The Oil Drum

In his second blog entry, Andris Piebalgs moves the focus to European energy security. A few choice excerpts for those who want to have a more spontaneous debate:

Europe is currently importing half of their energy needs, and according to most of the studies, our dependency may grow to 70%. We are running out of fossil fuels and our energy needs grow. This makes Europe terribly vulnerable. As Commissioner responsible for security of supply I often wondered, where are we going to get all that energy from? (my emphasis)

The EU is already a leader in renewable energy sources and we have taken a commitment to go further with a mandatory target of 20% of our final consumption by 2020......

This is the first posting of the ODAC (Oil Depletion Analysis Centre) bi-weekly newsletter. If TOD readers find it useful, it will be posted regularly. Keep in mind that the 'Comments' are aimed at regular subscribers for whom the newsletter may be their only source of information. The newsletter regularly covers oil and gas depletion, and related issues.

Times are changing in the coal trade, and while April marked the end of one era (the last pit pony in the UK died), on the other had we have the renewed interest, and debate over, the use of coal as a source of liquid fuels for a variety of vehicles, including aircraft. So I thought it worth trotting out some more facts that might help put the current (and future) situations in context. (Plus we haven't had a Techie talk in a bit).

The late Bob Stefanko has written that the Great Dismal Swamp is probably the best current place that represents the type of conditions under which, back in Carboniferous times (about 355 to 290 million years ago) the various vegetative fragments fall into the water, and are slowly compressing to form a layer of peat. The peat layer in the swamp is about 7 ft thick, which would convert to about 20 inches of coal. The swamp is slowly sinking, allowing the vegetative mat to continue to deepen and slowly built to a greater thickness. Back in the Carboniferous he noted that the speed at which the layers formed was likely about twice that at which the current Swamp is growing, and that, due to the different levels of pressure required to form them, it would have taken about 160 years to lay down what is now a 1 ft thick layer of lignite; 260 years for a foot of bituminous, and about 490 years for a foot of anthracite. Since it is more worthwhile to mine thicker coal, and eight-feet is a nice working height, this would have required about 2,100 years of steady growth to lay down the layer of vegetation that formed the Pittsburgh seam in Pennsylvania. The original areas over which these forests and swamps grew were vast, and the cycles of deposition grew as the land distorted, with multiple seams being deposited in some cases, and a single thick seam in others. But how has it survived? How much is really there, and how much can we actually 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).

I wrote the text below in late December 2005, i.e. just before the Russian-Ukrainian gas conflict, which had been simmering for a few weeks, blew open into the consciousness of the West

One reason I have been writing with such bluntness on the Russian-Ukrainian spat is that I was on the ground when this crisis was resolved for the first time, in 1994. I spent 6 months in the Kiev office of GDF (Gaz de France) that year. This was the way I had found to be on the ground as I wrote my PhD dissertation on "the independence of Ukraine", and it turned out to be amazingly useful as the gas negotiations were at the core of what made that independence possible. So I spent a lot of time tracking press reports in the Ukrainian, Russian and international press to try to make sense of all the announcements that were made ("we will cut gas if you don't pay." "we promise to pay next month: we will deliver 2,000 tractors." "We will raise prices." "Supplies will not be interrupted." "You are stealing our gas!" "We are a sovereign country." "We will give you loans." "We already paid 2 billion rubles." "You are jeopardizing our good relations", "You are not a serious country", etc...).

Even better, as I was in contact with the Ukrainian gas officials, I got access to their detailed technical data, and I prepared on that basis what I believe to be the correct maps of the Ukrainian network and the several quirks that explain some of the twists of the negotiations between the Russians and the Ukrainians.

Here are the maps I prepared then, with some explanations of some of the twists that underlie all negotiations on this topic between Ukrainians and Russians.

click for high resolution version

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.

The weather is still pleasantly warm, and winter seems, as yet, to be just an unpleasant thought that can be put off until, at least, Thanksgiving. But unfortunately for those who have to look towards energy supplies for the winter, particularly in Europe, it may already be coming too quickly. To simply describe what is likely going to turn into yet another mess this winter, let me try a quick summary of what seems to be in the offing.

Gazprom you may recall has been buying into, or acquiring more control of, pipelines that carry their gas from Russia to the West. In the process, last year, it had a bit of a row with Ukraine, over the price that should be paid for the gas Ukraine was using. By offsetting the cheaper price that was to be paid for gas from Turkmenistan, the deal that was cut gave Ukraine the promise of gas at a price that would allow it to continue to function. Well, unfortunately for that agreement, Gazprom has just agreed to pay more for Turkmen gas. At a price of $100 per thousand cubic meters this is already $5 above the price that Ukraine was going to pay for a blend that also contained $230 Gazprom gas.

Were we living a couple or three thousand years ago or so, perhaps now might have been the time to go purchase an animal and then get some learned scientist of the time to peer at its entrails. The thought struck me, after reading a comment by Jerome a Paris following my recent post on natural gas supplies, and how Turkmenistan might start favoring gas shipments east rather than west . His credentials in this are much better than mine. However, as you will see, I am not totally convinced.

Jerome pointed out that, with 25% or so of the world's natural gas under it's control, Gazprom is now pretty much calling the shots, and that a lot of the stories hitting the news should be read with that understanding in mind. That if they don't want a pipeline to be built, then it won't be.

With a couple of stories in the news this week, one's first inclination might be to think that we should stop worrying so much about immediate fuel supply problems.  Consider the report that natural gas supplies are at the highest level since 1984.  At a level of some 197 tcf, set against an annual production of around 18.3 tcf, this would appear to give us a reasonably good supply for over ten years.  Unfortunately life is not that simple.  As Dave pointed out our reserves are increasingly coming from unconventional sources.  And as the OGJ article points out

Production growth hasn't followed the increase in reserves, noted Chris McGill, AGA's managing director of policy analysis.

 "In 2005, over 27,000 gas wells were completed in the United States, which is the highest level of completions on record," he said. "However, most of these wells were drilled onshore in shale, tight sands, and coal seams, which are low-yield and slow-yield resources."

Sigh! It appears that the appearance of agreement between Russia and Ukraine is still just that, with final details of exactly for how long, and at what gas price remaining to be finally defined.  The Moscow Times carries a quote from the Ukrainian Foreign Minister

"Everything is extremely unpredictable," former Ukrainian First Deputy Foreign Minister Olexander Chaliy said by telephone from Kiev. "This is leading to huge uncertainty. This is all very bad for Ukraine." Chaliy coordinated talks with Russia on gas issues from 1998 to 2004.

It appears that this may note bode well for the current government.

"This is a big problem for Yushchenko," said Peter Bobrinsky, head of equity sales at Kiev-based investment bank Concorde Capital. "When you swim with the sharks and you start bleeding, you're in trouble."

Part of the problem appears to be that the initial agreement was achievable because Ukraine gets some gas from Russia and some from Turkmenistan.  At the time the Ukrainians agreed to pay a higher price for the Russian gas, but, by blending this with gas from Turkmenistan, which retained a cheaper price, the overall increase could be kept to an acceptable level.  Unfortunately the Turkmenistan government would now like to be paid at the going rate also. The fact that Ukraine has also increased its take by 70 million cubic meters to cope with the cold, which the Russians must allow since otherwise their customers in Western Europe would feel the pinch again,  does not make the negotiations any more friendly.