a letter to the treasury also encouraged a 10%
commonwealth royalty on offshore projects. Kearney said that
the uplift rates which are conceded to petroleum projects should
also be dramatically reduced, going forward. He said currently,
petroleum projects are eligible for uplift rates of about 8% and
18%, for general expenditure and exploration, respectively.
These uplift rates are not granted to any other industry, and are
remarkably generous.
“Currently, there is a startling lack of transparency for much of
the PRRT regime. The ATO should publicly disclose the different
types of PRRT credits which are earned and carried forward on
a project by project basis. The uplift rates have contributed to
the industry accumulating A$190bn in PRRT credits, and this
massive tax concession is likely to prevent any PRRT payments
for years to come,” Kearney added.
“In 2014-15, PRRT payments fell by more the A$500mn, despite
significant growth in gas production. Multinational corporations
Chevron, Shell, and BP made no PRRT payments; indeed
Chevron and Exxon have not paid any corporate tax over the
past two years despite earning billions.
“To further increase the transparency of the PRRT, the value and
calculation method of wellhead gas should also be made public,
and should be re-evaluated to ensure the Australian people are
paid a fair price for their natural resources. These prices are
calculated behind closed-doors and there is no market to which
to compare these,” he noted.
Woodside, on the hand, has warned in its submission that
specifically retrospective change to the fiscal regime, particularly
during the low price cycle, raises strong doubts about Australia’s
continued international competitiveness and questions about its
level of sovereign risk.
It said hard lessons have already been learnt from other
jurisdictions in which increases in government taxes were
legislated. Both Alaska and Alberta have seen a decline in
economic activity and the loss of investor confidence due to
adverse changes in taxes specific to the oil and gas industry.
Woodside derives most of its income from the sale of petroleum
products produced in Australia. The firm pays tax in Australia on
the profits made in relation to these sales, and this represents
more than 95% of taxes Woodside pays globally. Over the past
five years, the group has paid A$6bn in corporate taxes and,
since 2001, A$2bn in PRRT alone. Woodside’s NWS joint venture
partner BHP Billiton, also the single largest payer of PRRT,
believes that the tax system is working as intended. BHP said
as a profits-based tax, the amount of revenue to government
will fluctuate over the long life of a project. Whether the project
is delivering a profit depends on commodity prices, production
7
costs, and the exchange rate, among other factors. BHP noted
in its submission that while the PRRT has been effective in
stimulating investment in projects, such as its Stybarrow project,
that would likely have not been feasible under a different fiscal
regime.
Since 2000, BHP’s petroleum operations have paid more than
A$11.2bn in PRRT. In the past five years, the firm’s Australian
petroleum assets alone have contributed a further A$5.7bn in
company income tax. Similarly, Japanese energy giant Inpex
highlighted the fact that the PRRT played a key role in attracting
more than A$200bn of new LNG investment to Australia. Any
revision to the PRRT will risk Australia losing LNG foreign
investment to more competitive and highly prospective regions
such as the US and the Middle East, the company warned.
The recent decline in government revenue, Inpex said, is primarily
due to the drop in oil price and oil production, commensurate
with declining profits in the industry. The earlier increase in
PRRT was due to increase in oil prices and production likewise.
Inpex is by far the largest Japanese investor in Australia. The
group’s US$34bn Ichthys LNG development, currently on the
verge of completion in Western Australia, is the second largest
resource project in the country. Inpex is also a shareholder in the
Shell-operated Prelude floating LNG project that is also well into
its construction phase.
Prelude FLNG (Source: Shell)
Shell has been investing in Australia since 1901 and Australia
forms a core part of its global natural gas business. The group
has invested more than A$50bn in Australian LNG projects. With
its combination with BG in 2016 means Shell is also now a major
shareholder in the Queensland Curtis LNG project.
Shell’s direct taxes paid have amounted to around 40% of its
total accounting profits during the 2011-2015 years, totalling
over A$3.6bn. The super major said although the low commodity
prices have impacted the profitability of current PRRT paying
projects, it is confident that the regime is working as intended.
The firm has asked for Australia to maintain a globally competitive
fiscal regime that does not discourage future investment.
Audrey Raj
A NEW ERA FOR IRAQ
The parliament of Iraq approved Jabbar Ali al-Luaibi as oil minister six
months ago. NGW looks at the difficulties he faces.
The Iraqi parliament confirmed Jabbar al-Luaibi’s ministerial
appointment mid-August 2016. He is the first technocrat to
occupy this position, having previously been head of state-run
South Oil Company (SOC), which produces most of Iraq’s oil.
He comes from the Basra region and has a bachelor of science
in chemical engineering, and has worked in Iraq’s oil industry
since 1973.
It is clear that he cares greatly about the health of the country’s
oil and gas sector, having kept SOC running under sanctions and
very difficult circumstances during Saddam Hussein’s reign.
On his appointment he set the ministry new ambitious plans to
develop the oil sector and strengthen seller cartel Opec’s role
in balancing the oil market. He said: “Iraq is seeking to play an
active role in order to support oil prices while preserving a share
that is proportionate to its reserves.”
Last month al-Luaibi confirmed that Iraq had already reduced
production by 180,000 barrels/day from a reference level of
December’s 4.65mn b/d and would achieve its commitment to
cut it by 210,000 b/d. It cut it by a further 40,000 b/d during
the first two weeks of February, with all cuts coming from its
southern exports. He said: “We are abiding by Opec’s policy and
the Opec agreement… cutting from all Iraq,” with cuts started
at fields operated by national oil companies. He subsequently
confirmed that Russian Lukoil, UK major BP and others were
“Iraq is seeking to
play an active role
in order to support
oil prices while
preserving a share
that is proportionate
to its reserves.”
supporting this, but he did not elaborate on any cuts by the
Kurdish Regional Government, which on average produces
about 600,000 b/d.
His goal is to get Iraq back on its feet. With oil production
reduced, the oil ministry is concentrating on the downstream
and gas sectors and much-needed restructuring and reforms.
He is also working on exports, with Egypt in particular. He met
his counterpart, Tariq al-Molla, and the two have discussed
strengthening of bilateral relations between the two countries
and potential oil exports to Egypt. Egypt’s search for additional
oil supplies came after Saudi Aramco halted shipments of oil
products to Egypt last year. Bilateral talks are expected to
continue this month.
Minister Jabbar al-Luaibi (Photo credit: Ministry of Oil)
Reserves distant from the war
Most of Iraq’s oil industry is in the mainly Shiite central and
southern parts of Iraq. As a result, it has been largely spared
from the war with Isis/Daesh, which seized large stretches of
the country’s north and west, including oil fields and facilities.
Iraq, with US assistance, is now in the process of liberating these
areas.
Iraq holds the world’s fourth largest proved oil reserves,
estimated at 143bn barrels and he is confident that soon another
25bn barrels will be added to this estimate. He also said that only
a fraction of Iraq’s oil blocks is being exploited. The potential for
more, and substantial oil discoveries is huge, estimated by Iraq
to be as much as 360bn barrels. With all hydrocarbon resources

land-based, production costs are some of the lowest in the
world, estimated at $0.95-$1.9/barrel, and so giving the country
a headstart in the race to avoid stranded assets (see separate
feature on BP’s 2017 Energy Outlook).
In 2011 the IEA was predicting that Iraq’s oil production could
reach 6mn b/d by 2020. But even with the minister’s commitment
to drive oil production, this now looks unattainable.
Not only does it require massive new investments and more
drilling, but also water injection to enhance production from
the ageing oilfields. The ‘common seawater supply project’,
conceived in 2011 to achieve this, is still nowhere near
Major Oil Reserves in Iraq (Map credit: MIT OpenCourseWare/CC BY-NC-SA 4.0)
9
implementation. As a result, the minister is trying to drum up
support to expand Iraq’s natural gas industry. He put Iraq’s
proved natural gas reserves at 133 trillion ft³, mostly in the form
of associated gas from southern oilfields, making Iraq the 12th
largest natural gas holder in the world. He estimates additional
natural gas prospects to amount to another 300 trillion ft³.
However, Iraq is still flaring as much as 2bn ft³/d, despite the fact
that some of the associated gas is being reinjected into oilfields
to maintain oil production.
According to the World Bank, Iraq has seen a sharp increase
in flaring because of its rising oil production. Al-Luaibi said the

Gas flaring in Iraq
(Photo credit: iStock)
aim is to capture 80% of the flared gas by end of 2018 and 100%
by end of 2019, but that may be optimistic. So far Shell has
captured only 750mn ft³/d. He wants Shell to capture as much
as 1bn ft³/d by the end of 2017.
Iraq is also looking for international partners to build and
operate a gas plant in the south to capture and process more of
the gas that is currently being flared, and to proceed with new
gas liquids plants to boost exports.
The ministry has set ambitious targets to raise gas production.
Al-Luaibi said Iraq could become a major gas player, emulating
its success with oil. In order to achieve this the country needs to
attract the interest of the international oil companies (IOCs) to
invest and develop new gas fields beyond the southern region.
Recent progress in natural gas production and condensate
and LPG exports, as encouraging as it may be, falls far short of
requirements.
Continuous delays in implementing the required work to capture
and process the gas mean that flaring is still a big problem, to
the extent that the country is now importing gas for power
generation from Iran at a substantial cost to the Iraqi economy.
But despite this, Iraq has been in discussions with Kuwait to
supply it up to 200mn ft³/d gas, starting initially with 50mn
ft³/d. The two countries agreed to form a joint committee to
discuss prices and an implementation plan.
“Iraq must increase oil output to reach a
level that suits Iraq’s needs.”
7
Oil and gas revenues make up nearly 85% of Iraq’s GDP. Like
other oil exporting countries, its economy has been hit by
plummeting oil prices, but also by its war with Isis and the lack
of reform.
Sector reforms
The minister recognizes that realising Iraq’s hydrocarbon
potential requires radical and fundamental changes and
restructuring of the sector, upgrading of infrastructure and
reforming of the oil ministry and state oil companies and the
country’s laws and regulations.
He stressed the need for transparency and competence,
recognising that mismanagement is a major problem,
contributing to the under-performance of the sector. In addition,
the government, the parliament and the IOCs are all dissatisfied
with the lack of clear policies. He intends to improve legislation
and remove blockers to attract international investment.
He also recognises the need to solve the oil dispute between
KRG and the federal government, stressing that he sees ways
to achieve this.
The World Bank agreed to support Iraq’s reform programme
and its drive to reduce dependence of its economy mostly on
the oil sector and the fight against corruption. As part of this,
the World Bank is assisting the oil ministry in a comprehensive
review of the oil and gas sector and in the preparation and
 11

implementation of an upstream/downstream development plan, Forward planning

with ambitious targets, which has the grateful approval of the
minister.
IOC contract review
He stressed that one of his priorities is to co-operate more
closely with the IOCs operating in Iraq as well as modifying
and improving the oil contracts signed with them in order to
increase oil production and investment for gas.
He said that potential options include new types of contract,
incorporating some elements from technical services contracts
and some elements from production-sharing contracts. Lessons
can be learnt from KRG’s contract models, which helped the
region achieve a lot in a short time. The ministry has retained
international consultants who are advising on the revision of the
terms of current contracts.
He made clear his aim of solving the problems and challenges
faced by IOCs in order to promote partnership, training and
employment of Iraqis and, once the oil cuts are over, increase
investment and production of oil and gas. The drop in oil prices
forced the IOCs to reduce their investments in expanding oil
production in Iraq, which led to a sharp drop in state revenues.
As a result, the federal government was unable last year to
maintain quarterly repayment levels to the IOCs. This, in turn,
made it difficult to engage with the operating joint ventures
to negotiate contracts and commercial terms. With prices
recovering as a result of the oil production cuts, he hopes that
this now becomes possible.
He also plans to expand the global marketing capability of the
state oil marketing company SOMO by benefiting from the
experience of IOCs in this area. He went further to suggest that
Iraq is considering entering into joint ventures with IOCs to
support SOMO.
Al-Luaibi said the oil ministry wants to increase the capacity of
Iraq’s refineries. He invited international oil companies to invest
in the upgrading of existing refineries and the construction of
five new across the country. Iraq is open to discussing different
contract models for the new refineries, including build, operate
and transfer.
He has also outlined plans to improve capacity building,
restructure the downstream sector and conclude joint ventures
in areas such as pipeline, storage and tanker development. He
added that Iraq is opening the doors wide for investment to
increase downstream capacity. The overall message is that, in
spite of the challenges faced by Iraq through its fight against
terrorism and the global oil-price crisis, the country will be going
forward with its plans to expand its oil and gas industry.
The Opec deal is for six months and al-Luaibi hopes that the oil
price will stabilize after that. Once the oil production cuts are
over, Iraq intends to prioritise increasing production. Time is of
the essence in terms of realizing oil revenues. Iraq’s estimates
reserves can last another 150 years but the oil-age may decline
within 30 years. Iraq must develop its assets with this in mind.
As a result, keeping the oil for future generations is no longer
an option. There is a 30-year horizon to realize benefits before
world oil consumption declines as the global energy transition
takes effect.
Al-Luaibi said Iraq must increase oil output to reach a level
that suits Iraq’s needs. But this requires focused policies and
better management to attract investments, something that Iraq
is aware of. Above all Iraq must make better use of future oil
revenues and avoid the squandering of the past.
Charles Ellinas

SHELL CUTS FLARING

Shell is involved in the Basrah Gas (BGC) venture with a 44% interest, alongside Iraq’s South Gas Company on 51% and Japan’s
Mitsubishi with 5%. The venture in 2013 declared its eventual ambition of producing 2bn ft³/d instead of flaring it.

Shell’s vice president for conventional oil and gas projects Graham Henley says that BGC takes some of the gas previously destined
for the flare stacks from Round 1 oilfield concessions, treats it, strips out the liquid petroleum gas and delivers gas into the domestic
grid. “I’m very excited about that. Before Shell’s participation in 2013, less than 200mn ft³/d were compressed. Now we’ve achieved
more than 600mn ft³/d. So that’s a tremendous environmental benefit and will also help the Iraqis to support their economy,” he said
late last year.
IRAN TO LOSE $135BN FROM
LOW GAS RE-INJECTION
A new report by the Iranian parliament’s research centre shows that maximizing
the economic recovery of the oil reserves means sacrificing more gas.
Iran could lose a cumulative $135bn unless it re-injects more gas
into oil fields, according to a new report by the research centre
of parliament. Four out of five of Iran’s active oil fields are in the
second half of their lives and each year their production falls by
8-12% owing to natural pressure drop in the reservoirs.
The secondary recovery rate (after gas and water re-injection)
of Iran’s crude oil reserves, which stand at 711.53bn barrels in-
situ, is about 24.65%. The primary recovery rate, based on the
reservoirs’ own natural pressure is about 14% on average.
National Iranian South Oil Company (NISOC) is the biggest
producer, with 3mn barrels/d of the national 4mn b/d. The
report said that Iran has carried out studies which prove that
timely and planned re-injection of gas into NISOC’s oilfields will
increase their recovery rate by 9.15 percentage points, yielding
an increase of 16.3bn barrels cumulative output.
“Therefore, while establishing required facilities, enough gas
should be provided for reinjection. Studying the documents
of the sixth five-year economic development plan (2017-2022)
shows that the amount of gas being re-injected into the oilfields
is less than what is required,” the report says.
The official statistics also indicate that Iran should re-inject about
287mn m³/d between 2016 and 2025 as well. There is no official
information about how Iran will go about realising its recycling
aims in the next ten years, but a parliamentary report says Iran
plans only to re-inject about 125-150mn m³/d until 2020.
“If a sufficient volume of gas for injecting is not provided, it is
estimated that 2.3-2.7bn barrels of recoverable oil will become
unrecoverable. “Taking each barrel of oil into account at $50,
between $115bn and $135bn of assets will be lost.”
 13

“Taking each barrel The cumulative oil production from Nisoc’s fields
without and with gas re-injection:

of oil into account at

70

60

$50, between $115bn

60
50

and $135bn of assets

40
42

will be lost.”
30

20

42
10
Based on initial planning, about 76 m³ of gas have been reinjected
on average to produce a barrel of oil (primary+secondary 0
Primary Production Secondary Production Total Production
production) from Nisoc’s fields.
Source: Parliamentary report

However, statistics show that the average barrel of oil has had
only 46 m³ injected. “This means a shortfall of around 218bn
m³ in gas injections and consequently a lag of accumulated
production to the tune of 1.3bn barrels of oil over the course of
gas injection projects.” Actual versus required re-injection (mn m³/d)
1995-2015
Overcoming the effects of the shortfall mean that as much as Demanded Volume Re-Injected Gas

102 m³ of gas/barrel of oil recovered need to be injected over 450

the coming years. 400

350
If gas cannot be provided in time, then oil production should be 300
reduced proportionally to gas re-injection in order to prevent
250
more losses. Based on past performance, oil output should be
200
cut by 215,000- 251,000 b/d. Taking each barrel of oil at $50, it
150
means that the national income is reduced $4-4.5bn/yr. Studies
show that the share of secondary production from Iran’s total 100

output in 2015 was 49.6%, but it will increase sharply to 72.5% 50

by 2025. 0 2010

2011

2012

2013

2014

2015
1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Considering the volume of gas that is being reinjected, in order

to maintain the present level of production, a Nisoc study shows Source: Parliamentary report
that 172mn m³/d of gas are needed this year and even more –
199mn m³/d – will be needed in 2020 before declining to 140mn
m³/d in 2025.

Iran doesn’t inject water into Nisoc’s oil fields, but it has cut
Re-injection volumes needed at Nisoc’s fields:
gas re-injection into fields operated by the country’s second
250
biggest oil producer Iranian Offshore Oil Company. And in 2014
it doubled water re-injections into them, or 260mn barrels, in 200
2015. There are no published statistics for 2016.
150

The recoverable oil reserves of IOOC’s fields stand at 100bn

100
barrels with 15% primary and 27% secondary recovery rates.
50
Dalga Khatinoglu
0
2020

2021

2022

2023

2025

2026

2028

2029

2030

2031

2032

2033

2034
2016

2017

2018

2019

2035
2024

2027

Source: Parliamentary report

GAS EARNINGS TO EQUAL OIL BY MID 2020s:
SOCAR CEO
While Azerbaijan has been known for more than a century as a petroleum
pioneer, revenues from gas sales are now catching up with oil exports.

Natural gas-related revenues flowing into Azerbaijan’s treasury
will equal those coming from sales of oil by the mid 2020s, while
the share of petrochemical products export will also go up, the
CEO of state oil company Socar, Rovnag Abdullaev, told NGW.
Azerbaijan plans to add 16bn m³/yr to its gas exports from the
second phase of Shah Deniz gas field (SD2) by 2021, but it has
also been busy expanding its petrochemical, refinery, pipeline
and LNG projects, especially overseas.
“In the next decade, Azerbaijan will conduct a number of
activities based on the realisation of its current gas projects,
their expansion, and the launch of successive new gas projects.
10.6% in last year, while the figure for oil revenues fell by 13.5
percentage points (see table 1).
Abdullaev said: “We will have a more promising project at Shah
Deniz – Phase 3 (SD3) is due on soon before 2030.” SD3 is the
biggest phase of the offshore field.
He said: “Increasing the share of natural gas in production, as
well as operations aimed at improving the oil and gas refining
and chemical production will create conditions for a more stable
income and sustainable development in Azerbaijan, and make
an important contribution to the energy security of partner
countries.” Existing markets include Turkey, Georgia and Greece.

Additionally, the commissioning of gas processing and
petrochemicals plants and the establishment of a new industry
run on gas constitute further important aspects of our operations.
The newly-built plants will contribute to the diversification of
the country’s economy, create new jobs and encourage the
development of small and medium businesses,” he said.
Azerbaijan has already increased the share of gas export
revenues from 2.7% of the country’s total in 2012 to about
Azerbaijan is now focusing on realising SD2, aimed to export
6bn m³/yr of gas to Turkey and 10bn m³/yr to EU by 2021 initially,
through the Southern Gas Corridor (SGC).
He said kick-starting production from Shah Deniz heralded a
completely new era, not only in the oil and gas industry and
the wider economy “but, I would say, in international economic
relations as well.”

Table 1: Percentage of receipts from

exports

Year Crude oil Natural gas

2012 84.6 2.7

2013 84.4 2.9

2014 84.3 1.4

2015 69.6 11.8

2016 71.1 10.6

Source: Statistics Committee of Azerbaijan Socar CEO Rovnag Abdullaev (Photo credit: Socar)

According to Abdullaev, today, Azerbaijan’s gas strategy
has achieved a number of important objectives. First,
the sustainability of Azerbaijan’s energy security and the
development of gas reserves, producing environmentally
clean energy. And second, the establishment of sustainable
infrastructure to ensure secure and stable supply of these
resources to world markets. This includes the opening up of
the SGC from the land-locked Caspian basin and expansion
into Europe, which, as the president, Ilham Aliev, has said, will
gradually change the energy map of the region.
“If we were formerly limited to a gas pipeline across Georgia
and Turkey, currently, our pipeline geography goes beyond
these countries by covering Greece, Albania, and Italy as well.
Following the construction of the pipeline, the local population
of these countries will be able to benefit from the gas that is
transported,” Abdullaev says.
“Initially, many cast doubts on the realisation of the SGC, which
is over 3,500 km long. But all construction work comes up
against objections of this nature. Here, the main thing is to lay
the foundation and build the first floors of the building. If that
is feasible then the rest is not a problem. However, in our case,
the complicating factor was that the construction schedules for
the upstream (SD2) and the midstream (SGC) had to be exactly
lined up with each other. Thus, building a pipeline and then
waiting for the gas to come did not make any sense; nor vice
versa.”
He added that in 2017 the expansion of the South Caucasus
Pipeline in Azerbaijan and Georgia will be completed. “The
scheduled work on the Trans-Anatolian Pipeline (Tanap) is
60% complete and the Trans-Adriatic Pipeline (TAP) is 31.8%
complete,” he said.
Low oil price era
Abdullaev added that financial matters relating to SD2 had
to be solved on time in order to allow the purchase of goods
at an initially negotiated price and the payment of services.
“Thus, building a pipeline
and then waiting for the
gas to come did not make
any sense; nor vice versa.”
15
“Apparently, the project has a quite high degree of complexity
indeed. In addition, the implementation of the project started
in 2014 when the world markets witnessed a sharp plunge in
oil prices. Therefore, even western media started to publish
materials questioning the ability to realise the project as
scheduled.”
Regarding the impact of low oil prices on the enthusiasm of
foreign companies for energy projects in Azerbaijan, he said
that they had had a dampening effect in the last two years.
“However, as oil prices in the world markets began to rise to
$50/barrel and above since the last quarter of 2016, the more
promising forecasts for this year are an encouragement. It could
be said that we have already received a number of requests
from a large variety of companies.
One of them is willing to work on a gas condensate field which
has small reserves and which was discovered in the late 90s in
the Caspian Sea. Another company’s proposal is related to the
development of an oil field. In other words, if the technological
potential and oil prices made the development of deposits
unprofitable 20 years ago, now earning a profit seems possible.”
Downstream projects
Beside domestic downstream projects, the company has
invested $4.487bn in foreign projects in total as of the beginning
of 2016, of which about three quarters – $3.334bn – were spent
in Turkey, $414.5mn in Switzerland, $334.3mn in Georgia,
$280.8mn in Ukraine and $71.3mn in Romania.
It also bought a 26% stake in an LNG regasification terminal in
Cote d’Ivoire with a capacity of 3mn mt/yr (4.15bn m³/yr). Socar
Trading won a tender with a consortium including Germany’s
Siemens to supply LNG and build a re-gasification facility for
the island of Malta and build a gas-fired power plant costing
€175mn.
Regarding domestic projects, Abdullaev said that sustainable
development strategy of Socar would play an essential role in
insuring against losses even during times of market volatility. Table 2: Gas output, by category (mn m³)
“Currently, Socar is working on huge projects in both gas
production and oil and gas processing and petrochemicals.” Year Gross Associated Non-associated Commercial
gas gas gas gas
Work on industrial complexes producing polymers for example
is underway in Azerbaijan. Despite the decline in oil prices, these
and other projects of this kind are continuing. This lays a steady 2010 26,312 12,370 13,943 16,673
foundation for sustainable development – capable of resisting
market volatility in the coming years – by improving the value 2011 25,728 13,360 16,361
12,368
chain.”

2012 26,796 13,579 13,217 17,242

He said that consequently, following the example of its strategic
asset in Turkey, Petkim, revenues from oil refining do not fall
so much when oil prices plunge; they might even increase. 2013 29,245 13,945 15,300 17,895
“Therefore, investments in such projects as Socar Polymer,
Socar Carbamide, the Star refinery and others in the processing
2014 29,555 13,945 15,610 18,827
industry, made in recent years, will prove their value.”

If Azerbaijan’s oil industry pursues sustainable growth, he says, 2015 29,175 13,663 15,512 19,236
it can carry along with it the development of other sectors too.
“In addition to creating new jobs, Socar’s Azerikimya, Socar
2016 29,331 NA NA 18,715
Polymer, Socar Carbamide and other facilities can contribute
to the sustainable development of economy. Intermediate
Source: Statistics Committee of Azerbaijan
products from these plants may be used as raw materials by the
country’s small and medium enterprises.”
Turning from era of oil to era of gas
The $750mn Socar Polymer plant will produce 180,000 mt/yr of
polypropylene and 120,000 mt/yr of high-density polyethylene Azerbaijan used to produce 0.2mn b/d of oil 110 years ago,
by Q1, 2018, rising to 570,000 mt/yr by 2021. accounting for a half of global output. The volume reached the
peak point in 2010, of 1mn b/d but has since fallen to 820,000 b/d
The Socar Carbamide project, which will also cost $750mn, will today. Azerbaijan is expected to produce its 15 billionth barrel
be commissioned at the same time. It will turn 1.5mn m³ of gas this year. More than half of the oil produced so far comes from
into 438,000 mt/yr of ammonia and 730,000 mt/yr of urea. the Caspian Sea. Today, only 3.5% of oil is produced onshore.

Upstream gas projects

Abdullaev said that although oil production has over 160 years’
history in Azerbaijan, the gas issue had never been so topical in
Azerbaijan has other projects to develop, apart from Shah
the country as it is today. “There were objective reasons for this
Deniz. Abdullaev said that a number of them are already on the
as the scope of using gas was limited previously. Gas, produced
agenda.
in the 20-30s, was associated gas from oil wells and it was used
in industry.”
“The most important among them is the Absheron field,
operated by French Total, whose development might be realised
Natural gas supply to the commercial and residential sectors
by the end of 2019. As it is a priority for us to make Azerbaijan
began in the middle of the last century. In Soviet times, the peak
self-sufficient in gas, 1.5bn m³/yr of gas from the first phase will
period of gas production was recorded in 1982 at 14.89bn m³/yr,
be delivered to the domestic market,” he said.
of which 11.3bn m³/yr was non-associated gas, produced from
the offshore Bahar field.
He added that Socar put high hopes on the drilling works in
the first exploration well in deep-Shafag and Asiman, which had
Currently, a significant part of country’s gas is produced from
been drilled by BP in the Caspian Sea this year. “Based on the
the offshore fields. At present, annual gross gas production in
results of 3-D seismic surveys done in the last year, there is a
Azerbaijan stands at 29bn m³/yr”. Of that, 99.2% comes from
strong possibility that gas will be present in the contract area,”
the offshore fields. As of the end of last year, the country has
he said. He added that the development of the Umid gas field
produced a total 769bn m³, he said.
and the exploration of Babak were high-priority projects for the
future, “as the latter was proved to possess large gas reserves
Ilham Shaban, expert on Caspian region energy issues
following geological exploration work.”
 17

EUROPE’S EAST-WEST SUPPLY-DEMAND GAP

March sees capacity auctions for Eugal, where shippers’ bids will start the
process of planning and building one onshore branch for Nord Stream.

There is a looming gap between supply and demand in Europe
at the moment, but Nord Stream 2 is not quite the solution it has
been presented as. Most of the gas it carries – 51bn m³/yr of the
55bn m³/yr – will arrive in the east of Europe; while demand to
replace declining production is in the northwest.
German transmission system operator Gascade – a Gazprom-
BASF joint venture – told NGW in early February that only a
small amount of gas from NS 2 is going to flow into the North
European Line (NEL), built to carry Nord Stream 1 gas, once
the necessary compression has been added. This could mean
around 4bn m³/yr, it said.
Among the claims made for the route of NS 2 have been its
relative cheapness compared with Ukraine, particularly where
northwest Europe is concerned; and also given the certain
demand, given decline upstream: the UK and Norway for
economic/geological reasons and The Netherlands, for health
and safety reasons.
At the moment though about 87bn m³/yr of Nord Stream gas
are set to end up in eastern Europe, thanks to the two Nord
Streams, and only 23bn m³/yr in northwest Europe, which is
not even as much as the legislated reduction in output from the
Dutch Groningen field over the past few years.

The NEL TSOs Gascade, Gasunie, Ontras, NEL Gastransport and
Fluxys NEL are actually carrying out the so-called “more capacity
project.” The auctions will be held on March 6 on the European
primary capacity platform Prisma. Based on the auction results,
potential gas transport system expansions will be developed
which could lead to an expansion of the NEL pipeline.
There may be some assumptions made about a lower cost of
transport westwards from 2019 and sufficient hub trading to
allow price differentials to do the job of moving gas to where
it is wanted, opening up a gap between the contract and the
Onshore plans for Nord Stream

Gazprom maintains that NS 2 and additional infrastructure is

necessary in order to meet the growing import needs in Europe,
which it puts at about 120bn m³/yr within the next 20 years.

Although gas arriving in the Czech Republic will be able to reach

France or the Netherlands, this is not the short, north-to-north
route promoted by NS 2 on grounds of cost-effectiveness (see
below). When the 485-km twin-pipe Eugal line is built, it will
bring gas from Greifswald down to the German-Czech border,
effectively shadowing the route of the existing 35bn m³/yr
capacity Opal pipeline, whose capacity allocation is still a matter
for a court to decide.

From the German border, the gas would flow through existing
capacity across the Czech and Slovak republics to the
Baumgarten hub in eastern Austria; much of this capacity would,
by then, have been freed up by Gazprom’s exports via Ukraine
as its contract with Naftogaz Ukrainy ends in 2019.
Map credit: Gascade
molecules. This goes a long way to explaining Gazprom’s record
sales to Europe last year, which included 8.2bn m³ that ended up
in Ukraine, although Ukraine did not buy any gas from Gazprom.

Gascade says the Eugal project is still in its early stages, but
hopes that gas can start flowing through the first of its twin
pipes in late 2019. Capacity auctions are being held next month,
at which point the investments for the planning and construction
of the line will be settled. The auctions are open to all market
participants, Gascade told NGW, and as Eugal will be a fully
regulated pipeline, there is no risk of a capacity restriction such
as at Opal.
Gazprom has said news on finance for the pipeline was coming
soon: on the sidelines of the European Gas Conference in Vienna
late January, Gazprom chairman Victor Zubkov spoke of his
confidence that a finance package would be arranged in the
coming months, “as all the partners see the importance of the
pipeline.”
William Powell
BALTICS SLOW TO SHRUG OFF RUSSIA
Latvia’s gas market is supposed to be fully liberalised from April 1, but
Russian export monopoly Gazprom will continue to play a substantial role
in supply and transmission.
Russian gas giant Gazprom has secured chunky 34% stakes
both in the hived off national gas trading and supply company,
Latvijas Gaze, and in its demerged gas transmission system
operator, Conexus Baltic Grid.
The decision to split Latvijas Gaze in two is in line with a
European Union directive requiring the separation of energy
supply and generation from transmission networks.
Latvia was the last of the three Baltic States to implement the
unbundling. Parliament decided in February of 2016 that Latvijas
Gaze should be split by the end of 2017 to open the gas market
for competition.
“In the first stage, the composition of shareholders in both
companies will overlap by 99%. Gazprom was given shares in
Conexus Baltic Grid during the restructuring of the Latvian gas
market. They received the same amount of shares as they have
now in Latvijas Gaze,” Conexus Baltic Grid spokeswoman Dace
Baltabola, told NGW.
The other shareholders in the split companies include the EU’s
infrastructure investment fund Marguerite (28.97%, acquired
from Uniper), Uniper (formerly Ruhrgas International, with
18.26%), Itera Latvija, an intermediary gas supplier and subsidiary
of Russia‘s largest oil company Rosneft (16%) and the remaining
2.8% belong to employees and others.
The unbundling process raised the possibility – and, in some
quarters even, the hope – that the Russian gas monopoly would
be forced to sell its shares and leave the Baltic market, but that
did not happen.
“Nothing is now too small or too insignificant for Gazprom
amid the new energy geopolitics in Europe. Retaining a
significant part of the ownership in Latvia will help Gazprom
exert influence over the Latvian and Baltic gas markets. Besides,
Gazprom is dealing with the big problem of (gas) overcapacity
and the shrunken market, which means it has to consider every
possibility,” RusEnergy’s Mikhail Krutikhin, an independent
Russian energy consultant, told NGW.
Latvia has made clear its reluctance to have Gazprom as a
stakeholder in the country’s reorganized natural gas market.
First, it was rumoured that Latvia may have partnered with the
EU-backed Marguerite Fund investment to buy out Gazprom‘s
34% stake in Latvijas Gaze, although in the event Marguerite
bought just 28.97% from Uniper.
Then Latvia’s government, which was first in line to obtain shares
in Conexus, hired US consultants Deloitte to advise on whether
it should buy the stakes itself or stay out. The consultancy did
not encourage retaining Gazprom as a stakeholder in Conexus,
but in the end Gazprom managed to retain a substantial stake
both in Latvijas Gaze and the gas transmission company.
A former boss at Lithuania’s national commission for energy
control and prices, Vidmantas Jankauskas, told NGW that,
in Lithuania, as in Latvia, Gazprom had at the start of the
unbundling process in 2010 been considered as a possible
minority stakeholder in Lithuania’s demerged gas supply
company Lietuvos Dujos.
“That Gazprom could secure a presence in the hived-off gas
companies in Latvia was therefore predictable too. In the near
future, the Russian company is most likely to be the country’s
main gas supplier,” Jankauskas said.
To the surprise of some energy experts, Gazprom this year has
recaptured 34% of Lithuania’s gas market.
Lithuania’s state energy holding Lietuvos Energija (Lithuanian
Energy), which supplies gas to households and industrial
customers, is set to purchase around some 2.9 TWh or around
34% of its gas needs from Russia; and the fertilizer manufacturer
Achema, the Baltics’ single largest commercial gas consumer,
plans to buy about 9 TWh, or two-thirds of its gas needs, from
Gazprom.
It has complained about the costs of the Lithuanian LNG
terminal, which have been socialised across consumers and so
made gas more expensive.
Meanwhile, Gazprom’s total in the Lithuanian gas market this
year is expected to hover at around 55%, up from one-third in
2016, but it is expected to remain below its 2015 market share
of over 80%.

Gas transmission and storage (Map credit: Latvijas Gaze)
Legal loopholes persist
Although the unbundling of Latvia’s gas sector ownership has
been completed, formally, with the set-up of Conexus Baltic
Grid, the practical embodiment of the new gas legislation is not
in place yet, Baltabola concedes.
“In order to be able to sign the framework agreements on the
use of infrastructure before the market opening date (April 1),
Conexus Baltic Grid hopes to have the regulatory framework
necessary for performing its duties in open market conditions
in place as soon as possible and not later than middle of March
2017,” Baltabola said.
“So far the state institutions have acted very slowly, calling
into question the reliability and predictability of the regulatory
framework, especially taking into account the requirement that
19
shareholders who are involved in gas production and supply sell
their shares in Conexus Baltic Grid by the end of 2017.”
In implementing the single Baltic gas market strategy, Lithuania’s
Klaipeda Nafta, operator of the Klaipeda LNG terminal, must be
granted access to the Incukalns underground gas repository,
which, so far the owner, Latvijas Gaze, has blocked.
“So far, Conexus Baltic Grid and Klaipedos Nafta have not
negotiated and agreed on gas transmission from the Klaipeda
LNG terminal. Conexus Baltic Grid has just a letter of intention
from one market participant in Lithuania (Klaipedos Nafta) with
the message that it could use some of the capacity if the services
are provided on a short term basis and the combined costs of
transmission and storage were lower than the seasonal spread,”
the transmission company official said. “It has to be noted that
our storage is an aquifer – clearly a seasonal one,” she added.
Shall we dance?
The gas transmission companies of Lithuania, Latvia and Estonia
signed an agreement in the end of last year on the formation of
a single Baltic gas market and the introduction of the model is
thought to mark a step towards the integration of the national
gas markets of the three.
“The transmission system operators are introducing innovations
to the capacity allocation model in order to enhance the
competitiveness of the Baltic States’ gas markets and in order
to promote cross-border trade in gas. The implicit capacity
allocation method means that short-term cross-border
transmission capacities will be allocated on the gas exchange
platform simultaneously with the quantities of gas traded on the
Baltic States markets through the gas exchange,” Baltabola said.
According to her, the implicit capacity allocation model will not
only improve the efficiency of transmission capacity allocation
and enable the optimisation of any associated costs, but it
will also interconnect the short-term gas markets of Lithuania,
Latvia and Estonia and help improve their liquidity as well as
the competitive ability. “The implementation of this model
will result in direct competition among the suppliers of all the
Baltic States, which will in turn reduce the level of gas prices for
consumers,” she said.
As the Baltics looks forward to more reliance on LNG in its
energy source composition, Russia hopes that it will be able to
keep its firm positions in the region’s gas market by offering
conventional pipeline gas at a price competitive to the regasified
liquefied natural gas available at the Klaipeda LNG terminal. The
Norwegian gas being supplied to it is believed to be around 30%
more expensive than the gas by Gazprom.
Yet Russia’s Kriogaz, a spinoff of Russia’s Gazprombank, has
already announced its LNG European ambitions in supplying
marine vessels and ferry lines with LNG.
Bunker of last resort
Kriogaz has reportedly signed a LNG supply contract with
Estonia’s ferry service operator Tallink and looks forward to
inking similar contracts with customers in Germany, the Czech
Republic, Poland and the Baltics. In addition, for the purpose,
it plans to start in the near future a long ago planned 150,000
metric ton (mt) LNG regasification facility in the Russian enclave
of Kaliningrad.
But the experts to whom NGW spoke remain unconvinced.
Jankauskas, of Lithuania, says that Russia has not done anything
“tangible” in making an inroad in the European LNG market.
“My understanding is that Russia still counts on its natural
gas exports and, to be precise, the flexibility of the gas price
it offers now for its European clients. I have this feeling that
Russia, with the dense network of natural gas pipelines, hopes
that the golden age of conventional gas is not gone yet. On
the other hand, Russia sees the glut in LNG market and clearly
understands it has no place in it,” the Lithuanian expert said.
“Supplying ferry lines and ships with LNG is a trifle in the larger
LNG picture,” he said.
Krutikhin agrees, saying that Russia’s part in the European LNG
market is zero for now. “But the implementation of the Yamal
LNG project the Russian Arctic in a year or so can turn things
around for Russia, I believe,” said Krutikhin. “With the project’s
capacity of 16.5mn mt/year, and most of the output to be
delivered to Europe, Russia stands good chances of shaking up
the European LNG market significantly.”
Although the cargoes may be transshipped at Zeebrugge
following a deal with Belgian terminal operator Fluxys, there
is no pipeline link between the tank where Yamal LNG has
reserved storage capacity and the rest of the continental grid.
Theoretically though LNG in that tank may be swapped with
LNG in another tank, which would get around the Gazprom
monopoly on exports.
“Russia has not done
anything tangible in
making an inroad in the
European LNG market.”
More than 200 wells are expected to be drilled for the project.
Over the next three years, the Arctic port of Sabetta in the
Yamal peninsula is expected to take delivery of 150 modules
representing 450,000 mt, transported from Asia by some 20
vessels, according Russian media. The port will also serve for
LNG export, and Total says the first cargo is due to leave later
this year.
“The other Russian LNG projects are either frozen or well behind
their implementation schedules,” Krutikhin said, referring to the
Baltic LNG terminal, although the same is also true of those that
Gazprom is working on in the Russian far east: the expansion of
Sakhalin Energy’s plant, with Anglo-Dutch Shell; and Vladivostok
LNG, which surprisingly took a final investment decision without
announcing any sales agreements..
Linas Jegelevicius

BOOK REVIEW: THE NEW GEOPOLITICS OF GAS
The Atlantic Council should be pleased with this scholarly
addition to the discourse on gas, in passing promoting the
idea of Nato as a source of technical and policy advice for its
members on energy security. The US, as the only major producer
in the strategic alliance, could even be the European Union’s
guarantor in the event of a cut-off from hostile powers – if the
present government approves such an idea, says senior fellow
Agnia Grigas. She has written a detailed analysis of how the US,
European and Asian gas markets have reached their present
state. It considers their next stages of development, having
examined the wealth of published research about the events so
far. The notes account for a quarter of the book.
The “new” in the title refers to the coming of age of the US as
a gas exporter: the book begins with shale production and the
politics of shale and exports of LNG from the US, and ends with
the ‘golden age’ question. The joke about oil being for dating and
gas for marriage has lost its point. Cheaper import technology,
bigger canals, spare capacity and new contracts have opened
up trade and optimisation possibilities that did not exist even
five years ago. Into all this upheaval comes US LNG.
The process of asserting the US presence on world energy
markets was begun by the previous US president, Barack
Obama, to allow domestic producers to reach new markets and
higher prices abroad. This will gather momentum in the coming
few years, if his successor, Donald Trump, follows through
with his plans to quicken permitting for gas export terminal
infrastructure, despite those who say this new demand will raise
prices at home.
Generally, Grigas finds that there is less politics and more
markets around these days. This is perhaps less the case in
Europe, where the Kremlin’s hand is seen in so many gas deals;
conversely, much of the building of renewables has come from
the public purse – €25bn ($26.5bn)/yr in Germany alone and
with no reduction in carbon emissions – in pursuit of policy
objectives, and have distorted the market. But generally the
monopolistic structures, necessitated by the long-term nature
of investment in gas and the high cost of transportation and
storage relative to oil, are giving way to markets.
But there is a sense of regret by the time of the conclusion that
the US cannot perform a bigger role. She says: “Its government’s
institutions, unlike those of the EU, do not have funding for hard
assets and have little sway over the private energy companies
that drive the American energy sector.” The EU by contrast
has funding available for pipelines, LNG import infrastructure
and electricity distribution networks, even though much of
the infrastructure is under-used, pushing up gas prices. This
funding is put at $5.35bn between 2014 and 2020. She finds
21
the European Commission spineless in its acquiescence over
Gazprom’s access to Opal; and the lack of a unified stance
against Nord Stream 2 makes her doubt the commitment of the
European Union, torn as it is between its insistence on markets
and the awareness that a market-oriented approach will open
the door wider to Gazprom, likely to remain the EU’s cheapest
gas supplier. The EU also did not come down that hard on Russia
with sanctions, following the annexation of Crimea.
Particularly detailed is the section on the key individuals,
politicians and companies in Europe and their different
relationships with Moscow. She examines the rift between the
new, former Soviet bloc countries who are now European Union
members and with a big axe to grind; and the establishment, as
led by Germany and Italy, where industry has long profited from
Russian gas imports.
Other themes are corruption and power in Europe. After the
break-up of the USSR, regional gas supply and the murkier
varieties of trade took off. Invisible, and only measurable by
select individuals, gas exports originating from western Siberia
and flowing through pipelines under eastern Europe’s topsoil
have long proved a tempting source of self-enrichment for
Russian and local politicians, industrialists and businessmen, as
well as means for Moscow to bring recalcitrant client states to
heel through a change in the price.
Asian gas demand growth is the big unknown: China has the
rosiest prospects, as it can negotiate with LNG sellers from a
position of strength. It is a gas producer of some note, but also
has a lot of pipeline imports. The writer, like most commentators,
sees China holding the aces where Russian pipeline exports are
concerned. Elsewhere cheaper coal and depressed demand
mean Asia will not take any gas at any price, but “gas will be the
Kremlin’s main calling card in Asia as it seeks to reinvigorate or
establish new alliances.” India, heavily reliant on imported gas,
might lack the will to abandon coal, for example.
She also cautions that a global gas market, while apparently
imminent, is not quite yet a fact. How much gas will leave the
US depends on factors beyond any one party’s control, such as
prices rising in Asia and Europe to make US projects commercial.
However, “if US LNG exports are coupled with America’s
leadership in the gas market then [the global gas market] looks
bright,” she says.
The New Geopolitics of Natural Gas will be published by the Harvard University Press
in April. 405pp $35.00 (ISBN 978-0-674-97183-7)
William Powell
ENAGAS EXPANSION: A CAUTIONARY TALE
Spanish gas grid Enagas has discovered the hard way that an overseas expansion
strategy is not without risk. Sometimes it pays to focus on matters at home.
Enagas invested €912.2mn in key assets in 2016, of which €199.3mn in Spain and €712.9mn internationally (Map credit: Enagas)
It’s been a bumpy start to 2017 for blue-chip Spanish gas grid
operator Enagas, as its plans to expand overseas became
bedevilled by a Peru concession termination and complications
in Italy.
Squeaky-clean Enagas – it’s among Spain’s 35 top-listed
companies – had been seeking to reduce its exposure to what
was a languishing Spanish gas market. However instead of
finding El Dorado, it became embroiled in South America’s
biggest corruption scandal and a battle for the survival of one of
Italy’s steelworks, just as Spain’s gas market is beginning to rally.
Enagas owns the Spanish high-pressure gas network and gas
storage there, wholly or part-owns all but one of Spain’s six
operating LNG receiving terminals, and plans to develop a small
LNG terminal on the Canary Island of Tenerife as a way into the
bunkering market.
Spanish gas demand went into a tailspin at the start of this
decade, forcing Enagas to mothball Spain’s seventh LNG
terminal built in 2012 at Musel in Asturias. So the company
sought to boost its international exposure for lack of demand.
Spanish gas demand only started recovering in 2015, and a cold
snap this year has caused a sharp spike in gas use so far in 2017.
Enagas reported its 2016 net profit increased by 1.1% last year
to €417.2mn ($445mn), of which 10% came from abroad. It also
outlined that its €1.45bn planned 2017-2020 investments will be
fairly evenly split between Spain and overseas.
It expects some €750mn to be invested in Spain – including
€260mn on a Tenerife LNG terminal that it foresees
entering service in 2020, €110mn on the planned MidCat gas
interconnector with France, and €60mn to buy cushion gas for
its Yela storage project. The Tenerife terminal, to be developed
by 100% subsidiary GasCan, will have storage for 150,000 m³
LNG, but its regas capacity is undisclosed.
But the other half of its investments will go overseas – and that’s
where the uncertainties are now mounting.
TAP and the Italian connection
Among its overseas investments to 2020, Enagas foresees
investing €210mn on the Trans-Adriatic pipeline (TAP) to link
Greece and Albania to Italy in which it has 16% equity; €280mn
in Chile where there are plans for a third LNG storage tank at its
60%-owned Quintero LNG import terminal; and further ongoing
investments in the Gasoducto Sur Peruano (GSP) in Peru.
Enagas’s investment plan however depends on circumstances
not always within its control, both in Spain but particularly
overseas.
The 878-km TAP project will make landfall near Lecce in
southeast Italy, in the municipality of Melendugno, near San
Foca. It’s the westernmost of the ‘Southern Gas Corridor’ chain
of three planned pipelines that will channel Shah Deniz gas from
Azerbaijan to western Europe.
But there’s a problem.

Growth in LNG trading - new liquefaction capacity and
regas terminals to 2020 (Map credit: Enagas)
The region of Puglia in southeast Italy has blocked the start-up
of construction on the landfall of the Trans-Adriatic Pipeline, in
which both Enagas has a 16% stake and Italian gas grid Snam
20%.
“Puglia has the right to ask for environmental compensation and
to discuss their location,” Puglia governor Michele Emiliano told
Italian business newspaper Il Sole 24 Ore earlier this month.
This may be a battle, led by the San Foca mayor, for some re-
routing away from olive groves of the final 8-km stretch onshore
Italy of the TAP pipeline’s route that starts at the Turkey-Greece
border. But it risks delaying TAP’s scheduled 2020 start-up of
Azeri gas deliveries to Italy, thereby adding to costs.
Governor Emiliano appears to be linking his region’s assent to
government support for switching private Italian steelmaker
Riva’s ageing ‘Ilva’ works at Taranto from coking coal to gas,
reducing its carbon footprint and more likely saving it from
closure.
Construction began last year of parts of TAP in Greece and on
access roads in Albania.
In contrast, an incendiary device in mid-February caused minor
damage to the walls of TAP’s office in Melendugno but no injuries,
in what local police have so far called an ‘act of vandalism’.
A TAP spokesperson said that, regarding construction in Italy, the
venture is in the process of obtaining step by step the verifications
of compliance to the prescriptions of the EIA Decree, approved
by the Italian government in September 2013, which if received
23
in due time will leave TAP’s schedule unaffected: “However, if
the process to approve these verifications is delayed in any way,
this can potentially put the TAP schedule at risk.”
Any further delays to TAP won’t just delay its shareholders, which
also include BP, Socar and Belgium’s Fluxys, but also could delay
delivery of 8bn m³/yr of Shah Deniz gas to Italy that is meant to
improve that market’s diversification in the next decade.
Enagas can say this is the responsibility of TAP project managers,
who have some experience in resolving such problems, and the
chances are that some package will be worked out that mitigates
the governor’s and locals’ concerns.
Spanish projects’ uncertainty
In Spain, however, Enagas has nobody else to blame. In 2011
it gained full control of GasCan, the Canary Islands developer
which even then had been attempting for the best part of a
decade to build one or two small LNG import terminals there.
Enagas tells NGW that its Tenerife LNG project now has
its environmental (EIA) approval, although it still needs an
administrative consent from central government in Madrid. It
says the project will have a 150,000 m³ LNG storage tank, but
declines to elaborate on its regas capacity – possibly because
its role will be more as a trading and bunkering entrepot, than
for import.
In any case, it should benefit from expansion of marine LNG
bunkering, a market that barely existed outside Norway ten years
ago, but has now been boosted by the UN IMO’s introduction of
a worldwide 0.5% cap on sulphur in ships’ fuels from 2020. It
should make a Tenerife LNG terminal economic, especially given
the islands’ potential for gas-fired power generation and its
place on LNG shipping routes to Europe.

But another Enagas project looks uncertain. Although the

proposed MidCat gas interconnector with France is designated
an EU project of common interest, it still needs agreement from
EU, French and Spanish governments to proceed.

Enagas decided to include MidCat in its 2017-2020 investment

outlook, but that doesn’t imply any certainty it will get built –
certainly not this side of 2022.

MidCat, a 7.4bn m³/yr gas pipeline project that would link France
and northeast Spain along the Mediterranean coast, is still
strongly opposed by French energy regulator CRE which views
it as a waste of money for French gas customers. Madrid and
Brussels argue it could enable Spain to channel more LNG and
North African gas to Europe, improving France’s resilience. Both
the IEA and the Spanish industry gas users’ association chief
Juan Vila recently pointed out the flaw in the French approach,
shown by France’s struggle to cope with this winter’s closure of
20 nuclear plants for safety checks – and instead was forced to
massively import power from Spain and the UK and appeal for
extra LNG shipments, prompting power and gas prices in parts
of France to surge (NGW, Vol2 issue 2, p40).

Executive chairman Antonio Llarden (Photo credit: Enagas)

Meanwhile, Enagas says it will need the Spanish government’s
approval before it can commercially open the 7bn m³/yr
mothballed LNG import terminal at Musel, near Gijon in Asturias.
It is less well-connected to the Spanish gas grid than the
country’s other six LNG terminals, and Enagas is trying to build
a market – perhaps including LNG bunkering – that might give it
critical mass. To date, however, that’s not shown on its 2017-20
strategy, and it’s out of Enagas’s hands.
Peru pipeline concession terminated
The same cannot be said for Enagas’s decision in 2014 to join a
new Peruvian pipeline consortium.
At the start of 2017, Enagas had stakes in two key Peruvian gas
pipeline operators: Transportadora de Gas del Peru (28.9%) –
a venture in which it had long held an interest, and which for
over a decade has flowed gas from the jungle Camisea field
westwards to the Peru LNG plant on the coast – but also a 25%
stake in Gasoducto del Sur Peruano, GSP. As of late February, it
still retains the TGP interest, but the GSP concession has been
terminated.

Musel LNG terminal (Photo credit: Enagas)
The 1000-km GSP pipe was built to supply Camisea gas south to
power plants and industrial customers in the far south of Peru.
The concession was awarded in 2014 to Brazilian contractor
Odebrecht (55%), Peruvian contractor Grana y Montero,
founded in 1933 (20%) and Enagas under a 34-year concession.
Odebrecht however became the subject of investigations over
its alleged ‘car wash’ bribery of senior Petrobras and Brazilian
government officials and the former Peruvian president
Alejandro Toledo, now in hiding possibly in the US.

Odebrecht last year planned to sell down its GSP stake to
Toronto-based equity fund Brookfield, under a deal that would
have seen GyM and Enagas also raise their stakes to 30%, in
order to restructure GSP ahead of a financing deadline on
January 23.
But three days earlier, Enagas admitted there would be no deal
reached by the deadline. It was right. The government in Lima
on January 23 said GSP had failed to re-finance the project and
declared it would terminate the GSP concession.
Peru’s president Pedro Pablo Kuczynski declared on TV
February 12 that the government had collected the $262.5mn
performance bonds’ penal sum owed by the Odebrecht-led GSP
consortium. And two days later, Enagas recorded a loss of €41.5
Mn from the GSP termination in its 2016 results – not enough
to seriously dent its 2016 net profit which increased by 1.1% to
€417.2mn.
Enagas insists it’s covered
Enagas acknowledged February 14 it had invested $275mn to
date in GSP and contributed $162mn in bank guarantees for a
bridging loan and $65mn in performance guarantees; the latter
now forfeit.
But its executive chairman Antonio Llarden insisted Enagas had
run customary due diligence in 2014 before teaming up with
Odebrecht, and insisted it would not lead to any major changes
in its overseas investment strategy, and denied the episode
would mar Enagas’s prospects of gaining future new business
in South America.
Llarden insisted the Peruvian government was working “very
efficiently” over the re-auction of the GSP concession, and had
“accepted Enagas’s goodwill” in seeking to resolve problems
– and that Enagas CEO Marcelino Orejo had just returned
from talks in Lima on February 11 with the government -- but
he declined to be drawn on whether it might be interested in
joining a new GSP concession. Llarden however insisted that
Enagas wants GSP to continue as a going concern.
The Peruvian government will now re-auction the assets of the
concession and award them to a new concessionaire, with GSP
to be paid up to 100% of the net accounting value (NAV) of
the concession, following an international audit, said Enagas
February 14.
It added that, if proceeds are less than 72.25% of NAV, or if there
are no bidders, or no auction is completed within 12 months,
then the government must pay a minimum of 72.25% of the NAV
in GSP’s favour, and that any major discrepancy (greater than
$30mn) should be solved through the World Bank-led arbitrator
the International Centre for Settlement of Investment Disputes.
25
“The global
LNG market will
become much
more fluid, like oil.”
Proceeds from the GSP auction may take up to three years to
be paid out, said Llarden, although he hopes it will be sooner
and that Enagas’s share could be some €400mn. While sources
cannot point to any absolute certainty such investments will
be recovered, it’s clear that Enagas and GyM for sure would
consider legal means to recover their investments (NGW, Vol.2,
issue 3, p29).
So confident is Enagas of repayment, indeed, that it has included
GSP in its 2017-20 cash flow projections, shown to analysts on
February 14.
In addition to organic cash flow generation of some €2.8bn over
the next four years, it expects a further €1bn cash between now
and 2020 from a mix of sources which it lists as: recovery of its
GSP investment; possible sale of 15% of Chile’s Quintero LNG to
Chilean state ENAP in the event it exercises a call option; plus
various adjustments from its TAP holding.
The wider perspective
On the wider horizon, it estimates the 2015-2020 compound
annual growth rate in LNG trading at 6.3% “driven by new
liquefaction capacity in the US and Australia”, regasification
growth in new non-OECD markets, and a greater proportion of
floating LNG solution.
Enagas expects that its recent investments in LNG and scheduled
investments in 2017-2020 will consolidate it as a “leader in the
sector, with a focus on fully-fledged markets.”
Llarden said the global LNG market will become “much more
fluid, like oil” which would require greater use of storage facilities
– thus benefiting Enagas’s investments in this sector.
Mark Smedley
GAS NATURAL SAYS QATARGAS DISPUTE
ONGOING, SHRUGS OFF COLOMBIA
At its full year results, fellow Spanish utility Gas Natural (GN)
said an arbitration case involving Nigeria LNG is over, but that an
arbitration case with Qatar remains ongoing. It also downplayed
the repercussions of Colombia debts by deconsolidating its
subsidiary there.

CEO Rafael Villaseca told the results briefing that GN’s only
arbitration case over gas supplies that is in play is with Qatar
(Qatargas) although he said GN hopes to reach an agreement
about gas prices with the company soon.

“Arbitration with Nigeria is over; we reached an agreement with

Union Fenosa Gas [UFG] and negotiations came to an end.” He
did not say if GN had referred UFG, a 50-50 joint venture of GN
itself and Eni, to arbitration.

UFG has contracts to supply GN with Omani and Egyptian LNG,

but is unable to fulfil the latter contract as feed gas for the
Damietta export terminal is diverted to the domestic market.

In mid-2016, UFG strongly denied that it lost an arbitration case

to Egyptian state gas company Egas; UFG has a 80% interest Rafael Villaseca, managing director (Photo credit: Gas Natural Fenosa)

Gas Natural’s recent large contracts

Signed With bn m³/yr Duration (yrs) Options

Nov.2011 Cheniere 5 20 from 2017*

Jan.2013 Sonatrach 0.8 18 via Medgaz pipe

Sep.2013 Shah Deniz 1 25 from 2019-20

Nov.2013 Yamal LNG 3.2 long-term ‘from pre-2020’

Jun.2014 Cheniere 2 20, probably from 2019 option for further 10 yrs

Source: Gas Natural; * early cargoes were received in 2H2016


in the Damietta LNG export plant in Egypt, idled since 2012
because Egas diverted feed gas to the inland Egyptian market,
in what UFG views as a breach of contract.
Qatargas has two contracts to supply GN, each of 0.75mn
metric tons/yr, one expiring 2024 delivered ex-ship (DES) and
one ending 2025 that is free-on-board (FOB).
Nigeria LNG is a more significant supplier to GN, with two DES
contracts: one for 1.17mn mt/yr expiring 2021, and another for
1.99mn mt/yr ending 2024.
It’s possible that both suppliers retained some oil indexation in
their supply contracts to GN, which the latter may have been
seeking to replace fully with European gas hub indexation.
Given GN’s large volumes either starting, or soon to start, with
Cheniere (US) and Yamal LNG, it’s possible that the Spanish
utility wished to harden its negotiating tactics, as the Qatargas
and NLNG come closer to expiry or renewal.
Cheniere, Yamal LNG contracts
GN signed two contracts with Cheniere, in 2011 and 2014, with
different start-dates. This first contract, lasting 20 years, is for
3.5mn mt/yr FOB (5bn m³/yr) Sabine Pass, Louisiana, indexed to
Henry Hub, plus a fixed tolling fee of $2.49/mn Btu.
The 2014-signed contract is for 1.5mn mt/yr (2bn m³/yr) and is
expected to begin in 2019 when the second train at Cheniere’s
Corpus Christi export terminal is operational. It too will last 20
years.
Villaseca said February 8 that GN was taking delivery of four
new LNG tankers in 2016-20 to transport its Cheniere offtake
volumes. Two have already been delivered and the other two will
cost some €500mn in 2017.
Yamal LNG and GN in 2013 concluded a long-term contract for
the supply of 2.5mn mt of LNG (3.2bn m³/yr) from northern
Russia; initial cargoes may begin with train 1’s start-up, expected
later in 2017.
The new contracts do not include destination clauses, so GN
will be free to take cargoes to its European or South American
27
operations, or trade them globally including to Asia. Villaseca
was asked why GN’s Spanish sales to the liberalised market
brought in 23% less, relative to 4Q 2015, despite rising prices
and increased volumes.
He said GN was not selling at spot prices, and that 90% of its
sales are in medium and long-term contracts, normally indexed
to Brent, though not exclusively so.
Colombia Shrugged off
GN downplayed the repercussions of Colombia debts by
deconsolidating its subsidiary there. Three months ago GN said
its 85.38%-owned Electricaribe was owed 4.05 trillion Colombian
pesos (€1.26bn; $1.34bn) by customers and had been taken over
by the authorities there “as a precautionary measure” to tackle
customer non-payment and fraud.
On February 8, GN announced it had reduced net debt at end-
2016 by 1.4% year on year to €15.42bn, chiefly by deconsolidating
its Colombian retail and supply subsidiary Electricaribe which
led to a €536mn reduction in GN group debt.
Villaseca told the results briefing that GN “has lost control over”
Electricaribe and had thus deconsolidated it as of December 31
2016, treating it since as a financial investment “with a fair value
of €475mn”.
GN would continue arbitration with Colombia with a view to
obtaining a settlement, he said, noting that the Colombian
government’s takeover of Electricaribe had been extended by a
further two months from January 11. Electricaribe supplies over
2.5mn customers in coastal Colombia and has a distribution
network of 54,000 km; it is also an energy supplier.
Full year 2016 net income for GN was €1.347bn ($1.43bn), 10%
less than in 2015, and its 4Q 2016 profit of €417mn was up 2%
year on year.
Wholesale gas supplies in 2016 were up 3.4% globally at 295.3
TWh (27.5bn m³). That comprises 4% lower sales in Spain, at
151.8 TWh, and 8.3% less global LNG marketed, at 69.3 TWh, but
43% more sold in the rest of Europe at 69.3 TWh.
Mark Smedley
Gas Natural headquarters
(Photo credit: Gas Natural Fenosa)
BP ENERGY OUTLOOK TO 2035
Companies need scenarios in order to plan, although there are more
moving parts than ever nowadays, not least in technology, policy and the
engines of economic growth.

BP has launched its annual energy outlook for the next twenty Fig. 1: Global energy consumption by region
years late in January. The document seeks to analyse what might
happen in different quarters of the globe and how this will affect
energy supply and demand, while steering clear of anything as
definitive as a forecast. Comparing this year’s edition with last
year’s shows significant changes over the course of just a year.

CEO Bob Dudley said: “The global energy landscape is changing.

Traditional centres of demand are being overtaken by fast-
growing emerging markets. The energy mix is shifting, driven by
technological improvements and environmental concerns. More
than ever, our industry needs to adapt to meet those changing
energy needs.”

The key messages from BP’s presentation of its Energy Outlook

2015 to 2035 are that:

• Energy use will rise by 30%, mostly in Asia but hardly at all in
OECD, such as in North America and Europe (Fig. 1);

• Fossil fuels will still account for 75% of primary energy supply
but gas grows faster than oil and coal;

• The power sector accounts for about two-thirds of the Source: BP Energy Outlook 2017

increase in primary energy.

And certainly this is reflected in a comparison between the 2016
and 2017 editions of the Outlook shown in Fig 2. Energy, oil,
gas and coal demand growth are all reduced, but renewables
supply rises by about 15%, from 6.6% to 7.6%. There is nothing
to say that these trends will not be repeated in the next edition.
BP has certainly been consistent in revising renewables growth
upwards and carbon emissions downwards since 2011.
Critics have seized on this, arguing that BP is still reluctant to
recognise how sharply falling costs will inevitably lead to rapid
increases in the growth rates of renewable power and electric
cars, and as a result may be overestimating future fossil fuel
demand.
This highlights the inherent limitations of forecasts. The Outlook
is not really a forecast, but, like the scenarios published by
the International Energy Agency in its own Outlook – whose
scenarios have also been faulted for under-estimating the
growth of renewables – sets out a base case which outlines the
‘most likely’ path for global energy markets until 2035, based
on assumptions and judgments about future changes in policy,
technology and the economy.
According to the Outlook, even though global GDP is expected
to rise on average by 3.4% per year, the average growth in
energy demand will be limited to 1.3% per year, as a result of
increasing efficiency, technology improvements and response to
environmental concerns.
Abundance of hydrocarbon resources
There is an abundance of technically recoverable oil resources,
with the world facing a long-term oil glut. According to the
Outlook, as a result of the slowing growth of oil demand, less
than half of these oil resources will be consumed by 2050.
As Fig 3 shows, the estimated technically recoverable resources
total 2.6 trillion barrels of oil, with cumulative demand between
2015 and 2050 estimated to be less than half, about 1.25 trillion.

Fig 2: Annual changes from the 2016 to the 2017 Edition
Source: BP Energy Outlook
Fig 3: Abundant oil
Source: BP Energy Outlook 2017
Similar arguments apply to natural gas. It is estimated that the
world has proved reserves of 187 trillion m³. At the current and
future rates of consumption in the Outlook, these will last for at
least another 40 years.
However, proved reserves are only a fraction of total remaining
technically recoverable resources, which provide a better
indication of the available resource base and are the key
parameter used in IEA modeling of future gas production.
IEA’s World Energy Outlook 2015 estimated that, at the end
of 2014, total remaining technically recoverable gas resources
amounted to at least 781 trillion m³. With consumption in 2015
at 3.47 trillion m³ and growing at a rate of 1.6%, according to the
Outlook, by 2050 cumulative demand will be about 155 trillion
m³ – still only a fraction of the remaining technically recoverable
gas resources.
Given the pace of change, not all discovered hydrocarbons will
be consumed even by 2050. This means strong competition
between producers to capture this more limited market, so
those resources cheapest to bring to market will win. These
29
are mainly in the Middle East, US and Russia. According to BP’s
Outlook, Opec is expected to account for nearly 70% of global
oil supply growth by 2035. Spence Dale summed it up: “Low-
cost producers will use their competitive advantage to increase
their share relative to higher-cost producers.”
More costly resources will find it difficult to compete and
increasingly run the risk of remaining stranded, as the world
shifts gradually from fossil fuels to renewables.
This has been apparent since 2014, with persistently low oil, gas
and coal prices. And this is one of the main reasons prices are
very likely to remain low for the longer term.
Taken at face value, this trend will mean producers limiting
their exploration and production investments to relatively low-
cost fields and projects, avoiding more expensive or frontier
developments. This effectively isolates the vast gas reserves in
Canada and Alaska from export markets, for example.
On the positive side for fossil fuels, low prices may be one of the
factors that keep them as the dominant energy supply source
during the reference period.
The Outlook forecasts that by 2035 fossil fuels will still account
for three quarters of global primary energy, compared with
86% in 2015. But among fossil fuels, growth in the oil and coal
contribution will carry on declining, while the natural gas share
will carry on growing, overtaking coal by 2030 (Fig 4).
Even though the share of renewables is expected to rise faster
than any other energy source, quadrupling by 2035, they will
account for only 10% of global primary energy by then.
However non-fossil fuels, which include nuclear and hydro,
are expected to provide about half of the increase in energy
demand between 2015 and 2035.
Fig 4: Shares of primary energy by fuel
Source: BP Energy Outlook 2017
Oil supply, demand dynamics change
The demand growth for oil comes completely from emerging
markets, with China accounting for half. The transport sector
accounts for two-thirds of this growth, driven by rising prosperity
in the developing world, particularly in Asia, and doubling of the
global car fleet over the Outlook period.
Even though the number of electric vehicles (EVs) is assumed to
increase from 1.2mn in 2015 to 100mn by 2035, in BP’s base case
they will be only about a twentieth of the global car fleet and so
their impact on oil demand will be small.
However, entry of EVs into the car market is at such an early
stage that there is no way of knowing how it will develop. For
example, Bloomberg’s New Energy Finance estimates that 35%
of car sales could be electric by 2040. As Spence Dale said:
“The impact of electric cars, together with other aspects of the
mobility revolution, such as self-driving cars, car sharing and
ride pooling, is one of the key uncertainties surrounding the
long-term outlook for oil.”
Certainly, BP’s own scenario studies show that a faster ‘electric
mobility revolution’, as it is termed, would bring oil demand
down by 7mn barrels/day by 2035, in comparison to 2mn b/d
in the base case.
China will be the largest source of growth for renewables over
the period to 2035, adding more renewable power than the EU
and US combined.
A notable change from the 2016 Outlook is that BP now
forecasts that global coal demand will peak by 2025 and decline
thereafter. This will be largely driven by China’s move towards
cleaner fuels, and will cut carbon emissions. Reflecting the
inherent uncertainties with such forecasts, BP considered two
other scenarios in addition to its base case – a ‘faster transition’
and an ‘even faster transition’ scenario that lead to falls in CO2
emissions from fossil fuels in the power sector as a result of a
quicker reduction of coal and gas use in favour of renewables
(Fig 5).
• The ‘faster transition’ case (FT) assumes that carbon prices
in leading economies rise to $100/metric ton in real terms by
2035 and policy interventions encourage more rapid energy
efficiency gains and fuel switching. As a result, emissions peak
in the early 2020s and by 2035 are 12% below 2015 levels.
• The ‘even faster transition’ (EFT) delivers an emissions
trajectory that matches the path of the IEA 450 scenario.
Emissions in this case are 32% below 2015 levels by 2035.
Fig 5: Comparison of Base, FT and EFT scenarios

BP forecasts that oil demand is unlikely to peak until the mid-

2040s, much later than others predict. Opec’s own forecast
is that global oil demand will peak by 2029, and Shell’s even
earlier, in strong contrast to BP.

BP also forecasts that as oil demand for transportation slows,

demand in the developing world for plastics and petrochemicals
manufactured using oil-based feedstock is expected to sustain
oil demand growth. Dale said: “The key to growth isn’t to power
transportation… rather oil as an input into other products,
particularly into petrochemicals and fabrics.”

What this means for emissions

Source: BP Energy Outlook 2017

The key conclusion of the Outlook is that carbon emissions

But both of these require major shifts in government policies.
will slow down, but not to the extent needed to meet the Paris
Climate Agreement, which sets a ceiling of 2 degrees centigrade
Under these scenarios, renewables’ share of global energy by
on the permissible rise in temperature. In the base case emissions
2035 rises from 10% in the base case, to 16% in the ‘FT’ and to
will grow by 13% by 2035.
23% in the ‘EFT’. Predictably, the strongest impact is on coal,
with only small changes in the oil and gas share. Dale summed
However, the trend towards increasing clean energy is clear. The
up these uncertainties when he said: “If you get a combination
growth of renewables has been revised upwards to 7.6%/year in
of a very rapid increase in electric vehicles with a very rapid
the 2017 Outlook, in comparison with 6.6% in 2016, driven by the
increase in these new technologies the numbers involved could
continued expansion of renewables in China and falling costs in
get bigger and more significant.”
solar and wind power (Fig 2). Similarly, carbon emissions have
been revised downwards to 0.6% in 2017 in comparison with
In BP’s view any changes in US climate policy, through the
0.9% in 2016. This is the slowest rate of emissions growth since
election of Donald Trump as president, are unlikely to have a
records began in 1965.

big impact on efforts to tackle climate change. But if the US
stops playing its global leadership role and withdraws from the
Paris Climate Agreement – which is promised – it could be more
serious.
The growth in gas demand
According to the Outlook gas demand is expected to overtake
coal by 2030, helped by energy policies that encourage the shift
in both industry and power generation (Fig 4).
A large contributing factor to this is shale production which
grows at 5.4%/year and accounts for around two-thirds of the
increase in gas supplies, driven by the US, where shale output
more than doubles. Towards the end of the Outlook period,
China emerges as the second largest global shale producer (Fig
6).
China’s gas demand growth is expected to outstrip domestic
production. By 2035 imported gas will comprise close to 40%
of total demand, in comparison to 30% in 2015. In Europe, the
share of imports rises from around 50% in 2015 to more than
80% by 2035.
Fig 6: Global natural gas supply and consumption growth
Source: BP Energy Outlook 2017
As a result, the Outlook shows that LNG supplies may grow
rapidly to account for over half the traded gas by 2035, in
comparison with 32% now, led by LNG exports from the US,
Australia, Africa and Russia. BP expects LNG to grow seven
times faster than pipeline gas over this period.
Asia will be the biggest destination for LNG, with demand
expected to grow faster than oil or coal in China, India and other
countries in the region. BP said that Australian exports are likely
to be absorbed within Asia, but eventually most US LNG supplies
will be diversified to Europe, Central and South America, as well
as Asia. With global gas demand growing, a Trump-backed US
gas boom could reshape the global gas market, as it is doing
for oil.
31
Globally gas markets are expected to become more integrated,
anchored by US gas prices.
Fig 7: Global LNG supply and demand
Source: BP Energy Outlook 2017
Effective climate policies
Without further changes in government policies, BP foresees
global energy demand could rise by 30% by 2035, with three
quarters of that coming from fossil fuels. The end result is that
emissions will remain at almost twice the level recommended in
the Paris Climate Agreement. In order to meet this, BP suggests
that emissions need to fall by 30% by 2035, indicating the need
for further policy action.
Dudley said BP needed to “be responsive to a carbon constrained
world” but it is not for BP to lead change. Dale added “It is
not for us to lead, it is for us to do our job and respond to the
incentives and structures provided by policymakers… We can
say to the policymakers: ‘We think your policies are inconsistent
with what you are trying to do.’”
BP argued that it is for policymakers to put a meaningful price
on carbon to drive emissions cuts down and he challenged
governments to match their climate goals with effective policies.
Dudley said “The timing and form of government policy to
encourage and facilitate the energy transition is important… In
BP, we continue to believe that carbon pricing has an important
part to play as it provides incentives for everyone – producers
and consumers alike – to play their part.”
No doubt, if there is a major shift in future policies it will be
reflected in future editions of the Outlook. But BP also said that
energy transition is raising important choices and opportunities
for the oil and gas industry.
Charles Ellinas
LNG SHIPPING EYES TIGHT MARKET
Losses have been rife in the LNG transport business, but the market is due to
tighten and the FSRU business remains strong.
London-based future shipowner Flex LNG said February 17
has raised capital as part of its fleet expansion, which has the
backing of Norwegian shipping billionaire John Fredriksen. Flex
LNG successfully placed a $100mn private share offering and
is considering a further $10mn placement. Both are linked to
its February 16 announcement that it intends to take over an
order from Flex LNG’s majority shareholder, Geveran Trading, for
two LNG carriers due for delivery in early 2018 by South Korean
shipbuilder Daewoo (DSME).
Fredriksen controls the world’s largest oil tanker company
Frontline as well as Geveran Trading; the latter has provided
$270mn credit to Flex LNG. Flex LNG does however have two
LNG carriers under construction by Korean shipbuilder Samsung
(SHI) so – with the two DSME orders – it will have four wholly-
owned new LNG carriers by early 2018. It foresees a tighter LNG
shipping market, “indicating a shortage of vessels in 2018-19.”
Until early 2018, Flex LNG is managing three LNG carriers on
behalf of third-party shipowners. Flex LNG, which also said it
can draw on significant floating LNG import terminal (FSRU)
experience, now has Jonathan Cook – a co-founder of Excelerate
– as its CEO, and Thomas Thorkildsen as its senior vice president
since February 1. The latter was head of business development
at Hoegh LNG. Cook’s appointment, announced mid-2016, took
effect late last year.
Flex LNG fleet: 3 managed ships, plus four ready for delivery in 1Q 2018 (Graphic credit: Flex LNG)
In December 2016, Flex LNG signed a heads of agreement (HoA)
with US developer NextDecade, whereby Flex would provide
FSRUs and dockside solutions for international customers of the
US firm while NextDecade would export LNG cargoes from its
planned liquefaction terminals in Texas.
NextDecade’s main focus is developing its multi-billion-dollar,
27mn mt/yr Rio Grande LNG export project at Brownsville, South
Texas, but it also plans later to develop another large terminal
at Shoal Point, east of Texas City (NGW, Vol.2 issue 2, pp24-25).
Neither yet has full US Federal Energy Regulatory Commission
approval to export to all countries. At the start of the decade,
Flex LNG wanted to enter the floating liquefaction sector, but it
chose a Nigerian offshore gas venture just as government policy
shifted away from new gas export ventures.
Awilco expects upturn
Norway-based Awilco LNG, which owns two LNG carriers – the
2013-built 156,000 m³ LNG carriers WilForce and WilPride –
reported February 15 a 2016 net loss of $22.8mn, two thirds of
its $36.3mn loss in 2015. Its operating earnings (Ebitda) rose to
$19.8mn last year, compared with $15.8mn in 2015. LNG charter
rates bottomed in summer 2016 at some $30,000/day for
vessels of Awilco’s type, it said; they improved slightly through
Q4 but softened again this year, ending January at $40,000/d,

The planned Alexandroupolis floating import terminal is marked in red, along with the IGB and TAP pipeline projects. The existing Revithoussa LNG import terminal is not marked
(Map credit: Entsog)
the firm said citing rates supplied by shipbrokers Fearnley LNG.
The historic average of about $80,000/d was last achieved two
years ago.
Oslo Axess stock market-listed Awilco LNG said that LNG charter
rates are “still volatile” but insisted the sector was “at the start of
the biggest increase in LNG volumes in history.” One-sixth of the
existing LNG carrier fleet was built before 2000 and is therefore
smaller and less efficient, it noted. Awilco LNG reported a net
4Q 2016 loss of $2.5mn with vessel utilisation of 83%, compared
with a loss of $4.2mn and vessel use rate of 80% in 3Q 2016.
GasLog progresses in Greece
Monaco-based LNG shipowner GasLog also reported a loss
attributable to shareholders of $21.5mn for full year 2016,
contrasting with a profit of $10.8mn in 2015. It made a 4Q2016
profit of $31.3mn compared with a year-before $5.5mn profit.
CEO Paul Wogan said: “GasLog had a strong final quarter of
the year and despite the market volatility in 2016, continued
to execute on its strategy throughout the year.” He noted the
signing of a seven-year charter with Centrica, and “encouraging
progress on our FSRU strategy.” In December 2016, GasLog
agreed to buy a 20% stake in Greek firm Gastrade, a firm licensed
to develop a gas import system based on an FSRU moored
offshore Alexandroupolis in northern Greece. The purchase was
finalised on February 9 this year.
Gastrade remains in talks with a number of additional potential
investors, including Greek state owned gas supplier Depa, state-
owned Bulgarian Energy Holding, and other major gas suppliers
33
to take final investment decision (FID) in the Alexandroupolis
project by end-2017 with the FSRU scheduled to be operational
by end-2019.
Gastrade has noted how Greece wants to become a regional gas
hub by expanding the existing Desfa-run LNG import terminal
at Revithoussa, near Athens, and developing Alexandroupolis.
Despite the empty treasury, Greece remains the owner of Desfa,
talks to sell it to Azerbaijan’s state energy giant Socar having
fallen through.
Gastrade says the Alexandroupolis FSRU – included on a list
of European projects of common interest – will have an LNG
storage capacity of 170,000 m³ and a regasification capacity of
6.1bn m³/yr. It will be connected to the national gas grid through
a 28-km pipe. This should enable regasified LNG to flow not only
to the Greek market, but also Bulgaria, Romania, Serbia, FYROM
(Macedonia), Hungary and potentially even Ukraine, Gastrade
said, with the possibility it might even flow through the Trans-
Adriatic Pipeline.
Gaslog entered into a shipbuilding contract with Samsung to
build a 180,000 m³ LNG carrier expected to be delivered in 2Q
2019, to be used for the Centrica charter. Centrica indicated in
October the ship would likely be used for its offtake from Sabine
Pass, starting at the same time. The Monaco shipowner also took
delivery October 31 2016 of the GasLog Gibraltar, a 174,000 m³
LNG carrier built by Samsung (SHI), which is chartered out to
Shell from delivery until 2023.
Mark Smedley
PETROBRAS’ $5.2 BN SALE TO BROOKFIELD
HITS LEGAL BARRIER
Brazil’s Petrobras has hit a legal challenge
with its planned sale of gas assets worth
$5.2bn to a group of investors led by
Brookfield Asset Management. A Brazilian
federal judge has granted an injunction
against the sale, saying that it had not
been advertised enough to encourage
competitors.
The assets, known as Nova Transportadora
do Sudeste, supply gas to the southern
industrial states of Rio de Janeiro,
Minas Gerais and Sao Paulo. The sale
of a 20% stake in the 2000-km pipeline
system would be Petrobras’ largest asset
divestment to date.
Brookfield Infrastructure Partners, a
unit of Canada-based Brookfield Asset
Management, agreed to take a 90% stake
in the unit with a group of investors last
September.
The other investors in the group reportedly
include CIC Capital Corporation and GIC
Private. Brazilian banking group Itau
Unibanco is also in talks to join the group,
according to a Bloomberg report.
Petrobras said in response to the
injunction that it is taking legal steps to
ENBRIDGE GOES FOR OIL AND WIND
Canada’s largest gas distributor Enbridge
is spending more in North American
shale oil pipelines and European offshore
windfarms, as hedges against stagnant
gas pipeline business at home.
Calgary-based Enbridge, which
transports 56% of US-bound Canadian
crude through its system, announced
February 17 that the new Dakota Access
oil pipeline could enter service in 2Q 2017.
Two days earlier Enbridge closed a $1.5bn
protect its interests, as well as those of its
shareholders. The deal is still likely to go
ahead but Petrobras will have to prepare
a more transparent strategy, analysts
have noted.
The beleaguered state-run oil firm is
divesting assets as part of a larger
programme to turn its finances around,
planning to raise around $35bn between
2015 and 2018 to reduce its debt load.
A major corruption scandal has been
unearthed at Petrobras in the last two
years, causing its debt to soar.
The cash-strapped firm has also seen its
production drop significantly in recent
years, as fields mature and infrastructure
needs updating. Persistently low crude
oil prices have exacerbated existing
problems, putting further pressure on the
company to improve its finances.
As well as asset divestments, it has turned
to a number of cash-saving initiatives
including lowering its production
forecasts and slashing investments.
Its current investment plan, which runs
from 2016 to 2020, was cut by 5% last
year to $93bn. That was the second
deal for a 27.6% stake in the Bakken
Pipeline System, which comprises the
Dakota Access Pipeline and the Energy
Transfer Crude Oil Pipeline projects, both
to be operated by Dallas-based Energy
Transfer Partners.
Dakota Access – along with TransCanada’s
Keystone XL – are the two oil pipe projects
that US President Donald Trump backed
by signing executive orders January 24
to speed their construction with US steel.
AMERICAS
time the plan had been lowered, from an
original $130.3bn.
The Rio de Janeiro-based firm also made
a 20% cut to its oil and gas reserves last
year. It has said it wishes to focus on
its potentially most lucrative activities,
including exploiting Brazil’s pre-salt
reserves.
The firm’s attempts to shed some of
its assets have been challenged by a
recent change in Brazil’s laws governing
divestments.
At the end of last year, the Brazilian
auditing court TCU said that all assets
sales that are not in the final stages
of negotiation would be suspended.
Petrobras has also seen its planned sale
of two offshore fields to Karoon Gas
Australia suspended by a regional court.
In November, the company filed an appeal
against the injunction on the Karoon asset
sale, which includes a 100% interest in the
Bauna oil project and a 50% interest in
the Tartaruga Verde oil project.
Sophie Davies
COMPANIES
Both were delayed by the previous US
administration, on the grounds they might
spur more carbon-intensive development
of shale oil in North Dakota and tar sands
in Canada’s Alberta.
Enbridge and German power utility EnBW
meanwhile took final investment decision
February 17 in the €1.8bn ($1.9bn) Hohe
See project to build a 497-MW windfarm
in Germany’s sector of the North Sea –
which for EnBW marks a continuation

of its diversification from nuclear to
renewable energy. EnBW will own 50.1%
of the Hohe See project, with Enbridge
holding the other 49.9% but it’s not its first
European wind project. Enbridge already
has 24.9% of the E.On-led Rampion 400-
MW windfarm offshore southern England,
due for start-up in 2018.
The Canadian invested C$800mn
($610mn) in Rampion and expects to
invest C$1.8bn overall in Hohe See. In
November 2016, it also acquired 100% of
the 249-MW Chapman Ranch windfarm in
Texas (for some C$400m) that is due to
start operating in the second half of this
UK ATLANTIC MARGIN BECKONS
Oil and gas discoveries on the UK
Continental Shelf (UKCS) have become
likelier, thanks to analysis of the Rockall
Basin offshore northwest Scotland by
geologists at Aberdeen University. Their
work has revealed previously unknown
insights that could aid exploration in the
North Atlantic.
By studying the latest seismic data
supplied by the Oil & Gas Authority
(OGA) and employing lessons learned
elsewhere in the UKCS, geologists from
the university have gained a clearer
understanding of the Rockall basin where
of 12 wells drilled, but only one gas
discovery was made.
Dr Nick Schofield who led the analysis,
funded by a £250,000 award from UK
regulator Oil and Gas Authority (OGA),
said February 17: “Our analysis has
revealed that one of the barriers to success
may have been a misunderstanding of the
sub-surface geology. By analysing seismic
data provided by the OGA and Petroleum
Geo-Services (PGS), and using what we
have learned through our work in the
Faroe-Shetland Basin, we found that the
character of areas where operators hoped
year. “The Hohe See project is consistent
with Enbridge’s strategy to increase our
presence in the renewable power business
and it comes with an additional organic
growth opportunity within the European
offshore wind market,” said Enbridge
CEO Al Monaco: “We like this business.”
Hohe See is planned to be commissioned
in 2H 2019, 100km northwest of
Heligoland, and will consist of 71 turbines,
each of 7 MW, that will be built by
Germany’s Siemens at its Hull, UK and
Aalborg, Denmark factories; the project
will save around 1.5mn metric tons of
CO2/year.
to find oil may have been misleading.”He
explained that explorers’ previous
targeting of so-called ‘bumps’ in the sub-
surface, where it was hoped that oil had
been trapped, “in many cases, appear to
have actually been caused by volcanic
intrusions in the sub-surface.”
“What we are working towards is the
most detailed geological understanding
for Rockall which will be made freely
available to industry as part of efforts
to maximise economic recovery in the
UKCS,” he added.
Analysis of the Rockall Basin has revealed
previously unknown insights that could
aid oil and gas exploration in the North
Atlantic, says Aberdeen University’s Dept.
of Geology and Petroleum Geology.
35
Enbridge also has an option to participate
in another EnBW North Sea windfarm
project, Albatros. FID for that project will
be taken by EnBW early this year, which
could mean that 116 MW project could
be built together with Hohe See. EnBW
already has two windfarms in the Baltic
already operating, and a further North
Sea wind project ‘He Dreiht’ (700 MW)
under development.
Mark Smedley
EUROPE, MIDDLE EAST & AFRICA
“We believe that the oil and gas is more
likely to have migrated to the outer
fringes of Rockall instead, away from
these previous exploration targets.” The
study has identified the eastern edge
of the Basin against the Outer Hebrides
Shelf as an area of interest for future
exploration activity.
Schofield’s paper, Challenges of future
exploration within the UK Rockall Basin, is
available to view online here.
The new data on which the analysis was
based was provided from the OGA’s
£20mn seismic campaign of the UKCS
Rockall and Mid-North Sea High areas
completed by WesternGeco in October
2015.
Mark Smedley
For corporate subscriptions,
please contact:
magazine@naturalgasworld.com
LEVIATHAN: NEW DATE FOR FID
Noble Energy, the American producer
that is the main pillar of Israel’s gas
monopoly, last year earned $751mn from
its businesses in Israel in 2016: $390mn
of cash flow from operations and $361mn
from selling 3.5% of Tamar shares. That is
up by $152mn and it is no exaggeration to
say that it was Israel’s gas that came to
Noble’s rescue.
So it was not a surprise that CEO David
Stover was quite optimistic when he
described the status of Leviathan gas
field development during an analysts
earning call mid-February.
“We are on track to sanction the project
this quarter with first gas targeted by
the end of 2019,” he said, setting for the
first time a precise date for the project’s
sanctioning: March 31. But the final
investment decision was also due by
the end of last year and major questions
persist.
For one thing, there are no major
customers. So far, Leviathan Partnership
has signed no meaningful gas sales
agreements, apart from one with Jordan’s
Nepco. Sanctioning an estimated $5bn
investment without serious anchor
customers is not a light undertaking,
unless someone can guarantee the
project. The natural candidate for that is
the Israeli government.
MAERSK MORE HOPEFUL FOR TYRA
Maersk Oil CEO Gretchen Watkins is more
optimistic about a positive conclusion
to ongoing negotiations with the Danish
government on how to extend the field
life of the Tyra offshore gas hub – which
today handles 90% of Denmark’s offshore
gas production from a dozen or so satellite
fields. As the UK government has found,
as it seeks to extract as much oil and gas
Second, in mid-February, daily paper The
Marker reported that a confidential letter
signed by Israel’ prime minister Benjamin
Netanyahu guarantees Jordan preferential
gas supply over Israeli entities if there is a
gas supply disruption.
But Jordan is in no mood to approve a
bilateral agreement, since Israel’s right-
wing government is refusing to negotiate
with the Palestinians, and is striving to
annex at least parts of the occupied West
Bank territories.
Good numbers in Israel
In its 2016 annual report Noble reported
an annual loss of $985mn compared with
a net loss of $2.441bn in 2015. Globally
Noble operates in four regions and in
three of those it registered operational
losses. The biggest of them is a $943mn
loss before a tax benefit of $330mn in the
US.
Only its activity in Israel remained in the
black. Revenues grew to $540 (8.6%)
despite the company’s reduced 3.5%
shareholding in Tamar of 32.5% as from 1
January 2016. Operating profit after tax
was $222mn (down 5.1%). Cash flow from
operations in Israel was much higher at
390mn, as the company registered $81mn
DD&A expenses and asset impairments of
$88mn.
and hence revenues from its offshore, tax
changes could be the solution. A year
ago, the company cautioned that it might
have to shut down Tyra in 2018 unless a
cost-effective way of extending its life
were found.
“The Danish oil and gas industry is
negotiating right now – really having
EUROPE, MIDDLE EAST & AFRICA
Noble also reported on development cost,
concerning a new well in Tamar and front-
end engineering and design for Leviathan
of $104mn.
Divestments
Noble completed the sale of 3.5% of
Tamar project to Harel Group, one
of Israel’s biggest financial groups.
Harel paid $431mn valuing the project
at $12.7bn. Bloomberg reported that
Barclays bank with another unidentified
bank is in the process of selling Noble’s
7.5% of Tamar for $1bn valuing the project
at $14.7bn, some 20% higher than the
previous transaction’s valuation.
All those are good numbers. However,
they are based on high price for natural
gas in Israel which was sold last year at
an average price of $5.22/’000 ft³. The
Leviathan Partnership will not be able to
achieve those prices.
Tamar’s financial success is a result of a
captive market. Such a bonanza is not
expected to be repeated with Leviathan,
given the logistics of gas export from
Israel. By the end of next month it will be
clear if his confidence was justified.
Ya’acov Zalel
EUROPE, MIDDLE EAST & AFRICA
good discussions with the government
to look at ways to promote opportunities
to invest in the Danish North Sea,” said
Watkins on the margins of the IP Week
conference in London February 21.
“Those discussions have been very
collaborative. Both sides are looking
for win-wins. Everyone, the state and

industry, sees opportunities for continued
investment….It’s about maximising the
value both for the state and the industry,”
she added.
“We stand on a much stronger platform
as a company when we go, as an
industry, and say – look at what we can
do. We have a much more robust way of
operating than in the past, we’re more
efficient, we have higher uptime, our
equipment runs better. So if I’m looking
at the benefit, I think it’s a much stronger
benefit than just a couple of years ago
for both the state and for Maersk Oil.
LNG OVERSUPPLY NOT HERE YET: SHELL
The LNG market is not yet oversupplied
and demand growth is proving robust,
according to the LNG trading chief at
Anglo-Dutch major Shell, the world’s
largest seller of the fuel.
The executive vice-president of gas and
energy marketing and trading, Steve Hill,
formerly of BG, told journalists February
20 that there was evidence for this
assertion, despite the claims made for
the flood of LNG that was meant to have
arrived last year.
These include the failure of LNG to arrive
in Europe – the market of last resort; and
the high prices that LNG fetched at times
of high demand last December.
The drop in LNG deliveries to the UK and
Belgium in 2016 was “good news” he said
as it pointed to higher-paying customers
elsewhere – despite the start-up of new
plants in Australia and the US adding
17mn metric tons to output compared
with 2015.
LNG might be selling at low prices
compared with past levels, but these
prices are not low enough to suggest
value destruction, Shell says: instead,
LNG trades at a steady 13%-15% discount
to Brent crude and so they reflect low oil
and other energy prices. “Every cargo
”In her presentation, the Maersk Oil CEO
said that “maturity [of basins] does not
mean a lack of opportunity.” At the UK
Culzean gas development Maersk “took
out $0.5bn of capex – an 11% reduction
– and now Culzean’s breakeven is below
$33/boe.”
“Companies that lock in these reduced
costs are key to the future,” she noted.
Maersk Oil achieved [across its operations]
90% production efficiency in 2016, up
6.5pts from 2015, despite a 36% reduction
in operating costs, compared with 2014
that could be sold, was sold, and not into
Europe,” he said, and at a price reflective
of the downturn in energy. “Clearly there
was not a flood of LNG. Demand growth
absorbed LNG.”
Analysis conducted for Shell by external
consultants showed strong potential
demand growth, from new areas such
as transport – battery-powered planes
remain a remote prospect while cruise
ships and heavy-duty trucks are using
more LNG – but mostly from older sectors,
such as power, heating and industries
where the carbon-based molecules are
key, not the kilowatt-hours.
According to Shell’s Integrated Gas & New
Energies Director Maarten Wetselaar,
“Power needs to decarbonise, while also
growing very fast,” and that sector alone
would account for 45% of the demand
growth for gas, until 2030.
Shell’s Prelude FPSO, due to start
this year
The number of LNG importing countries
has gone from 10 at the start of the
century to 35 today, thanks to lower costs
and higher flexibility.
Governments are attracted by the idea
of reliable energy supplies that can be
37
baseline. Co-operation with contractors
can mean the difference between
extending or shutting production hubs,
she added: “We have a window to push
out decommissioning.”
“Maersk Oil loves the North Sea – it’s
the foundation for our potential growth
beyond,” said Watkins, noting that the
company’s E&P annual capex out to 2020
would be $1bn to $1.5bn – mostly on
Culzean offshore UK and Johan Sverdrup
offshore Norway.
Mark Smedley
LNG
bought on spot markets at the rate of a few
cargoes a month, and fed into quick-to-
build, clean power plants. This promotes
economic growth while not breaking
any carbon reduction commitments or
entailing constricting long-term contracts
backed by triple-A credit ratings, the
Shell executives said.
Geographically, Asia would see 40%
of the gas demand growth, while only
accounting for 20% of global gas demand
now, they added. China is the most
interesting area owing to the sheer scale
of its energy demand. A small percentage
shift away from coal to gas would mean a
very steep rise in gas demand, not all of it
to be satisfied by pipelines.
BP last month forecast that China’s
energy intensity will decline by 3%/
yr, quicker than the projected global
average, converging on US levels by
2035. China’s consumption of natural gas
would also increase sharply with its share
almost doubling between now and 2035
to 11%, added BP.
William Powell
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