The Oil Drum

Well, while polling and results are being debated elsewhere, let me instead turn back to Russia, and try the possibly less accurate entrail-reading on what the signs portend for their production of oil and gas in the near term.

It was just last week that Leanan pointed to the Bloomberg piece which was already noting a slight fall in both oil output and exports, from this country which is, currently, the world's largest crude oil producer.

Average daily oil output during the month was at 9.711 million barrels a day, or 41.07 million tons, down 0.4 percent from 9.751 million barrels a day in September, according to the Energy and Industry Ministry's CDU-TEK unit. Exports dropped 9.4 percent to 4.94 million barrels a day as the government raised export duties to a record. . . . . . Exports to countries outside the Commonwealth of Independent States fell 6.5 percent to 4.2 million barrels a day. Russia raised export duties to oil to a record $237.60 a ton ($32.41 a barrel) from Oct. 1, up 9.8 percent from the previous duty of $216.40 a ton.

And yet, today the Russian Deputy Prime Minister said that they would not cut production, but would rather boost production at the same rate as at the beginning of the century. However, there are questions about what is going to happen with the planned export of LNG to Japan and Korea from the Sakhalin 2 development, given the problems that Shell is having with that project. At present most of the production is supposed to be heading to meet those two countries needs.

Well, I had to think about this for a little while, but I have decided to draw your attention to the BBC commentary on the current European vs Russian situation in regard to fuel pipelines, as described by Mark Mardell at the BBC yesterday.

"You know what happens when they get in the same room as Putin. They all drop their trousers and say 'I love you Vladimir'." This is the gloomy and cynical view from a senior EU insider, of the leaders of the European Union's 25 countries. Perhaps it's intended to chivvy rather than insult. But there is no doubt that the EU summit in Finland is a rather odd event.

There has been much debate over the reliability of the Russian oil and gas supplies to the rest of the world, with many commentators noting the historic reliability of the source. But as Gazprom takes over an increasing percentage of the world's delivery system, there are some concerns that perhaps need to be highlighted. This is particularly true for the United States with our "Just in time" philosophy, which (as I noted) James Woolsey worried about in St Louis.

The BBC article notes three concerns with the situation a) the threat of a supply disruption, b) the increasingly monopolistic position of Gazprom as a supplier, and c) the lack of a common resolve among nations as to how to deal with this.

Well the traveling tourist (not really, it was real-job related) is back in town to change suitcases and be off for a couple more days, but I will be back to more regular posting after Wednesday. However, without having had the chance to read any of the posts over the past two weeks, (though I will) I did catch a comment in Platts this morning that echoes a theme that I have been posting on intermittently. This is the anticipated supply of LNG from the Shtokman field to the U.S. The current report notes that President Putin is considering redirecting the gas from the US to its more traditional market in Western Europe.

"I can inform you that Gazprom is examining this possibility and could make a decision on this issue very soon," Putin said Saturday at a press conference following a summit with French President Jacques Chirac and German Chancellor Angela Merkel.

Jerome a Paris seems to feel that I am being somewhat hard on Gazprom, and that I should recognize that they are a good provider with a more than adequate reserve, and that I should therefore, I suppose, shut up.

At the risk of being a tad repetitive, let me therefore explain, and clarify, some of my concerns. To begin let me state that very obviously Gazprom and Russian interests are not the same as those of the West. Gazprom has every right to run their business to their own advantage, and that is not the major point of concern. However, what has to be of concern to the governments of each nation that it supplies with natural gas, is the reliability and price of the product that it is marketing. If those countries come to rely increasingly on Russian supply, then any disruption in that supply can have significant domestic consequences. Typically these shortages seem to fall in the winter, at a time where, as we learned from Colorado last spring, severe weather can limit production from gas fields. It is at those times that domestic power consumption goes up. And while not trying to teach my grandmother to suck eggs, I have to cough gently and point out, to some of our readers (though not Jerome), that electricity does not magically appear out of an outlet.

The BBC, on Channel 4, has just issued an analysis of oil and natural gas called Over a Barrel . Lest you feel impelled to search the dial, I should perhaps warn you ahead of time, that a favored expert is the good Dr Yergin. And so their opinion seems to be that the oil peak will not be a concern until 2020, but that the gas situation is worse. Not because there is a real shortage, but rather, as has been discussed here, because of the behavior of Russia, who supplies an increasing portion of European gas. A lot of the worry comes because Gazprom is spending more money on other investments, by a factor of three, rather than putting it into the development of their available fields, such as those in the Yamal Peninsula, Barents Sea ( mainly the Shtokman field) and in the Far East. Gazprom seems to be investing in distribution systems, and other businesses, and looking to foreign investors to help in field development.

This past week has been one where, despite the torpor that starts to fill the summer press, the progress of reality across the energy supply situation is beginning to make its uncomfortable presence known in the MSM. We have, it appears, reached that time where demand destruction, a phrase I heard for the first time not that much more than a year ago, is now beginning more evidently to impact the demand side of the oil and gas balance between supply and demand.

As I noted the other day, when talking about the oil sands, cornucopian thinking still seems to control the attitude of government. The comment by the Canadian National Energy Board that Dave cited includes the comment on gas needs

It takes about 34 cubic metres (1 200 cubic feet) of natural gas to produce one barrel of bitumen from in situ projects and about 20 cubic metres (700 cubic feet) for integrated projects. Currently, the oil sands industry uses about 21 million cubic metres (0.7 billion cubic feet) per day of purchased gas, or about five percent of the Western Canada Sedimentary Basin production. By 2015, this increases to about 60 million cubic metres (2.1 billion cubic feet) per day, or nearly 12 percent, assuming gas production remains at 482 million cubic metres (17 billion cubic feet) per day.

This seems to imply that the demand increase is not that significant relative to supply. But to continue Dave's thread onto a slightly larger scale, the failure to put the demand into a global picture can lead to considerable, and unfounded, complacency.

One of the major hopes for natural gas supplies over the next decade has to be Russia.  Yet, as noted in a couple of earlier posts, questions about long-term supplies from Gazprom are not easily laid to rest.  Consider one of the headlines in today's Moscow Times which suggests that selecting partners for the Shtokman field is not a simple investment choice.

My discussion with Russian officials has clearly suggested that while there is no formal connection" between WTO accession and participation of U.S. companies in Shtokman, "there is an informal understanding that if Russian membership in WTO is blocked, it would be considerably more difficult for American companies to win participation in Shtokman and other major Russian energy projects," said Dmitry Simes, head of the Nixon Center, a Washington-based think tank.

And that is the more positive of the two comments in the report.  Once again there are up's and down's in the question as to whether we can rely on Russia to fill the gaps between supply and demand.  

In my last post I commented that, while the mining industry was rejoicing in the increase in demand for coal, the impact of the underlying cause (Peak Oil) was not fully appreciated.  I had lunch yesterday with an engineer who has some responsibility in the SME, as well as a corporate job.  While I talked to him about the SME role in looking into ways of saving energy within the industry (where there are a number of processes that could be made more efficient) the answer was that the Mining Industry of the Future program at DoE had tried to do just that, and had just turned into toast.  Thus it was not a really positive thing to push.  So we talked some more, and after a while he switched to his company job role. And admitted that energy costs were the greatest current problem that he, his company, and the entire industry, are facing.  

And yet he still, the Peabody speech not withstanding, did not see this as a long-term continuing problem, but still as a short-term phase to get through.  The point being that it is short-term it's not worth the effort and cost to find alternative less-energy-intensive processes, if it is long-term, then you have to look at entire processes and make the investment (which can be high), to find lower-energy-cost alternative solutions.  (We had a variant of this discussion earlier in the year in regard to the poor and heating bills.  If the crisis is short-term you pay their bills, if it is long-term you are better to pay to insulate their houses - as a very crude summary of that debate and as an illustration of the point).