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Summary

  • New report by former Chief of Energy at the United Nations analyzes the developing energy confrontation between the US and Russia.
  • Descriptive natural gas and oil comparison; The most revealing aspects of Western European business today.
  • Gazprom anticipates profit in bypassing Ukraine as the main route for Russian gas exports.
  • Cold facts and data tables; the result of an energy confrontation between US and Russia.

After the end of the Second World War in 1945, the establishment of the United Nations as a guarantor of the independence of sovereign states was aimed at permanent world peace. Instead, the world was, in fact, politically divided in the so-called Cold War especially between the USA and their allies in Western Europe and Asian countries where their economies largely revolve on a capitalist system with private properties and free international trade. The Soviet Union and China under communist regime with their economies and trade controlled by the state. The Soviet Union extended its influence and practical control in the East European countries.

The whole period of the Cold War and nuclear threats ended with a transformation of political and economic policies in China in the late 1970s and beginning of 1980s into a mixture of communism and capitalism came together, and the collapse of the Soviet Union in 1991 brought hope to the world for a permanent peace of independent states, members of the United Nations.

Such periods of hope occurred in previous historical periods but obviously they did not last.

The dissolution of the Soviet Union resulted in the loss of about half of its population to the current 140 million of the Russian Federation, which has since been surrounded mostly by independent Muslim states in the South and independent countries in Eastern Europe, which hastened to join the USA and Western Europe in the North Atlantic Treaty Organization (NATO).

Such members of NATO include Poland, and perhaps more threateningly, Estonia, Latvia and Lithuania, which are small states with sizeable Russian speaking minorities that nevertheless control key transit routes of the Russian Federation in the area of the Baltic Sea. (Population of Estonia is estimated at 1.3 million with 68.7% Estonians and 24.8% Russians; Lithuania's population is 3.5 million with 84.1% Lithuanian and 5.8% Russian and Latvia's population is 2.2 million with the 61.1% Latvians and 26.6% Russian).

Ukraine, a country with a population of 44.3 million of whom 17.3% or 7.7 million are Russian speaking, was left on its own, but it became the transit route for half of Russian natural gas exports to the Western European countries. Historically, Crimea was Russian and hosted the most important naval base of Russia since other ports would freeze during the long and severe winters. Perhaps on the belief that the Soviet Union would last forever, Crimea was transferred to Ukraine and subsequent agreements supported continued function of the Russian naval base.

Whether Crimea should belong to Ukraine or Russia is a matter of opinion, but whether this should lead to an energy war between the West (USA and Western Europe) and the Russian Federation, should be based especially on oil and natural gas statistics rather than half thought sentences and assertion instead of facts. The rest of this report attempts to provide such statistics that are widely available, but hardly used in the daily press and other media.

Natural Gas and Oil Comparison Between the US and Russia

A. Natural Gas

US and European daily news and media are full of information of actions by the Russian Federation to re-absorb Crimea from Ukraine with measures and threats for economic sanctions, including the acceleration of investments by US firms in exporting liquefied natural gas ((NYSEMKT:LNG)) and even oil to Europe in order to cause financial distress to Russia and contain similar behavior in neighboring countries with Russian speaking minorities, especially countries that have since become members of NATO.

These threats for an energy cold war between the USA and Russia are based on the shale revolution in the USA that has already produced enormous shale gas reserves at very low prices and sizeable quantities of shale oil that has reduced the amount of oil imported into the USA.

It should be noted, however, that Tables 1 and 2 demonstrate that the Russian oil and gas situation at present is much more advantageous than that of the USA. Even in LNG, the USA has only one plant under construction by Cheniere Energy (LNG), which is expected to start exporting late 2014 or early 2015. Two-dozen other corporations have applied for special LNG export licenses. Even if the approval of these licenses is given soon it would require years (3-4 years for each plant) for construction.

The Wall Street Journal in an editorial entitled "One Down, 24 to Go" urges that Congress should speed along Obama's slow gas export approvals. The editorial insists that "If The White House and Majority Leader Harry Reid are serious about changing Europe's energy security calculus, they will not block that vote. And if they try to block it, a bipartisan coalition should roll over them in the national interest."

Russia has not been waiting for USA LNG exports to take action to defend its strong position in natural gas exports by pipelines to Europe. In 2012 Russian natural gas exports by destination were:

Eastern Europe

24%

Germany

24%

Turkey

19%

Italy

11%

Other Western Europe

10%

France

6%

UK

6%

In order to bypass Ukraine as the main route for Russian gas exports, Gazprom (OTCQX:GZPFY) the Russian gas monopoly has attracted Western European capital in both production and perhaps more importantly in the construction of the North Stream offshore pipeline in the Baltic Sea which are two parallel lines to Germany with a capacity of 971.2 billion cubic feet each. Owners of the North Stream pipeline are Gazprom 51%, Germany's BASF/Wintershall AG and E.On Ruhrgas AG 20% each and Netherlands NV Gasunie 9%.

In March 2014 Nord Stream AG completed a feasibility study for expanding capacity in the twin North Stream gas trunk lines through the Baltic Sea and the results suggested that one or two more lines would be technically and economically viable. Additionally, the study stressed several possible routes that will serve as the basis for further research.

Table 1 Natural Gas Russia & USA

Russia

USA

2012

Proved Reserves

1,162.50

300.00

Trillion Cubic Feet

Production

20.91

24.05

Trillion Cubic Feet

Reserves/Production Ratio

55.60

12.47

Years

Consumption

14.69

25.49

Trillion Cubic Feet

Exports (Pipeline)

5.43

1.59

Trillion Cubic Feet

Imports (Pipeline)

-----

2.96

Trillion Cubic Feet

Exports, LNG

0.79

0.28

Trillion Cubic Feet

Imports, LNG

-----

0.17

Trillion Cubic Feet

Net Exports

6.22

-----

Trillion Cubic Feet

Net Imports

-----

1.26

Trillion Cubic Feet

Estimated Revenue

62.20

-----

$ Billion

Estimated Payments

-----

12.60

$ Billion

Sources*

Table 1 demonstrates Russia's natural gas Reserve/Production ratio in 2012 was 55.60 years and exports provided about $62.20 billion whereas the USA Reserves/Production ratio was only 12.47 years and was still importing 1.26 Trillion Cubic feet at about $12.60 billion.

The shale gas revolution in the USA has added enormous new reserves, recovery efficiencies, and new discoverable areas that may add considerably to existing reserves. Producing at very low costs that has resulted in gas prices of less than $5 per thousand cubic feet as compared to about $11 in Western Europe and $16 in Japan. Prices are arbitrarily imposed by the gas exporters with prices of oil as the main determinant.

Exports of LNG from the USA to Europe will not only take considerable time (3-5 years) but will involve huge investments that will be constantly threatened by a potential LNG glut since huge gas discoveries have already been made in the Eastern Mediterranean and East Africa (Mozambique and Tanzania) that are already actively seeking markets. In the final analysis what is there to prevent the Russian Federation to reduce its export price to such levels as eventually to bankrupt US LNG companies?

B. Oil

The Russian oil situation compared to that of the USA is even more advantageous as shown in Table 2 where Russian net exports of 2.72 billion barrels in 2012 with a potential income of foreign exchange of $300 billion while the USA is a net importer of 2.89 billion barrels with a possible loss in foreign exchanges of $318 billion or about $1000 per year per capita.

Quite often the statement is made that USA may surpass Russia as the highest oil producer by 2015.

So what? The USA will still be a major importer of oil with hundreds of billions of dollars in foreign exchange payments while Russia will continue to collect practically the same amount as shown in Table 2.

Table 2: Oil in Russia & USA

Russia

USA

2012

Proved Reserves

87.20

35.00

Billion Barrels

Production

3.90

3.26

Billion Barrels

Reserves/Production Ratio

22.36

10.74

Years

Consumption

1.16

6.79

Billion Barrels

Net Imports

-----

2.89

Billion Barrels

Net Exports

2.72

-----

Billion Barrels

*Sources BP Statistical Review of World Energy, June 2013 and US Energy Information Administration March 2014.

Conclusion

The crisis in Ukraine and the annexation of Crimea by Russia has led to renewed animosities of the cold war enemies. Progress made since the collapse of the Soviet Union in 1991 is in danger and sanctions by the West are unlikely to be effective in terms of an energy strategy because of the strong position of Russia has in both oil and natural gas.

The West is not even united in their policies with Western European countries. Especially Germany that apparently wishes to regard the annexation of Crimea as a temporary setback, which should not be allowed to result in the deterioration of economic relationships that had added to benefits of both sides.

Perhaps the most revealing aspect of Western European and Russian business is Siemens' Chief Executive Joe Kaeser statement, "Siemens has been present in Russia since 1853 - a presence that has provided many highs and lows. We want to maintain the conversation even in today's politically difficult times for us; dialogue is a crucial part of any long-term relationship."

Siemens is one of Europe's biggest companies. Its Chief Executive also met with colleagues of Mr. Putin including Alexei Miller, Chief Executive of OAQ Gazprom and pledged to continue cooperation with the Russian energy monopoly. Siemens annual sales in Russia amounted to $2.99 billion through September 2013 that accounted for 2.9% of the company's total sales.

Germany is among Russia's top economic partners, with 56.3 billion Euros in total trade between the two countries in 2013, according to the Russian Government. On the German Government side, German Chancellor Angela Merkel stated "business contacts are still taking place and I am not interested in seeing the situation escalate, but rather am working towards deceleration."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.