Ilargi: Big Oil and Gas Wars

Mar 10 2014

By Ra?l Ilargi Meijer, editor-in-chief of The Automatic Earth

Forests and trees. We live in a world built on such an overkill of 24/7 propaganda and misinformation that some of it easily slips by. At that point you need to rely on the little man inside to raise a warning sign. That?s about how I felt when I read yesterday about EU plans to deliver gas to Ukraine by reversing the flow through existing pipelines. That made me wonder things like: ?How would that work in practice?? and: ?Which gas?? While the little man simply said: ?I don?t believe a word of this?.

And before you know it, you spend many hours trying to get a clearer picture. Here?s an idea of how that went for me. First, the Guardian on the initial report:

EU leaders draw up plans to send gas to Ukraine if Russia cuts off supply (Guardian)

EU leaders are rapidly drawing up plans to send some of their stocks of Russian gas back to Ukraine and other eastern European countries that need it, if Vladimir Putin reacts to western sanctions over the Crimea crisis by starving the continent of energy.

Gazprom provides Ukraine with around half its gas, and other countries in eastern and southern Europe, including Poland and Greece, reportedly have low stocks of gas. Although Gazprom said the threat to Kiev would not affect the supply to the rest of Europe, western leaders are steeling themselves for a possible battle with Moscow over energy supplies. [..]

?Either Ukraine makes good on its debt and pays for current supplies, or there is risk of returning to the situation of early 2009,? Gazprom CEO Alexei Miller said on Friday, adding that Ukraine now owed $1.89 billion in unpaid bills. [..] Although it is the largest producer of natural gas, the US does not currently export its supplies, and the construction of a handful of export terminals will not be completed until at least 2015. [..]

In Brussels on Thursday, European leaders engaged in detailed discussions about the feasibility of switching the flow of gas in eastern Europe?s pipelines. Storage reserves in Europe, particularly Germany and Hungary, which have ample supplies, could be used to pump gas back towards Ukraine. Jos? Manuel Barroso, the president of European Commission, said energy security was an early priority for Ukraine, adding: ?We are looking in the short term at the gas transmission network to ensure that reverse flows with the European Union are fully operational.?

A project to modernise Ukraine?s gas transmission infrastructure forms part of the EU?s $15 billion promised aid package to Kiev, with an initial loan possible in the near future.

A European Commission memorandum specifically states it will seek to enable ?reverse flows? of gas to Ukraine, ensuring they can be ?operationalised as soon as possible?. [..]

What I get from that: Europe is drawing up all sorts of plans before there is any real threat to its supplies. That gives me the idea that it?s overplaying the Ukraine threat card on purpose, but that?s just my little man inside. There?s also a lot more to that than either Ukraine or EU are saying, and that makes me suspicious. As does the line about ?part? of the promised aid being set aside for ?modernizing? Ukraine?s gas transmission infrastructure. What does that mean? That Shell and BP are going to come in to make sure that get control, and push aside Gazprom? What else could it be? Who else has the know how?

What is clear is that Ukraine has a horrible history of paying Gazprom for gas deliveries through the past 20 years. And Barroso et al are not urging Kiev to finally pay the bills, they intend to help them get gas without paying Russia for past delivery. But still, you could argue that these things are open to interpretation, though I think western coverage of delivery and payment has been very one-sided for a long time.

So let?s try another angle. My first question about reverse gas flows was: ?How would that work in practice??. Here?s what the article says about this:

? European officials and energy experts concede there are doubts over whether it would be technically possible to transfer sufficient gas through the continent, west to east, if Russia decided to restrict its supplies for a significant period of time. While short-term assistance through the summer months could help, western Europe would not have the capacity to supply neighbours in the east for an extended period of time.

Speaking on the condition of anonymity, one senior executive said reversing gas flows would be an extremely complex move. ?This is not easy to do. Certainly the Gazprom export pipeline is built to move gas only in one direction, and it would involve a lot of time and money to reconfigure for imports ,? the executive said. ?You would also have to get the agreement of dozens of commercial and other organisations. It is not going to happen.?

That?s pretty clear, though they have only the lone anonymous industry voice (you can?t exactly speak freely on this if you work for Big Oil of course, far too many conflicting interests). It seems obvious even to the layman that there are lots of pumps along the hundreds of miles of pipeline, and they?re all configured for one way flow. Logistically, this is a potential nightmare, and administratively too. There are plans these days to reverse flow in a Canadian pipeline from Montr?al to Sarnia ON, and that?s hard enough. Doing that across multiple borders with dozens of interested parties and legal entities is quite another thing again.

Europe imported 155 billion cubic metres (bcm) of gas from Russia in 2013, about 30% of its overall gas demand, according to Wood Mackenzie, an Edinburgh-based energy consultancy. Ukraine is the key transit route for Russian gas to Europe, with around 50% piped through the country in 2013. [..]

In Washington, there is a growing appetite to retaliate against Russia with a long-term, strategic acceleration in energy exports. [..] Republicans, backed by gas producers such as ExxonMobil, have for years been pushing to dramatically increase gas production to enable export trade, and are using the crisis in Crimea to argue for swift action by the Obama administration.

I?ll get to the ?retaliate against Russia with a long-term, strategic acceleration in energy exports? bit in a bit. First, the money quote from the article, one that puts on a very bleak light what madness al these ideas are based on:

US gas production is projected to rise 44% by 2040, according to the US Energy Information Administration, and producers have been pressing the Obama administration to expand exports of natural gas. [..]

A senior US official said the State Department was supportive of introducing substantial gas exports abroad as a move to counteract Russia?s influence. Carlos Pascual, a former American ambassador to Ukraine, who leads the State Department?s Bureau of Energy Resources, told the New York Times that opening global markets to US exports ?sends a clear signal that the global gas market is changing, that there is the prospect of much greater supply coming from other parts of the world?.

The EIA is an organization of overpaid cheerleaders that haven?t had one prediction right in forever and a day. It?s perhaps because they have no track record to defend that they issue such double or nothing claims; it?s hardly interesting anymore. That claim that US gas production will be 44% more in 26 years than it is today is simply bonkers, and not supported by anything other than industry interests, loud as they may be.

The train of ?thinking? behind it is what?s good to keep in mind: We?ve seen how Shell and BP and Exxon all see their production and reserves and investments fall. These are arguably the world?s most powerful corporations outside of Wall Street, and they?re on the brink of becoming irrelevant. That they, in their present predicament, would seek to go to ?war without soldiers? with Gazprom and Putin, is no surprise, it?s desperation.

As we see also in an article by Nafeez Ahmed for the Guardian:

Ukraine Crisis Is About Great Power Oil, Gas Pipeline Rivalry (Guardian)

Just one month before Nuland?s speech at the National Press Club [in Dec 2013], Ukraine signed a $10 billion shale gas deal with US energy giant Chevron ?that the ex-Soviet nation hopes could end its energy dependence on Russia by 2020.? The agreement would allow ?Chevron to explore the Olesky deposit in western Ukraine that Kiev estimates can hold 2.98 trillion cubic meters of gas.? Similar deals had been struck already with Shell and ExxonMobil.

The move coincided with Ukraine?s efforts to ?cement closer relations with the European Union at Russia?s expense?, through a prospective trade deal that would be a step closer to Ukraine?s ambitions to achieve EU integration. But Yanukovych?s decision to abandon the EU agreement in favour of Putin?s sudden offer of a 30% cheaper gas bill and a $15 billion aid package provoked the protests.

To be sure, the violent rioting was triggered by frustration with Yanukovych?s rejection of the EU deal, along with rocketing energy, food and other consumer bills, linked to Ukraine?s domestic gas woes and abject dependence on Russia. Police brutality to suppress what began as peaceful demonstrations was the last straw.

But while Russia?s imperial aggression is clearly a central factor, the US effort to rollback Russia?s sphere of influence in Ukraine by other means in pursuit of its own geopolitical and strategic interests raises awkward questions. As the pipeline map demonstrates, US oil and gas majors like Chevron and Exxon are increasingly encroaching on Gazprom?s regional monopoly, undermining Russia?s energy hegemony over Europe.

We?ve already seen that US agents have been heavily involved in regime change in Kiev. Now the picture emerges of the (for now let?s say potential) involvement of Big Oil behind the scenes. They want to break Gazprom?s power monopoly and replace it with their own.

For additional juicy tidbits, let?s take a look at this March 5 piece from Bloomberg.

Ukraine Plans to Cut Russian Gas Imports, Raise EU Supply (Bloomberg)

Ukraine, the subject of a struggle for influence between Russia and the West, plans to cut natural-gas imports from its eastern neighbor and fill the gap with supplies from Europe to reduce dependence on Gazprom. Ukraine will need to import about 30 billion cubic meters of gas this year, of which a third may come through Slovakian pipelines, Energy Minister Yuri Prodan said today in Kiev.

Prodan?s remarks follow a decision by Moscow-based Gazprom, which accounts for most of Ukraine?s gas imports, not to extend a price discount beyond April, citing unpaid debts for supply. Tensions between Russia and Europe and the U.S. have escalated since President Vladimir Putin sent troops into Crimea in a bid to regain influence over Ukraine following the overthrow of Kremlin-backed President Viktor Yanukovych last month.

Ukraine has reached a preliminary agreement with Slovakia to import 10 billion cubic meters of gas a year from various European Union countries through Slovakian pipelines, Prodan told reporters. It also has signed a deal with German utility RWE AG for 5 billion cubic meters a year, he said, without giving a start date for supply. RWE Chief Financial Officer Bernhard Guenther said this week that the Essen-based utility may be able to supply Ukraine in the event of a shortage.

The EU will help Ukraine diversify its imports and provide funding to upgrade its pipelines, the bloc?s regulatory arm said today in a statement. The European Commission also backs the use of ?reverse-flow corridors? via Bulgaria, Romania and Croatia, whereby pipes that send gas west switch direction, or some fuel earmarked for those countries is sent directly to Ukraine.

Note the timeline: On March 5, Ukraine says it plans to cut gas imports form Russia. A bold enough statement to begin with if you still owe $2 billion worth of the stuff (I think I?ll go buy somewhere else now ?), but that aside. I?m thinking it?s perhaps not the whole truth and nothing but the truth, because 8 days before, on February 25, Reuters reported this:

Ukraine?s Naftogaz Slashes Russian Gas Imports In February (Reuters Feb 25)

Naftogaz, has slashed gas imports from Russia?s Gazprom to 28 million cubic meters per day as of February 24 from 147 million , two Russian industry sources told Reuters on Tuesday. They said Naftogaz had gradually reduced its imports from 147 million cubic meters as of February 1 , but did not offer a reason for the cuts. [..]

In December, Russia agreed to reduce the gas price for Kiev to $268.50 per 1,000 cubic meters, a cut of about one third from around $400 which Ukraine had paid since 2009. Under the deal, gas prices are revised quarterly.

Yanukovych was ousted on February 22. Two days later, Ukraine?s state oil and gas company announces it?s cut imports from Gazprom by over 80% (to be replaced with?!). What?s more, it started cutting on February 1, weeks before the Yanukovych ouster. We can probably only guess as to the reasons behind that, but it?s certainly a noteworthy event. Not least of all because the December deal with Russia that cut prices by a third was still valid and not up for revision by at least another month.

So where is the gas coming from for Ukraine today, and where will it come from in the future? Perhaps this from The Voice of Russia lifts part of the veil:

US tries to calm Europe as Russian gas shortage looming over Ukraine crisis

To be on the safe side, last week, the European Union made a decision to increase the volume of the gas purchased from Russia by 15%. In response, Josh Earnest, who is the US White House Special Assistant to the President and Principal Deputy Press Secretary, hurried to calm Europeans. He says that the American government has no information that would make it possible to conclude that Europe may face any lacks of natural gas in the foreseeable future. However, if such lacks do take place, the US would help Europe with its own liquefied gas, although it would be able to start deliveries of this gas to Europe not earlier than from the very end of 2015.

That is so funny you?d think April Fool?s Day is near. Not that the entire reverse flow story is not, but hey ? The EU plans to buy 15% more gas from Russia, which they intend to use to ? pretty openly ? undermine Russian interests. Through some far-fetched reverse flow scheme it wants to take gas that has been pumped through Ukrainian pipelines, back to Ukraine, which can then continue to refuse to pay its past bills to Gazprom. And if Russia in turn would refuse to go along with such a scheme ? and cut supplies ? , they can all simply blame Putin.

And even then ?

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