Wednesday, 14 January 2009

Russian gas to Europe 'blocked' - I don't think so...

According to the BBC, it is really happening again - those pesky Ukrainians are tampering with our gas supplies, or are they?

I must tell you I have had an itch about this since 2006 when I read a very interesting article, which identified structural shortcomings in Gazproms ability to deliver Gas to the EU. Again in 2008 this piece by a British Academic in the German Press here caught my eye - there is a nice summary here in English. Alan Riley the academic responsible for the 2008 article is also published here and here, citing fundamental problems with the Russian monopoly Gazproms inability to deliver, which in summary are
  • An antiquated pipeline system, going in one direction west through Ukraine
  • Lack of investment in bringing on new reserves
  • State enforced commitments to meet domestic priorities for supply
  • Aging agreements with former USSR states to supply Gas at cost
  • The falling cost of Gas on the wholesale markets, further restricting development of new transmission systems and reserves
  • Gazproms dependence on cost price East Asian gas imports to meet current demands

Russia may have extraordinary reserves of gas, but these are underexploited, and they lack the transmission systems to meet their current demands - ostensibly there is a shortage of Russian gas, and the solution is investment - however the first of the new pipelines and fields are unlikely to get past the planning stage this year and will not be available for at least another 3-4 years...

This shortage became apparent in 2006, but was blamed on the Ukraine, 2007 was a relatively warm winter in Europe and Gazproms European transmission pipeline was called upon to deliver less gas than for some years - no problem there. But this winter is a cold one across Europe and the inability of Gazprom to meet it's delivery commitments is a symptom of a shortage, not the fictional wrangle between Ukraine and it's former masters. Gas is stored in high pressure pipelines, backed by storage and production facilities, when the taps are turned on by consumers the pressure plumments unless you have sufficient supply capacity and compressors, Gazprom has insufficient supplies and aged compressors - ie. neither.

Would it come to you as a surprise that our inept UK and European politicians are aware of this, I wonder why they are so silent on the issue?
Paragraph 170 and 171 of the House of Commons Foreign Affairs Committee Global Security: Russia Second Report of Session 2007–08

170. The CSRC told us that “Impending shortages of gas […] present new risks of supply disruption to [the] EU.” It also warned of the risk that CIS states dependent on Russian energy were most likely to fall down the widening gap between demand for and supply of Russian energy resources, since, as we have seen, Russia is prepared to prioritise its higher paying EU customers. Dr Averre warned that the likely reduction in Russia’s ability to export “may be more of a problem than the idea of holding countries to ransom. Similarly, Ms Barysch told us that “Our main concern at the moment is not that Russia cuts off the energy to us, but that it will not be able to deliver as much gas to us in the future as we would like to buy”. We conclude that the prospective shortfall in Russian gas production represents an urgent energy security concern for the EU, and a greater one than the risk of Russia disrupting supplies for political reasons. The intensified competition for Russian gas which appears to be in prospect between Russian domestic consumers, Russian CIS customers, and the EU, has the potential to aggravate a number of political relationships. We welcome the Minister for Europe’s apparent awareness of the urgency of the problem. We recommend that the Government work to achieve a common understanding of the likely Russian gas shortfall with both EU partners and Moscow, and that it inform us in its response to this Report of the steps being taken in this regard.

171. Our witnesses largely attributed the shortfall in productive investment in the Russian gas sector to the dominance there of the Russian state, in the shape of Gazprom. Our witnesses pointed to developments in the Russian oil sector as foreshadowing the pattern that seems likely to unfold in gas. Having been below 20% in 2004, state ownership of the Russian oil industry (by output) is expected to exceed 50% in 2007. However, Professor Hanson told us that “growth of output and export volume of oil has slowed strikingly” over recent years. According to Mr Clark, the two main previously private oil firms, Yukos and Sibneft, were achieving returns on total assets of over 30%. By contrast, Gazprom and the state oil firm Rosneft, which have largely taken over these two firms’ assets, achieve returns of less than 10%.
We should be very concerned about this lack of clarity, in this piece and the associated research paper, again by Prof Alan Riley it is made clear that Gazprom and our reliance on Russian gas is a threat to global security.

All the time the Ukrainians are being turned into scapegoats by dint of their misfortune to host the main interconnect to Europe, to save the face of plundering Oligarchs and corrupt Politicians in Moscow.

I don't have a solution, but I do know that we are sitting on massive coal reserves in the UK, in addition to oil that is nowhere near peak, and some gas reserves. Why do we need to import energy and fund a state (Gazprom represent 25% of federal state revenues in Russia) that poses a security threat and is incapable of honesty about their one genuine commercial success since Glasnost?

Edit: Do not thunk for one second it is coincidence that the gas supply falters at peak demand times only - this is a direct function of Gazproms inability to meet the demand. If Ukraine wanted to force a price negotiation with Gazprom, as a prospective candidate for EU membership, surely they would limit supplies in the summer - thus flexing their only means of control over the Russians with the minimum of disruption to their prospective EU partners not to mention their own citizens and neighbours.


  1. I got linked here by Timmie. Nice Blog.

    I am somewhat shocked to realize that Euoropeans and Brits......Relied On The Russians.

    Why do you suppose the gas reserves and pipelines are underdeveloped? Because every international gas developer and pipeliner from here in western Canada to some guy with a home built service rig in West Bumfart Louisiana knows...You Can't Trust The Russians.

    You Euoropeans and Brits have all gone mad.

  2. Hi Fred, yup gullible and willing to fritter away our own reserves - that's us.

    I really wonder if any of the European and UK politicians have actually considered energy security, guess not.

    Tx for your kind words.

  3. Very good article. I had thought that it was just politics but now realize my naivete. Good blog BTW.

  4. Tx scunnert, interesting how a bit of retention and research gives you an alternative view...