This page has been archived and commenting is disabled.
Guest Post: The Great Geopolitical Battle Over Energy Transit Routes
Submitted by Philip de Leon of Oilprice.com
The Great Geopolitical Battle Over Energy Transit Routes
As we all live in the present, it is very hard to fully assess the future implications of decisions supported or made by political and business leaders. An extraordinary game of geo-strategy is under way to lock in long-term agreements, notably in the energy sector. At a global level, the transit routes of future oil & gas pipelines become the object of a power struggle involving not only the suppliers and end-users but also the transit countries. Intensive courtships are under way where a ménage à trois, or more, may be the best option to prevent any country from being in a dominating position to rule a region and exercise political or economic pressure.
Let’s take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.
Nabucco and the competing projects
Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe’s dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco’s estimated cost is about €8 billion with a completion date of 2014 while south Stream’s estimated cost is from €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia's largest company and the world's largest gas producer.
Nabucco and the supplier countries
Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available - as underutilizing the pipelines is not a viable option - but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guardée such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.
The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: ”Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.”
This statement and contract are interesting because the agreement provides for a supply of 500 million cubic meters starting in January 2010, with potential increases depending on Azerbaijan’s export potential. This comes at a time when Gazprom has interrupted its deliveries of gas from Turkmenistan since April 2009, arguing a lesser demand from Europe. A few days after being in Azerbaijan, Miller was meeting with the President of Turkmenistan but no decision was reached regarding resumption of gas imports from Turkmenistan.
Who is holding whom by the tail?
The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.
Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An “unfortunate” explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009. Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas. Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.
Needless to say that Turkmenistan’s announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: “Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan's strategy of diversifying energy export routes to world markets.”
Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: “Turmen Gas – Caveat Emptor” http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html In any event, the potential of Turkmenistan should not be underestimated.
Nabucco and the transit countries
Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU’s energy security objectives to reduce its dependency on Russia gas. The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria - which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects - will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees. Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.
Russia: just another shrewd player but…
One may think that Russia pockets the difference from rates below market prices, but the reality is that Russia uses the discounted gas for its own domestic needs. It also has been using it to supply Ukraine under very favorable terms, and Ukraine has been very vocal in resisting Russia’s attempts to raise prices. Note must be made that Ukraine imports the bulk of its natural gas from Turkmenistan via Russia. Countries like Russia and Ukraine have been resisting passing on price increases to end-users to avoid social unrest and have been struggling to keep non-competitive industries afloat. One way of doing so is by keeping the cost of energy low. The adverse effect is that Ukraine is one of the most energy inefficient countries in Europe.
A point must be made that Russia should not just be perceived as a natural bully but more as a wounded bear. Russia, like any country, is looking after its own interests and is not always subtle about it, even more so as it feels that everyone is ganging against her, rightfully or not. Russia is also confronted with its own economic reality, most notably the over reliance of its economy and state budget on oil & gas revenues. Efforts to diversify the economy have failed to generate visible results. It is therefore essential for Russia to secure a guaranteed income flow from the sale of it oil and gas, and from the oil and gas of its neighbors, that it buys to resale at a profit or that it routes through its extensive pipeline network for a fee. But things change: sourcing oil and gas from or routing it via Russia is no longer the only option.
… a new transportation mode is emerging
As the gas pipeline battles are under way, a new trend is emerging which is the transition towards Liquefied Natural Gas (LNG). That transportation mode of natural gas through seaborne tankers will open new markets, alleviate the dependency of some countries on existing pipeline routes, and reduce the number of players able to impact proper delivery and pricing.
This article was written by Philip H. de Leon for OilPrice.com - Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com
»
- 4904 reads
- Printer-friendly version
- Send to friend
- advertisements -
Interesting article. On a slight tangent, LiquidNatGas would also encourage transition from Gasoline/Deisel based engines. It is cleaner than Oil (Tree huggers rejoice), and something USA has a lot of -- ie, less dependance on foreign oil. Not sure why there isn't a greater push for this? Honda shut down its Honda Nat Gas manfucturing firm earlier this year. http://www.thestar.com/Business/article/615960
Quiet, Daedal!
Amass as much of this stuff as you can before everyone else notices!
The last time that I heard of these cars, the main problem was what to do in a wreck. As the manufacturer would be liable in the case of a catastrophic break in the storage cylinder (there would be no way to prove that it wasn't bad design), no one could decide on a cylinder spec. I am sure that LNG would work as well as propane, which there are conversion kits for right now. My dad had a propane powered pickup when I was growing up, and the only two drawbacks having a multi hundred pound tank strapped to the pickup bed, and the difficulty in getting it filled when traveling. The benefit was driving more than 8 hours without having to stop for gas. Of course, there was also the drawback of having an assured death in the event of a bad crash because the propane would displace all of the oxygen nearby and then most likely catch fire, but when you are a kid such things don't enter your mind.
The cylinders are incredibly strong and CNG vehicles (there is no such thing as an LNG car) have consistently withstood 100mph+ impacts. Lots of fleet vehicles in the US (buses, vans, some passenger cars, etc.)are powered by natural gas. Honda even sells a version of the civic in the US that runs on natgas, the only problem is its a bitch to find somewhere to fill it up when you're outside of your home turf. LNG is regular natural gas that is chilled to liquid form, put on a ship that keeps it cold, and unloaded at a receiving terminal where it is either kept in storage or undergoes a process referred to as regasification (converted back to gaseous state) and is fed into pipelines.
Noted. But keep in mind that gasoline isn't exactly inert. Also, we already have cars and even buses that run on natural gas. The technology to implement natural gas as a fuel exists. I think one of the primary bottlenecks is infrastructre -- where can you refuel a natural gas powered car? But if ethanol can be distributed (which is more expensive to do since they can't use pipelines), natural gas should be relatively simple to implement. T. Boone Pickens is betting on it, and it makes sense -- I think long term Nat Gas should be quite a profitable investment.
Isn't natural gas even less abundant than oil?
I remember doing geology projects in college where we found either natural gas or oil by using seismic readings to decide on where to drill, and natural gas reserves were always near oil, but in much smaller quantities.
Long story short, I'm pretty sure that there's less natural gas.
Horizontal drilling made all that stop. Big thing is US has way more NG than oil.
http://www.eia.doe.gov/emeu/international/reserves.html
1.239 trillion bbl oil; 1.146 trillion bbl gas (boe)
The domestic outlook has changed significantly in the last three years.
Abundance is irrelevant.
What matters in energy is rate of production.
There are infinity reserves of NG on Titan. However, maximum production rate is currently 0.
If you study oil, you'll see reserves, URR, and a lot of people think you can take URR and divide by present consumption and get "lifespan." It simply DOES NOT work this way. Fields have maximum yields at various rates of production, maximum levels of production. THEY dictate how much you will get out over how long of a time and the shape of the production curve. You can increase production until the well peaks and then production starts to decline. If you have been consuming 100% of the well's output, after it peaks, you will have progressively less to consume on an ongoing basis. Think of a bell curve or a trapezoid shape
Yea very Syrianaish. If you try to map Nat Gas refueling stations in the US you find very few, mostly in Utah. If you map national pricing for Nat Gas you find an interesting result. The state with the fewest Goldman people has the most refueling stations and lowest prices on Nat Gas.
If you look at Nat Gas usage in China it's amazing how cheap they've made transportation. They sell a conversion kit for most cars that allows you to cheaply and easily convert a gas/diesel vehicle to a duel fuel vehicle.
And the cost of Nat Gas for your vehicle in China is like 0.25 cents a gallon.
I hope T. Boone can buy FuelMaker on the cheap and supply us with a home refueler that works and doesn't cost $10K.
I am glad that I live in America.
Today perhaps. The future of your country is not looking so good.
is thwarting Iranian hegemony that might result from Iranian success in energy transit routes to China the real reason teh USA went to war in Iraq, Afghanistan and the drone incursion into Pakistan ?
I've heard about the pipeline in Afghanistan and how they wanted to use that instead of Russian transit routes, and that it was the true reason for the war in Afghanistan...
At the same time though... wouldn't a pipeline using Iraq and Afganistan's geography ALSO have to go through Iran? I mean each country is on either side of Iran.
I dont know, which is why I was asking. It is obvious that Iran's sphere of influence would grow by orders of magnitued if they could cash in on getting energy to China. Entering Iraq and then Afganistan in effect surrounding Iran as you suggest was obviously an attempt to destablize Irans shpere of influence ... but why ?
and who benefits ... the pepe escobar articles SDRII linked below answer that in a way that we never saw mentioned in teh USA.
Why stop there? We surround them, why not move in for the kill? Other than we cannot afford it:)
First of all ... I am in over my head on having a valid opinion on just about any topic discussed here ... so as not to be rude I will respond to your question from my narrow understanding of what is ..
Why not move in for the kill ? .. the how did our oil get under their sand thinking is not leading the world by example but imposing "our" view on the world ...which is really not the people's view of the USA but the oiligarchial view of the world .. so colonialism continues.
But if we end the FED ... returning to souldn money we can cut off the purse strings of the War machine ... we the people will be faced with having to decide how much tax $ we are willing to have taken and in the end must choose between building our infrastrucure and providing health care for our fellow citizens vs continuing the contribute treasue to the corporate take over of the planet ...
If we can end the FED and end the Empire we can restore the Republic and move towards a happy ending of choice vs complusion.
all in my kooky humble opiinion of course ...
deleted
A better article that frames the issues was written by Pepe Escobar from Atimes in a series calle Pipelinestan
http://www.atimes.com/atimes/Central_Asia/KC26Ag01.html
http://www.atimes.com/atimes/Central_Asia/KE14Ag01.html
even diesels can be converted to run on 70% CNG. easily. it would make older models, meet the new emission standards,
Very nice contribution - informative, pertinent to the times - thanks once again.
1. Natgas is much more difficult than propane. Storage pressures must be much higher. LNG is not usable directly except at mega sites. It must be stored cryogenically. Neither is practical for privately owned vehicles with typical maintenance. NOT accident safe. NOT for transport through tunnels or indoor parking.
2. Methane is extremely abundant. Old maps tended to show permitted fields only. And permitting is difficult. The infrastructure, and legislation, was developed in WWII for military purposes. It is continued for lobyist purposes.
3. There are industrial processes for converting methane into liquid hydrocarbons directly usable in current engines processes and distribution nets.
4. The US has no usable energy policy for usage reduction other than taxation. Exactly when will the Alaska oil pipeline be finished? It is still not brought down to the lower 48. And then there is the question of the parallel gas pipeline that is not even to the public discussion stage yet.
5. Reductions in use larger than any contemplated with millage standards could be accomplished inexpensively by transferring home heating from oil to gas. Most urban areas have both available. Burner technology is in existence. Efficiency is > 95%.
6. Pipeline rights of way are in existence already in the U.S. Check a map of the national railroad system. And then check a map of the interstate highway system. These routs are Federal, NOT State.
7. Re IRAN, U.S. plan is for pipe to go through Turkey to Bulgaria to Europe. Turk price is membership in EU. For historical and economic reasons this is not acceptable to EU countries. US would like to link Mideast to EU to promote stability. EU would take over need for Mideast involvement and we could exit powderkeg. EU would stabilize without Russia and form anti-Russian economic block. Iran - Pakistan link with EU influence would help quiet a fundimentallist nuclear armed country. Energy through Pakistan to India would tend to stabilize Paki - India relations.
8. Stable non Chinese exporting India would be in US interests. Developing China has been extremely expensive and a great risk for US. They can not retreat to Maoist Communism. For internal stability they must provide more for peasants. US threat to inflate out of debt is lever over China. US threat to outsource imports away from China is another.
There is one additional pipeline not mentioned. Nord Stream, the new pipeline from Russia to the north of Germany which will travel 1,220 km under the Baltic Sea and will open in 2011. It will carry enough nat gas for 25million European households.
European newspapers have commented if America has found so much nat gas and there is not enough of a domestic market, it would be feasible to export that nat gas via tankers as the author mentions in the last paragraph
We should be burning water:
http://www.youtube.com/watch?v=JiKa4nOkHLw
Does anyone know what the predominant fuel for power plants is in Europe, ex-France (for which I believe the answer is nucear)? Is this demand for gas primarily for heating purposes, or for gas-fired plants?
Depends on how much up north you go, the colder the more gas will be used for heating purposes. But gas is mostly used for electricity prodution then comes kitchen and bath/water heating. The south-west of Europe (Spain + Portugal) is very aggressive in renewables and LNG projects. In Portugal almost 25% of all energy is generated by wind farms. A company called EDP-R (in the likes of Iberdola Renovables) owns Horizon in the US and will be investing 4 billion USD to keep its status as n#2 player in wind farms. Meanwhile both countries have regulated the gas and power network industry ahead of European Union directives. Meaning that large investments have been made in storage of LNG (in Portugal, the most south western tip of Europe) and transport thru Spain and into central Europe (France). Both countries also stake holders in Algeria's LNG projects, and Portugal is a steady partner with sub-Saharan African country Angola (just recently beat Nigeria as top oil producer for that continent). I guess the volume won't be able to match the Nabucco project. But it is a politically more stable and viable solution, and will help bring a more better "market force" playing field to the European natural gas panorama. Disclaimer : Long on REN (Portuguese company that runs the national electrical and gas power grid).
Note : In the UE, governments still hold a golden share in their previously state owned utilities and oil companies.
Natgas wells have offensively bad peak curves. Especially horizontal frac wells.
All recent discoveries have shorter time-to-peak than the older mature fields.
Reserves are irrelevant; only production matters. And production is most definitely NOT "take reserves and divide by the consumption you wish to have"