2020 mixed into one cocktail a decline in energy consumption, a pandemic, a collapse in oil prices, a confrontation around Nord Stream 2 and the latest green trends. And 2021 looks set to be just as exciting.
Expert on the oil and gas market, partner of the consulting agency RusEnergy Mykhaylo Krutikhin, told Kosatka.Media what, in his opinion, made 2020 unique, why hydrogen energy is more than just a fashionable topic, and what the future holds for the energy sector in Ukraine, Russia, and Europe, Asia and the USA.
WHAT IS 2020 LIKE AND WHY OPEC IS "NO LONGER OPEC"
- With what year can you compare the situation in the global oil and gas industry in 2020?
I would not compare with any particular year. However, the year's crisis phenomena are somewhat reminiscent of 1973-79 when the industry faced severe problems due to political events in the Middle East. But overall, it was a unique year. Although a recession in the global economy was already outlined: some developed countries, starting with Japan, went into a stagnation stage, if not recession, but the pandemic has accelerated this process, further slowing down the global economy and sharply reducing the energy demand.
- In your commentary to Echo of Moscow, you said that financial markets had not responded to OPEC statements for a long time. In your opinion, why has this situation developed and won’t it lead to the emergence of another instrument for regulating supply/demand in the oil market?
- Indeed, the members of not just OPEC, but OPEC +, that is, the states that have joined them, suddenly announce that they will increase oil production. And the raise is pretty severe. Then we see that Libya has dramatically increased its oil production, preparing to increase Iraq's illegal oil production. We see that Venezuela has increased its production and export of oil, albeit not very significantly.
And we see that the demand for this oil is not growing as expected. There is more oil, it seems that prices should be pushed down due to the abundance of supply, because of the "overhang" of supply over demand, but prices are going up. They go up because there are large players in the broader financial market who play derivatives, financial futures contracts, spreads, forwards, and so on. That is, there is such a fight - every month, when these contracts expire, those who want to increase, they organise an increase in these quotes, and someone wants to decrease. Battles are unfolding, and because of these battles, we see that the prices of "paper oil" are growing very strongly. And since, in part, these "paper prices" have an impact on prices in the physical market, prices also rise there. Not under the influence of OPEC, but the effect of this "financial mess".
So far, no one has come up with a mechanism to influence such a "disorder". Sometimes, some hints in the press would be nice to curb the “paper players” who strongly influence the world economy with their games, prohibit forward contracts, or futures contracts, or restrict in some way. But the forces involved in the broad financial market are so powerful that nothing can be done about it. We now see that we have LNG forward and futures contracts by region. That is, the phenomenon spreads further.
" THE ROAD THE WHOLE WORLD WILL FOLLOW "
- The European Commission has proposed reforming the EU rules on the trans-European energy infrastructure, particularly by excluding gas and oil pipelines from priority energy projects for the EU. The priority is the development of power grids and projects for energy storage, offshore wind power generation and other renewable energy sources, production and transportation of hydrogen. How can this redraw the energy map of Europe?
- This is a serious start. Here it should be noted that, in principle, gas pipeline networks within Europe have already been built and are functioning. Everything is all right there. If pipelines are excluded, then perhaps some reservation will be made for the hydrogen power grid. There, too, the "backbone of Europe", as it is sometimes called, or some kind of network leading from north to south, through hydrogen is being outlined. That is, yes, indeed, this energy is changing, changing very seriously. The so-called green deal, a "green deal" for the whole of Europe, it works.
The rules introduced in Europe, the so-called "taxonomy of projects", work and cause some doubt and concern among oil and gas, energy companies around the world. That is, in Europe those projects will be approved that contribute to the transition to green energy. And each company will need to be accountable for the contribution it makes to the development of green energy. This is additional work for companies. Moreover, it will be considered what a company, for example, an American or a Japanese company, is doing in Europe, but how they behave at home. That is, what contribution they make there. Companies' reporting may now be under pressure, and auditors will have to try hard so that companies, investors, could work in the European market.
- And how does the rest of the world perceive the obligation to make energy as clean as possible?
- It is evident in Europe - there is unanimity in Europe in the transition to some kind of new energy. But the world's largest consumer of energy resources - China - also announced that it is switching to completely new economics and energy principles, and by 2050 it will completely ban internal combustion engines. That is, much less oil may be required. India, following China, is going to do the same. Africa is still lagging behind, but I think that this trend will continue to be observed and strengthened in the developing world.
- Is hydrogen energy just a fashionable topic, or does it really have a future?
- I think there is a very serious future. And the talk is now not just about the fact that someday there will be hydrogen energy. We see very specific projects. For example, the conversion of large-capacity trucks to hydrogen fuel - not to liquefied natural gas, as planned, but to hydrogen fuel cells. Trains, planes - models are already starting to fly on hydrogen fuel. That is, the problem there is not in the safety of using hydrogen in engines, but in the cost of these projects. But we see that due to technological breakthroughs, the cost price is continually decreasing. So sooner or later, this will be the road that Europe and the whole world will follow.
WHAT WILL HAPPEN TO THE "PIPE" IF SANCTIONS WON
- It is already obvious that the bypass gas pipelines Northern and Turkish streams have not justified economically. In your opinion, how and when will their construction end?
- I would not say that they were not justified economically, because these projects had two tasks. The first task - a geopolitical one - to punish Ukraine by bypassing it from the north and south, it completely failed, since a transit agreement between Gazprom and Ukraine was signed. Everything seems to be in order there for the remaining four years. And the second task - the economic one - was to transfer money, expenses for the construction of such colossal gas pipelines (one must also take into account the corridor from the Yamal Peninsula, which went to the Baltic and the Black Sea) from Gazprom's investment program into the pockets of private contractors who built these are non-commercial gas pipelines. This task has already been completed. Even for Nord Stream 2, all the money has already been spent. The Russian population received little, if anything, from this. That is, the money has been transferred to the right pockets.
- In connection with Turkish Stream, there was news that Serbia expects to receive Russian gas as early as December 29-30 this year. Are these plans feasible?
- Yes, quite realizable. The completed section is not the Turkish Stream, but the Bulgarian pipe called the Balkan Stream. Its builders are diligently showing the European regulator and the Americans that this is not a continuation of the Turkish Stream, but an independent pipe that will receive gas from Russia and Azerbaijan, possibly, gas from Turkey through a new bridge that is now being built ... That is, it will be, as they say, a completely new piece of infrastructure. In fact, Gazprom has reserved all the capacity for the transition from Turkish to Bulgarian territory. It will be the same monopoly of Gazprom that is being revolted in Europe and the United States. The compressor station on the border with Serbia was recently actually ready, because the American company that supplied the compressors delayed it, because it was afraid of sanctions, and then supplied the compressors, turbines and everything is already there. I think that they can fulfil their obligations and start transferring gas to Serbia.
In Serbia, Gazprom financed and built a bridge across Serbia to Hungary. Now let's see how these messages will correspond to reality. But the volumes are small.
- The United States is taking an adamant stance against Nord Stream 2. They say that the gas pipeline will never work as a result of the sanctions imposed by them. If this does happen, what will physically happen to the pipe? Can you explain please.
We see that the Fortuna barge is now sailing at sea, which is apparently laying part of the Nord Stream 2 at a depth at which American sanctions are allowed to operate. It is 100 feet deep, up to 30 meters. But the section where the depth is deeper, most likely, Denmark will not allow work there, since the operations for laying the pipe according to American laws. According to the law that will still be adopted in December, these works cannot be certified. It is impossible to ensure these operations. It is impossible to provide technical support. So there is a huge chance that the pipe will not be completed. There will be a piece that cannot be paved due to US sanctions. If there is no pipe for pumping gas, this means that everything has gone to waste. That is, this pipe cannot be used anywhere else.
There were fantastic assumptions that a branch could be made from the pipe and gas supplied to Kaliningrad, but this is also a frivolous project, because it in no way justifies the construction of this route. It will be buried.
- Physically, what will happen to the pipe if gas is not pumped through it?
- During the year, Gazprom carried out operations to strengthen the laid pipe. Placed ballast on top so that it would not float and interfere with navigation. Repair and safety work is permitted under US sanctions law. Therefore, the only thing that will be done is to make sure that the pipe is not dangerous.
- To whom will these expenses be distributed – to the Russian side, evenly to investors?
- These costs have already been incurred. For Gazprom, these are already written off expenses. But the offshore section of the pipe was jointly financed: 50% by Gazprom, and 50% by a group of respectable international companies. On average, these global companies will lose $ 1.3 billion if the project does not work. They invested money, they took a risk, the risk was not justified. Their risk was justified when they were building Nord Stream 1; everything is in order there, they receive dividends from it. And from this project, there will only be a loss of these foreign companies.
- In other words, the pipe will lie at the bottom of the sea and gradually rust, or will they somehow preserve it?
- And there is no other way out. US sanctions will punish any company that puts its pipe-laying vessel into Danish waters to finish building this route. I do not see a company that would agree to do this.
THE RUSSIAN WAY TO THE ARCTIC AND CHINA
- Russia is now, despite the protests of the "greens", is going to switch to active gas production in the Arctic. In your opinion, does this project have any economic future?
- Well, why not? Gas is produced in the Arctic. It is even partially liquefied, in particular, at the Yamal LNG project and there will also be an Arctic LNG-2 project, which has already started, has investors, and money is being invested in it. That is, gas will be produced in the Arctic zone, and now a lot of gas is being produced in the Arctic zone.
But the problem is with oil production. First, there is not much oil on the Arctic shelf - there is mainly gas there. And secondly, there is simply no need to mine it there. The cost of oil production in the Arctic zone is high. I have calculations for one of the projects: if the price of oil is $ 70 / barrel, then its production will not be justified even in 20-21 years. The price is still "forbidden" for these projects. Well, let's say someone starts producing oil there. But it will have to be sold not at cost, but significant discounts. And if such a project appears, then, in fact, it is a project to cut the funds allocated for it. It is no coincidence that Rosneft is handling the project, while the state-owned company has a task not to minimise costs, but maximising them so that they can be cut.
- In late May, Lenta.ru published an investigation that the volume of gas production at one of the largest fields in Russia - Chayandinskoye - may not be enough to fill the Power of Siberia gas pipeline. This threatens to disrupt the 30-year gas supply contract between Russia and China, and Gazprom risks losing more than 1.5 trillion rubles. This was due to the haste with geological exploration and technological disruptions. What is the state of the project now, and what, in principle, is happening with Russia's trade with China?
- We already see that this year plans for gas supplies via the Power of Siberia have been disrupted. Less than 4 billion cubic meters were supplied, although 5 billion should have been supplied according to the plan. That is, the Chinese can already claim some kind of forfeit from Gazprom. There has been no drilling at the Chayandinskoye field (I am following the situation) since mid-May. They just can't figure out what to do with those wells that turned out to be dry or with those that turned out to be in such a state that they will also be dry in a year and a half, from which gas will not flow. Yes, we miscalculated with the estimate of reserves, miscalculated with the technologies used (down to the composition of drilling fluids). We see that we have closed some blocks at the Kovykta field in the Irkutsk Region because they also made a mistake with the reserves estimate. And it should be connected to the Chayandinsky pipeline 800 km long. And there, too, work is underway to connect, but there is no great confidence that it will be possible to fulfil the Chinese's obligations.
There was a project to bring another pipe there from the north of the Tyumen region, from the Yamalo-Nenets Autonomous Okrug. But if you look at the length of this pipe, the conditions for its laying, then the cost will be under $ 100 billion. Therefore, Gazprom's money for the so-called Power of Siberia-2 corridor to save the Power of Siberia gas pipeline and its obligations to China is a big question.
PROSPECTS FOR UKRAINE
- Let's move on to Ukraine. We are finishing the first year out of five, when the transit agreement with Gazprom will be in effect. In Ukraine, they hardly hope to continue contracts with Russia and are now thinking about how to load the gas pipeline in the future. What do you think will happen to the Ukrainian "pipe" in 4 years?
“So far, I'm afraid I can't look. Most likely, the demand for Russian gas, some kind of niche for it in Europe, will remain in four years - about the same volume as now. Maybe there will be a little reduction. But the Ukrainian gas transmission network will be in demand. We see that the plans to replace it from the south have failed - South Stream has been closed, and Turkish Stream can deliver microscopic volumes of gas to the Balkans in comparison with Gazprom's total exports. Nord Stream is working halfway and sometimes gets up for preventive maintenance. One cannot do without Ukrainian transit. On what conditions it will be, it's hard for me to say.
But I see strenuous efforts by the Ukrainian GTS operator and the Ukrainian government to integrate this structure into European networks. I already see some tenders for the use of underground storage facilities in Ukraine. Perhaps, the transformation of this network into a segment of the future North-South gas transportation corridor, which was planned in Europe. In Europe, there are some plans for integration, for the use of the entire gas infrastructure. I think that participating in these plans is a good prospect.
This year, Turkey discovered a natural gas field in the Black Sea with a volume of 320 billion m3. At the same time, Ukrainian Naftogaz obtained the rights to develop the shelf. Could this lead to a conflict of interest between Ukraine and Turkey?
- No, I don't think there is a possible conflict of interest. Look, on the opposite bank from Turkey, there is a search for gas and oil in the waters of Ukraine, Romania, but no big successes. That is, Romania announced that it could have big discoveries in its waters, and it will become independent and export its gas throughout Europe. But so far no progress has been made.
Moreover, Turkey, which announced that it will allegedly begin oil production in 2023, is most likely too early to talk about it for technical reasons. 2025 is the most optimistic year. The volume of output may be less than 10 billion m3 per year from this field. So there is likely more hype than real sense in this field.
ABOUT THE MIDDLE EAST AND SHALE OIL
- The Middle East is becoming an increasingly active player in the world oil and gas market. At the same time, there are contradictions between the countries in this region. What can this region expect next year?
- I think that they will retain their role, because they are the leading oil suppliers to many countries. And up to 25% of the oil that goes to the world market comes from the Persian Gulf. Firstly, the Persian Gulf countries will continue to play a very important role, since their oil production costs are meager and can play with prices and play with volumes. We see that this is the Middle East and North Africa; we see that Libya has almost completely recovered its booty, disrupted by military operations. Libya is currently producing 1.3 million barrels a day and this is a significant addition to the oil that goes to the market. It is possible that Iran will be able to restore its production if the American sanctions against Iran are at least partially removed or eased in connection with the coming to power in America of the new administration.
Therefore, it is necessary to wait for festive events for the oil market, if some military action does not interfere.
- This year, a wave of bankruptcies of oil companies swept across the United States. Some experts talked about the end of the shale oil era. Do you agree with this point of view and what will happen next?
- First, the industry is very flexible. We see not only a wave of bankruptcies. And what is bankruptcy? This means that some companies have declared the so-called “bankruptcy on 11 points” - they asked for protection from creditors. They can restructure their debts; they can sell the company to another company - this does not mean that the company ceases to exist and is no longer engaged in anything. Bankruptcy there and our bankruptcy are entirely different phenomena.
Second, it is effortless to restore production in shale deposits. Look at American liquefied gas now. Gas flows in very large volumes - and this is shale gas. The Americans have restored almost the pre-crisis volume of LNG production and are shipping it to Asia, where prices have slightly increased. Therefore, it is premature to talk about the oil shale industry's death - it will continue to play its role.
There may be some subsidence in investments because, in 2020, little investment was made in this direction. But if everything goes well with the economy, vaccinations start working (in two years we will feel this effect), then oil and gas will be extracted from shale fields again. Don't bury them.
- To sum up – what awaits the global energy sector in 2021? What are the forecasts?
- Making forecasts is a thankless task. Because even forecasts for oil prices from $ 35 to $ 65 per barrel are starting to jump from different observers, nobody can say anything here.
But it is already clear that the world will move towards abandoning reliance on fossil fuels (oil, and in the future also gas), this is absolutely certain. This year was the beginning of such a movement. And 2021 will continue this trend. Different countries will be rapidly investing in projects sponsored by governments to move from oil, gas, and coal to shifting to something cleaner.