European Gas Demand is Decreasing – A Dutch Fairy Tale

Uncle Volodya says, “Every morning you have to wake up, assemble this busy, dissembling monster, and get him on his feet again for another round of fantasy .”

Gonna use my arms
Gonna use my legs
Gonna use my style
Gonna use my sidestep
Gonna use my fingers
Gonna use my, my, my
Imagination…

The Pretenders, from, “Brass in Pocket”

The remarkable thing about Brussels and Washington’s stubborn and increasingly panicky resistance to the Nord Stream II gas pipeline, which is to be laid in parallel to the existing Nord Stream pipeline from Russia to Germany, is the necessary suspension of disbelief you are required to adopt. It is as if you cannot read, are incapable of thinking for yourself, cannot puzzle anything out.  You are simply invited to assume a set of ‘facts’ as if they were actually true, and from that foundation a storyline emerges which would make a great deal of sense. If the ‘facts’ on which it rests were true. But they are not, and they are easily disproved. Which is what we are going to do. Ready?

Once upon a time, there was a Dutchman. His name was Sijbren De Jong. He worked for a think tank called the Hague Center for Strategic Studies, where he was a strategic analyst. Mr. De Jong claimed, as his area of expertise, “Eurasian (energy) security and the EU’s relations with Russia and the former Soviet Union”. As you will soon see, his views on the aforementioned relations with Russia and the former Soviet Union are very one-sided indeed, and in the ideal world he envisions,  Russia would be seen and not heard, and would be obedient to Europe as the latter ordered it smartly around, and told it what was good for it.

I should mention at this point that what Mr. De Jong writes in the referenced article comes under the heading, “Opinion”. However, I think you will agree that certain premises are presented as if they are facts, rather than just something he thinks.

And chief and most problematic among those is his statement that Europe should fight Nord Stream II because “gas demand in Europe has gone down due to the competition from renewables and coal.”

Oh, dear. Mr. De Jong is full of stront, because that is what the cockneys call a porkie-pie, which is to say, a lie.  It’s one people like Mr. De Jong will tell you over and over, because they want you to internalize it, just like that red herring about the current Nord Stream pipeline only operating at half-capacity. These two powerful facts – Europe is using less gas now than it once did, this is a trend which can be expected to continue, and the Nord Stream pipeline which is currently operational is only using half its capacity – lock down an ironclad case for there being no need to twin the Nord Stream pipeline.

In fact, demand for natural gas in Europe has declined only slightly, overall, and the reason for that is a global-financial-crisis recovery which remains as shaky as a blancmange has stalled development. If development resumes, which would be good news, then gas consumption will inevitably go up. However, the constant citation of a decrease in gas consumption is intended to distract you from the fact that gas imports have risen steadily. Why? Because Europe’s traditional sources of supply are in inexorable decline.

“Indigenous and North African supplies of gas to Europe declined by 50 million tonnes per annum over the last decade and are likely to decline by a similar amount in the next…The reality on the ground, often ignored, is that indigenous EU+ gas supplies have been in decline since 2004. Never mentioned is the fact that N Africa, in particular Algeria, is an important source of European gas and this too has been in decline since 2005. In 2012, supply from indigenous sources and N Africa was 50 million tonnes oil equivalent per annum (152 million cubic meters per day) below the level of 2004. In Europe, there should be a single minded focus on how to make good this shortfall…Since 1987, Russia has supplied between 25 and 30% of European gas needs and has proven to be an extremely reliable supplier throughout the Cold War and the fall of the Soviet Union. The only time that Russian supplies have been threatened has been when Europe’s new best friend, Ukraine, has created trouble.”

Imports of natural gas are up; well up. Europe’s suppliers could not give a tin weasel if Europe is using less gas overall, because that is having no negative effect whatsoever on their bottom line, or would not but for the current lunatic’s dance with energy prices, which has nothing to do with Europe using less gas. The canard that Europe’s demand for natural gas has decreased is used to make another Russian pipeline appear a ridiculous idea, when Europe’s demand for Russian gas is growing steadily as its traditional alternative supplies splutter and fail.

According to the Quarterly Report on European Gas Markets for last year, “After a 12% increase in the first quarter, EU gas consumption grew by 5% in the second quarter of 2015, both on a year-on-year basis.” Mind you, the year prior was an exceptionally mild winter, and consumption was low. Still, does relying on all winters henceforth to be mild seem like a sensible energy policy to you? “The reduced production cap for the Groningen field had a noticeable impact on Dutch production, which decreased by 44% in the second quarter. This contributed to an accelerated decrease in EU gas production, which fell by 14% year-on-year.” Don’t tell me De Jong did not know that; Eurasian energy security is his area of expertise. “Imports were unusually high in the third quarter, with double-digit growth in Russian, Norwegian and Algerian deliveries compared to the same period of 2014. In contrast, LNG imports fell by 7% year-on-year. Almost half of Russian imports arrived via Ukraine, the highest share observed in 2014-2015.” As already discussed, both Norwegian and Algerian supplies are in decline, and the sole major European supplier capable of increasing production…is Russia.

Almost half of Russian imports arrived via Ukraine, the highest share observed in 2014-2015. Ahhh, yes; Ukraine. Brussels and Washington’s new bestest buddy. “The trilateral discussions between Russia, Ukraine and the European Commission failed to reach an agreement for the third quarter and from 1 July 2015 Naftogaz halted Russian gas imports. In the third quarter of 2015, Ukrainian imported no gas from Russia. As deliveries coming from Hungary and Poland were also suspended, Ukraine imported gas during this period only from Slovakia…Although the interruption had no impact on the transit flows to the EU, it raised concerns about Ukraine’s ability to fill storages and ensure smooth transit during the upcoming winter…Russian gas imports were suspended again on 26 November. Ukraine claimed this was because it did not need any more Russian gas. In fact, because of the rapid fall in Ukrainian gas demand, the country’s import dependency has significantly decreased.” Oh, so I guess we’re good, then – because Ukrainian industry has collapsed, gas demand has decreased! Every cloud has a silver lining, what? Now the only standard required to maintain this brave, stiff-upper-lip gas-independent stance is to ensure there is no development. Why in hell did it take so long to think of this? Ever notice it’s the simplest solutions that are the most brilliant?

It’s not hard to see why Washington is pushing so hard to stop Nord Stream II. Reliable Russophobe hand-jobber to The Home Of The Brave, Ambrose Evans-Pritchard trumpets just today the ‘geopolitical earthquake‘ that is the United States of America’s very first LNG cargo from Sabine Pass. This, he says, is just the bow wave of a surge in exports of dirt-cheap gas which is going to change the energy game of the planet, and leave Putin groping tearfully at the shards of his country.

Uhhh….I have a question, Ambrose – may I call you Ambrose? Yes, okay, my question is, if the USA can supply Europe easily with cheap gas far below pipeline prices charged by Russia; if the USA is ‘storming the market’….why not let the Gazprom consortium build Nord Stream II? After all, it’ll cost them $10 Billion for a pipeline that will never be used! It’s not as if an overabundance of gas forces the Europeans to use it all – what are they going to do, start leaving the stove on all day while they’re at work, because they have too much gas and have to use it up? Don’t be stupid. If there is an overabundance of supply, European customers will stop buying from expensive Russia and shower Uncle Sam with Euros.

Oh ; about that. According to Platts – a fairly reliable source in the energy business – the price you just quoted in your article is half what the USA can sell LNG for and still make a profit. How many energy companies do you know of in the USA which deliberately operate on a break-even basis? What, none? You’re kidding. Gazprom can sell pipeline gas for $6.00 per MMBtu, while the indexed U.S. price for LNG would be $10.00.

Let me tell you something. Washington and Brussels are not trying to kill Nord Stream II because they believe Europe will not need it. It’s because they’re afraid it will.

Let’s not kid ourselves – this is merely the next salvo in Washington’s all-or-nothing war against Moscow for dominance of Europe, and Moscow is already handicapped by the current crop of European leaders being mostly American toadies who want to help Uncle Sam achieve complete control over Europe, with trade deals that permit U.S. companies to sue European governments if they perceive any commercial practices which hinder their competitiveness, and energy deals which will let the USA have a go at being Europe’s gas sugar-daddy instead of Russia. And before we leave that subject, there’s another factor, which I discussed in some detail just a couple of posts ago; the viability of Ukraine. Washington is okay with Russia supplying some gas to Europe, because Washington knows well it cannot really compete for volume. But it wants what Russian gas Europe gets to go through Ukraine. For two reasons – one, because Ukraine has already built $2 to $3 Billion in transit fees into its budget, and its economy has already breathed the tank down to bubbles. Ukraine simply cannot afford to lose that money, even though it was proportionately quite a small share of its income under Yanukovych, because it has blown its reserves on civil war. Two, for leverage. As I already pointed out via a cited reference, Russia has been a steady and reliable supplier, except for when its duplicitous partner, Ukraine, caused trouble. Many will recall, from the time when Russia shut off Europe’s gas, that it was due to a dispute with Ukraine over that country’s siphoning of gas for which it had not paid. Washington’s official position was that there was no proof, and Russia was probably making it up. Behold with amazement, then, Bloomberg not only stipulating that it actually did happen, but framing it as a necessary strategic tool in Ukraine’s toolbox to prevent its own supply being cut off! Nothing personal, Europe, but Ukraine needs your follow-on exports as collateral so that it can steal gas, and Russia is helpless to stop it. That’s just how you make things happen, baby. You can’t make an omelet without breaking eggs, if you feel me.

“Without the gas-transit business, Ukraine wouldn’t be able to maintain its Soviet-era pipeline network. It would lose $2 billion a year in revenue (1.5 percent of the country’s gross domestic product). And it would no longer be able to deter Russia from cutting off Ukraine’s own gas supplies by threatening to siphon gas that’s bound for the EU.”

There you have it. Russia needs to be stopped from establishing a pipeline link to Europe that does not go through Ukraine, so that Russia can be coerced into contributing to the repair and upgrade of Ukraine’s corroded pipeline network and bolstering its flailing economy to the tune of around $2 Billion a year, by the simple expedient of threatening to steal gas if they don’t cooperate. As a statement of western values, I….well, fuck. I just don’t know what to say.

There is no reason to believe Russia would cut off Ukraine’s domestic supplies provided it paid its bills on time for the amounts it took. Apparently western analysts, pundits and think-tankers feel that is now an unreasonable standard to demand of a commercial partnership. Russia has never once declined to supply gas which Ukraine paid for in accordance with the agreed-upon and signed terms. Never.

Let’s also dispense with the innuendo that Russia’s intent to circumvent and cease using Ukraine as a transit country is some kind of secret Kremlin plan, which would never have been discovered had clever investigative journalists not exposed it. Putin sent a detailed letter of intent to European leaders in the spring of 2014 which clearly laid out the risks along with Russia’s official position. Gazprom’s Alexei Miller announced more than a year ago that all flows currently going through Ukraine (not including those to it) would be shifted to Turkey. Ten bonus points to anyone who can guess what Maros Sefcovic’s reaction was. Yes, that’s correct – that it ‘made no economic sense’; well done. Just like Nord Stream II ‘makes no economic sense’. Makes you wonder how all but 4 EU countries could be running a budget deficit, while the EU’s overall debt is 90% of GDP, considering its Commissioner has such a comprehensive grasp of economic sense, doesn’t it?

If it’s not crystal clear by now, let me spell it out; the only terms acceptable to current European leaders – plus Washington, which should have nothing at all to say about it – for delivery of Russian gas to Europe by pipeline is the existing, creaky and substandard network which runs through Ukraine (it needed $3.4 Billion in repair in 2009 just to keep it running, which was never done and nothing has been done since), that country’s naked and carefully-nurtured hatred toward Russia and its demonstrated unreliability as a transit partner notwithstanding. This is the only solution which ‘makes economic sense’. Uh huh. More economic sense than a brand-new pipeline built at zero cost to the EU which would deliver gas straight to the heart of the EU’s de-facto ruler and most powerful economy – Germany. That settles it; I’m running for EU Commission Vice-President – vote for me. Out of my way, Sefcovic, you stammering retard. What??? It’s an appointment??? Lucky for you, Sefcovic, is all I can say – you could hold your campaign rally in a sleeping bag and all your supporters would fit, and there would still be room for a Hoover spin-dryer and a couple of floor lamps.

Whew; let’s summarize what we have established to this point. European demand for imported natural gas is increasing, not decreasing, and overall consumption is down slightly only because domestic supplies are in decline and post-crisis recovery development is stalled. Brussels and Washington are trying to force Russia to abandon Nord Stream II and continue using Ukraine as a transit country because (1) Ukraine’s economy is in crisis and it needs the money it realizes from transit fees, (2) its pipeline network is decrepit and the EU does not want to pay anything to upgrade it, and (3) Ukraine’s inherent unreliability is bound to erode Russia’s reputation as a supplier, paving the way for the American dream of taking over gas supply to Europe via LNG exports. Ukraine’s siphoning of Europe-bound gas is acknowledged, but framed as a necessary extortion method for Ukraine to ensure security of its own domestic supply. The EU Commission finds that a new pipeline, provided at no cost to Europe, to carry the gas that currently goes through Ukraine jeopardizes EU energy security and ‘makes no economic sense’, while insisting on Russia continuing to ship gas through a leaky environmental-disaster-in-the-making which crosses the territory of acknowledged thieves and extremists. Gee – when you lay it out that way, the EU looks sort of…stupid.

Could the USA really supply the EU with gas, via LNG tanker? That might make an interesting topic for discussion. Since I get first pick, I’m defending the “Ha, ha; no” side, and I invite the defenders of “Hell yes, absolutely” to make their case.

We already know from the previously-cited reference that Platts agrees with me: not before 2020, they say. “Looking at the supply and demand picture, Russia remains the lowest cost producer for Europe until 2020 at $6.00/MMBtu (Eur16.60/MWh), and it will not allow US LNG to berth in Europe, according to the analyst. US LNG supplies to Europe indexed to Henry hub prices are estimated at more than $10/MMBtu (Eur27.70/MWh) including all costs”. Oilprice goes further, declaring shale gas “The Dot-Com Bubble of the 21st Century“.  “As I review the financials of one of the largest shale producers in the United States, Whiting Petroleum (WLL), I can’t help but notice the parallels to the .COM era of 1999 which, to some extent, has already returned to the technology and biotech sectors of today. Back then, the faster you burned cash to capture customers regardless of earnings to drive your topline, the higher your valuation. The theory was that after capturing the customers (in energy today, it is the wells) spending would slow and so would customer additions allowing companies to generate cash.” That strikes a responsive chord, because it is well-known that shale-gas wells are only gushers up-front, and rapidly play out, necessitating constant drilling of new wells. Some sites have made the point that technology keeps getting better, and that is absolutely true – recovery is becoming more efficient and effective, allowing more profitable returns for less layout. But it has always been described as a “Red Queen” environment, in which operators have to continually run faster just to stay in place. There are a lot more skeptics among the investor community, as well, and what generated the big cash flows in the early days was big payouts for leasing of exploration blocks. Those have largely gone the way of the Dodo.

Bad news is echoed in The Globe and Mail, which calls it – accurately, is my guess – a ‘downturn’. “The U.S. shale oil boom that contributed to the current global glut is now in rapid retreat, with the production decline expected to hit more than one million barrels a day and the industry facing widespread bankruptcies among smaller producers…That decline in U.S. oil production won’t be enough to rebalance global markets, as analysts had expected to be the case when oil prices began falling sharply after the Organization of Petroleum Exporting Countries failed to rescue the market by curbing production in November, 2014. The EIA expects prices to rebound somewhat this year from the 12-year lows touched this week; it forecasts West Texas intermediate oil will average $38.54 (U.S.) a barrel in 2016 and $47 next year…’The shale oil industry cannot survive on sub-$60 oil,” Mr. Gheit said in an interview.” There were rather a lot of meaty numbers in that quote and the accompanying article – first, if the price comes back up, it cannot fail to benefit Russia also, which pumps in rubles and sells in dollars. Also, the number of active drilling rigs in the USA has dropped to less than half the count in January 2014, at 516, down from 1,421. More to the point, Washington cannot sell its LNG in Europe at a profit, and still undercut Russian pipeline prices. Of course those rigs are not written off, and could be put back into service, but not unless the price rises and until then the USA cannot generate anything like the volumes Evans-Pritchard ecstatically yodels about. According to the U.S. Energy Information Administration’s (EIA) Drilling Productivity Report, production has dropped off sharply in 2016, with a decline of 116,000 barrels per day from the 7 major gas plays which make up 95% of U.S. production. I have to say, that picture looks grim, and quite a far cry from a ‘geopolitical earthquake’. But Evans-Pritchard always was given to hyperbole.

How about the LNG shipping angle? Is that viable?

Not even close, in the short to medium term. As previously discussed, it takes from 14 to 36 months for a new-build LNG tanker to be completed. The owners of America’s LNG export terminals claim they will need 100 of them. The world’s major builder – South Korea – already has orders for 250, and there are only about 400 total in the entire global fleet. None of those already ordered in South Korea are American orders. In 2014, Congressman John Garamendi introduced a bill which would require American LNG cargoes to be transported in American-flagged ships which were built in the USA and crewed by Americans. This would require an almost-unbelievable galvanizing of the American shipbuilding industry, which is currently not geared up for anything like it. That’s probably why Garamendi’s bill enjoys strong support from that sector, strong enough that Congress can’t just tell him to sit down and shut up. And although he can’t get it passed, he keeps re-introducing it. Meanwhile – are you ready for the funny part? – of four LNG export terminals under construction in the entire US of A, only one has signed contracts for European shipments. One.

The USA is playing a crazy game, frantically trying to stave off another Russian pipeline from being built while it postures and pretends that abundant LNG imports are just a finger-snap away, because it is desperate to control the European energy market, in turn because it is desperate to control and manage and manipulate Europe. Europe’s current leaders are game, but the whole thing is an elaborate house of cards. There are not currently enough LNG terminals either on the import side, in Europe – although every time one opens, the press fanfare suggests the modern equivalent to penicillin has been discovered – or on the export side, in America. Meanwhile Europe’s domestic supply continues to fall off a cliff, even as its suppliers other than Russia gasp and wheeze in an effort to keep up. If Russia sticks to its guns and cuts Ukraine out of the transit loop, Nord Stream I will be running to capacity and will still not be able to keep up with demand.

I believe it’s your move, Mr. De Jong.