The Oil Drum

This is the second posting of the ODAC (Oil Depletion Analysis Centre) bi-weekly newsletter.

Topics include:

Peak Metals; Gas Supplies: Turkmenistan - Russia - Ukraine; Natural Gas Exports - Azerbaijan; LNG Imports – China and Japan; US Energy Information Administration Forecasts; Economy - UK Trade Deficit; BBC Peak Oil Documentary; Shortage of Oil and Gas Workers; Biofuels; UK Oil Depletion Conference

Some measure of the importance of Gazprom to Russia can be estimated by the BBC story which notes that the company provides half of Russia’s energy, and 15% of its hard currency earnings. Of equal importance to those who would buy some of that energy Gazprom will likely send it to you through it’s pipeline company, Tyumenstransgaz.

Over the past couple of years we have seen a decline in the speed with which Russia is developing its major gas reserves. Shtokman is now considerably delayed, as is the anticipated development of the Kovykta field. These make it less likely that the US will see much of this gas production, which seems increasingly intended for domestic and European consumption. But that may also be a concern for the Chinese and Asian markets, whose increasing needs were supposed to be met, in part, by increased exports from Russia.

As the production from Saudi Arabia continues to lag, even if transiently, Russian production and exports become more critical to world supply. And so we exchange the problems of getting oil from the sandy wastes of the Empty Quarter, with those of production from the icy wastes of Siberia. There are a couple of small issues, that I thought could be discussed, relative to this.

The first of these relates to gas supplies from that part of the world. It was interesting to note, in light of a number of comments made on this site about Gazprom’s acquisition of Western European pipeline company shares, that they now appear to be similarly interested in those of Portugal, as their strategy to control gas flows throughout Europe continues to succeed. The benefits, to them, of this policy are clear, for example in the negotiations over Kovykta, a field with 2 tcf of natural gas and over half a billion barrels of condensate. The plans were to sell some 2 bcf, largely locally, and then to expand deliveries through pipeline networks.

Unfortunately BP has noted:

TNK-BP cannot sell gas from its vast east Siberian Kovykta field or its smaller Rospan unit in western Siberia without Gazprom because of the Russian gas giant's monopoly control over Russia's pipeline network.

And here it has a problem, since the local market is not large enough to absorb the gas that the field can produce...

Well the situation East of Georgia continues to evolve. I thought to begin there since, as mentioned in an earlier post, there are a number of small countries in the strip that runs south of Russia and over into China where oil and gas issues will make the nations a bit more internationally prominent. Consider, for example, Azerbaijan. It was only a couple of days ago that, in the face of Russia doubling the gas price that Azerbaijan cut off its oil flow to Russia. It shut down its oil exports in order to fuel some of the power stations that would no longer be supplied with the Russian gas. The original plan was to do this until the gas from the Shakh Deniz field becomes available in April (though that may now have slipped to June).

Interestingly gas from Shakh Deniz was also scheduled to be supplied to Georgia at a price of $120 per thousand cubic meters (tcm). This is just over half the price that the Russians have been asking. However, since Georgia needs about 2 billion cu m per year it will still need to buy 1.1 bcm from Russia at the higher price. Azerbaijan has been supplying around 80,000 bd of oil to Russia through the Baku-Novorossiysk oil pipeline which belongs to the Russian pipeline company Transneft. Part of the intent of the increase in price to Azerbaijan was, apparently, to reduce their ability to supply Georgia. Azerbaijan bought 4.5 bcm of natural gas from Russia last year at a cost of $500 million. Apparently the thought was that, at the higher price, Azerbaijan would have to cut back on imports, and thus have less to make available to Georgia. However, by switching their power stations to oil-burning, they appear to have thwarted this idea.

Natural gas from Shakh Deniz will be fed into the Baku-Tbilisi-Erzerum pipeline, which is almost ready to receive and deliver the gas. Note that this is a different pipeline to the recently completed Baku-Tbilisi-Ceyhan pipeline, which carries oil and which, between January and October carried some 4.8 million (though it does not say if this is tonnes or barrels).

It hardly seems any time at all since we heard that Belarus and Russia had signed an agreement that had set the price per thousand cu meters at $100, Gazprom was going to use part of the money, over time, to purchase a 50% share in the Belarus pipeline company, and another crisis had been averted.

Except that the story dealt only with natural gas, and there is a second fuel, oil, that also makes its way from Russia, through Belarus, to places like Germany and Poland. It carries about 20% of the total supply. (The photo on Robert Amsterdam’s site shows you how large the diameter of the Druzhpa pipe is, large enough, he notes, to carry 1.2 mbd of oil to Germany and Poland. It is thus one of the highest capacity pipelines in the world . And on Monday Russia turned that tap off. For much the same reasons as, last year, they closed the tap on the natural gas pipeline feeding through Ukraine. Large volumes of the fuel headed west were being siphoned off. It is not, in fact, the Russian government that is directly involved in this dispute, at least superficially and at this point, but rather the Russian oil pipeline company Transneft. Their story is that, as with Ukraine, Belarus did not want to pay the new duty on the oil, that Russia was now demanding .

Last month, Russia imposed an export duty of $180 per ton of oil sold to Belarus, a severe blow to the country's reprocessing industry and government revenue. Belarus responded by imposing an import duty of $45 per ton of Russian oil that crossed its territory.

UPDATE: When I said that most countries had reserves that would get them through the crisis I forgot to look at Belarus, and they apparently only have a week's worth. And the second point is that without customers for their oil, Russia might have to cut back production by up to 1 mbd, since it will run out of places to store the oil, and has only a very limited means of alternate shipping (which includes a lot of railcars.)

UPDATE 2 It now appears that Russia refused to meet with the Belarus delegation today.

However, a quick resolution to the dispute seemed distant after the Russian government refused to meet a Belarussian delegation that arrived in Moscow on Tuesday.

Andrei Kabyakov, the Belarussian deputy prime minister, flew there for talks with his Russian counterpart but failed to start negotiations.

"The Russian side told us... they are not yet ready for talks," Vladimir Naidunov, Belarus's first deputy economy minister, told reporters in Moscow.

The same source also mentions that President Putin has warned Russian oil companies to consider cutting production.

Oil & gas in the Caspian has a long history - indeed it is one of the earliest oil production regions in the world, with Baku a major oil center in the second half of the 19th century and beyond. What makes the situation today interesting is the simultaneuous appearence of three things: (i) new reserves discovered offshore, (ii) the fact that, with the break up of the Soviet Union, the oil is located in (new) countries that are keen to have foreign investment and are now one of the few oil provinces around the world that still welcome Western oil majors, and (iii) these countries have no direct access to the world markets.

Graph by JaP. "kb/j" = thousand barrels per day. "Autres" = other

[editor's note, by Prof. Goose] This is a guest post by lads.

This article is a first simplistic (but comprehensive) assessment of World Oil Exports, here defined has the total amount of liquid hydrocarbons that are surpluses in producing countries. This assessment is made by projecting in to the future fixed change rates that reflect current trends in liquids production and consumption in countries where presently the difference between the two is positive. The outcome of this assessment is worrisome.

Grin! Given the nature of much of the discussion here, dare I mention that I was up in Indianapolis at an event that has a relation to NASCAR vehicles (duck!) Thought not!

More seriously as I traveled, I noted that the USA Today is reporting that the bad weather in Central Europe is continuing. As a result for the sixth day Gazprom was unable to meet its international market commitments.  And, with sabotage to the pipelines, supplies to Georgia and Armenia remain cut-off. The Turkmenistan President is in Moscow possibly to talk about Gazprom taking over Turkmen gas. The BBC reports that:

some experts doubt that Turkmenistan has the gas, or the pumping capacity, to cope with what is expected to be a 30% increase in demand for its gas from Ukraine.

In fact some think that Turkmen gas may be at peak levels.

For the short term Gazprom is sending some gas to Georgia via Azerbaijan but if the cold weather persists, as is anticipated, it may get more complicated.  Iran, for example, is also willing to supply Georgia.  This may be needed since the Russian supply is providing only 35% of that which is needed.