Perspective on Russian Natural Gas
an article to
In the wake of the ‘Georgia Incident’, which began around the opening of the 2008 Olympics, it initially appeared that there could be a pilgrimage back to Cold War days. Many questions were asked about Russian geopolitical intentions, and at the same time some bizarre opinions about the availability or non-availability of Russian energy resources were put into circulation.
For instance, a short article appeared in Newsweek claiming that oil and gas passing through Georgia was supposed to “free Europe from Russia” but, according to its author, “not anymore”. How anyone could believe that the prevailing gas superpower, Russia, was capable of having its ambitions thwarted by a few pipelines from the interior of central Asia, is something that deserves the attention of psychologists or psychiatrists and not readers of an important weekly news publication.
There were probably many items in my gas book, published in 1987, that prevented it from becoming the favorite bedtime reading of various experts. But almost certainly, one of them was the contention that there should be more cooperation between the producers and consumers of energy resources to include Russia and OPEC, and not just because an important axiom of conventional game theory maintains that when cooperation is possible between actual or potential antagonists, it should be attempted.
The reason I am thinking of this is because in the medium to long run there could be a serious global shortage of gas (and oil), and it is important to everybody if what is left of these resources is used to smooth out the transition of a new global energy economy – probably one emphasizing renewables and various alternatives, but also nuclear.
A gentleman who apparently had some difficulty grasping the mechanics of the gas market was former US president Ronald Reagan, as well as his advisors, because instead of buying gas from the Soviet Union, they thought that some effort should be made by European consumers to obtain the supplies they required from others, e.g. Africa and Argentina, arguing that by doing so it would weaken the Soviet economy.
The correct strategy at that time – and perhaps now – was to contract for the largest possible quantities that could be obtained from the Soviet Union/Russia, and to encourage that country to invest in (and fill) the largest possible pipelines. The basic issue was not merely safeguarding and expanding Western Europe’s supplies of gas in the years to come, but increasing the general accessibility of all energy materials, to include those purchased by the United States (and its friends and allies) from any supplier.
Twenty years ago, when I pointed out the advantages of doing business with the Soviet Union in a talk at Cambridge University, and in addition suggested toning down Cold War rhetoric, a number of observers – to include the founder of the influential publication Geopolitics of Energy, Melvin A. Conant – assured me and everyone else within earshot that although the ideological commitment of the Soviet Politburo was ostensibly to Marx and Lenin, it held an equally high regard for dollars and deutschmarks, which made Soviet gas industry executives prone to discharge their business obligations in a civilized manner.
In the Newsweek article referred to above, as an aside, it was stated that European gas buyers have excellent relations with Russia and do not fear greater dependence. In addition, Germany is supposed to be building its own pipeline through the Baltic Sea to guarantee its supply of Russian gas.
I know a great deal about this pipeline, and believe that persons interested in it should pay extremely close attention to certain details. There has been some delay with this conduit that is at partially due to strange ideas in, e.g., Sweden as to the ulterior purposes of the Russians, when the most likely agenda of those good ex-communists turns on collecting as much money as possible, and sooner rather than later.
According to Jeffrey Michel, an MIT engineering graduate living in Germany, this underwater pipeline would allow Russian vessels to avoid a complicated sea passage, and in addition would mean that possible disputes between Russia and Baltic states will not lead to a reduction in gas contracted by Germany and perhaps other countries, or even another Cold-War burlesque.
A further observation has been made by the important petroleum consultant Herman Franssen, who notes that Russia is not only an energy powerhouse, but also possesses an enormous amount of unused and underused agricultural land.
Buttering up to Russia, to include supplying them experts, might lead to the efficient exploitation of this land, which eventually could be essential for feeding hundreds of millions or even several billions of persons outside Russia.
Several years ago the kingpins of the European Union held a meeting at which the availability of Russian natural gas and oil was discussed at length, and the Financial Times (March 23, 2006) suggested that the sale of Russian gas to China and Japan might have a negative effect on the energy prospects of Europe, which relies on Russia for perhaps 40% of its gas. By extension, in the long run, this could have a negative effect on North America, because the global gas scene has started to take on some of the features of a mainstream textbook market, due (among other things) to the ability of huge liquefied natural gas vessels to deliver ‘spot’ cargoes. But in referring to a “textbook market” I specifically mean a market with more flexibility than a conventional LNG market. For instance, instead of a portfolio of long-term contracts in which gas carriers are locked into predetermined routes, British Gas now tries to structure its operations so that gas can be diverted to buyers that are willing to pay premium prices.
According to the Newsweek article mentioned above, a recent Rice University Energy Program modelling exercise found that Russian efforts to deprive Germany of gas would likely be futile, as market deregulation would allow other suppliers to fill the gap. What this odd conclusion missed is that, ceteris paribus, there are no other suppliers in the short-run, nor perhaps inexpensive exporters to Europe in the long-run, which is a reason why Finland chose nuclear instead of Russian or Norwegian gas. On the other hand, Russia can always rush to completion any pipelines that they are constructing in the direction of China, in which case Germany, perhaps other European countries, and unless ‘shale gas’ lives up to its publicity, the United States might someday find themselves bidding for progressively larger increments of imported gas.
The Russian advantage
The running mate of presidential candidate John McCain, Governor Palin, was apparently very positive to larger investments in Alaskan (and perhaps Canadian) natural gas, which would eventually find its way to the U.S. Midwest. This scheme was being discussed in some detail twenty years ago, and the cost was (mistakenly) considered excessive at that time. At the present time the estimated cost may be much larger than the 10 billion that several Russian pipelines toward Asia will ostensibly cost. The truth is that Russia’s position with regard to alternative export markets is so enviable that its government does not have to be concerned with the future of underwater or any other kind of pipeline carrying natural gas in the westward direction.
One of the editors of the Financial Times, Martin Wolf, sometimes likes to offer opinions in energy matters. He suggested that Russian “elites” should be punished because Russia overreacted in the Georgian incident. When I was informed of this proposition, I informed his energy staff that the only kind of punishment I could imagine for those ladies and gentlemen was to prohibit them from enjoying the marvellous skiing in places like Courchevel and St Moritz for a season or two . Of course, the French and Swiss governments would have to agree to this, which is unlikely.
Something else that we do not hear much about is a possible participation of the Russians in the growing liquefied natural gas (LNG) market, although that option has been raised by some observers. There has also been some talk about Russian gas exports from the new Sakhalin LNG scheme gaining access to Asia-Pacific markets, which could include utilizing any terminals that might open in India, and also taking advantage of the fact that Indonesia’s gas fields are ageing, and consequently are less attractive to potential customers. It is also interesting to note that the Russians have decided to develop the giant gas field Shtokman without foreign help, and possibly switch it from a source of LNG for the US to a pipeline venture whose gas is destined for Europe.
In theory there should be a place for Russian LNG just about everywhere, because while LNG accounts for only about 2% of the gas used by the US at the present time, the United States Department of Energy (USDOE) has suggested that it could amount to 30% by 2025, with the total demand for gas in the US amounting to about 30 trillion cubic feet. If shale gas does not live up to its promise, it might be useful to remember a statement by an important American energy executive (Mark Papa) several years ago. “Right now, on the supply side, LNG is the only lever we have to pull.”
One more observation can be offered here. The demand for oil appears to have stagnated to a certain extent, but the price is slowly increasing. This is because OPEC today is a genuine cartel that understands how to play the oil game. They are capable of playing it the way that you and I would play it if given the opportunity! At one time it was believed by certain oil market insiders that Russia would be allowed to join this club, but that did not happen because both OPEC and Russia considered this unnecessary. But there is also talk of a possible GASPEC, in which Russia would play a leading role. Here I will offer a prediction: This GASPEC is a certainty if, e.g., the presence of shale gas puts a strong downward pressure on the gas price.
REFERENCES
- Angelier, Jean-Pierre (1994). Le Gaz Naturel. Paris: Economica
- Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. London, Singapore and New York: World Scientific.
- Banks, Ferdinand E. (2000). Energy Economics: A Modern Introduction. Boston, Dordrecht, and London: Kluwer Academic Publications
- Banks, Ferdinand E.´(1987) The Political Economy of Natural Gas. London: Croom Helm.
- Chew, Ken (2003). ‘The world’s gas resources’. Petroleum Economist.
- Commichau, Axel (1994). ’Natural gas supply options for Europé – are distant supplies affordable?’ The Opec Bulletin (May).
- Dispenza, Domenico (1995). ’Europé’s need for gas imports destined to grow,’ Oil and Gas Journal, March 13.
- Karplus, R.S. (1985). ’Competitiveness of Norwegian and Soviet gas supplies (Stencil)
- Morris, Avi (2010). MLPs Keep Rolling Along. (SeekingAlpha.com)
- Söderbergh, Bengt (2010). Production From Giant Gas Fields in Norway and Russia and Subsequent Implications for European Energy Security. PhD Thesis, Uppsala University.
- Späth, Franz (1983). ’Die preisbildung für Erdgas.’ Zeitschrift für Energiewirtschaft(3) 4:99-101.
- Teece, David J. (1990). ‘Structure and organization in the natural gas industry’. The Energy Journal. 11(3):1-35.
Disclosures: No positions
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However, I do question some of the logic in it. Why would LNG (i.e., your GASPEC) be a certainty if shale lives up to its promise? At today's prices, wouldn't even lower prices shut out shale plays completely, as well as LNG imports due to transportation costs?
How long is that going to last? Gas flelds lose pressure very quickly, which means that the US spike in natural gas production may not last very long.
The production profile of gas fields is poor.
That could be or not nowadays but it will not for sure in the future, Europe has some good cards to play in the next years.
1. Shale gas (seems that Poland, Denmark, even Germany can benefit of it (in a first stage, other will follow)
2. Many new pipelines are in construction with possibilities to obtain Iraq and Iran gas in a second stage in addition to Russian and ex soviet countries.
3. Nuclear is moving fast in Europe now
4. PV project in North Africa will create a supply to balance gas.
5. Promising results in north africa gas will materialize in next future (pipeline in Spain crossing Mediterranean sea)
This is public information, but Hungary and Estonia etc are now working their own we will see what kind of results they get.
Energetic future of Europe is quickly becoming more stable and diverse than never before we can not use only old material to analyze the future in this case.
Rgds.
There was a recent article in the FT saying that proposed plans for an LNG facility were put on indefinite "hold", in favor of pipelines extending to China/India, as I recall.
Let's look at a couple of comments. Yes, this article was too long. Sorry.
The potential GASPEC people are already having some informal meetings. I don't think that they are willing to take a gas price of of less than $5/mBTU. Of course I could be wrong. And Alex, I'm sure that you know as much about this business as I do, but the Russians don't have to worry about shale yet. (Of course, Russia and Norway might turn out to be two of the largest producers of shale gas.) The point is though, if the Russians got too nervous they would just rush to completion the pipelines they are building to sell gas to China, and perhaps behond.
Eamon, I'm not completely convinced about shale oil either, but you cant pick up a newspaper today without hearing that it's great. I think that we will have to watch that phenomenon very closely however.
Alan, Siemans is going to join in selling a Russian reactor. If a German firm is going to sell a Russian reactor, instead of the other way around, our ex-communist friends must have something going for them besides vodka for breakfast. But my bottom line here is that Medvedev and Co. are basically very flexible people. I forget the occasion, but Medvedev once used the expression 'communist remnant'.
And last but not least we get back to Mr Isaac. That "best..".is mostly for the colleagues in the university world - you know, the ones who have ruined the faculties of economics, and someday might do the same thing to those faculties that really make a difference, like medicine. Where those people are concerned, baby, I take no prisoners.
check out the lead bismuth reactor used in the Alfa class sub, it was the most advanced with a thermal efficiency 1.6 times compared to western reactors (i.e over 40% ). today West is trying to develop similiar reactor and its called a Gen IV reactor .
next time please get your facts straight , and talk related to your sector ,and not off topic , because USA has had its share of disasters too.
As for Middle East gas pipelines into Europe, I seem to remember saying in my gas book that this would happen, and it would be a big thing. I picked that idea up at the conferences 20-30 years ago. The people who said this were wrong, and I was wrong to believe it, but in terms of economic logic it made sense.
About the Sakhalin LNG scheme. The less said about that the better, but as I understand the situation, the Russians have decided to play that old game 'get the guests' with the people who are/were handling that project. I think that it's BP. I remember telling someone about 15 years ago that they should get in on that arrangement and eventually make a few billion, but it seems that they declined. I guess that my personality turned them off.
Advill, I really and truly hope that Europe is not at the mercy of Russian gas suppliers, because that would be bad for yours truly; and I certainly hope that the decision makers here in Sweden are not stupid enough to attempt to replace nuclear with gas - although I wouldn't put it past them. As for pipelines from Iran and Iraq, I've been waiting almost 30 years for the first, and I've never heard anything about the second. Something that might make engineering and economic sense though is pipelines from Libya to Europe, assuming that there is gas in Libya, which somebody claims. But you see, regardless of what you or I see or think, Mr Jarco has the right answer: China is going to be the destination for a large part of Russian gas, and if you were sitting in that Gazprom building in Moscow you would be as happy as all get out that the Chinese are there..
Clearly a shortage of cheap energy is going to develop over the next ten years. We agree on that point.
However, I am not sure it makes sense for us Europeans to unnecessarily increase our dependence on Russian gas. Russia is a pseudo-democracy run by an oligarchy which yearns for the days of Stalinist glory. Stalin was celebrated as a hero this past Friday in Moscow.
I don't see why Europe and particularly East Europe should be funding a country that was fundamentally responsible for the Cold War. East Europe lost a half decade due to this scum.
Any long term deals with the Russian should be accompanied by more energy efficiency gains, including an energy tax, and more nuclear development at home.
Dependence must be minimized.
The Russian elite fears true democracy and pluralisms. That is quite clear from their attempts to block NATO expansion and talk about "Ukrainization" (a reference to the clean Ukrainian elections).
The reason is BECAUSE WE NEED THEM for oil and specially gas, the Russian reserves of gas (the old way) plus gas (the new way) shale, etc will mean that Russia holds perhaps over 50% of the total gas in planet Earth.
Yes, East Europe losted half CENTURY but the position of Russia now is changing.
As Ferdinand says Gazprom waiting halls are fully pack of Chinese....how do you think Russians feels being the largest country in Earth, having less than 150 million habitants (and counting down) and having border with the most populated country in Earth ...and nuclear power as the tip of the cake?.
The are occidental, they need Europe and they need USA ...in the long term they will sell to China because there is no other route but their back will be Occident.
I think Germans has the most intelligent (long cycle approach) policy to Russia, they need us as much as we need them.
Rgds
I really wonder if the Russian oligarchy yearns for the good old days of Comrade Stalin - or 'Bob Steele', as a former student of mine called him. Mr Medvedev resently used the expression 'communist remnant' in criticizing a suggestion by someone about something. Of course the key thing for me is a policy of live and let live: I spent almost 6 years preparing to fight the Russians in the 3rd World War, and although I loved almost every day of it, I really couldn't see the point after I was demobilized and back in school. My son also had a long vacation in minus thirty degrees weather in Swedish Lapland, and his regiment was not up there to await the wonderful skiing in the Midnight Sun.
About Nato There are people in high places in Sweden who want this country in Nato. Most of them are fools, but some of them want this because they want highly paid non-jobs in or near some nice Nato bureaucracy. So do I, but don't expect an offer any longer. I remember being invited to a long (Nato Sponsored) conference once after telling the conference boss that I had been a brother-in-arms of General Alexander Haig, then Nato commander. That was of course a serious departure from the truth, and apparently the conference boss found out, but he did not interrupt my wine drinking, feasting and tennis (all of which was free) although he removed me from the conference program. As it happened though he was absent for half a day and I told his secretary that something had gone wrong, and I was unable to give one of my killer lectures. She put me back on the program, which was about electric deregulation, and I spent a beautiful half hour condemning and ridiculing everything about it.
Russia is not a pseudo-democracy; lets face it, it is not a democracy. But that is not the point. We would care a lot less if we thought they run in a way that we could trust they would hold a deal.
Europeans would be well advised to look at the deal the government of Chile did with Argentina for their gas. Lower deliveries higher price than contracted.
The private sector could have been trusted but unfortunately we have less private sector in Russia than before - and why is that?
No sir, I don't care how many conferences you go to. Europe should not rely on Russians for a key input to their economic wellbeing. As for North America, we seem to have plenty of gas right now; shale gas is likely going to be less promising that currently expected, but we have reserves to last for a while. What is a pipeline or two between friends eh?
Overproduction in the shale plays to try and milk investors could depress the natural gas price for a while. If this gas glut results in some natural gas switching, and then in a year or two the shale ponzi scheme collapses, you could be in a worse position than you started.
If something sounds too good to be true, it usually is. Shale gas appeals to everyone, let's see:
Liberals - clean energy, a coal alternative, a compliment to wind
Economic conservatives - close current account deficit
National security conservatives - get off Arab oil
When everyone agrees, just like in the housing boom, then that's a recipe for myopia. An FT article from today references the term 'shale religion' (www.ft.com/cms/s/0/e34...).
There are some folks speaking out though, chief among them Arthur Berman (petroleumtruthreport.b.../).
I also wrote a blog about shale supply:
(seekingalpha.com/insta...)
But I would not be surprised to learn that what we have with shale oil is a load of hype, although I hope not. What I am glad about though is the kind of comments on my article. This shale thing needs to be looked at more carefully.