Thursday 2 July 2009

The Great Game, 2009-Style

Europe needs gas, of which there is no shortage. Although LNG brings welcome diversity, pipeline gas costs less, and Russia has the biggest reserves of the lot. But Russia is a bit strapped right now, as CU pointed out on Monday.

Ordinarily there would be a number of sensible ways around this dilemma: but Russia likes to play silly buggers, they feel it’s worked well for them over the years

Current attention is on a new supply route for EU countries in the south and east, who need increasing amounts of gas as they decommission really old coal and nuclear power plants. For diversification, the EC’s favoured project is the ‘Nabucco’ pipeline, a rather complex scheme which would bring gas from a catchment area of non-Russian states through to Austria and Italy.

Russia’s game is as follows. They’ve invented ‘South Stream’, a rival project, or more accurately a paper concept, which would fulfil the same purpose but with gas from Russia – and a lot less multi-national complexity. As usual, they spend no money on it, but they’ve leaned on the Italians – always suckers for a ‘special relationship’ with Gazprom - to give this less-than-tangible scheme some cred. It's unlikely both schemes could proceed.

Every time Nabucco takes another step forward, Gazprom announces some new degree of 'commitment' (short of actual cash, you understand) to South Stream, causing potential customers for gas from either system – from any system, really – to feel a bit cautious about committing concretely to purchasing Nabucco gas.

Paralysis is the result. Gazprom believes – with some justification – that this plays straight into their hands, pushing up the eventual price of gas. Hint to Russia: when (many years hence) you have succeeded with the gas price, you’ll find that LNG import terminals cost a lot less, and are built a lot quicker, than pipelines …



James Higham said...

Dead right. I had some connection with the Russians and this was the game all right.

Now, Nick, what's Europe's next step?

dearieme said...

Awfully vulnerable, a gas pipeline. Stationary target of great length.

Nick Drew said...


(a) lots of those relatively cheap LNG terminals & force the Bear to dance to the catch-up beat, instead of him forcing us to dance to his tune

(b) enforce the liberalised, single energy market vigorously, to prevent German companies holding back gas liquidity

(c) more energy efficiency; plus any renewables and nuke projects that are economic, to minimise import requirements

(d) & finally, our old friend ultra-efficient coal plant (not compulsory CCS)

* * * *
On (a): it truly doesn't much matter if, in the event, the LNG terminals aren't heavily utilised (e.g. when Russia belatedly gets on with its new pipelines): they really are that cheap. Look, for example at Isle of Grain and South Hook in the UK - both built cheerfully by big energy players, both now significantly under-utilised, equally cheerfully.

Italy is daft on LNG, it allows local planning authorities to block terminals for a combination of corrupt and NIMBY reasons. Most other EU countries give consent at the drop of a hat, & quite right too.

On (b): this is how the IEA fixed the OPEC oil embargo of 1973 - allow price signals to be acted upon freely in an open market, to sort out supply & demand.

dearieme - yes, but actually quite easy to repair ...

dex said...


Do you think we might witness something along the likes of the boom that Shale Gas and unconventional gas has been for the US, such that they experincing a glut of Natural Gas, here in Europe.

Admitally Shale Gas development in Europe is probably a decade away before it would start achieving levels where it might make an impact.

but something along those lines, bit like the LNG you mentioned which would remove the grip the russians have witht he gas supply.

Nick Drew said...

Dex - welcome. Yes, there's always more out there than people think, and I agree that high prices will bring forth additional indigenous resources

but Europe's a small place and we know what's there: of the big plays ..

(a) UK - pretty much maxed out
(b) Norway - real potential here, for sure
(c) Netherlands - they long since decided to eke out their gas reserves according to a state plan, it's their only natural resource

and that's it: no shale-equivalent that I know of

but nil desperandum, there is plenty of gas in nearby places other than Russia: Algeria, Libya, Egypt, Iran, Iraq, Qatar, ... the list goes on. We ain't running out of gas.

As regards a glut, that's happening right now, because of collapsing industrial demand (which is one of the reasons the LNG terminals are not being used much). Gas storage is at record levels for this time of the year (it usually isn't full until the end of the summer).

History suggests these cycles are exacerbated by the lack of an open market.

dex said...

I agree with you there is plenty of gas near Europe which could be developed to reduce the dependecy on Russia but despite Europe being a samll place there is an estimated 510Tcf of Shale Gas Resources in Europe (according to GASH

The glut in america, i would say is partly from crumbling economic demand like you said but the appearance of unconventional gas production. The likes of Chesapeake Energy were producing 2bcf/d from Shale gas in 2008. That has led the States to see an increase in gas production by 6% from 2007 after almost a decade of zero growth.

So i guess in a round about way i'm agreeing with you that there is certinally a way out of this game with Russia but where it will come from i think that could prove to be suprising like Shale gas was int eh States. Nobody really saw it coming until the technology made it possible. Wheather Europe will do something about it, i remain doubtful.

anywyas, keep up the stories about Energy. always enjoy reading them.

All this talk about LNG might get russia back into forming their Gas OPEC that you talked about several months ago.

Old BE said...

I have already outlined the BE plan for energy salvation but I think it bears repeating because it's such a nice day.

Windmills to be connected to liquid hydrogen generators so that when they are generating at above demand the energy is not wasted.

Cars to run on said hydrogen.

Homes to be heated by cheap wind-generated electricity.

Electricity to be so cheap that it isn't worth metering ;-)

Nick Drew said...

tx for the link, Dex

Gas-OPEC ? as you know, I don't see Russia ever obeying a committee decision. Kinda falls at the first fence.

ivan said...

Nick, re your point (c) in reply to James.
Most renewables are not economic - as you say - and will never be, despite all the green lobby say. For wind energy to even begin to supply 1% of our needs there would have to be very large turbines on every available open piece of land in the UK. Then there is the need for a national grid system connecting them, then the necessary backup generation system and so on.
Nuclear power is the only one that should be economic - if we are not stupid over unnecessary elf & safety.

roym said...

you may want to read this before deciding nuclear is economic

Nick Drew said...

Ivan - skeptical as I am on the economics of wind, I think you'll find >1% is quite feasible, indeed we may be there already

it's when it approaches double digits that the system-wide costs become ridiculous

rwendland said...

On nuclear, the EDF story for today is that a third of French nuclear power (20GW of 63GW) is switched off because the weather is too hot - the lowest level of French leccy generation in six years. River water too hot to use as cooling water.

Speak up those that say wind is too unreliable to use because of those icy winter windless mornings.

To be fair UK nucs are all by the sea, so we don't have this problem. But we were exporting a fair bit of leccy to France yesterday (upto 1.3GW - about a fully working nucs worth).