21st Century Wire
Britain’s Foreign Secretary William Hague is certainly talking a big game, but is having some trouble producing his big stick.
In Spanish bull-fighting, the man with the red cape is known as El Matador. He pretends he can stop the bull, but in the end is only attempting to fool the beast. When the Matador gets too fancy with his moves however, he sometimes ends up getting trampled by the beast. Either way, the crowd gets their money’s worth.
William Hague’s verbal show of force towards Russia is about as convincing to the crowd as that dusty old red cape. Hague is either too afraid, or too uninformed to know tell the cluster of press microphones the truth – that neither EU, nor the UK, has any real leverage for economic sanctions, and cannot finish the fight which Washington and EU instigated and which all western players have actively egged on from the onset.
Instead of Europe working for mutual benefit with Russia – diplomatically and economically, they do the opposite. You can guess who benefits.
Better, imagine William Hague wearing a toga. Caesar’s emissary, Hague, has been dispatched, scroll in hand, to the steps of the Pantheon to tell crowds that Caesar is still strong and that the outer reaches of the empire are still secure and growing, and that those Barbarian hordes will be severely dealt with – but that Romans will have to tighten their belts, pay more for heating and of course – cough up more taxes.
High Priced Energy – High Priced Security
Speaking to the press, 9 March, the UK’s Foreign minister William Hague said:
“If no solution to this (energy dependence on Russia) can be found”, European countries will “Recast their approach to energy and economic links with Russia over time”.
He was very careful not to give any time lines, and certainly no investment cost estimates for making Europe energy independent from Russia. Present plans so far mooted by officials in Europe’s capitals, and in Washington include larger imports of U.S. natural gas, reversing gas flows through pipelines from Western Europe back into Ukraine, and accelerated buying of more energy from countries other than Russia.
In all cases the investment costs are either high or very high, and the timelines are long. Taking oil, any rapid cutback in present EU28 oil imports from Russia of around 3.5 million barrels a day will instantly drive oil market prices far higher, easily reaching $150 per barrel.
Foreign ministers like Hague, and his opposite numbers in other EU states and in the US can close their eyes to economic and energy-economic realities on the ground as they set out to “punish Putin”, but Europe’s energy policies already cast high energy prices in stone. The Dec 2008 climate-energy policy vote by the European Parliament, transposed into member state regulations, laws and energy-economic policies from March 2009, sets out to reduce Europe’s import dependence on oil and gas. It has the never-stated but obligatory assumption that European energy prices will stay high, or increase. In turn this means fuel poverty and Europe’s energy intensive industries fleeing the continent, for as long as member state governments play the card of “free flowing markets” and refuse to prevent the real world results of extreme high energy prices “to save the climate and reduce European dependence on Russia”.
The real results are a frenetic energy asset bubble, for as long governments allow energy prices to stay at extreme highs, followed by a market collapse when energy prices decline due to oversupply.
If the Price is High Enough
Put in more simple terms, if the energy price is high enough – and it certainly is in Europe – there will be supply, in fact as we find, too much of it. European energy demand of all kinds – electricity, oil, gas and coal – is on a down-trend, but supply is rising. Sooner or later, this has to result in a reset during which the speculative energy investment bubble fed on high and increasing energy prices collapses. To be sure and certain, the results will not be pretty.
The present Washington-influence EU foreign policy mindset, conversely, is resolutely piecemeal and ad hoc, shown by Russian oil supplies to Europe being treated as unrelated and unaffected by any Washington-backed European de facto embargo on Russian natural gas exports to the continent. Russia would supposedly continue supplying oil to Europe in all tranquility, as the Europeans scramble to reduce Russian gas imports to nothing, in order to punish Putin!
Making these ad hoc instant foreign policy initiatives all the more laughable, Europe’s gas prices are already high – which directly aids Russia, Norway and Algeria – because gas prices are indexed to the price of oil, making the oil-gas relationship fundamental. Put another way, if oil prices are for any reason maintained at their present high level, European gas prices will also remain high, despite the talk about “de-indexing” gas.
In brief and worldwide, Asian gas prices remain tightly linked or indexed to oil prices at about $100 per barrel equivalent (boe), European prices are close-linked at about $70 per boe, while only North American gas prices are fully-deindexed at less than $30 per boe.
Low Cost Gas and Gas Import Dependence
Ukraine, despite its own massive national gas reserves which have been ignored for decades, relies on Russia for 70% of its natural-gas supply. Six other European nations rely on Russia for 100% of their gas. Another seven obtain at least 50% of their gas from Russia, and several others depend on Russia for 25%-33% of their national gas consumption.
The “legacy reason” for this was low-priced Russian gas supply, which slowly but steadily morphed into high-priced Russian supply, as other suppliers – especially Norway and Algeria – increased their own exports to Europe in order to profit from high oil-indexed gas prices. LNG suppliers to Europe have followed suit for exactly the same reason. Europe, in overall gas supply and potential gas supply terms – which include European shale gas development – faces the real prospect of oversupply at some near-term stage and point in time. This will be brought forward by the continent’s now four-year trend of significant falls in its yearly gas consumption, in part due to the high price of gas!
Europe’s gas import dependence on Russia is very clear. Certainly in the short-term, it can be called “structural” due to the short-term impossibility of ramping up either pipeline supplies, mainly from Norway and Algeria, or imported more expensive LNG from world suppliers to cover any theoretical short-term cut-off of Russia supplies. This is completely evident and should be known – even to Mr William Hague.
Highly significant for understanding the gulf between mindsets in Moscow and in Brussels (and Washington), officials in Moscow cited by US media including ‘Wall Street Journal’ say they are convinced that the biggest immediate threat is of Western responses which will undercut the price Russia gets for its gas exports. Russia’s Gazprom officials go on to repeat their base-case analysis of rising European demand for Russia gas, as pipeline supply from Norway, Algeria, the U.K., Holland and elsewhere slows, and LNG import capacities in European countries fail to ramp up, in part due to high LNG terminal construction costs and low-growing EU gas consumption, and world LNG supplies moving towards the even higher-priced, gas-hungry markets of Asia.
Threatened gas sanctions, in particular, are seen by some key Russian officials as a disguised commercial policy simply seeking lower prices for Russian gas…
Gas Infrastructures Depend on Gas Prices, not Politics
Rightly called a permanent circus act, the map of potential new gas pipeline and LNG supply infrastructures in Europe is a pathwork overlay to a continent already criss-crossed with both “legacy” and “project” gas pipelines and gas reservoirs. It is also criss-crossed, but mostly at the “project” stage with LNG import terminals, and their actual or planned national or regional pipeline delivery infrastructures.
In overall and total terms, continental Europe has close to, or more than the total of approximately 240 000 kilometres of gas pipeline and delivery infrastructures that exist in the much larger area of the continental US. Europe is not short of gas infrastructures, and will not be short of the gas to fill them!
Spectacular and very high-cost projects such as the Nord Stream and South Stream gaslines serving Germany alone (Nord Stream) and several western EU states, by South Stream when it is completed and operational, are also accompanied or rivaled by mostly-projected new gas lines oriented to the southern EU states. Web search with “projected gas pipelines, Europe” will suffice to show the continent is promised – or threatened – with a deluge of new gas pipelines.
Russia’s massive gas infrastructures for supplying all of Europe are the largest of the “legacy” infrastructures, with Ukraine being the key legacy pipeline route and hub.
Brave words from the European Commission, 6 March, are that it would help expand the Ukraine’s natural-gas pipeline system as part of an aid package. This expansion’s completion date, nor its funding were described, but the EC’s aim is enabling Ukraine to import gas from certain other neighboring countries – although the gas will be of Russian origin or mostly Russian origin. European officials call this the “reverse flow strategy”, that is to pump mostly Russian-origin gas back into the Ukraine – to reduce the country’s dependence on Russian gas!
Ukraine’s heavily oversized gas infrastructures are able to transport and store more than 4 times the country’s annual demand for domestic consumption of about 80 billion cubic metres, and are used not only to transport gas at different daily flow rates depending on compressor power utilised, but also to store gas in situ (gas stored in slow-moving pipelines). The gas can also be offloaded to underground storage reservoirs, which in Ukraine’s case are massive but in degraded or badly-maintained condition.
As at present, according to specialist publications such as Platts Gas News and Market Data, Ukraine’s reservoirs are at extreme high levels, for reasons including mild winter weather and economic recession in Europe damping gas demand. The present European Commission “outline proposal” to reverse-flow gas to Ukraine would, if it was ever funded and built, certainly face serious infrastructure problems, possibly including the need for repairing existing, or building more storage infrastructures – while the alternate and rational strategy of rapidly developing Ukraine’s own massive national gas reserves is at present ignored!
Proving that gas prices are a lot more important than talk about “energy security” the first U.S. LNG export terminal out of the six approved by regulators so far, is expected to start production in late 2015. Its total output is however already under contract to customers in Asia, due to Asian gas prices being even higher than European. This signals the commercial limits on the brave talk coming out of Washington, Brussels, London and elsewhere on “cutting Europe’s gas dependence on Russia to nothing”.
If the price is right, yes. If not, forget it.
READ MORE UKRAINE NEWS AT: 21st Century Wire Ukraine Files