This is a guest post by Andrew McKillop. Andrew has held posts in national, international and European Commission energy, and energy policy divisions and agencies. An extended bio is given at the end of the post.
Outdated Geopolitical Musing
March 17, world stock exchanges from Moscow to New York and Frankfurt to Shanghai gave a whoop of joy at the symbolic-only prospect of European and American “hard hitting sanctions” being set against Russia for its Crimean action. The wait was over, the panic wasn’t needed, at least not yet, so jobbers and traders got back to doing the thing they know best of all – talking up share prices. The media and press, however, did what they could to keep the story going, for example Garry Kasparov’s raging in the ‘Wall Street Journal’, telling us that Putin “is another Saddam Hussein or Slobodan Milosevic” and should be treated by the West the same way. Kill him!
The outdated geopolitical theories and rationales used to bolster the panic and rage were summarized and massaged into a would-be doctrine a long time ago, by Zbigniew Brzezinski the former US National Security adviser to Jimmy Carter. His theory basically claims that firstly the USSR, then the Russian Federation is using its energy resources to bring Europe to heel through energy dependence. Russia needs Ukraine for its energy dominance, as a “pipeline corridor country” so the West and Russia have totally opposing goals in Ukraine and Crimea. This could mean war.
The first problem is the “Ukraine energy corridor theory” is a major exaggeration. Ukraine is a critical corridor country for gas supply to Europe, only. Oil has got almost nothing to do with it. Also, the gas pipeline transport role of Ukraine can only decline and will decline, particularly as the Nord Stream and South Stream gas pipelines, which completely avoid Ukraine, are completed and ramp up.
In addition LNG terminal financing, if not building, is now a fevered speculative boom spreading across Europe. Some countries including Poland and France intend to build enough LNG import capacity to cover their total gas needs, by or before 2017-2020. LNG supplies, almost by definition, will come from a large and increasing number of supplier countries, many of them “exotic” such as Mozambique and Australia (and Russia and the US, but in Russia’s case that is not exotic).
Whether Crimea rejoins Russia, or stays with Ukraine has less and less real world leverage and hold on European energy. The old geopolitical models and paradigms, which in any case were weak, are being superceded and replaced.
Energy Colony of Russia
To be sure, Putin may have acted to force Ukraine to play the role of a Russian energy subsidiary, but if it was forced to play that role, this is not how journalists or Brzezinski want us to take it. Long running gas price and gas debt disputes between Russia and Ukraine – whatever its government – have been constant since Ukraine left the collapsed USSR in 1991. Major issues concerned the price Ukraine pays for its own gas, and accumulated debt on unpaid (and stolen) gas. One key reason Yanukovych was voted in by Ukrainians in 2010, and Tymoshenko was voted out, was her extreme radical and probably corrupt attempt to pay Russia a much higher price for domestic gas consumed by Ukraine, partly repay gas debt, and trade Russian-sourced gas in other EU markets. Her attempt using a murky Swiss-based trading and finance company created to those ends with a few chosen Ukrainian oligarchs was a total disaster, and Yanukovych largely profited from it.
Today’s arguments coming out of Washington and London, Paris, Warsaw and Berlin claim that despite appearances, or reality, Ukraine’s energy transport corridor role is poised to grow. The country will become more strategic, not less. Its role will expand. Ukraine will link oil and natural gas reserves and production in the Black Sea and Caspian basins, with Europe.
The exact opposite is at least as likely, not because of the new political uncertainty, but because European gas will be transported and sourced from and through different countries on an accelerating basis. One factor bolstering this counter argument is that European domestic shale gas development will move forward, as well as European LNG import development.
The Russian energy dominance theory, and its subset of Ukraine’s critical transport corridor role was cobbled during the Cold War era, and heavily used by Brzezkinski for his own political grandstanding. The theory seemed seductive to its writers, perhaps, but is light years away from the real world situation and the powerful global energy trends setting the future.
Taking only gas pipelines serving Europe, the total quantity of transport lines from a few inches diameter (the industry uses inches for measuring) to 4 feet diameter, both public and private, both national and international is so huge it can only be estimated. One guess would be about 400 000 kilometres. Only the much-larger area United States has more, at about 450 000 kilometres. When we add local (sometimes regional) gas distribution lines, for example in cities, the numbers can be doubled to near 1 million kilometres total.
This oversupply problem also concerns oil pipelines, you can be sure. Renovating and replacing, and simply keeping the lines operating and filled, is a major task.
To date, projected new east-west oil pipelines serving the EU states are almost absent. One reason is that Europe’s oil demand, like its gas demand is on a downward track that all analysts agree “has no light at the tunnel’s end”. This could or might change, for sure, but since 2005 in some EU states – long before the 2008 financial economic crisis – and since 2009 for the rest, their national oil and gas demand has been declining, every year in the straight majority of countries. This trend is called structural, by more and more analysts. In some cases their oil and gas needs, today, are back to 2000-2003 levels, and declining, making their existing energy transport infrastructures more than sufficient.
When we look at electricity demand in EU28 countries, the “decline paradigm” has been operating since the late 1990s in an increasing number of countries.
One immediate result for oil is that European refining and oil transport capacity are both heavily surplus to needs. Analysts and sector specialists suggest at least 15%, even 20% of refinery capacity will have to be cut, trimmed, outplaced or shut down by 2020. Linked and associated oil pipelines, mostly local, will also have to go. Oil refining, in Europe, is a sunset industry heavily dependent on state subsidies in most countries and mostly unprofitable. Its needs for new pipelines is very low.
Transport infrastructures for oil supplied to European refineries are in surplus for another simple reason. The intensely developed “legacy network” of oil shipping routes and maritime installations including mostly seaboard-located refineries, throughout Europe and across SE Europe and west Central Asia, makes oil pipelines unattractive – we mean unnecessary – so the financial investment rationale for new European oil pipelines very, very weak.
Europe’s combined oil transport and refining capacities must fall – not increase. Put another way, who wants to finance new oil pipelines for uncertain and unlikely needs, when new large diameter oil pipelines cost $7.5 million-per-kilometre?
Only the many projected – but few financed and built – new gas pipelines in the wide area spanning the Caspian, south and east Europe, and the MENA region are potential but small scale game changers. Small scale means their capacity to capture more than 5%-10% of the EU’s total 600 billion cubic metres annual gas consumption, which is declining, is either low or zero. Apart from the Nord Stream and South Stream gas pipelines, building progress with new gas lines is slow or very slow, in part because of the existing high level of “legacy infrastructures” and falling gas demand.
The essential point is that Ukraine’s role in European oil transport is close to zero, and its role in European gas transport, although still significant, is declining. Massaging this reality into a major geopolitical crisis is at worst war-hungry political grandstanding, and simple ignorance at best.
The Image of Scarcity
Also massaged into the media and worked by grandstanding politicians eager to pick a fight with Russia, perhaps confusing it with Mali or Iraq, the image of gas and oil scarcity always gets a major stand-in role. Some journalists have even claimed this scarcity was another reason Ukraine’s PM Viktor Yanukovych rejected the EU association-partnership deal he was on the point of signing, in the weeks before he was overthrown by the Kiev Flash Mob. Apart from Putin’s offer of a one-third (33%) cut in the extreme gas price that Yanukovych’s hapless predecessor Yulia Tymoshenko tried to force on Ukainians, and the $15 billion state debt repurchase offer by Moscow, his government also turned down US Chevron Corp’s and European Shell’s fuzzy-edge but claimed-as-enticing proposals to accelerate investment in shale gas and shale oil E&P (exploration & production) in Ukraine.
The argument is these proposals, if they ever became plans, could or might at some unspecified future date also have included oil pipeline construction activity, some of it in Ukraine, able to bring new non-Russia gas and oil to “energy-starved Europe”. The proposals were backed by Washington and the EU, so when Yanukovych turned them down he was obviously acting to artificially maintain energy scarcity in Europe, to the benefit of Putin.
In fact hydrocarbons E&P is powering ahead in the region without any special needs for increased US or EU political support to energy corporate investment and activity.
Reported by media including the UK ‘Independent’ and energy sector ‘Offshore’ magazine, US Exxon and Russia’s Rosneft have made encouraging finds in Crimean and Russian offshore areas, while in the Romanian sector test drilling by Austria’s OMV found interesting deposits, so much so that the majors are bringing in the panoply of deepwater drilling technology. Other majors cited by the specialty press that are either already operating onshore and offshore in Ukraine and Crimea, or are considering near-term action, include Spanish, Chinese, French and Malaysian companies, among others. Canada’s Trans Euro Energy has already found commercial resources of natural gas on the Crimean mainland, underlining the distinct prospectivity and probable large gas and condensate potentials in Crimea.
Available public data only concerning Ukrainian and Crimean conventional onshore gas resources published by the IEA, EIA, CIA, European Commission, and energy majors indicate the country (or 2 countries) have around 1.25 trillion cubic metres of conventional gas – about 120 years of Ukraine’s bloated national gas consumption. However, the country’s gas production peaked in 1975 and has declined ever since. Very basically, and impossible to be ignored (even by geopolitical “hawks”) this has nothing to do with resource scarcity or Ukraine “depending on Russian gas”. Ukraine has profited from ultra-cheap Russian gas – and even forgot to pay for it! Why produce it at home?
Eastern Ukraine’s giant Donbas coal field is estimated by many analysts as holding very impressive quantities of coalbed methane, with published outline estimates from the US EIA and other sources extending well above 1 trillion cubic metres. The coal field is also deep, due to depletion, incurring high coal production costs and methane or coal dust explosion danger for miners, making coalbed methane extraction, instead of physical coal, the logical future path. Onshore shale gas potentials in the region, including Ukraine and Crimea are also probably large or very large. There is no shortage.
Scarcity is Off the Menu
The Brzezinski line of patter has the article of faith that both oil and gas resources are limited and declining, but natural gas resource scarcity does not apply in the Black Sea-Caspian Sea region. This is also shown by the massive gas discoveries, and start of production, from Azerbaijan’s gas and condensate fields. In the eastern and southern Mediterranean, gas E&P continues to make large new finds and extend previously-known offshore gas and condensate reserves, for example offshore Israel and Cyprus. Further away, in east Africa, truly gigantic offshore stranded gas resources have been discovered offshore Mozambique and Tanzania, since 2009.
The argument that Russia is making an “energy resource and transport corridor grab” in Crimea and perhaps subsequently in east Ukraine, driven by energy scarcity among other factors, is therefore impossible to take seriously. Another key reason includes the huge amount of cash already invested by Moscow, in oil and gas E&P in the region. This has helped accelerate – not hindered – discovery and development. In theory at least, this would heavily play against Russia’s ability to get the whip hand on this large region’s large proven and potential reserves and so doing, dominate the energy importers of Europe. In other words, Russia like other players is speeding hydrocarbons E&P – and is hard to portray as a geopolitical power trying to limit E&P with the sole intent of profiting from scarcity.
Especially in the Ukraine case, the scarcity theme has also been projected on gas and oil pipeline and transport capacities and oil and gas infrastructures in the region. While this applies to some extent in the east of the region, Caspian Sea and onshore, it is easier to talk of overcapacity and oversupply in the west of the region. Ukraine, notably, is oversupplied with massive but outdated and badly maintained gas pipeline and gas storage infrastructures, while it is undersupplied with gas and oil E&P financing and technology, to develop its own domestic reserves.
In the Caspian, as Italy’s ENI and its consortium partners (Shell, Exxon, Total, Conoco, the Kazakh government and Impex) have found in their Kashagan project, extreme high costs and a harsh environment, plus a lack of infrastructures have heavily slowed down development of this giant oil and gas field. In the region’s west and Black Sea, these barriers are lower, and timelines for projects to reach export status will be shorter, making it even harder to portray Putin’s strategy as a resource grab.
One clear bottom line is that simply due to the region’s gas resource endowment, and its energy infrastructures including pipelines, Gazprom will soon have no other option than to cut gas prices. Supply from non-Russian sources will grow, and prices will fall. This is hard to portray as a “resource grab” profiting from scarcity!
Resource Scarcity Fears and Geopolitical Musings
From the right distance away, from roughly 8000 kilometres in Washington that is, in the 1990s, Brzezinski could announce that both eastern and western Europe are energy resource depleted regions, in which Russia’s Vladimir Putin would later make a thinly-disguised energy resource grab. More than 15 years ago, Zbigniev Brzezinski was advising US political leaders that the “real meaning of the Cold War” was an attempt by Russia to make Europe dependent on Russian energy and cut off western Europe’s access to energy resources and energy transport routes of the Black Sea, Caspian Sea and Central Asia.
We can note Brzezinksi in the 1990s did not include the Suez Canal, because that theory of Russian conspiracy to cripple Europe’s oil transport security, by supporting Egypt’s Nasser, was put to bed long ago. Today, his 1990s-vintage theories also need putting to bed – or in the document shredder.
US energy corporations, to be sure, are still interested in eastern Europe-Central Asia, but since the 1990s the often extreme high costs, lack of infrastructures, and unpredictable local political partners – usually recycled Soviet era party bosses now calling themselves “democratic” – have tamed US and international energy corporate hopes – and their willingness to spend in the region. To be sure, the western fringe of this large region, including Ukraine, is better served with energy infrastructures, but as present events show, political turmoil and unpredictability still runs high, and at least as important, Ukraine already has more gas infrastructures than it needs.
More important for US energy corporations who were drawn to the region, their own shale gas and shale oil revolution is led by and focused on North America. Home is best.
US Big Energy’s political masters, in Washington, may still be steeped in Cold War-vintage geopolitics and Peak Oil energy resource shortage themes, but these are not the reality on the ground. Since at latest the period from 2005 to date, outlooks for hydrocarbons reserve discovery, and output development and growth have radically increased on an almost worldwide basis – including SE Europe and Central Asia. At the same time, only taking Europe, its oil and gas demand trends are on a sustained downward track, meaning the continent has overcapacity of its existing energy transport and refining infrastructures. This is the real European energy problem, today.
Europe’s key trade surplus status with Russia is also a major factor heavily shading the Cold War geopolitical musings of Brzezinski. EU trade surplus with Russia basically means that Europe trades manufactured goods and services, for Russian energy. This commercial interdependence of Europe and Russia makes it unrealistic to imagine that Washingtonian paranoia has any rational basis, suggesting again that the EU, sooner rather than later, will shelve its talk about sanctions against Russia and support to the anti-Russian aggressivity of the new and instant Kiev “government”.
As we know, political shadowboxing and geopolitical musing can fly far over the cuckoo’s nest, tempting would-be Great Statesmen or women to raise their stupidity quotient, even further. To be sure, the financially overheated SE European and Central Asian “energy and pipeline play” will likely suffer from the recent and present turn of events in Ukraine and Crimea, but this will have little effect over time on hydrocarbon E&P and infrastructure development in the region. Among other real world results, this certainly implies a downward trend for both oil and gas prices in Europe.
Andrew McKillop has held posts in national, international and Euro Commission energy, and energy policy divisions and agencies.
These missions have for example included role of National energy coordinator, Govt of Papua NG, Director of Information at the AREC technology transfer subsidiary of OAPEC, Kuwait, Senior energy research associate at the UN ILO and UNDP, Senior advisor to President, Hydro & Power Authority of British Columbia, Canada (BC Hydro), Seminar leader at the Administrative Staff College of India, Hyderabad, study, Senior energy associate at the Canadian Science Council, and elsewhere.
Andrew McKillop is a regular contributor to many specialist oil and energy Web sites. He was first energy editor of the journal ‘The Ecologist’ and has published works with other analysts, e.g. ‘Oil Crisis and Economic Adjustment’, Pinter Publishing, with Dr Salah al-Shaikhly, currently the Interim Iraqi government’s Ambassador to London.