When I hear the phrase, “American rocker”, I frequently think of John Mellencamp. He started out in the 1970’s, professionally, as ‘John Cougar’ because his manager said nobody would ever buy a record by someone named John Mellencamp. Eventually, when he was well established in the music business, he went back to his birth name, after a brief transition period as ‘John Cougar Mellencamp’.
He seemed to me the quintessential American performer in the few interviews in which I saw him; although he does not come across as particularly well-educated, he is always honest, modest and direct, and…real, I guess. He still lives in the same Midwestern state where he was born, and dedicated much of his musical career to mild activism in support of American farmers, small-town life and the environment. If you were looking for an American star who is not a pretentious prick full of himself, but who reflects quiet dignity, self-awareness and what Americana beyond the delusional world of the Beltway is all about, I don’t think you could do much better than John Mellencamp.
I’ve never seen him play, although we were actually in the same city at the same time once; Norfolk, Virginia, in the early 80’s. I was only there for a couple of days, and by the time I heard about the show it was sold out.
But this post isn’t about John Mellencamp; we just want to borrow the lead-in from his “Authority Song”. When I fight authority, authority always wins, baby. In discussion of the situation in Ukraine, long-time commenter Yalensis proposed a slight rewrite to encompass the yawning chasm between Kiev’s happy talk of visa-free travel and Eurosnuggling, and the miserable penury that is the daily lot of Ukrainians who do not own a candy company, a TV station and assorted other business ventures. The new version would be, when I fight reality, reality always wins. And so it will, because you can only keep it at bay for so long.
The story that inspired his witticism was this one: “Natural Gas Shortage Will Cause Ukraine to Look to Russia”, in The Observer. That’s how it’s listed by search item, but for some unaccountable reason the headline on the actual story reads, “Russia is Hoping to Freeze Ukraine Into Submission”.
That so? Well, their hopes of doing that must have been temporarily dashed back in November, when Poroshenko assured the country that Ukraine had enough gas and coal to last through the winter. Bragged about it as just another of Ukraine-under-Poroshenko’s miraculous achievements, in fact. But who knew winter would still be going on in January, am I right? Must be climate change, or something.
I can’t speak to what the Russian state plans or thinks, but it seems to me if Russia wanted to freeze Ukraine into submission, it would refuse to sell it gas. It has demonstrably not done that, although it has insisted Ukraine pay up front for the gas it takes, since Ukraine has a habit of taking gas at an agreed price and then complaining that the cost is too high, and stiffed Russia on a $3 Billion loan that even western courts agreed was a sovereign debt for which Ukraine was liable. Kiev’s alternative plan was to buy gas from France, at about 20% higher costs than what it was offered by Gazprom. Who wouldn’t want a president with those economic chops at the wheel, right? Mind you, Yurrup keeps writing Poroshenko cheques to pay for gas, so what does he care how much it costs? European chances of ever recovering that money are somewhere between zero and nil decimal squat. And a major supplier of natural gas to France is Russia, whose sales to La Republique rose more than 27% in 2016 over 2015.
But let’s go back to the original article for a moment, because it said some alarming things. Chief among them is that Ukraine produces just a bit more than half the gas it uses each year, even though its consumption has dropped by three-quarters over what it was when Ukraine was the industrial heartland of the Soviet Union. Next is that that saving has come at a cost of the near-total collapse of Ukrainian industry.
So even with its remaining industry gasping for breath, Ukraine cannot supply anything like its own natural gas needs, and it must import significant volumes. It has a fat, jolly idiot at the helm who does not mind paying a 20% markup on gas just so he can say he didn’t get it from Russia. On that basis, Ukraine should achieve financial independence at just about the time Poroshenko’s great-great grandchildren corner the chocolate business on the moon.
On January 19, CEO of the Russian gas monopoly Gazprom Alexei Miller made an assumption that Ukraine had no more than 10.8 billion cubic meters of natural gas in her hubs. “There are still two and a half months of heating season ahead, and the demands on natural gas by Ukraine during this cold period causes our serious concern,” Mr. Miller said.
Yes, that does sound like the kind of comment someone might make who is hoping to freeze Ukraine into submission. Into submission to what, if I may ask? Does anyone think Russia, having taken the steps to bypass Ukraine as a transit country for its gas and successfully tested the capability, wants to take it on as a starving dependency with billions in damage from its years-long civil war?
Ukraine has about $15 Billion left in its treasury, reports The Observer, including aid money funneled in by the IMF. And that works out to be just about exactly what the country will have to come up with in 2017 to service its debt, according to The Economist.
Gosh: what to do? Well, Jérôme Ferrier and Florent Parmentier have a suggestion: it is astonishingly similar to Gazprom’s plan for the Turkish Stream interface with Europe – Russia would deliver gas to the border, and Europe would invest in Naftogaz’s Gas Transit System (GTS) (read, own it in everything but name) and “leave it up to the European Union to choose its preferred delivery points and volumes, rather than have delivery points imposed upon it, at the expense of Ukrainian interests.”
On the face of it, it sounds like a win/win, right? Russia would not have to pay transit fees – since its delivery point of responsibility would be the Ukraine border – and Ukraine would no longer be able to posture and prance and threaten using energy as…ummm….a weapon. Some sort of transit through Ukraine would prevail, only it would be the EU that had to deal with its hissy fits and drama, not Russia.
But there are a couple of flies in the ointment which make that solution impractical. One – the one nobody seems to want to talk about, which leads me to suppose few really grasp the true state of affairs – is the physical state of Ukraine’s GTS. I referenced an independent report on this blog some time ago, and although I can’t put my hand on it just now, it was horrifying in its description of how unsafe the pipeline network is and how much work would be required to bring it up to European standards. Two, according to the first commenter on the subject article, Russia plans to decommission the service to the Ukrainian GTS;
The Ukrainian route is also highly dependent on the Russian GTS connected to it, something the Russians are busy to decommission, and if the Russian GTS is no longer connected to the Ukrainian GTS then no matter how much you invest in the Ukrainian GTS it will become worthless.
I have to say, though, that the latter seems unlikely, especially as Russia will want to transit some gas through the network for Ukraine’s domestic use.
It would be precipitate to dismiss Ferrier’s musings out of hand, though; he is the former director of Total, the present President of l’Association Française du Gaz (AFG) and the honorary President of l’Union Internationale de l’Industrie du Gaz (IGU). With more than thirty years’ experience in the gas business, there’s probably not much about it he doesn’t know.
Which is why I found a couple of the points he made, in an interview in May 2015, of particular interest. Point one – and as we go through these, I’d like you to think of it in the framework of its implications for Ukraine – was that scenarios from the IEA show growth in the gas industry until 2035. You and I know forecasts that far out are just pie in the sky, as they depend on present conditions prevailing, but nonetheless, the gas industry is likely to remain dominant in the energy picture. Two, he assesses that “At the end of the day a captive buyer and captive seller will develop a strong relationship.” As an aside, but illustrative of the topic, he described Russia as a reliable supplier to Europe, with very few exceptions. Three, Ferrier is convinced that over 50% of commercial relations will continue to be vested in long-term contracts, and that the gas business is incompatible with a full spot market. Recall that Brussels (especially) and Washington have dedicated considerable effort toward forcing Russia into a full spot market using European hubs, which would greatly hamper its ability to set prices.
The Ferrier picture is not totally one-sided, of course; he also believes Europe should build more pipelines to Iran, Turkmenistan and Azerbaijan, and that ‘this is not the time for a 65 BCm pipeline’ (referring, at the time, to South Stream), and parrots the line that European gas consumption is decreasing. As I have frequently rebutted – yes, it is, but not as fast as European domestic supply is.
We’ll have to wait and see if Ukraine approaches Russia with a view to resuming gas purchases. If that happens, it might teach Kiev a lesson if Russia made up some reason why they couldn’t do it – sorry, I’d like to, but I’ve got a bone in my leg, something like that. Of course, it won’t, and it will simply strike an agreement as if all the prancing and face-pulling and insults never happened, because the Russian government is nothing if not pragmatic. The alternative is that Poroshenko has so tightly painted himself into a corner that he dares not pursue even the most businesslike and distant rapprochement, and will continue borrowing money Ukraine cannot ever afford to pay back to buy Russian gas from someone else at a higher price.