The Oil Drum

There has been the occasional story popping up in Drumbeat over this past week or so about the severe winter and gas shortages in Iran, and their resulting cut in supplies to Turkey. The Iranian domestic shortage was supposed to be made up from Turkmenistan. Unfortunately the shortfall from Iran to Turkey was supposed to be made up by increased supplies from Russia, but those also are falling short. About a year ago we saw some of the same discussion about supplies from Turkmenistan, through Russia, to Europe, with shortfalls and price increases – particularly relating to the gas supplies to Ukraine, through which the pipelines flow. At the end of that discussion the Turkmen got an increase in the price of their gas. It is therefore not surprising to see that Turkmenistan is seeking to double the price it gets from Iran.

... or is Europe running low on natural gas?

OECD Europe gas imports may grow by 295 BCM per annum by 2020. In the same time period, global LNG production is set to grow by 350 BCM per annum. So we Europeans should be OK, so long as the USA, Japan, China, South Korea, India and Taiwan are not planning to expand their LNG imports as well.

Edinburgh, the capital of Scotland, at Christmas. A wondrous site. And none of our politicians or the general public ever wonder where the energy comes from and how we will pay for it. Cutting CO2 emissions is a priority for all parties. Eliminating nuclear power is also high on the agenda. Confused? Our politicians certainly are. Visit Edinburgh while you can, it's one of Europe's finest cities.

I've been struggling for two weeks with the article in the Economist about Russian gas (A bear at the throat) as it takes legitimate (if often poorly informed) worries about Russia's sometimes blustering behavior on the energy markets to peddle the usual insane crap that market liberalisation is the only solution to promote energy security (I'll get to why I think it is insane below).

But two days ago, I spoke at a debate on Gazprom at IFRI, a French think tank. That conference was organised after the publication of two quite different articles about Gazprom:

Gazprom as a Predictable Partner. Another Reading of the Russian-Ukrainian and Russian-Belarusian Energy Crises by Jérôme Guillet
Gazprom, the Fastest Way to Energy Suicide by Christophe-Alexandre Paillard

The titles give a hint that the papers start from pretty different positions - as you can see in the executive summaries of each that I am posting below. Before jumping in, I'll flag that I am identified as an Oil Drum contributing editor in the paper, so the good name of the site is slowly spreading around...

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...

It's hard to avoid thinking that some people are stupid and that they will never learn, when they keep on proposing the same solutions over and over again, despite obvious failure in previous attempts. Trouble is, these people are still in power - or in positions of influence.

I'm not talking about the neocons on Iraq or Iran, nor about the neolibs on Social Security privatisation, labor market "reform" or trickle down, but it's the same kind of behavior.

No, in this case, I worry (again) about the growing body of institutional support for "toughness" against Russia on gas matters.

A lot of people have discovered in the past year that Europe's dependence on Russian gas was growing, and have begun to panic. The result has been increasing stridency and hostility against Russia, or coldwaritis, as exemplified by the latest opus from the CSIS (Center for Strategic and International Studies, a well known think tank), written by former ambassador to Lithuania Keith Smith.

The full text of his article can be downloaded from here, but I'll focus only on his list of recommendations for the EU. It's scary.

Reading the piece that Leanan has in Drumbeat about the continuing cost increases for natural gas in Ukraine, following the agreement last year with Russia on sustained deliveries, I was struck with the contrast to an earlier item on anticipated costs for natural gas in the UK. In the Ukraine costs are going to be going up another 40%, while in the latter the wholesale price of gas in the UK has dropped by more than 50% since June, and this is projected to extend into the future. With that thought in mind, and given that part of the supply for the UK will likely increasingly come from Russia, I thought I would have another little look at what is going on with Gazprom.

In the Ukraine the agreement last year almost doubled the natural gas price (raising it to $95 per thousand cubic meters (tcm) . Belarus just signed a deal that will cost them $100 per tcm, while Georgia is now paying $235 per tcm . The price that Belarus pays, however, is given as $70 in cash and $30 in shares of the Belarus pipeline company Beltrangaz. Over the next four years the price will rise to the European price (currently the one that Georgia is paying) and by that time Gazprom will own half of the company.

As the year draws to an end, so Leanan has quickly caught the news that is only now being picked up elsewhere that the ruler of Turkmenistan, Turkmenbashi has died of an apparent heart attack with the immediate heir being announced as

Deputy Prime Minister Gurbanguly Berdymukhammedov as interim president -- in apparent violation of the country's constitution, which stipulates that the parliament speaker should take over until elections are held.

His nominal successor was the speaker Alezov, but, in the immediate consequence of the death, he has apparently been put under arrest (something that was prominent about 4 hours ago but which seems to have vanished from the Internet).

The reason for this little post is that Turkmenistan holds the fourth largest gas reserves around, and the future of these may now be in some doubt. We have written about some of the interplay between Turkmenistan, Russia and potential customers over the past year and it might be appropriate to repeat some of that information to remind you of the situation.

UPDATE: Thanks to Greko there is a Stratfor piece that gives more information on the current situation here .

EU outlines new carbon permits

The European Union has established carbon limits for the second phase of the carbon trading scheme, a key step in cutting greenhouse gas emissions. The European Trading Scheme (ETS) aims to cut emissions by 8% of 1990 levels. Critics say that nations involved in the scheme had set their carbon allowance levels too high, and have not been aggressive enough in cuts. The EU set allowances for the 2008-2012 period to an average of 7% below the levels proposed by member states.

Europeans face fuel 'price surge'

Electricity prices could double in Europe if power firms are to meet emissions reduction targets under the Kyoto protocol, says a report. Carbon prices are set to surge, and firms might pass this rise on to the wholesale market, says a report by consultancy Global Energy Decision.

British Energy Ousts Head of Nuclear Operations; Output Reduced

British Energy Group Plc, the country's largest power producer, ousted the head of nuclear operations and said production will miss forecasts by at least 8.2 percent a year because of faulty reactors.

Annual production will be no less than 5 terawatt hours lower until at least March 2008.

Six of British Energy's 16 reactors are shut, with four down because of cracked boiler tubes. Production at two of its plants, which generate enough electricity to supply some 2.4 million homes, will be restricted for at least the next 16 months. This may undermine government efforts to promote building new reactors to replace aging units.

British Energy has 38 percent of its nuclear capacity out of service, or 3,620 megawatts from a total of 9,568 megawatts.

This is really bad news for the winter. If the gas situation is anything like last year electricity shortages are likely.