"“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.” "

Chinese premier Wen Jiabao 12th March 2009

""We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system."

Timothy Geithner US Secretary of the Treasury, previously President of the Federal Reserve Bank of New York.1/3/2009

Sunday, November 19, 2006

Gazprom / LUKoil - Russian energy gets to grips with Europe

The prospects for EU energy security begin to look even more fractured. Russian State controlled Gazprom is rapidly becoming dominant in the EU, by combining its natural gas supply position (25% of EU curent demand) with an ever growing downstream market position in Europe’s main markets. This puts Moscow / St. Petersburg control where the more alert Europeans don’t want it to be.

After the supply problems to Ukraine in January and resultant problem with pressure and reduced supply elsewhere in Europe, Austrian Energy Minister Martin Bartenstein (pic) said in May that Russian gas would remain the backbone of the European energy supply mix but ....:

"We have to think about energy supply security in general, gas supply security... and we have to learn the lessons."
See 30 min OPEC video 12/9/06 ""Challenges to Energy Policies: The Case of Europe" by M

Gazprom and CEO of ENI, Paolo Scaroni,
have just announced an agreement with Italian oil and gas major ENI [NYSE:ENI] to enter the Italian domestic market with the prospect of supply up to 3 Bn. cubic metres per year to Italy from 2010 onwards, with an estimated value of $770-$963 million per year. Gazprom sells around 21 billion cubic meters of gas per year to Italy - equivalent to around a third of its gas imports and 29% of total consumption.

This has 3 consequences ;

1. Gazprom will be selling directly to Italian domestic consumers
2. ENI will become Gazprom's largest gas customer
3. ENI / Gazprom will build a 2nd Bluestream Russia - Turkey pipeline, to supplement the one they built and inaugurated in 2005.

The head of the Anti Trust Authority in Italy, Antonio Catricala has criticised what he sees as an anti-competitive arrangement. A previous deal was blocked in March 2005 (under the previous Gubment) by regulators who said it would "curtail the development of competitive intensity in the market." It is thought however that last winter's supply problems and the events in Ukraine and Georgia will concentrate minds on the realities of supply rather than notions of competitiveness before the planned LNG supplies are up and running.

Italy has only one LNG terminal operating but they are the 3rd largest LNG market in Europe and currently have several new LNG reception terminals in progress. Construction has commenced at Rovigo in the Adriatic and other projects at Brindisi, Porto Empedocle, Tuscany, Rosignano, Gioia Tauro, Taranto and two at Trieste are in various stages of planning, authorization or preliminary construction.

Gazprom are building their its first LNG export project by 2009 at Ust Luga, outside St Petersburg. Gazprom are also involved in the amazing Norwegian Statoil Snoehvit LNG export project on Melkoya Island outside Hammerfest.(pic)

Gazprom already has a 50% equity stake in German utility Wingas which was agreed in April with a complicated asset swap where Gazprom has traded some of its upstream assets in the Siberain gas field, Yuzhno Russkoye for the Wingas domestic retail and distribution market.

Gazprom have also had talks
with the Meeuse / Rhine combine with the newly established Trianel European Energy Trading GMBH and Trianel Gas Storage Association GMBH.

Ruhrgas has a 5% stake in Gazprom. Ruhrgas is

German energy giant E.ON have also agreed to take up a 25% minus one share stake in Yuzhno Russkoye, and in return Gazprom is receiving minority interests of 50% minus one share in Hungarian gas companies E.ON Foldgaz Trade and a 25% stake in the regional power and gas supplier E.ON Hungaria.

The Russian gas giant has now taken a stake in Amorim Energia, which owns 33.34% of newly floated (30/10/06 - raising US$1.1 Bn for the Portuguese state) Galp Energia [Lisbon:GALP] the privatised ex state energy company which is itself 33% owned by ENI. Amorim Energia is owned by Portuguese businessman Americo Amorim and Angolan oil company Sonangol. Diario Economico (Daily Portuguese paper) has reported Americo Amorim, and Manuel Ferreira de Oliveira, Galp chief operating officer, went to London yesterday (18/11) to sign an agreement with Gazprom. Part of the deal involves the supply of gas to GALP by Gazprom.

Gazprom have also let it be known they are looking for expanding downstream in Belgium and have been having discussions with gas distributor Fluxsys exploring underground gas storage
possibilities within Belgium at Poederlee in La Campine.

Gazprom is one of the companies which own the Interconnector pipeline linking Belgium and the UK.

Gazprom acquired the small (12 employees) Pennine Natural Gas (PNG) in June this year to gain a foothold in the UK retail market. There is continuing speculation that they have set their sites on acquiring Centrica and have made no scret that they plan to supply 20% of the UK market.

Several other deals in Europe are known to be cooking - and LUKoil have repeatedly stated and make no secret of their intentions of expanding withing Europe.

The energy world is however full of reports that a supply crunch is looming in Russia before even 2010. Claude Mandil, head of the International Energy Agency, said in may "We are afraid that Gazprom will not have, in the coming years, enough gas to supply even their existing customers and existing contracts .This is our data, Gazprom is not investing enough."

The Russian policy of divide and rule by dealing with each nation seperately - for example the
Baltic sea pipeline to supply the UK , Holland and Germany, negotiated in Chancellor Schroeder's dying days by Putin - construction of the Russian end of which has commenced. Supply contracts are also said to be in place with German and Dutch operators such as Gasunie.

All this flies in the face of Brussels policy who want Russia to ratify an "energy charter treaty" that would provide access to Russia’s reserves and remove Gazprom’s monopoly of the export pipeline to Europe. A point the Polish government , with long experience of Russian deal making (42% of their gas is supplied by Gazprom) are demanding as a prior condition to any further EU / Russian energy supply busines agreements.

Financing these and further deals said to be on the way is not a problem . Gazprom , assisted by
Credit Suisse and UBS placed 2 tranches of Eurobonds for $1.35 billion (US$ denominated) and
500 million euros both maturing in 2017 under the euro medium term notes (EMTN) program worth US $15 billion.

Within Russia, Vagit Alekperov CEO of LUKoil [LSE:LKOR] is complaining as they have had to
lose majority control of a planned joint venture in Russia to Gazprom. Lukoil claims still to be in
control of its existing oil field, but Gazprom’s state backed control has only increased further.

However last year LUKoil's natural gas production soared 265% to 5.1 Bn. cubic meters, after LUKoil brought its Nakhodkinskoye field on line last year, on top of being Russias largest oil producer and had total sales in 2005 of US$55Bn. up from US$33Bn. in 2004. Lukoil's sales network covers 17 countries, including the USA where they purchased 200 gas stations from Getty and Mobil in May to add to 795 gas stations bought from Conoco Philips (who have a substantial 7.6% stake in LUKoil) in New Jersey and Pennsylvania.

LUKOIL CEO Vagit Alekperov said in June that they were thinking about the purchase of Coryton refinery from BP. BP’s last UK refinery, Coryton, accounts for 8 percent of all refining in the country (around 8.6 million tons a year). Coryton produces diesel fuel, automobile fuel and aviation fuel, as well as the liquefied petroleum gas and bitumen. The petrol goes to BP’s fuel stations.

Contrary to BP (esentially now a US company) which is disposing of refining assets, LUKOIL’s policy is to buy refineries , and especially in Europe. In the recent months, for instance, globe trotting jet setter, Vagit Alekperov has had talks about acquiring Slovenian Nafta Lendava,
Oilinvest (Netherlands) B.V. Group (actually State owned by Libya) who operate as Tamoil in Europe and Africa (and sponsor Juventus for €110 million - Gadaffi's son has a 7.5% stake in the club) - although on 1st October it was announced that the shady Carlyle Group had bought Tamoil for US$3Bn. , a Rotterdam refinery owned by Kuwait Petroleum, Serbian state owned Naftna Industrija Srbije which Merrill Lynch are busily privatising, and is discussing building a refinery in Turkey.

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