Speculation was rife that Presidents Vladimir Putin and Xi Jinping would sign a major gas deal during Mr. Putin’s visit to China, but it didn’t happen. Although agreement is still said to be close and is probably contingent on price – the two have been wrangling over price for nearly 10 years – the signatures are typically a formality after all the details have been worked out in furious negotiation beforehand between ministers and industry executives. This suggests there was a fairly serious misunderstanding somewhere, and it may have originated in European bluster of late (because it’s warm now, and the idea of freezing in the winter is a distant echo) about “weaning itself off” of Russian gas. Europe likes to portray Russia as an unreliable partner who might shut off the gas again, “like they did back in 2009”, and Putin as a dictator who revels in his power to “use energy as a weapon”.
Are those serious concerns? No, they’re not. Currently much of Europe’s gas goes through Ukraine’s pipeline network. In 2009, the currently-operational Nord Stream pipeline was in its initial stages, and all Europe’s gas went through Ukraine. That country began siphoning Russian gas during transit, for its own use, and the quarrel escalated until Russia shut off the gas, provoking a great outcry that Russia was using energy as a weapon. The alternative – for Russia – was to complain, but acknowledge helplessness to stop Ukraine from getting free gas owing to its monopoly. And of course, the easier it became for Ukraine to steal gas, the more it would steal. Yulia Tymoshenko was in the front rank of accusers when Naftogaz was doing this; mind you, she had just left the board of rival United Energy Systems and been appointed to a key post in Yushchenko’s government, and was consequently in a position to punish her archenemy. Yulia Tymoshenko rarely passes up such an opportunity, and anyone who has any sort of association with her would do well to remember it. She is also a known liar and opportunist, so her accusation against Naftogaz is offered more as an amusement than an indictment, although there seems little doubt the Ukrainian state was indeed tucking in and helping itself.
Nord Stream is now operational, and when South Stream is completed the two alternative pipelines will be capable of carrying all Europe’s gas without any of it going through Ukraine. You would think Europe would be chuffed to pieces at this, since their energy supply would be secure and since Russia has never shut off the gas to paying customers. You would be wrong; since the trouble began in Ukraine last winter with the simpleminded Maidan demonstrations which rapidly – thanks to American and European coup-enabling and pot-stirring – escalated into violence, Europe has alternated between yelling that it wants off the Russian gas tit, and insisting that South Stream must not be built.
Why would Europe take such a seemingly-counterproductive attitude? Well, that’s what we’re here to find out. But we can start from the position that Europe likes its gas going through Ukraine just fine, even if Ukraine is an unreliable partner who seldom pays its bills and whose intransigence imperils the gas supplies to a continent. And that, in turn, is because the vulnerability provides a counterweight to Russia. So long as Ukraine is the middleman in Russia’s dealings with Europe, Ukraine is important and necessary. Ukraine’s future hangs in the balance, and NATO would like very much to have it. Not because it loves Ukrainians or even because it believes Ukraine could be a prosperous asset one day. No, NATO wants Ukraine to prevent Russia from gaining control of it and building the Eurasian Union. And Russia will not ever fight a destructive war in Ukraine so long as Ukraine’s pipelines carry Russia’s profitable gas to Europe. That allows NATO to fight an economic war for control of Ukraine without getting directly involved militarily. If none of Russia’s gas went through Ukraine, Russia would still want control of Ukraine at least insofar as partnership in the Eurasian Union went – not to mention keeping NATO off its doorstep – but Europe would have lost leverage over Russia because Ukraine’s pipelines would no longer be important. As Frank Umbach – of London’s Kings College European Centre for Energy and Resource Security – put it bitterly, “”If we agree to South Stream, Europe will sell the rope with which Russia will hang Ukraine, and it will also agree to increase its energy dependency on Russia”. Europe could always just refuse to buy any gas from Russia, but then it would face the problem of alternate supply. More on that later.
For now, Bloomberg is jubilant that the deal with China was not completed. Had it been signed, Russia would have had a powerful option with which to confront Europe’s maneuvering – you don’t want our gas? Well, sorry you feel that way. I guess we’ll just sell it to China. The amount China would take would not completely offset the loss of Europe as a customer, although one day it may, and of course Russia would like to retain Europe as a customer. But it could be less tolerant of Europe’s histrionics and the USA’s background kibitzing, and more assertive. Still, though; could Europe really do it? Could they do without Russia’s gas supplies?
No, they couldn’t.
And the reference I just quoted suggests Europe’s business leaders know (a) the political posturing over Russia’s alleged intervention in southeastern Ukraine is just smoke, and that political Europe knows full well Russia is not involved – the current caterwauling and escalating sanctions are just a front which allows Europe and its managing partner the USA to pursue economic warfare – while (b) South Stream makes sense, and the stubborn effort to keep gas running through Ukraine is an attempt to buy time while the west gropes for a weakness it can use to seize Ukraine for itself. To be clear, Europe is doing all it can to imperil the supply of Russian gas to itself so that it can complain that its supply is in peril, and use that assumption to push for alternative supplies. Perceiving that reality, Austria has just quietly concluded a deal with Gazprom which puts South Stream’s European terminus at Austria’s Baumgarten gas hub. When Brussels got shirty about individual European states doing deals without its approval, Gazprom and Austria simply went around them. Germany is also growing increasingly restless with this charade.
But what about U.S. Liquefied Natural Gas (LNG)? The American industry regularly touts it as a game-changer, and four U.S. ambassadors have written to Obama begging him to fast-track LNG facilities so the USA can start
using energy as a weapon applying good old American persuasion to that rascal Putin. The trouble is, they can’t supply it at Russia’s prices. Who here knows anything about economics? Is it better for a country’s budget if it has to pay less for energy, or more? I guess you could argue that diversification of supply is important, too, particularly if your supplier is unreliable. However, Russia is a reliable supplier – when it’s not being stolen from – and is working hard to build a pipeline alternative that will make Europe’s energy supplies more secure. That’s right: the pipeline Brussels is pulling out all the stops trying to….well… stop.
Perhaps it would be helpful at this point to determine just how much gas we’re talking here, so we can see what U.S. touts are aspiring to. And it’s not easy, because you’re liable to see a wide variety of figures, all claiming to be accurate. The best we can do is go with a reliable source. How about an industry source? Here’s what Gas in Focus says: the EU imports 1,370 TWh from Russia, comfortably the largest supplier, followed by Norway at 1,168. Nobody else is even half Russia’s total.
I’ve always blamed Europe for making me learn the metric system; well, Europe and Pierre Trudeau, when he was Prime Minister of Canada. My education in standard measures was already well advanced – to me, height was measured in feet and inches, weight was in pounds, liquid measures were in pints and quarts and gallons, and the growling Ford Mustangs and Chevrolet Camaros the cool guys drove boasted their muscle in cubic inch displacement. Pierre Trudeau told us that if we did it, the USA would quickly follow our example. That just shows what a visionary he was: when was the last time the USA followed Canada’s lead in anything? Anyway, Europe is still up to its customary weirdness, as if measuring natural gas in Billion Cubic Meters was too much to ask. The measurements above are in TeraWatt Hours, if you can imagine anything so cumbersome and senseless. Now we have to convert it to a familiar figure; according to this reference, 1 Billion Cubic Meters is equal to about 11 TeraWatt Hours. Now we’re into the home stretch as far as my mathematical abilities are concerned, and 1370 over 11 gives us 124.5 Billion Cubic Meters. Norway’s figure comes out to 106 BCm.
Well, now, I see a problem already. If you’re a regular reader, you probably see it, too. Norway’s energy boom is on its way to more of an energy pop. According to Reuters, Norway’s energy boom is “tailing off years ahead of expectations“. That mostly refers to oil, but the news is no more optimistic for gas, I’m afraid, which is forecast to decline steeply after 2020. That’s still a ways away, but let me ask you this; would you feel comfortable relying on your uncle to pay for your college tuition if his doctors said he was likely to die before you finished your first semester? Norway is putting all its hopes on major new discoveries, while it has drilled nearly everything it owns until it looks like Jarlsberg cheese; mind your feet on the doorstep of the Ministry of Petroleum and Energy, lest you fall into a drill hole.
Just to add to the misery, one of the references I cited earlier says North Sea oil and gas are all but finished, and Britain’s dependence on imports for its energy is only going to increase. Britain currently does not buy any energy from Russia to the best of my knowledge, but it’s going to need more and more unless its population becomes less and less – which would be its own hard-luck story, and it has to come from somewhere. Britain is proud, and so it buys expensive LNG; but that is getting to be an increasingly untenable proposition, as the proles begin to mutter rebelliously. Oh, bother! Britain gets 37% of its gas by pipeline…from Norway. Cue the “wah, wah, whaaa” sound that has become universally associated with disaster and failure.
Anyway, back to America and its bountiful supplies of shale gas. Well, let’s see. Using the current scenario – in which the USA has only one LNG terminal operational, at Sabine Pass, near Houston, Texas – it’s almost 5000 miles to the UK. Your LNG tanker will not want to go much above 9 knots in speed or it will get into an unprofitable situation pretty quickly, and we’re already trying to shave the margin to the bone so we can become the permanent supplier to those nice European folks. So at 9 knots, it would take….tap, tap, tap, click, rattle…pa-ching!!! about 18 days to make the trip. An LNG carrier’s typical load is about 135,000 Cm, which is about 1% of what Russia supplies to Europe annually by pipeline. So if the USA is to save Europe, one LNG tanker-load would last less than a day at a consumption of 339 MCm per day, which is 124 BCm/365. So you’re going to want a couple of tankers offloading each day just to keep up, and it takes each one 18 days to get there. Look, my math is awful, compounded by the fact that I hate doing it, and that’s already about as much math as I do in a month, so someone who likes math can pick at my conclusions, but right off the top of my head I’m gonna say no.
And that’s assuming America’s shale reserves are as massive and bountiful as they would have you believe. Are they? Not according to the Energy Policy Forum, which reports – and I quote – “The recent natural gas market glut was largely effected through overproduction of natural gas in order to meet financial analyst’s production targets and to provide cash flow to support operators’ imprudent leverage positions…Wall Street promoted the shale gas drilling frenzy, which resulted in prices lower than the cost of production and thereby profited [enormously] from mergers & acquisitions and other transactional fees…U.S. shale gas and shale oil reserves have been overestimated by a minimum of 100% and by as much as 400-500% by operators according to actual well production data filed in various states…Shale oil wells are following the same steep decline rates and poor recovery efficiency observed in shale gas wells.”
* And at this point in the post, several stooges near-simultaneously shouted that Russia and China did sign the gas deal after all – after 10 years of negotiation, contract value $400 Billion, Gazprom’s largest ever. The reporting source estimates a price of $350.00 per 1000 Cm, but that would be for delivery of gas supplies only. Several industry sources speculated China wanted to be involved with the pipeline, and if so they would presumably be bearing some of the expense. Were that the case, the price might be slightly less – I’m sure it will be the subject of intense investigation, if for no other reason because it was not disclosed and was said to be a “commercial secret”. The west will not like that, and will want to trumpet that Russia made a bad deal and got taken to the cleaners by the wily Chinese (no pun intended). But everyone in the photo looks extremely happy – please note that Mr. Putin remains relatively unobtrusive in the background rather than seizing all the credit and taking off his shirt.
Going back for just a moment to that Gas in Focus reference, click the tab marked “Focus”. Select the report entitled “Russia: A Key Natural Gas Supplier”.
“The fact is that the EU consumes 17.6% of the world’s natural gas but holds only 2.2% of proven reserves, and will have to deal with the increase in demand for natural gas from the emerging countries and from China…Today, 25% of the natural gas consumed in Europe comes from Russia, before Norway, Algeria and Qatar. So the European Union cannot do without this crucial partner… A number of issues could make the relationship between Europe and Russia evolve : the solvency and attractiveness of the Russian internal market, management of gas field development, the stability and steady growth of Gazprom, which is 51% owned by the Russian State and manages 87% of Russia’s natural gas production, the retention of the long-term contracts that represent the large majority of commercial exchanges between Europe and Russia, and control of access routes to the European market, for example through the construction of new pipelines.”
I trust that’s clear enough.