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.

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).

You may have noted a couple of posts recently concerning the relationships between Gazprom and its customers.  More particularly the pressure being put on places such as Armenia, Belarus and now the UK to allow Gazprom to take over the distribution companies for the natural gas.  Well, just in case the message wasn't getting through, there now comes a new threat. The West has been benefiting too long from Russian largesse, in terms of oil availability.

Russia plans to cut oil supplies to Europe, diverting shipments from "overfed" European markets to Asia, Semyon Vainshtok, president of pipeline monopoly Transneft, said in an interview published Monday.

"We have overfed Europe with oil. Every economics textbook says that surplus supply lowers prices," Vainshtok said in an interview published in Nezavisimaya Gazeta. "But we can't reduce supply -- all our exports are oriented toward Europe."

That will change with the construction of the Eastern Siberia-Pacific Ocean pipeline, which will feed energy-hungry Asian markets with up to 1.6 million barrels of oil per day, Vainshtok said.

"As soon as we turn to China, South Korea, Australia, Japan, it will immediately take away a portion of oil from our European colleagues," Vainshtok said.

The situation in regard to who has enough gas to supply whom, is getting just a little hard to follow in the area around Georgia.  The other day I had noted that Iran was supplying gas to Georgia to make up for the losses due to the pipeline explosion.  Now I read that Iran is having problems with meeting it's own demands for gas, due to the winter, and has cut supplies to Turkey.

Iran had raised the gas it pumps to Turkey to 10 million cubic metres, still well short of the 26 million cubic metres a day previously agreed between the two neighbours.

Last week Iran cut the flow to 5 million cubic metres a day, but the supply subsequently rose to 8-10 million cubic metres before falling again to 5.48 million on Wednesday.

Iran says it had to reduce its exports because harsh winter weather has raised consumption at home.

And so who is helping Turkey out (since it has reached the point that it is starting to close factories and redirect supplies). Remembering that Russia has had to reduce supplies to Europe, now for the eighth day, because of the severity of the temperature drops in Moscow and points East, guess who?

Russia, the biggest supplier of natural gas to Turkey, has stepped in to help cover the shortfall.

And, recognizing the threat to supply, Hungary and Croatia have signed agreements to install an LNG terminal on the Adriatic, and Poland is giving serious thought to the idea.  (Which, apropos yesterday's post, will require even more tankers be built.) In the meanwhile Ukraine continues to take gas from the pipeline transiting gas to Europe, in quantities above the levels agreed.