Igor Alexeev – Economy Watch

Will Russian Sanctions Compromise Global Energy Security?

Igor Alexeev — Thu, 17 Apr 2014 09:18:35 +0000

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After a series of headline-grabbing statements about the possibility of “switching” European consumers over to American gas, the US media hastened to announce the launch of Obama’s oil and gas offensive against Russia. In reality, the EU is not prepared, neither technically nor in terms of price, to buy its energy resources from the US. It would take at least ten years to adapt even the technically advanced German energy system to work with American gas supply.

Whether German industry is ready to pay more for gas from overseas just for the dubious pleasure of “punishing” someone is a big question. Unlike EU officials, the German government is not publicly calling into question either its long-term contracts with Russia or the future of the South Stream pipeline. On March 13, 2014, the chairman of the board of Gazprom, Alexei Miller, attended a meeting with the Vice-Chancellor and Minister of Economics and Energy of Germany Sigmar Gabriel.

“Germany is Russia’s number one partner in Europe’s gas and energy market,” Miller stated. “Russian gas accounts for 40% of all German imports. And we’re also noting an upwards tick in the quantity of gas supplies coming from Russia. Last year, shipments totaled more than 40 billion cubic meters and we’ve seen a 20% annual increase.”

Looking at these statistics, it’s clear that all the talk about Atlantic solidarity is having zero effect on the German government’s rational decision making. “We don’t need conflict escalation”, said Sigmar Gabriel during an expert roundtable on energy policy later in March. “Russia met its obligations under the gas contracts even in the darkest years of the Cold War”.

Sigmar Gabriel knows what he’s talking about. For Europe to be able to fully utilize gas supplies from the US, it will be necessary to build expensive facilities to decompress and store the gas. Moreover, in order to incorporate the “American” gas into the existing local energy systems, the European countries would need to construct new pumping stations. The associated infrastructure will further add to the price for the end consumer. Neither the bosses of the German industry nor the responsible political leaders will support such policy.

So Who’s Behind The Demands That Russia Be Punished?

Barack Obama continues to look outside of Europe for ways to pressure Moscow. It is no coincidence that the US president’s recent statements on energy policy coincided with his visit to Saudi Arabia. President Obama came to Riyadh to bring down prices in exchange for the development of Saudi Arabian facilities to extract and liquefy gas for delivery to Europe. It’s unlikely that even Charles Maurice de Talleyrand himself could have persuaded the Saudis to dump as many resources as possible onto the market in exchange for the nebulous promise of American help to obtain new gas facilities at some unspecified date in the future.

Qatar’s position needs to be kept in mind too. There are serious personal disagreements between the Saudis and the hypersensitive former emir of Qatar as no one in the Middle East needs a new competitor in the gas industry. Obama’s attempt to repeat Ronald Reagan’s oil trick in the Middle East and “shake down” global prices will face many obstacles. A hike in oil prices below $80 would expose yet another issue that was a real controversy during Obama’s reelection campaign, namely – what to do about Iraq. Even a 10% drop in oil prices would finish off the Iraqi economy, still reeling from the US invasion. And Israel is closely monitoring the White House’s attempts to initiate a rapprochement with Iran. If Uncle Sam tries to levy energy sanctions against Russia using his political positions in the Middle East, he will quickly find he has loaded a gun only to shoot himself in the foot.

The US Secretary of Energy, Ernest Moniz, an Obama appointee and shale enthusiast, has jumped right into the discussion of “punishing” Russia. He promised to consider new efforts to ship LNG from the USA to Europe. In this particular case his verbal intervention is unlikely to reflect the position of the CEOs of the oil majors. They know very well that the industry’s real break-even points are nowhere near where they were 30 years ago due to inflation and higher operation costs. Today one facility—Cheniere’s $10 billion Sabine Pass terminal in Cameron Parish—has the required approvals from the Energy Department and U.S. Federal Energy Regulatory Commission.

In early March, the American economist Philip Verleger, who worked in the White House and the US Treasury the 1970s, spoke as an expert on the issue of using energy as way to “punish” Russia. In the March 3, 2014 newsletter that he publishes for his clients, Verleger wrote that the US has a tool it can use to influence Russia – its Strategic Petroleum Reserve (SPR). US Reserve currently contains almost 700 million barrels of oil, five million of which were unloaded onto the market during the Washington visit of the interim Ukrainian Prime Minister Arseniy Yatsenyuk.

“It almost defies logic to think there isn’t a link,” noted John Kingston, the director of Platts’ news division. Tapping the SPR to manipulate the global market would be a highly extraordinary decision. The only way to exert any real pressure on global oil prices would be to open up at least 50% of the entire SPR and grant export licenses to anyone who wanted one. The American DoE is obviously not ready for such draconian measures.

Looking at the 2014 report written by the DoE analysts who are known for their almost religious faith in alternative energy, the minimum price for oil in 2015 will be $89.75/barr. The Russian national budget in 2014, which was saddled with expenses related to the Olympics, was drawn up based on an average price of $93 per barrel. Ergo, even $80-90 would hardly spell disaster for Moscow, much less $100 a barrel. In addition, the “nonmarket” pressure by the US could be balanced by the exporter nations. For example, the idea of “energy currency” has long been a hot topic within OPEC and the Gas Exporting Countries Forum (GECF).

For the first time ever in the history of US-Russian relations we are seeing a public debate about a threat of economic sanctions that may have a long-range negative effect on global energy security. The Obama administration acts as if it is guided by a chapter out of an old Soviet textbook on political economy. At the moment, apparently, the sacred dogma of the free market, from Samuelson to Friedman, can be conveniently overlooked for the sake of punishing a sovereign nation. When the head of the most influential state in the world talks about manipulating market prices to punish recalcitrant players, what kind of “global free market” and fair play are we really talking about?

By Igor Alexeev

Igor Alexeev is a Russian journalist and blogger for Strategic Culture Foundation and Route Magazine. He writes on the oil and gas sector, Eurasian energy security and shipping industries in the Arctic.

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Eastern Europe’s Shattered Shale Dreams

Igor Alexeev — Tue, 12 Nov 2013 13:35:16 +0000

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Shale projects in Eastern Europe are being challenged by delaying tactics of industry majors. Media coverage of shale gas development is positive; but in Lithuania and Poland, global oil & gas companies are one by one dropping bids to explore for unconventional. Lack of business awareness and overdependence on preliminary estimates of shale reserves may also lead to the same result in Ukraine.

U.S. energy major Chevron, the only bidder to explore for unconventional hydrocarbons in the 1,800 square km Silute-Taurage field, has pulled out after winning a tender to explore for shale gas in Lithuania.

“The fiscal, legislative and regulatory climate in Lithuania have substantially impacted the operational and commercial basis of the investment decision”, announced Chevron representatives.

Business risk assessment resulted in the official statement, which is highly disappointing for Lithuania’s politicians – known for their harsh criticism of Russian energy supplies. The former Soviet republic is struggling to survive on EU grants and subsidies is in dire need of natural gas for peak-shaving.

So what’s to be done to explain the failure to the voters? “Let’s pray for shale gas”, proposed The Baltic Times covering Lithuania’s Speaker of the Seimas Vydas Gedvilas’s shale “road show” in the United States in the beginning of October 2013.

Despite the fact that drilling for shale gas poses risks for the nation’s underground water reserves, Lithuanian elites still put high hopes on the possible import of American fracking technology.

A rude awakening in Vilnus happened just before another colder-than-normal 2013/2014 winter in Europe. Just in time Lithuania’s leaders got a 20% discount on natural gas prices in recent talks with Gazprom’s officials in Moscow.

In return, Lithuania’s representatives are, reportedly, promised to buy gas from the east till 2020 and abandon all claims against Russian supplier in European courts. This deal and earlier decision in Vilnus to raise the level of royalties on fracking may seriously hamper future shale projects in the country.

Poland

Poland’s shale gas dreams are withering on the vine for similar reasons, writes The American Interest.

In 2012, Polish newspaper Gazeta Wyborcza initiated a pro-fracking media campaign full of bold and forward-looking statements. But by May 2013, Exxon Mobil, Talisman, Marathon and even state run Lotos have pulled out of Polish shale gas, citing difficult geology and short-comings in the regulatory environment. What’s more, the US Energy Information Administration’s latest global survey revised Poland’s technically recoverable shale gas reserves downward by more than 26 percent.

Poland’s 46 exploratory wells drilled by various ventures companies couldn’t produce commercial quantities of shale gas. EU’s court put a period to fracking plans and eventually ruled Polish shale licenses illegal. Hasty promises of energy revolution are left hanging in midair.

Interestingly, one of the leading Russian international energy policy experts Dr. Nodari Simonia (MGIMO) predicted such course of events in summer 2013: “US ConocoPhillips and other forty energy companies arrived to prospect for shale gas in Poland. They promised energy independence to the Polish government and said Polish gas would oust Russian gas from the EU market. In the meantime Exxon Mobil withdrew from Poland in 2012 and ConocoPhillips is thinking so far.”

Ukraine

Ukraine’s dreams of joining the club of fracking nations may also lead to unexpected effects. Unlike neighbouring states, Ukraine’s local demand is insufficient to create and sustain unconventional gas boom. There are many examples of political instability and corrupt practices which make very risky large energy industry investments in the country. For instance, last year a small privately-owned company SPK-GeoService suddenly won lucrative shale development tender over three well-financed bidders. Some have tied in GeoService to “The Family,” the shadowy circle around Yanukovych and his two sons, Oleksandr and Viktor.

Finally, Shell’s decision to pour $400 million into the Yuzovskoye field exploration does not mean that shale gas extraction in Ukraine will be profitable. After the turn in business expectations in Lithuania and Poland, there are chances that both Shell and Chevron stakeholders might change their mind. More often than not business interests outbalance politically charged projects.

By Igor Alexeev

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The Great Pipeline Race: Are Europe’s South Stream Fears Rational?

Igor Alexeev — Thu, 30 May 2013 07:00:50 +0000

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Despite possessing better financing and greater energy benefits compared to its competitors (namely the Nabucco pipeline), the proposed South Stream pipeline has faced considerable opposition in Europe – by countries who wish to reduce the region’s reliance on Russian gas. Europe must ask itself: is politics really worth losing out on South Stream’s economic benefits?

The third and fourth sections of Russia’s “South Stream” will be completed by 2018. However, supranational structures in Brussels and their representatives in Berlin still cannot set forth a predictable and unified position on this project of undisputed geopolitical importance. Bureaucratic hurdles like “Third Energy Package” or even more mysterious “Southern Gas Corridor” create non-competitive and non-transparent advantage to the EU initiatives on the energy market.

“We will not impose any unreasonable or unjustified level of administrative or regulatory requirements. We will act as fair partners”, promised EU Energy Commissioner Guenther Oettinger in May, 2011. Two years after this speech one can clearly see quite an opposite situation.

“Third Energy Package” is a direct attempt to implement retroactive legislation thus driving down natural gas prices. It is absolutely inconsistent with the principles on which the whole European legal framework is based.

Another notorious example of arbitrary behaviour on the part of the European Commission is its indirect support to the alleged “virtual” reverse gas supplies from Poland to the Ukraine. There is every reason to believe that this natural gas is Russian. One can hardly call it fair play (any partner would consider such actions fraudulent), but after the Cyprus affair it is very hard to predict how far the EU can go in denying market realities.

On a long-term horizon this strategy may harm German national interests as a major natural gas importer and create unnecessary credibility gap between Russia and the European Union. Germany needs to get over its love/hate relationship with “South Stream” and return to thinking in terms of realpolitik. After all, it’s just a pipeline, not some ad vitam Doctor Faust’s contract as some analysts with Atlantic orientation often assume.

European double-game seems especially illogical if we consider the scope of economic problems which Merkel and Oettinger have to solve in their own backyard. Global natural gas demand growth should be treated as an opportunity, not a “threat”.

[quote]The European leaders are very well aware of “Nabucco West” and “TAP” project limitations (lack of solid resource base and insufficient infrastructure to name a few). These pipelines may contribute to the diversification of supplies although even if completed they cannot be a game-changer. [/quote]

Recent talks of Azerbaijan’s President Ilham Aliev in Austria have shown that “OMV” and other key European shareholders prioritize “Nabucco-West” over other pipeline blueprints. Unfortunately “South Stream” remains on the periphery of European energy policy, despite the fact that it is a very advanced project. In comparison, “Nabucco West” is yet to meet environmental goals and objectives in Romania. Nabucco Gas Pipeline International, the consortium to develop, build and operate the “Nabucco West” pipeline, has spent less than 5 percent of the total value of the investment on the development of the project.

There are clear differences of opinion among the EU regulators. EU Energy Directorate’s wavering position on “South Stream” sends contradictory signals to the non-EU transit states. Serbia, for instance, has officially announced it is ready to start building its section of the South Stream pipeline. “All problems are solved”, announced “Srbijagas” Director-General Dusan Bajatovic.

At the same time “Nabucco” and “Southern Gas Corridor” lobbyist Zorana MihajloviÄ‡ (Serbian Minister of Energy and Washington-backed ISAC Fund zealot) has recently been very active in her meaningless crusade against Russia’s “South Stream”. Many experts also remember her “brave” attempt to change the final draft of agreement between Gazprom and Srbijagas not that long ago. Although an old Serbian proverb says: you can’t have both goatling and money. Politically motivated red tape will not undermine Serbia’s energy self-sufficiency on the Balkans.

In April, 2013 Prime Minister of Slovenia Alenka Bratusek confirmed that Russia’s gas pipeline remains a priority for her country, which pursues economic development and foreign investments. Slovenia’s investments in the project will total some 1.1 billion euros ($1.4 billion). Bulgaria has also expressed its deep interest in Russia’s pipeline. A look on the map of the Southern Europe reveals that political contradictions in Belgrade will cause nothing but a short delay in “South Stream” realization. Hardly the same could be said about “Nabucco”.

By Igor Alexeev

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