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More on Russian Gas

by: Ferdinand E. Banks September 01, 2008 | about stocks: GZPFY.PK / OGZPY.PK / RSX / UNG    

Ferdinand E. Banks

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"The production of energy is the moving force of world economic progress." -President Vladimir Putin

Almost a year ago, Professor Jonathan Stern of Oxford University visited the Stockholm School of Economics, where he presented a ‘pop’ version of Russian gas intentions in both their own country and regions west of the Russian border.

So many dubious statements were launched by Stern and local ‘researchers’ during that low-level get-together, that I found myself painfully aware once more of the macroeconomic and political catastrophe that may someday arrive because of a sudden shortage of energy resources – a condition that has its basis in the grotesque failures to teach and/or promote realistic versions of energy economics.

In the wake of the ‘Georgia Incident’ that began around the opening of the 2008 Olympics, it appears that there has been a large-scale pilgrimage back to cloud-cookoo land – both to gage and examine Russian geopolitical intentions, and to a lesser extent to circulate some bizarre opinions about the availability or non-availability of Russian energy resources.

Recently a short article appeared in Newsweek claiming that oil and gas passing through Georgia was supposed to “free Europe from Russia” but, according to its author, “NOT ANYMORE”.

How anyone could believe that the prevailing gas superpower, Russia, was capable of having its ambitions thwarted by a few pipelines from the interior of central Asia, is something that deserves the attention of psychologists or psychiatrists and not readers of a weekly news publication.

There were probably many items in my gas book (1987) that prevented it from becoming the favorite bed-time reading of various gas experts, but almost certainly one of them was my contention that there should be more cooperation between the producers and consumers of energy resources, to include Russia and OPEC, because my position then – as now – is that there is an unavoidable shortage of gas (and oil) on the horizon, and it is important to use what is left of these resources to smooth out the transition a new global energy economy – probably one emphasizing nuclear and renewables. A gentleman who apparently had some difficulty with this concept was former U.S. president Ronald Reagan, as well as his advisors, because instead of buying gas from the Soviet Union, these energy gurus thought that some effort should be made by European consumers to obtain the supplies they required from e.g. Africa and Argentina, arguing that by doing so it would weaken the Soviet economy.

Obviously, the chief executive was constitutionally and intellectually unable to accept a sensible strategy, which was to contract for the largest possible quantities that could be obtained from the Soviet Union, and to encourage that country to invest in (and fill) the largest possible pipelines. The basic issue was not merely safeguarding and expanding Western Europe’s supplies of gas in the years to come, but increasing the general accessibility of all energy materials, to include those purchased by the United States (and its friends and allies) from any supplier. (It was also possible, or even likely, that another of President Reagan’s theories was that a return of the Taliban to Afghanistan was desirable and should be expedited. If so, I would like to go on record as saying that the war taking place in that part of the world could be in full swing when music begins at the New Year’s eve parties celebrating the arrival of the 22nd century.)

When I pointed out the advantages of doing business with Russia in a talk at Cambridge University, and in addition suggested toning down Cold War rhetoric, a number of observers – to include the founder of the influential publication Geopolitics of Energy, Melvin A. Conant – assured me and everyone else within earshot that although the ideological commitment of the Soviet Politburo was ostensibly to Marx and Lenin, it held a high regard for dollars and deutschmarks, which made Soviet gas industry executives prone to discharge their business obligations. In the Newsweek article referred to above, it was stated that European gas buyers have excellent relations with Russia and do not fear greater dependence. In addition Germany is supposed to be building its own pipeline through the Baltic Sea to guarantee its supply of Russian gas.

I know enough about this pipeline to believe that the persons in this country (Sweden) who study this project should learn to ignore the precious wisdom dispensed by Oxford University pundits and certain journalists. There has been some delay with this conduit that is at partially due to strange ideas in Sweden as to the ulterior purposes of the Russians, when the most likely agenda of those good people turns on collecting as much money as possible, and sooner rather than later.

What needs to be understood is the relationship between the amount of Russian gas coming into Western Europe, and the price of e.g. electricity in most of Europe – a price boosted by the absurd electric deregulation desired by the European Union, in addition to the decision to promote the sale of electricity on the electricity exchange NORDPOOL, which is a sophisticated version of what George Orwell termed an “indoor welfare scheme”.

Several years ago, the kingpins of the European Union [EU] held a meeting at which the availability of Russian natural gas and oil was discussed at length, and the Financial Times (March 23, 2006) suggested that the sale of Russian gas to China and Japan might have a negative effect on the energy prospects of Europe, which relies on Russia for at least 40% of its gas. By extension, in the long run, this could have a negative effect on North America, because the global gas scene has started to take on some of the features of a mainstream textbook market, due (among other things) to the ability of huge liquefied natural gas tankers to deliver ‘spot’ cargoes.

According to the Newsweek article, a recent Rice University Energy Program modelling exercise found that Russian efforts to deprive Germany of gas would likely be futile, as market deregulation would allow other suppliers to fill the gap. What this half-baked conclusion by the Rice University know-nothings missed is that there are no other suppliers in the short-run, nor perhaps inexpensive suppliers in the long-run.

On the other hand, in the short-run Russians could rush to completion any pipelines that they are constructing in the direction of China, and possibly beyond, in which case Germany, perhaps other European countries, and also the United States would find themselves bidding for progressively larger increments of gas.

The running mate of presidential candidate John McCain, Ms. Palin, is ostensibly positive to larger investments in Alaskan (and perhaps Canadian) natural gas, which would eventually find its way to the U.S. Midwest. This scheme was being discussed in some detail well before my gas book was published twenty years ago, and the cost was generally considered excessive at that time. At the present time the estimated cost is about 40 billion dollars, as compared to the 10 billion that several Russian pipelines toward Asia will ostensibly cost.

In these circumstances the ignorant bluster originating with persons like Ms. Merkel and Ms. Rice should be restrained, because where energy resources are concerned, Russia’s position is so enviable that its government does not have to be impressed with voodoo economics or voodoo politics. Instead of contemplating investing in gas from Alaska and Canada that may not exist in sufficiently large and sustainable quantities, more attention needs to be paid to ascertaining the amount of gas that may eventually become obtainable from shale deposits in or near the US.

Something else that we do not hear much about is a possible participation of the Russians in the growing liquefied natural gas [LNG] market, although that option has been raised by some observers. There has also been some talk about Russian gas exports from the new Sakhalin LNG scheme gaining access to Asia-Pacific markets, which could include utilizing any terminals that might open in India, however it is interesting to note that the Russians have decided to develop the giant gas field Shtokman without foreign help, and possibly switch it from a source of LNG for the US to a pipeline venture whose gas is destined for Europe.

In theory there should be a place for Russian LNG just about everywhere, because while LNG accounts for only about 2% of the gas used by the US at the present time, the United States Department of Energy [USDOE] has suggested that it could amount to 30% by 2025, with the total demand for gas in the US amounting to about 30 trillion cubic feet. As Mark G. Papa, an important American energy executive has said, “Right now, on the supply side, LNG is the only lever we have to pull”. Of course, many Americans to not want LNG plants in or near where they live. After an accident in Algeria reminded environmentalists that LNG (because of its density) has a very large explosive potential, they informed the general public that LNG might prove to be an attractive target for terrorists. California is a state where the opposition to new terminals is very strong and growing, and as a result the next terminal serving consumers in that state will likely be in Mexico.

CONCLUSION

The US election is attracting a great deal of attention these days, and presidential candidates have not ignored energy. Energy independence has been mentioned as a possible goal, though not one easy to understand, since total energy independence e.g. is a nonsense goal. The same applies to ‘freeing’ European gas consumers from Russia. Not enough attention is being paid to nuclear, although John McCain has made some enlightened remarks on that subject. I suggest that more effort should be devoted to explaining the costs and benefits of nuclear, and given European gas requirements, less to accepting infotainment from neophyte Cold Warriors.

REFERENCES

  • Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory Textbook. London, Singapore and New York: World Scientific.
  • Banks, Ferdinand E.  (1987) The Political Economy of Natural Gas. London & Sydney: Croom-Helm.

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This article has 22 comments:

  •  
    Sep 01 09:06 AM
    Your conclusion I agree with. Energy independence is nonsense. The only real replacement for oil and gas is nuclear.
    Reply
  •  
    Sep 01 09:27 AM
    Sure! Trust the Putin, Chavez and Saudees
    Reply
  •  
    Sep 01 10:57 AM
    Perhaps Governor Palin would be happier to nail down the Denali (Alaskan) Pipeline...which would be likelier under Obama-Biden with their committment to infrastructure improvement...than she would be to succeed to a VP office for which she has no preparation.
    Reply
  •  
    Sep 01 11:58 AM
    The problem with developing a sound energy policy is the amount of special interests all competing for their 'Place in the sun"
    Reply
  •  
    Sep 01 12:27 PM
    How can there be an unavoidable shortage of gas when CH4 is infinite?

    American natural gas production is at a 50 year high: seattletimes.nwsource....

    If natural gas is in short supply, how come the "environ"men... (emphasis on mental) have a heart attack everytime a cow passes gas and are so worried about methane seeps and elevated levels of methane in the atmosphere?
    Reply
  •  
    Sep 01 01:11 PM
    i have read your articles in 321enegy and SA, obviously not everything. i am curious about your views on solar[CS, PV]. are there essays, articles, and others[less than text book content scope] to which you can direct me?
    also the same querry on nuclear.

    most everything i've seen deals with oil, nat gas, or the global energy topic.

    thanks
    Reply
  •  
    Sep 01 03:32 PM
    Is it possible that LNG will be transported from Abu Dhabi {UAE} to USA via special ships operated with partners Gazprom & Dolphin Energy [SOE-Abu Dhabi]..

    Surplus NG will be piped to neighbour Quatar [partnership] to produce fertilizer from their phosphates....& will be larger than POT Sask holdings....or is this rumor only???
    Reply
  •  
    Sep 01 03:57 PM
    And you think Reagan was shortsighted or intellectually incapable because he didn't want long term supply agreements made with the Soviets!!?? Incredible...just ask any of Russia's recent partners how well they've kept their contractual obligations...let's start with BP and work our way East towards Sakhalin.
    Also...it seems that to be taken seriously one needs to understand the difference between natural gas and oil. The BTC pipeline is oil...natural gas is still a regional market...LNG facilities MIGHT be built for fractionation in the US..but since shale deposits are ALREADY delivery record amounts of nat gas I'd think reversing the flow of LNG towards Europe is in the realm of possibility.
    No one knows if the US can be energy independent..along the way to finding out nuclear will certainly play a role, as will compressed nat gas for vehicular transport.
    If the tone of your book is as pompous and pretentious as your article one can only imagine how enlightening the ten copies sold were.
    Reply
  •  
    Sep 01 07:47 PM
    Pardon the pun, but it seems the writer is ignorant of alternative energy.

    Where ther is a will there is a way.

    The Europeans will have to work on finding alternative energy sources to use, and that would mean that they will have to stop their socialistic experiments and work to create energy sources other than Nuclear to fend off the winters.

    WHAT DO THEY HAVE THE MOST OF, BESIDES PEOPLE?
    Reply
  •  
    Sep 01 09:37 PM
    Sep 01 04:37 PMuser211108 - i read the nyt aricle you mentioned. Basically, it just lists the roadblocks people keep thowing in the way of getting the right things done.

    As I have said in other blogs, the grid needs to be beefed up and expanded, and also provide for solar and wind hook-up. And I grossly stated that high power transmission lines are probably within 25-50 miles of any future installation.

    Take a look at where all the hydro installations are (Grand Coulee Dam in the middle of nowhere is the equivalent of 8 (eight) 1000 MWe nuc plants. No look at the rest of the hydro locations west/midwest/southeast... etc. As for nucs; we have over 100 1000 MWe plants scattered around the US - few states without - most state are less than 200 mi in one direction or another. Then there is the coal - everywhere??

    So, the grid problem is just a bunch of roadblocks (policy/politics/regul... - we have the technology and wherewithall to improve it and expand it immediately. Report abuse
    nakedjaybird
    Sep 01 09:20 PMYou know, in the NYTimes article, a FERC member member is quoted saying we need an "INTERSTATE TRANSMISSION SUPERHIGHWAY SYSTEM" - he is so right.

    And where they should run that grid is alongside/between/abov... the US Interstate hiway system that exists. And then, put the electrified ferries on steel-wheeled rails in the same space. Then we simply take the cargo off the diesel (biodiesel hybrid) trucks and ferry it electrically powered by solar and wind - that's a good role for solar and wind.

    Centainly takes the wind out of the sails of the contras that continually talk about balancing the grid.

    This idea solves two if not three problems at the same time. Since the Gov't steamrolled for the interstate highway system, let them steamroll for electrifying it. Simple. The right of way is there. Who's going to argure?. Yes, I know, someone will.

    And what's the distance between interstate hiways? Do they go thru wind mill and solar land, and do they eventually move right into cities, and go thru where all the people are. DUH??

    I hope someone in FERC reads this.

    Help out, guys. I'm like solarPV on a native hut, with a microwave, color TV, cell phone, but connected to no one.


    Report abuse
    nakedjaybird
    Sep 01 09:27 PMOh yes, and wireless internet!

    But I'm as helpless as all the steers running around me and that just reminds me of Washington DC every time I look at them and feed them. And what do I get in return - about the same stuff - let me help you city folks, it's hot, wet, sort of like putty, and smells like shit. If it looks like, smells like, feels like, it probably is.........yup!

    Happy Memorial Day to all the Vets and all those enjoying the freedom they have provided in the US and worldwide - regardless of the naysayers.
    Reply
  •  
    Sep 02 01:36 AM
    Brian Purseley, you say that US production is at a 50 year high. I'd go into Google if I were you, because they have a very neat diagram showing US production over the past 75 years. According to that diagram US production peaked in the early l970s, and has been more or less flat since. HOWEVER, gas from shale may be in the process of changing that. The key issue however is not US production but the gap between consumption and production, however shale gas and gas hydrates may do something about that too. If so, we should be glad, because otherwise we will have to deal with more coal before the technology is developed to give us inexpensive gas and liquids from coal in large quantities.

    Fred

    Reply
  •  
    Sep 02 01:42 AM
    NakedJaybird, speaking of vets, I hear more gutter language on prime time television than I did in the barracks during my three years in the US infantry and two in the artillery. For that reason I dont need to hear any more in comments on my work - although, admittedly, those comments are extremely valuable.

    Fred
    Reply
  •  
    Sep 02 01:59 AM
    Georealist, my new energy economics textbook was published last year, and a new printing is now being prepared. Not bad I think, although nobody was more surprised than I was to find out about that. As for only selling 10 books, I wrote a couple of books that probably didn't sell half that many.

    About Ronald Reagan. I was going to vote for Mitt Romny had he been nominated, until I heard him talking about the "Reagan Revolution". Thanks to Reagan, dope sales throughout the world skyrocketed, because he increased access to Afghanistan drug production. Way to go, Ron.

    Fred
    Reply
  •  
    Sep 02 02:04 AM
    fran...the place to see things like solar and wind discussed is EnergyPulse. You can reach it through Google - or energypulse.net. As for myself, wind is eventually going to be some help, but not soon, and not where base load electricity is concerned. Nuclear is the answer there.

    And, of course, nuclear is constantly discussed on EnergyPulse, and not be amateurs like myself. Solar is pretty much a mystery to me, unfortunately.

    Fred
    Reply
  •  
    Sep 02 02:09 AM
    Lalo, the capacity of state-of-the-art LNG ships is about to double, which will mean more gas to the US from that source. As for this fertilizer thing, I remember when Sir Harry Kroto (Nobel laureate in chemistry) said that oil and gas production were to slump, it would hit the fertilizer industry. It has already hit domestic US fertilizer output, although access to shale gas may change that. As for fertilizer production in the Gulf, I dont know anything about that, but it could increase. The question is how much.

    Fred
    Reply
  •  
    Sep 02 02:16 AM
    fist... I only said that Governor Palin is in favor of a pipeline bringing gas from the far north to the US mid-west. They have been talking about this for more than 20 years, but if shale gas is going to be as big as some people think that it is, then I cant see that line being constructed in the near future.

    As for the energy policies of the candidates, John McCain has made a very sensible comment about nuclear. I certainly believe that all the other candidates and such can make sensible comments, but as I say, the energy picture of the future is going to need a big slice of nuclear. I dont see any getting around that.

    Fred
    Reply
  •  
    Sep 02 07:03 AM
    Fred,

    Please go to:

    www.stopoilspeculation.../

    and sign the petition.

    Also, on page 88 in the July/August 2008 issue of Wealth Manager magazine there is and excellent article by Matthew J Phillips on speculation in commodity markets. Everyone on SA should read it.

    OIL IS POLITICS

    OBAMA / BIDEN 08
    Reply
  •  
    Sep 02 05:59 PM
    Hey Fred, regarding hanging Afghan poppy production on Reagan. They've been growing it for centuries. How about blaming those responsible for the bump in production, The Taliban.

    flstearns-I agree Plain's experience isn't as much as a VP candidate should have. The trouble is, Obama has even less experience and he's running for the top job. At least Palin, who may never be the President if her tocket wins, should have the opportunity to get some on the job training.

    jjason-Are you going to spam every thread with your Obama drivel?

    Reply
  •  
    Sep 02 06:01 PM
    Fred, who in their right mind would invest in Russia with the very real threat of seeing their investment nationalized?
    Reply
  •  
    Sep 03 07:13 AM
    Investor 612, Russia is an energy powerhouse: oil, gas, coal and probably uranium and thorium.. In addition, that country has a huge amount of unused and underused agricultural land that should be exploited. Obviously, instead of dumb Condi and dumb Angela interferring in things that they dont know anything about and are incapable of understanding, they should find some way to introduce Russian farmers to the way business is done in the US and Canada.

    Now that its citizens are drinking less vodka and practicing more capitalism, Russia is on the way to becoming an economic powerhouse too. It's not going to happen tomorrow, but eventually, and I heard a lecture a few hours ago in which the many advantages for everybody of free trade were spelled out, so what's the point with the cold war rhetoric...

    I've heard people blame Reagan for the expulsion of women from universities and the professions in Afghanistan, but what they should also do is to blame him for the millions of persons who have been hooked on junk coming from that country. I thought that Mitt Romney was the best man for the US presidency, but when he started talking about the Reagan revolution I tuned out.

    Fred
    Reply
  •  
    Sep 03 08:10 PM
    The transAlaska/Canadian gas pipeline currently being planned to bring nat gas from the Arctic via Alberta to the U.S., is estimated to be the longest in the world, 2000 miles, with construction costs in the range of $30 billion, and a target date for completion of 2028.
    Reply
  •  
    Sep 12 01:56 PM
    adamnb, that 30 billion sounds right to me, although it could be closer to 40 billion Ostensibly it is headed toward Chicao, however there would likely be a few 'laterals' toward the larger Canadian cities on the way, and if it were started today they should have it finished by 2018 or therabouts - which is what you probably meant.

    Big Gas has called that concept "dumb", which is what I thought too for a while, but I'm not so sure now. There are some important economic problems to be solved before starting that project, and in the last analysis I think that Big Gas should have more to say about those then the Governor.
    Reply
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