“Europe without Gazprom” project postponed: oil and gas giants wrapping up Black Sea surveys

The supporters of “Europe without Gazprom” have a new reason for joy. Lukoil has announced opening of a large gas field in the Romanian Black Sea continental platform.  The gas reserves could amount to more than 30 billion cubic meters. It is already the fourth gas field opened during the last few years in the Black Sea continental shelf of Romania. The Western analysts say the new source of gas supply to Europe will reduce its energy dependence on Russia. Yet, Lukoil’s success may become the last in the years to come, as oil and gas companies wrap up Black Sea surveys. As to the gas supplies from the region, it will hardly affect Gazprom’s positions in the Old World.

U.S. expansion stumbles over prices

At the end of 2000s, oil price surpassed 100 dollars per barrel and the world plunged into oil and gas fever, amid the crisis of 2008, when the housing market slumped in U.S. Investors began searching new opportunities. Eventually, dozens of new oil and gas companies emerged opening several large oil fields throughout the world in a few years. The oil and gas giants missed the bold newcomers, but responded ambitiously. For instance, U.S.-based Exxon Mobil launched drilling in the Black Sea. By 2014, it has actually received the right to the best piece of the pie in the region and created a hub in the northwest of the Black Sea.  Americans both directly and through their Austrian partner OMV controlled the Neptun bloc in Romania and the Skifska field adjacent to it (in Ukraine), as well as Khan Asparuh Block in Bulgaria. The area of the license fields totaled about 40,000 square kilometers. In addition, Exxon mobil is still in a joint project with Rosneft  in the Tuapse Trough in the Black Sea. There is another field in Turkey, which the U.S. Company left after unsuccessful drilling.  Meantime, in Romania, the first gas field gave Western analysts a reason to say that Europe got a new source of gas supply. In 2012, a gas field was found in the Neptun block of 70 billion cubic meters.  After Crimea’s unification with Russia, the U.S. Company stopped the operation in Russia and earlier in the Ukrainian sectors of the Black Sea because of sanctions. In Romania, the drilling operations were continued. Last year, a new field of 25 billion cubic meters of gas reserves was found there and they began to drill new holes.

According to Wood MacKenzie, deep sea mining is profitable, if oil price is at least $70-$80 per barrel. However, Americans did not stop recovery even when crude oil price shrank even more. Yet, the oil price that stays below $55 per barrel and the downward trends made the Exxon Mobil change plans.  Even the world’s biggest companies cannot afford surveys in the Black Sea now. Ocean Endeavor drilling rig in Romania is due to stop exploration drilling, as drilling a deep water hole is still as expensive as $100 million.  A total of $3 billion drilling investment are needed for the Romanian project. It appears that the American company has decided to shelve the project, despite the fact that the project development was planned for the beginning of the next decade when the oil price is forecast to reach $100 per barrel again.

To make the situation in the offshore oil and gas production clear, suffice it to say that every third drilling rig may be stopped starting from the current year.

It seems that Lukoil will have to wait. Analysts say drilling of prospect holes is so far unfavorable to that Russian company, but it has obligations to the Romanian Government under concession agreement. The American company has already fulfilled the minimum requirements under its contracts, while Lukoil has several holes to drill. Non-fulfillment of obligations means loss of the right to the exploration sites.

Even Black Sea countries run short of gas

Wood MacKenzie said in its forecasting that the natural gas fields in the Black Sea continental shelf of Romania will give 6 billion cubic meters of gas per year. Together with Lukoil, this figure will make up 8 cubic meters.  Is it sufficient or not? Eurogas European association forecasts that gas recovery in other regions of Europe will shrink by 40 billion cubic meters by 2018. Therefore, hardly anything threatens Gazprom in the European market, even if all the southeastern projects of the EU – the promised Caspian Sea gas pipelines and Mediterranean gas – are added to the Black Sea gas. Azerbaijan has already said it will export to Europe 10 billion cubic meters of gas per year until 2044 from Shah Deniz. Egypt and Israel will supply no more than 20 billion cubic meters of gas to Europe per year.  This will be enough only to recompense for the decline of gas recovery in Europe.

So far, even the Black Sea countries, except Russia, are short of gas.  All these countries depend on Gazprom to some extent.  Georgia imports gas from Azerbaijan only.  However, the country has launched negotiations with Moscow also for import of Russian gas. Romania, Bulgaria and Turkey depend on the Russian gas by 19%-80%. No country has really gained from the Black Sea gas projects yet. Turkey has invested billions of dollars in these projects with no return so far. Bulgaria’s projects have not been launched yet, while the current recovery is shrinking.  Romania stays at the same level of gas recovery for already ten years.

Crimea that united with Russia in 2014 was the only exception until recently. In 2012-2013 the local company "Chernomorneftegaz" developed a new gas field, doubled the recovery and fully covered the peninsula’s needs. The situation has changed dramatically during the last year: recovery fell almost by 20%.  To meet shortage and supply gas to the newly built electric power plants, construction of a gas pipeline from the Krasnodar region will be launched in 2016.

Investor will wait

Despite low oil prices, oil and gas companies continue surveying the Black Sea. For instance, this autumn Shell, Royal Dutch Petroleum Company, was awarded Oil, Gas Drilling Permit for exploration of Bulgaria's Silistar Block. Analysts say the company’s strategy has not changed. The Black Sea remains attractive due to its developed infrastructures and proximity to consumer countries. Nevertheless, investors took a pause until the oil price reaches the pre-crisis level. Now, they invest in implementation of their obligations under the existing projects or preemption of the ‘unoccupied’ sites. It is noteworthy that previously drilling of expensive holes was a compulsory condition in the concession contract, while the contract between the Bulgarian Government and Shell has no such condition. The Dutch company is required to invest EUR 18 million in seismic prospecting, which is not big money for the world’s biggest oil company, but an opportunity to preempt the site for the coming five years.

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