How long can Russia keep this up?

An odd barb sometimes thrown in this blog's direction (from who-knows-what troll factory) is that since Russia's invasion of Ukraine four years ago (four!) we have been predicting the imminent collapse of Russia itself.  Well, we haven't.  Ever.  In fact, right from the start we have said that ultimately there's nothing to stop Putin taking Ukraine if he really wants to - which, if anything, was far too generous to L'il Volodya and his ramshackle army.  Further, we've always remarked that the Russian capacity for enduring privation and general suffering should never be underestimated. 

But it is beginning to look as though Putin's stamina is waning.  There are so many straws in the wind: in no particular order -

• the 'victory' parade, hugely-reduced in scale and betraying obvious fears for its security, to the point where Putin could be humiliated (the word used by Russian milbloggers) by Zelenskyy's gracious 'permission' to go ahead with the parade
• widespread and debilitating fuel shortages, courtesy of Ukraine's remarkable drone campaign ...
•  ... which, incidentally, has - yet again - blithely crossed one of Russia's stated nuclear red lines in terms of its scale ("the massive launch / take-off of aerospace attack weapons ... and their crossing of the state border of the Russian Federation")
• Russia's re-engagement with US negotiators, with the usual risible sabre-rattling
• the background PR planning for a sudden 'declaration of victory' - even based on today's status quo, if necessary
• serious domestic discontent at frequent blocking of the www and the (supposedly) imminent closure of access to Telegram, all in the name of 'security'
• internal dismay at the Hungarian election result, adding to keenly-felt impotence over Syria / Cuba / Venezuela
• serious economic issues, macro and micro - see below
• angst over the pitiful battlefield performance thus far in 2026 - zero net progress** in the spring/summer offensive campaign (intended to capture the remaining Donbass territory by autumn: Kkarkiv, Kherson and Odessa are rarely mentioned these days); casualty rates exceeding enlistments; and Ukraine has achieved, at least for now, superiority in the 'battlefield air interdiction' (BAI) stakes, courtesy of its swarms of very smart drones and their equally smart deployment in Russia's immediate rear, over and above the deeper oil refinery campaign 
• etc etc: I could go on.

Oh, and on the global scale, no joy from Xi on the long (very long)-awaited deal for more gas sales to China, a farce that we've often written about here in the past - check the 'Gazprom' tag - another serious strategic disappointment.

Even so, I still don't reckon on near-term "collapse", or defenestration of Putin.  He has plenty of tools to prevent either.  But I do say he's now beginning to think seriously in terms of an off-ramp: and many powerful people in Russia are even more seriously trying to get this to the top of the agenda.

In the midst of it all, the IISS has published this sober analysis.  It doesn't predict imminent collapse either; but it does set out the genuine problems and major dilemma Putin faces.  Between now and Xmas, I'm guessing we'll see recognisable, tangible movement taking place - in one direction or another.

ND 

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** Ukraine has in fact started making systematic small-scale territorial (re)gains all over the front, which in recent weeks have been larger than Russia's own small territorial gains.  On both sides these are to be understood in context: they are trivial in extent - largely infiltration sorties - and essentially opportunist in nature.  But there's a big difference: Russia's are intended, and indeed celebrated, as purposeful steps towards the taking of the Donbass; i.e. they are meant to be strategic.  Ukraine's, by contrast, are tactical spoiling measures - highly disruptive for any coherent Russian offensive this year.  But if they do indeed have that effect, they add up to having an important strategic consequence.

Xi highlights Putin's pipeline predicament

Russia's massive oil, & particularly gas exports have always mostly been via pipeline: ice-bound sea ports speak to that.  There's some LNG - with liquefaction courtesy of western technology, but pipelines are the big game.  So when Europe stops buying, and Putin has only a small outlet direct to China, the income largely stops.  And if, as he's been using every opportunity to signal, he's in for the very long haul vs Ukraine, there it rests - and it's gotta hurt, economically - until a big new pipe to China, "Power of Siberia 2", can be built.  

And Li'l Volodya was hoping to confirm that deal during this week's Xi visitation.  Even then, his exports to China could only reach around half what he's been selling to Europe, by, errrr, 2030.  Maybe.

But.  In keeping with all the body language showing clearly who's boss in that rather functional and one-sided relationship, Xi wasn't playing.  The best announcement Russia felt able to make on PS2 was minimal and pitiful.  We know the score.  Xi is gonna drive a Very Hard Bargain Indeed, from which Russia won't be getting anything close to half the revenues it once enjoyed from Europe, even if they manage half the volume.  Yes, China has brutal form on this one.  Nice to know who your best friends are, eh, Vova?

So, living off scraps it'll have to be.  We all know Russians can do this, and suffer long.  They can't be 'defeated', as such.  But it's not much of a strategic argument, is it?  You can't defeat me, so you'd just better give me everything I want.  Hmmm.  Maybe even the new 'multi-polar world order' doesn't work quite like that.

ND  

Natural gas as a feature of Putin's war

At the very start of Putin's war, I asked: What plans does Little Volodya have for his [natural] gas weapon?  (day one, 24.02.22)  Well, to his utter astonishment - and mine - we in Europe have managed a whole (exceptionally warm) winter without it, and gas turned out to be not the crucial geo-political trump card he quite fairly assumed (even if this is partly down to the ignorant nonsense that we don't actually need gas, peddled by greens and swallowed by many).   We went on:

Ol' Uncle Joe Biden said something at the weekend rather bellicose about Nord Stream 2 but I kinda doubt he has in mind blowing it up, easy and rather satisfying though this would be (there's a James Bond film involving a Russian gas pipeline, as I recall) ... Which leads us to consider a Big Accident. If there's too much high-explosive shit flying about in Ukraine, well, all that infrastructure is really quite fragile (although not too difficult to repair). Quite a big chunk of Russian exports still transit Ukraine, albeit NS2 is designed to put paid to that. Who knows what any number of rogue actors might think of doing in that very large country, in the fog of war? There are plenty of people who could profit handsomely from a Big Accident...

So now we have a new Nord Stream theory being widely bruited about: it was Ukrainians wot did it!  Let's see what evidence transpires - we've had enough quite evidence-free echo-chamber speculation for my liking already.  As you'll gather from the 24 February 2022 quote above, I'm not averse to a Rogue Actor hypothesis.  There are plenty of rogues, with plenty of money and complicated interests, in the world of Big Gas.

One thing I will tell you: there's almost no chance of anyone finding a smoking gun irrefutably in the hands of the Kyiv government.  With 100% certainty, we may be sure that Rule No.1 laid down to Zelensky by Joe Biden 12 months ago, will have been No Surprises.  And - can Zelensky get by without US aid?  I don't need to answer that.  So, let the wild speculation continue.  On the stopped clock principle, somebody's guess will turn out to have been correct (my money has switched from Soros to the military wing of Greta & the Greens). 

On the subject of Big Gas actors, they don't come much bigger than my old friends at Gazprom.  We hear that Gazprom is being encouraged to set up a 'private military company' on the Wagner model, but inevitably on much more Kremlin-friendly lines.  

Why?  Easy: Putin needs to harness all the local competence he can find; and Gazprom has plenty of competent people, well versed in mustering big efforts for big projects.  And, needless to say, they are part of the Kremlin elite (indeed, one of its paymasters).  If you're simply thinking like, perhaps a Shell or a BP - engineer-heavy companies stuffed with men-of-the-world with global experience of managing complex affairs - well, that's a fair starting point: but Gazprom has traditionally engaged in the practical world with even broader scope.  Not only do they have their own bakeries,  as I described here some years ago, they have schools and hospitals, AND an armed service, complete with AFVs.  

How come?  Because Russia is a big place (until 1990 it was even bigger) and the further you get from Moscow, the more you need to deal with local warlords of the Kadryov variety.  And Gazprom has always needed to do business far and wide.  Collecting money from a distant райо́н is often as difficult for the Big G as it was for the Tsar's tax farmers in earlier years, or the Golden Horde's tribute-gatherers before them.  The arrival of the men from Gazprom in a small armoured column is often how the matter is handled (as noted here 15 years ago). 

And would you rather be on the payroll of a Gazprom motor rifle regiment, or one of Wagner's cannon-fodder 'musicians'?

ND

Russia and leaking methane: the anecdote

By popular request ... (BTL here)

One of the few noteworthy outcomes from Cop26 in Glasgow was an international agreement to reduce methane leakage, CH4 being a far worse GHG than CO2, albeit much less persistent in the atmosphere.  Until then the gas had never received the attention it deserved, though if we get to the point where trapped methane from the Siberian permafrost starts escaping big-time, it certainly will.

There are many places in the western world - OK, in some states of the USA, to be precise - where regulatory standards for methane leakage and/or their enforcement, are essentially non-existent.  But the technology for tightening up on this is very straightforward, so it should be low-hanging fruit.  It's important for every reason under the sun, but not least that methane leakage from the natural gas system as a whole gives shale fracking a bad name:  if you've ever paid close attention to the notorious anti-fracking film GasLand, the genuine problems it highlights are not really to do with fracking per se, but rather the leaky infrastructure downstream of the drilling.   

Needless to say, (a) the COP26 agreement is being resisted by the oil & gas lobby in America; (b) Russia, China, India et al didn't sign up to it anyway; and (c) by far the greatest culprit is of course Gazprom and the entire Russian gas system, which is as leaky as all Hell (and there's a lot of leaking methane in Hell), on a scale hard to comprehend.  The World Bank has for 30 years been promoting schemes for doing something about it in Russia, whose own technology is not up to the job.

So to the story.  When I was in Moscow some years ago, one of the Russians I was on after-work-beer terms with told me this.  He was a mathematician working in the gas sector, and one day he was assigned to a small team that had been set the following challenge.  There were no gas meters to speak of in the entire Russian gas system, from one end to the other (domestic heat control was famously achieved by opening the windows in winter), but in order to satisfy certain World Bank requirements they needed to quantify gas leakage across the network.  They had some basic pressure readings etc at various points on the system, but they would need to develop some kind of modelling technique to derive an estimate of the methane lost.

Diligently, they worked on the task, and after some months came up with a complex formula for making the required estimate, in classic Russian fashion.  This they presented to the relevant Board member of Gazprom, who received their conclusions with interest.  He thanked them for their hard work, but told them that they'd overlooked something, namely the "environmental factor".  What is that? they queried.  Well, he said, you take the formula you've come up with, and multiply the whole thing by 0.1.  Why? they asked.

He leaned forward, and quietly but pointedly said: Because we couldn't be losing that much gas - could we, hmm?

ND

IEA: A Dog That Hasn't Barked (at Germany)

You'll often see pronouncements from the International Energy Agency being cited by all manner of differing parties & factions as authoritative & well-respected etc.  It is.  But it is also politically, errr, coy.

A note on the history.  Back in 1973 when the Arab-Israeli war (part 94) kicked off and the First Oil Crisis ensued, OPEC instituted an embargo - a blacklisting of certain importing nations (including the Netherlands for some reason I forget) which had a highly disruptive effect on world oil supplies.  The North Sea was in its infancy as regards oil production, and the UK was heavily affected, among many other western nations.  In order to coordinate the free world's oil supplies, the OECD in Paris set up an ad hoc group that did the business rather successfully (I've written about it here and here), encouraging all concerned to establish it permanently as the IEA**.   Although the moniker was 'energy' its early focus really was oil, and it staffed up with some very excellent oil people from around the western world.

By the 1990s a new concern was emerging.  Despite US opposition from the very start, Western Europe had become heavily dependent upon Russian gas supplies, notably Germany getting around 35% of its gas from Gazprom and rising (it's 40% now - not so very different); and of course former eastern-bloc countries even worse.  Although the Berlin Wall had well and truly fallen, the potential for disruption to gas flows from the east was starting to cause unease.  This was a bit left-field for some people, because (a) Russia had been at great, nay massive pains to be a really reliable source, cheerfully cutting off gas for its own people if needed to keep hard-currency exports going, even in the depths of winter: and (b) this was a lot more than could be said for the Netherlands, another big supplier to Germany, and statistically by far their most unreliable source.  Interruptions from Russia tended to be local to one pipeline, accidental in nature, and ultra-short-lived.  Everyone concerned had built substantial gas storage facilities to iron those out, and nobody ever really saw the need to make much of a fuss.

So in 1994-95 the IEA conducted a very thorough review on security of gas supply.  The resulting publication concluded that all major European countries could withstand one winter of curtailment of their single biggest source of supply, albeit potentially requiring massive switching to oil (which was far more substitutable back then than nowadays) and also shutdowns in industry.  The countries that couldn't withstand it were basically Ireland (dependent on supplies from the UK) and Portugal: the Baltics and Balkans were not included in the study (it was 1995).  The IEA made a number of recommendations, high on the list being: to liberalise the European gas market; debottleneck a large number of local pinch-points in the pipeline system; engineer reverse-flow options in many pipelines (easily done); and diversify import sources, especially via LNG.  All of these steps were taken, with the glaring exception being that Germany declined to involve itself in LNG: as pointed out here before, the sainted Merkel didn't commission a single LNG terminal in her entire reign, being wedded to the active-appeasement policy of Russenverstehen, so Germany still has none.  

The IEA 1995 publication was diplomatically worded, with not a hint that Russian political considerations might be lying behind the concerns.  But I can assure you, they were.

They've updated that report many times since, mostly recently 2020-21.  Then, the preoccupation was post-covid recovery plans.  So far as I can see (and I haven't trawled every single edition) the IEA has never troubled itself to speak openly about the concerns over Russia that I know for a fact they've harboured, and analysed, for nearly 30 years.  Right up until publication of a 10-point Plan++ in March of this year, that is - with a hint of concern being voiced as early as, oooh, January. 

OK, the OECD is a lumbering political beast.  But why nothing publicly from the IEA before March 2022?  We have to suspect a German veto at work.   C'est la vie.  And all a bit circular, really ...  Germany's got a problem but, oops, they'd rather we didn't mention it.

"As the world’s leading energy authority, the IEA will continue to serve as a focal point for global dialogue on how to ensure a secure and sustainable energy future."

Well speak up then, matey!

ND

_____________

** not to be confused with America's EIA - also very authoritative

++ actually, they slip in Point #11 as an afterword:  maximise oil substitution for gas.  This won't yield nearly as much as it would have back at the time of the 1995 plan, but it's still material.  But, as they coyly mention, it might not be consistent with Net Zero 2050 ...

Update:  40% is too low for Germany's proportion of gas supply from Russia (though it's widely cited as such).  It's closer to 50%.

Mr Putin's Gas

What plans does Little Volodya have for his gas weapon?   (Methane, that is: large-scale chemical warfare doesn't seem too likely right now.)  Gazprom's great selling point has always been reliability - better, for example, than the Dutch, who in their heyday as an exporter would always interrupt external sales rather than deliveries to their own people.  With Russia it was the exact opposite: Russians could freeze in order to support hard currency sales.  Notwithstanding Putin has been holding back gas for many months now, he's always met minimum contractual obligations and curiously, just today, westward flows of Russian gas are the highest they've been for several days.

"Suspending" Nord Stream 2, as the Germans have done, is virtue-signalling, but meaningless in practical terms:  they'll un-suspend it at the first convenient juncture.  Ol' Uncle Joe Biden said something at the weekend rather bellicose about NS2 but I kinda doubt he has in mind blowing it up, easy and rather satisfying though this would be (there's a James Bond film involving a Russian gas pipeline, as I recall).

So: will Putin turn off the taps, as that long-running and rather prescient little graphic in the opening credits of HIGNFY has it?  More constructively, he may satisfy himself with the dramatic price hike that's already happened, of course.  

One thing's for sure, the Germans (and many others) are in absolutely no position to forgo that gas voluntarily, as we've noted here before.

Which leads us to consider a Big Accident.  If there's too much high-explosive shit flying about in Ukraine, well, all that infrastructure is really quite fragile (although not too difficult to repair).  Quite a big chunk of Russian exports still transit Ukraine, albeit NS2 is designed to put paid to that.  Who knows what any number of rogue actors might think of doing in that very large country, in the fog of war?  There are plenty of people who could profit handsomely from a Big Accident ...

"Short gas" may describe all our positions as consumers right now.  Won't be many commodities traders short gas at the moment, though.

ND  

Inflation Ahoy (?)

Ever since QE was invented, some folks have been predicting inflation and others deflation.  Anyhow, back in January I commented (BTL here) that energy prices were stirring, led by gas and the Far East's insatiable demand for LNG cargos that would otherwise be available for Europe.  

A very mild March dampened this down a bit, but it's roaring away now, to the extent that this week, forward prices for this coming summer in Europe are only a fraction below forwards for next winter.  You might guess that is quite unusual for a very seasonal commodity like gas.  You'd be right: it's really remarkable.  (BTW, the fact that next winter's price is relatively low doesn't represent any kind of comfort that easier times are ahead.  Say after me: "a forward curve is not a forecast ...")

What's going on?  (a) Absolute demand, especially in the east; (b) Russia / Gazprom is playing silly-buggers, holding back supply capacity they could easily fill.  Why?  Because the are reminding the Germans, none too subtly, of where their energy comes from, pressuring them to resist US sanctions on Nord Stream 2.

The prices of oil, coal and carbon allowances are steaming ahead, too (and therefore electricity).  Is this destined to continue?  Well, Russian tantrums come and go, so the parochial matter of European gas supply can ease at the drop of a hat.  And the dreadful situation in India suggests that Covid may yet bring GDP-wrecking times ahead, offsetting the strong Asian bounceback from a year ago.  So who knows?

But when Biden's trillions start hitting the economy, on top of China's regular growth, the demand for steel and concrete (and copper, and ...) should boom.  Covid vs Concrete ... who knows?  You thoughts invited below -

ND

Biden & those multiple Trump sanctions: what now?

The wokerati seem to have invested a lot in Biden, and maybe with good reason as regards domestic policy; but is he going to turn out to be a Hillary-style hawk abroad?

Of particular interest to me is whatever is going to be the successor to Trump's fairly determined policy on blocking Nord Stream 2, the substantial Russian / Gazprom gas pipeline project designed strategically to outflank comprehensively their own former Ukrainian export route.  Germany of course is the intended landfall, and Germany has long stuck doggedly to its own wholly self-interested Russia policy, in the face of widespread unease and often downright condemnation elsewhere.  And yet Germany is exceptionally keen to cozy up to Biden, hoping he'll be both friendly and not overly concerned to make them step up to the plate as regards NATO contributions.

Then there's China ... and Iran ... was there a single global hotspot at which Trump wasn't throwing America's considerable sanction-clout around?  However much bravado the three target-countries muster, they do all suffer under sanctions to a greater (Iran) or lesser (China) extent.  If you've ever done any business where a sanctions-related issue arises, you'll know how paranoid mainstream western companies are about "transgressing" unilateral US diktats.  And of course most other western nations have broadly similar top-level policy goals as the USA in these matters anyway, even if no intention (or ability) to pursue them with as much (or any) vigour.

What will be the successor-policies under the new US regime?  Hillary Clinton's reputation in many quarters is that of an outright warmonger, so being a Democrat isn't per se much of an indication.  And then there are the Biden family's, ahem, *wider interests* ...

ND

Muddying the Waters in FB ... and Moscow

Today we read that Facebook intends to merge, in systems terms, various functions across various of the platforms it owns - FB, Instagram, WhatsApp, Messenger, etc - in order to make it harder for regulators to split the company up, Standard-Oil style.  (Google, incidentally, spotted this wheeze a long time ago - and it cost them an astonishing amount of development $ to achieve.)

Reminds me of a similar but lower-tech story from my days in Moscow.  Gazprom, inevitably, was my main counterparty and I was in their fine new offices a lot.  My Russian staff used to get me to buy fresh bread rolls from the canteen there - the Moscow City bakery only baked twice a week, but Gazprom's operated every day! - and to make this easier, they procured for me (I never quite knew how) a Gazprom pass ...

I was professionally very keen to get an accurate company organisation chart for the sprawling giant.  I was supposed to conduct all my dealings through the Protocol department, but after I got a bit of a presence in the company, people would just invite me in for a chat (out of sheer curiosity, as much as anything: I didn't conduct my affairs in quite the same way as many expats).  I had several memorable (and quite candid) encounters that way, which may be posts for another day.

Anyhow, I asked for the org chart, and was given this bizarre diagram, several times more complicated than the tube map of London, with dotted lines criss-crossing everywhere.  It was of course designed to indicate that there was no such thing as a modular division within Gazprom, oh dear me no: nothing that could be identified as a candidate for breaking off and floating separately - a fate which Gazprom dreaded.  (It was complete bollocks, of course, there were loads of meaty corporate chunks that could easily have been autonomous.)

This wasn't getting me very far towards understanding the hierarchy (which, in Russia, is an extremely important thing to do - КТО КОГО - who does what, and to whom?, the first thing you need to establish in any dealings with a Russian set-up).  But having studied these matters in some detail in my soldiering days, I knew there'd be an answer; and I had my resourceful staff procure me a Gazprom internal telephone directory.  The numbering system set it all out clearly ...  

ND

Back in the Real World, part 247: Big Energy News

In amongst the constitutional carnage, I just thought we should register a couple of big goings-on in the energy world.

1.  Price-rises ahoy

The wholesale markets in gas and power have responded instantly (particularly in the forwards) to three big European news items of the last two days:

• Admission by EDF they have discovered welding problems and other issues in the reactors of "several" of their French nukes.  My spies tell me it's 20 out of their total 58 in France.  If they have to fix this in short order - and the French nuclear regulator is surprisingly independent and stern - the price of electricity for the whole of Europe will rise steeply
• Europe's original and biggest (by far) gas field of the modern era, Groningen in the Netherlands, is having its output severly reduced with premature closure altogether in 2022.  This is because of the increasingly damaging earthquakes being caused by the gigantic scale of operations there over 50 years.  Groningen is a true monster, even by global standards, and the bedrock of north European gas supply for half a century.  Impact on price is pretty obvious ...
• On top of these two physical problems, a man-made issue: Poland has won a court case limiting Gazprom's access to an important gas pipeline, which in turn will limit their ability to utilise their Nord Stream 2 system which is designed to outflank their previous dependancy on Ukraine as an export route.  A bit involved, I know - but that, too, is causing prices to rise!   

2.  GE the new Enron?

GE is going under.  That's what someone thinks. “GE’s $38bn in accounting fraud amounts to over 40% of GE’s market capitalization, making it far more serious than either the Enron or WorldCom accounting frauds.” 

Oooh-errrr ...

ND

Meanwhile in the Real World ... Carnage at Gazprom

Back in October I signalled that if we had another 'beast from the east' in the traditionally tight Jan-March period, we might be in for a cold time of it.  That was because Russian gas had already been at max through the Yamal (Belarus route) and Nord Stream1 (Baltic route) pipelines at the start of the autumn; LNG imports to Europe were already running at high levels; the Dutch and the Norwegians were winding back their production; and the weather was by then still mild.

Well.  Three things happened to turn this situation on its head.  Firstly, LNG supplies increased still further, as global production rose to a far greater extent than demand from the Far East could accommodate; the weather was, errr, Quite Mild in Feb, to say the least; and, most surprisingly of all the mighty Gazprom has been shovelling gas through the Ukrainian route, famously shunned by Russia for several years now, towards Europe as fast as it is able.  Wholesale prices have correspondingly halved!

Why?  Because Gazprom, long the milch cow for Putin's regime and indeed his predecessors', is deep in the shit.  Amazingly (for an organisation that once could do no wrong) it has completely lost its monopolistic stranglehold on Russian gas production to newcomers with evident clout where it matters, and at the same time has been materially knocked back in the export markets by US shale production.  Compounding these woes, it has had to follow Putin's instructions and freeze out Ukraine (its cheapest export route); and divert vast resources towards (a) building Nord Stream 2, and (b) delivering on its new obligations towards the Chinese, who beat a very tough, big deal out of them a while back and are drumming their fingers impatiently.  So "dividends" to Putin et al have not been living up to expectations of late.

In traditional Russian fashion, there has accordingly been, yes, a Purge.  Three men at the very top have been given the old Olga boatman's yo-heave-ho without explanation  - "sent to pension", in the glorious Russian euphemism - and are no doubt grateful that things have at least moved on a bit from Comrade Stalin's day.  And they've opened the valves across every west-bound pipeline system to get as much revenue out of the European market as possible, chasing prices downwards all the while, of course (capitalism works like that ...)

Hilariously, their export-route contracts with Ukraine terminate a few months from now.  Even more hilariously, the EU intends to mediate the negotiations!  Ukraine by no means holds all the cards though, because lots of big western companies, not to mention Germany itself, have an interest in seeing the ultra-contentious Nord Stream2 completed, which will very effectively outflank the Ukrainian route in a couple of years' time - obstruction by Denmark notwithstanding.

I'll keep ya updated ...

ND

The Politics of German Gas

Round the back for the dodgy deal

A brief history, plus some other bits and pieces you won't read about in the meejah and might find helpful in forming a view on Germany's and Gazprom's shenanigans and Nordstream 2

(1) Firstly, it's also about oil - not just gas.  The Eastern and mittel-euro countries, including Germany, have long relied heavily on Russia for oil products (indeed, those countries nearest to Russia are almost wholly dependent).  Of course, oil as a commodity is very liquid - in both senses: and both senses are equally important.  (i) Market liquidity means there is a universally-accepted benchmark for pricing;  and (ii) literal physical liquidity makes transportation and delivery much easier than for (e.g.) gas, the latter being dependent on inflexible infrastructure.  Both factors make it much more difficult for Russia to stiff their european oil clients than it is for them to play games with gas: everyone knows what the market price of oil is; and it's not difficult to obtain the stuff, and transport it, from anywhere (albeit perhaps inefficiently).

Those factors combine to make the situation almost the converse to gas, because oil is easy to steal, and to fence.  There is a strong tradition of truckloads of misappropriated Russian oil being sold at discounted prices in eastern and central Europe by highly organised criminals (a bit like ISIS oil to Turkey a while back - and indeed mafia oil in New York City!)  In several EU countries, if they were being honest, what they lose on the gas price, they (well, some of their *businessmen*) gain on the oil.  I'm guessing we won't see an EC inquiry into that anytime soon.  (See also Raedwald passim.)

What does this gas-flow map remind Germans of?

(2) Gas and Germany:  it's fairly well-known that back in the late 1970s / early 1980s the USA made strenuous but unsuccessful diplomatic efforts to prevent Germany, France, Italy et al from buying Russian gas at all.   This was the era of Cruise, Pershing & 'Star Wars', after all.  But Germany (which in those days was more than pulling its weight in NATO) had already decided it was a strategic move, and went for it in a big way.  An exceptionally strong *commercial* relationship was forged between the predecessor of Gazprom (then called SoyuzGazExport) and Ruhrgas, a classic German entity of very complex ownership (including Shell, Exxon and BP) and extremely strong *connections* to the German government.  Ruhrgas was eventually bought by E.on in 2003 - mysteriously the EC competition authorities did not prevent it and E.on has continued in the tradition of being *very close* to both their own government and Gazprom.  No surprises there.

When the eastern countries complain that Germany has cut a preferential deal with Gazprom, they (and the European Commission) choose not to highlight the very substantial amounts of what we might call soft finance Ruhrgas and E.on have provided to Gazprom over the decades (obviously, at governmental behest, to say the least).  Whether Germany Inc as a whole has made a net return on this colossal *investment* in financial terms - cheaper gas in return for soft finance - I couldn't begin to guess.  Maybe they've received a "most-favoured-nation" discount, and maybe some of the eastern countries have been handed a "punishment premium".  Frankly, though, if Germany Inc has made an overall financial loss I wouldn't be surprised.   Because Germany sees it all as strategic.  And, as we know (see recently the Deutsche Einheit) Germany can be willing to pay a high price for what it sees as a strategic geo-political imperative.  

(3)  Overall / rest-of-Europe:  putting Ukraine to one side, Gazprom has generally been a very reliable supplier in political terms, i.e. they have kept the gas flowing westwards even sometimes at the expense of cutting off their own citizens in situations of shortage.  The reason is easy: hard currency revenues (trade was always better than fighting).  As I've mentioned here several times before, it's always been Holland that has been seen as a politically unreliable supplier: they'd always interrupt exports if there was a problem, in order to supply their own citizens in preference.
 

Not entirely reliable

(Incidentally, Gazprom hasn't been particularly reliable in engineering terms - in fact, their system is notoriously primitive.   But their big Europe customers understand this well, and have invested in huge gas storage facilities to tide them over the inevitable occasional hiccup; and everyone's too polite to talk about it much.)

Now Germany's dealings with Gazprom have been conducted more-or-less at state level; and while one can describe it as highly corrupt, you could also say it's just high politics (- like BAe and Saudi Arabia).  And on the western end of that relationship it's mostly a matter of plumb sinecures taken by Herr Schröder and the like - galling, but hardly the worst thing anyone's ever done, nor even remotely furtive.  But in other countries ... well, let's just say that in the case of certain large Mediterranean clients of Gazprom's, the hanky-panky has been rather more venal.

Ever meddlesome

(4)  The 'Energy Union':   I've written before of my disgust at the acquis-grab that is the European Energy Union.   Suffice here to say that for the eastern EU members, right from the start this has all been about getting the EC to deal with Gazprom on their behalves, urged on by the ever-meddlesome Mandelson, needless to say.  (The EC has actually been promising all countries everything they want in the energy space, in order to extend the acquis.)   Given that the timing of the Energy Union initiative coincided with the height of the Ukranian nonsense, the EC documentation contains some of the most undiplomatic anti-Russian sentiments you'll ever read from a non-Trumpian civil servant, so it's clear the easterners have been making the running and holding the pen.  Germany, though, blithely ignores all this crap and motors on with Nordstream 2 unaffected.

Let's see how it all pans out.  One of those easterners is presumably leaking the Competition enquiry stuff (which was almost forgotten, so quiet had things gone) in order to sabotage Nordstream 2 at a fairly critical juncture.  The Danes are nervous of approving their leg of the new Baltic pipeline, but will probably roll over.  The Finns have already rolled over (well, where do we think they get their oil and gas?)  Yes, it's power-politics all the way.  Think the worse of Germany for it?  They'll be the judge of their own strategic interests.

ND

Not a great look for Germany or its politics

The Telegraph have an excellent story out today on the Gazprom-Germany-EU shenanigans. It is well worth reading and here is a link to the full story on a non-paywall site.


I won't rehearse the whole article because it is very clear. The Germans have been happy to stiff Eastern Europe in complicity with the EU. Now that the whole story is out (which must be some miracle for the EU and I feel for the team who pressed publish on this), the EU are going to have to bury it or else end up with 30% income sanctions on Gazprom and State Aid charges against Germany.


The piece to add to it is some people context.


For a long time Germany has been well in with Gazprom. This has been arranged by Gerhard Schroder, the ex-Chancellor, who has long been in Putin's arc and is indeed now Chairman of Rosneft (replacing Putin late last year, natch). The picture here is from 2005, working closely with all the worst of the Putin Gang.


He is indeed a founder member really and today is in the inner cabal, always defending Putin. Angela Merkel has called him out once, saying she does not approve of what he is doing. But the reality is that he has done these sweetheart deals for Germany who look to have gladly lapped them up. Of course, readers here will know of the crazy "EnergieWende" policies in Germany which have left the Country desperate for Russian (low-carbon) gas.


As much as there is loathing in the UK for Tony Blair, he has not actually represented state actors that have hostile intentions. Yes he joined a few Bank boards - but even here Schroder has managed to be an Managing Director of Rothschilds to match. It is quite incredible really what has happened politically.


Of course, there are real world impacts in addition to the economic splintering of the EU that this has been creating, see just today where Germany refuse to join with US/France/UK in considering what action to take against Syria and their Russian supporters. Whilst there are plenty of solid reasons to avoid getting involved in Syria, the German-Russian gas relationship will always now allow for a lack of credibility to German political positions when we know how compromised they are with their Russian engagements.

Weekend Tale: the Moscow Mentality

BLT under CU's Iphone post, one of our anon's asked yesterday:  anyone know what kit the average Russian oligarch or Kremlin apparatchik has on their desks?

It's been quite a few years, but - History Corner here - when I was in Moscow I had a lot of Gazprom contacts.  Their offices were all identical, clearly kitted out on a hierarchical basis, and the senior ones all had the following inventory:

• two desk telephones ...
• ... one of them red!  A hot-line to the boss (I'm not kidding)
• a Dell PC
• an HP desk-top printer 
• a Sony all-in-one TV + VHS (but I never caught anyone watching TV or vid)
• a full-sized, admin-department-grade Xerox 

The whole package was quite clearly What They Thought Every Modern [western] Biznizman Has.

The red telephone was good for a smile: but it was the big Xerox that made me laugh.  Did they really think any westerner would be seen dead with the admin assistant's drudgery-box in his smart office?  Even David Brent left the photocopier in the hallway.

There was another amusing office phenomenon.  Gazprom was always in dread of being split up into multiple companies.   This made a lot of sense: the West is always railing at how big and awful a monopoly it is; and it is indeed so vast, there are loads of potentially modular (and quite marketable) companies you could break it down into, just as British Gas was de-merged into Transco / BG plc / Centrica etc etc.  

Gazprom's Cunning Plan for forestalling this was an organisation chart so complex, with lateral two-headed arrows and dotted-line reporting relationships all over the place, that no-one could point to a stand-alone chunk on the chart and say, well for starters you can obviously break out that division and sell it. 

However, I needed to understand how the empire really worked.  So I obtained an internal phone directory**, and guess what?  The extension numbers were organised in a perfectly logical, regular, hierarchical structure, from which the true set-up was readily inferred.  Easy when you know how.

ND 
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** my Russian staff were really good at getting stuff like that.  Someow, they also got me an office pass for Gazprom HQ ... useful for engineering meetings etc but from their point of view it was so I could go into the Gazprom food hall and buy fresh rolls.  The Moscow city bakery only baked twice a week, but Big G baked daily!

Power Play or Shell Game?

Eyebrows should be raised as Shell moves into the power market.  Why?  Because oil companies have been proven to be crap at electricity.  That includes Shell itself first time around when they - and BP, and Total, and Statoil, and Conoco, and Amerada Hess ... - tried, and screwed it up (this was in the '90s and early 00's).

It looked so logical, so easy.  They were (and are) big, big companies - energy specialists, no less, who had done OK in the gas markets when they got started around the globe in the 80's and 90's; they knew about trading and risk-management and marketing; they had ultra-credible brand names for the sector.

At least, that's what they thought.   But, to make a long story short, similarities notwithstanding it turns out trading electricity is an order of magnitude more difficult than gas.   There have only been two non-electricity companies to make a serious fist of the power market via organic development: Centrica / British Gas and the mighty Enron, both originally gas players.  (If someone points to Gaz de France - now 'Engie' - or Gazprom's European trading vehicle GM&T, the response is that neither of these moves into power were organic.  GdF simply bought Electrabel; and GM&T hired big teams of existing power specialists (and in any event haven't made waves in the power sector).)

So now Shell are trying again.  They are sticking to the easy segment of the market - sales to industrial customers - and can probably make a go of it if they hire enough of the right people (including at the top: will they make the mistake of assuming one of the old senior oil hands can manage this electricity stuff?).  They have certainly let fly with the PR: see that mighty FT puff-piece linked above, and this gullible nonsense:

"Shell becomes latest energy disruptor: the UK’s energy industry is braced for change as the world’s second-largest oil and gas company is to supply electricity"

The FT piece (Nick Butler, natch: they obviously gave him one of those really nice lunches) is just as sycophantic: 

"Shell’s decision to sell electricity direct to industrial customers is an intelligent and creative one ... Shell has been developing an extensive range of gas assets, with more to come. In what has become a buyer’s market it is logical to get closer to the customer — establishing long-term deals that can soak up the supply ... Shell is likely to be a supplier of choice for industrial and commercial consumers and potentially capable of shaping prices"

Ho hum, let's see how they do.  "Soaking up supply" is a crass business concept in a commodity market.  "Supplier of choice"?  In yer dreams, Shell.  "Shaping prices"?  Nope, just selling on price to buy market share, like any other new entrant in a commodity sector.  When Gazprom entered the industrial market they needed to take a massive haircut as buyers simply laughed and pocketed the windfall while it lasted - which in their case was several years.  Butler actually admits as much: "prices presumably set at a discount to the market". 

Yup. A short-lived price war.  Not so much a disruption as a harmless diversion.   

ND

Buyer's Market - Get Stuck In

Open those valves

There is a pronounced and timely surplus of natural gas right now, with no obvious end in sight.  With even Gazprom having run up the white flag on oil-price indexation, now is an excellent time for the utilities to be buying.

Centrica, a company of mixed virtues (check the tag for past examples) but always exceptionally shrewd in its purchasing - of assets as well as commodities - has just taken the opportunity to back up the truck to Qatar for a big contract roll-over, which is intelligent.  They'd already done the same with Gazprom last year.

Interestingly, for the first time in years gas-fired power plants are back in-the-money (hence all the big coal-plant closures this year).  It's not so surprising in the UK with our 'carbon price floor' (a tax devised by Osborne) which boosts gas at the expense of coal.  What's more surprising is that there is a small window of gas being in-the-money in Germany, where they still have only the perennially depressed Emissions Trading Scheme carbon price to contend with.  That really is somewhat unexpected, and probably won't last for long into the coming winter as gas prices rise, both seasonally and with the time-lagged effect of the upward nudge to oil prices since January (Germany still buying a bunch of gas at oil indexation).

This is real energy business, and to hell with Hinkley and the EU 'Energy Union'!

ND

Red Carpet for the Russians? Actually, No.

An interesting groundswell is taking place in the wicked EU, where (on a good day), having high regard for the basics of life like heat and power they are remarkably unsentimental about the green nonsense.

Thus we find a rolling-out of the mighty gas-based energy strategy (see here, and here) that is likely to find favour - broadly speaking - with some of our readers, I do believe.  Of course, it carefully pays lip-service to the Paris COP21 green-crap stuff; and burning gas is better than lignite (actually, lighting sheep-farts is better than lignite); but nobody seriously imagines that was uppermost in their minds at the time.

As has readily been divined by the green blob, haha.

The plans were immediately attacked by green campaigners, who contrasted the continued role of fossil fuels with commitments to cut carbon dioxide made by the EU at the Paris climate summit two months ago ... "It’s like the Paris agreement never happened, and the commission is stuck on gas, dishing out a costly proposal that will keep Europe hooked on energy imports. Only if Europe focuses on renewables and energy efficiency will Europe meet its climate targets and reduce dependence on foreign supplies."  Claude Turmes, energy spokesman for the Green MEP grouping in the European parliament, called the strategy "rolling out the red carpet for Gazprom"

Excuse me?  Mr Turmes should follow developments a little more closely.  In point of fact, the rhetoric surrounding this whole policy-thrust is strikingly and explicitly anti-Russian, with some of the language being bandied at committee meetings in Brussels being distinctly undiplomatic.  In this aspect the eastern european countries that really are dependent on Russian gas have set the agenda in no uncertain terms.  One of the phrases being used is 'mandatory solidarity', which at a minimum means everyone sharing the available gas if Russia turns off the taps.  That's more than a slogan - it appears concretely in the latest EC proposals.

We first encountered this when we spotted the disingenuous Mandy musing how nice it would be if 'someone' negotiated all the gas buying for the whole of Europe.  Germany won't much like that, nor Italy - because they have sweetheart Gazprom deals of their own.  So it'll be interesting to see how these Poland-driven proposals fare in the long run.  

Which brings us to the baleful aspect of all this: the putative "European Energy Union" we fingered right from the start and under the auspices of which all this is rumbling forward.   Just as with the gas strategy, all Energy Union documents pay lip-service to everything (green crap for the green blob, nuclear for the French, 'security' for the Poles et al) - including markets for the Brits and readers of C@W generally.  Hence, the gas strategy:

"contributes to internal energy market legislation by prioritising market-based measures"

Yeah, right.  Actually, as with the whole Energy Union thing it is as dirigiste as all hell (and Hell is particularly dirigiste).   Not, however, without precedent:  for those like myself with dinosaur memories, the IEA cut its teeth allocating by fiat all the free world's oil supplies** back in 1973-74 during the Arab oil embargo.  Without this, the Dutch in particular would have been in serious trouble.  It was, however, strictly a 'wartime' measure and was reduced in scope to a rather light regime of mandated oil stocks thereafter. 

I have a strong premonition the Energy Union is an out-and-out policy-grab by Brussels, desirous of emulating the CAP.  Anyhow, for the time being let's sit back and watch the Germans and the greens fight it out with the eastern countries over the gas strategy.  Could be fun.

ND
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** All conducted on an Exxon computer in Florham Park, New Jersey, for anyone interested ...

Oil Price, Yes - and What About Gas?

Further to Timbo's prodding, it's time to wheel out the old oil-price graphic - recalibrated for the remarkable current turn of events.  Last time something like this happened it was $10 in 1998 - which turned out to be the bottom (where canny John Browne bought Amoco, Arco and BurmahCastrol).  At the time, the Economist surmised it might fall as far as $6 ...

We've had several cracks at this since it crashed through 60 a year ago - click on our 'oil price' thread if you fancy - and the geopolitics are still playing out.  Saudi Arabia is behaving as though it reckons it can hold its breath; and of course little Volodya is disinclined to blink.  US producers, debt-financing and all, will simply play the market game; and their stamina has long since confounded the ignorant.

Anyhow, today my subject is the parallel collapse in the price of natural gas.  The current situation is that the world is divided into 3 gas markets: North America (cheapest); Europe (mid-range); and Far East (highest).  Until the shale gas revolution really got into its stride, imported 'Atlantic' LNG was the marginal source for both USA and Europe, and so prices in these markets converged, with those of the Far East at much higher levels - even higher still after Fukushima, when Japan increased its gas burn significantly.  However (cutting the long story short) North America is now self-sufficient but essentially unable to export, and so becomes a low-priced 'gas-island'; but LNG is now available in vast - and growing - quantities and demand is falling across Japan and Europe, so the Eu and Far East markets have converged (mediated again by LNG).  The USA is now on the point of being able to export its shale surplus, and soon the whole world will be one gigantic, heavily over-supplied gas market.

With me so far?

For reasons good, bad and historical, the price of gas can often be highly correlated to that of oil, and the weakness in oil is exacerbating the weakness in gas. None of these phenomena seem likely to go away imminently.  So: the price of gas in the USA is set to rise a bit, and that in Europe + Far East to fall even lower.  This has been brilliant for Japan & Korea.  The Chinese don't use very much, but Russia of course would dearly like them to, and has at long last sold them some future supplies on terms so humiliating, they don't really like to talk about it.   In the meantime some extraordinary power-politics has seen Gazprom trying to muscle back into the good books of their main hard-currency customer, playing their mighty German card for all it is worth, which is quite a lot.  In any event they are doomed to another mammoth round of price renegotiations, as continental European buyers trigger their crazy Civil Code 'price re-opener' clauses and demand cuts or rebates by the billion.

The other big gas exporters, notably Qatar, also Nigeria and increasingly Australia - all LNG rather than pipeline - are a bit stuck, and will probably just have to suffer from disappointing sales prices on their sunk-cost production.  The problem for LNG sellers is that the production cost is high, whereas Russian (and Norwegian etc) pipeline gas has a much lower marginal cost, sometimes even negative if oil production comes with the gas.

So:  some world-scale economic impacts, geo-politics, power politics - but what about us in Blighty?  All this price-softening has come at a very good time for us because (a) our own North Sea gas production is in terminal decline and (b) one of our important sources of winter gas - the Dutch - are rapidly winding down production from the gigantic Groningen field (which kicked off the whole North Sea thing in the 1960's) in light of its increasing age, and propensity for causing serious earth tremors. 

On the other hand it does nothing for stimulating a shale-gas industry here: but hey, that gas ain't going nowhere, it'll still be there when we need it.  Genius George seems willing to burn some political capital to get the fracking underway, but I'm not really sure why.

It will directly impact two other industries (and indirectly, many more).  Firstly, it will hasten the long drawn-out demise of European coal use, which has been enjoying an indian summer here and elsewhere.  We are gradually seeing gas become cheaper for power generation once again after several years of being out-of-the-money; and of course government policy is to stimulate - somehow, they are not quite sure how - a new and very substantial 'dash-for-gas'.  They "want" 30 or so new gas-fired power stations to spring into being, and sustained low gas prices are the way to get 'em.

Secondly, it trashes the prospects for renewables and nukes, because it will cause the price of electricity to fall, and make fixed-price subsidies ever more expensive.  The whole low-carbon thing was predicated on ever-rising prices.  The greens know this (despite loud denials) and we must draw a kindly veil over their ever-increasing misery. 

Everything has its cycle, and who knows how long this one will last?  Long enough to cause tremors even greater than those Groningen earthquakes, I suggest.  Many will wonder why domestic gas bills don't fall in proportion to the wholesale price: but that's not the only way consumers can benefit from these mega-trends.

ND 

Gazprom: On The Back Foot (Again)

It's been a while since our last Gazprom update.  Here's one for afficianados:

Gazprom is preparing to offer to sell more gas to Europe at spot prices

As opposed to, priced on an oil-based index.  Well, like I said, it's a matter of specialist interest: but for the generalists, stick with it - there's a punchline.  

For years and years, oil indexation had been a religion with Gazprom (check the Gazprom label-link below for back-catalogue on this). They had imposed it effortlessly during the years of strength, and in the bad times post the 2008-9 meltdown in European gas demand had been willing to die in the last ditch to retain it.  During the recent rounds of price re-opener negotiations they gave almost everything else - relief on minimum annual payments (effectively surrendering market share), even cash rebates -  so long as they were allowed to preserve oil indexation.  They didn't even mind telling people that cash rebates were on offer as a quid pro quo: and boasted about how they'd held the line on the oil index against all the odds (unlike their main rivals, the Norwegians, who used to have the same policy but rolled over quickly from 2009 onwards - and retained market share without too much difficulty, mainly at Gazprom's expense).  This was indeed a hallowed principle for the Russians, however irrational.

One might imagine they are jumping horses from oil to gas just now because the oil price is so low.  But unless they see it falling still further, you'd think they'd be even more keen to sell at an oil-indexed price, because the upside is that much greater ..?  Certainly, gas prices look like being soft - or even softer - for a long time to come.

No, that's altogether the wrong line of reasoning.  Signalling spot-gas indexation for continental* European buyers is an out-and-out white flag, a gesture unmistakeable in the gas world.  And a concession as big as that would never have been made without sanction from the very top.  As CU said yesterday, they aren't feeling too comfortable right now.

ND
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* They'd already conceded it for smallish volumes sold to Centrica in the UK, because (a) otherwise Centrica would readily have gone elsewhere, not an easy option for several continental players; and (b) it was for delivery in the UK, i.e. a wholesale deal, not a mainstream Russian export-pipeline gas sale

Russia: the Bear-Baiting Continues ...

... unabated, as one might say.  I have just returned from an outing across France and Germany to report that while all eyes are on Greece, something else very interesting is afoot.  Until a year ago the biggest civil actions the world has ever seen were (a) that being pursued against the German government by the three German nuclear power operators (E.on, RWE + Vattenfall), for damages in respect of Merkel's precipitate post-Fukushima closure of their plants.  That one weighs in at around EUR 12 billion, and is perhaps a story for another day.   (b) The BP oil spill ($18 billion, as we now know).

However, these were relegated to the second division by the extraordinary award against the Russian government of $50 billion last July, in favour of Yukos shareholders claiming that Russia destroyed their oil company illegally.

I don't recall this making monster headlines at the time (CU covered it here), but that might change.  Because all across Europe, law firms are diligently working up practical plans to seize Russian state assets - and last month the tip of this iceberg was sighted.  In all the Greek excitement, I certainly didn't spot it.

Apparently this is all very real and maybe even imminent.  There may be trouble ahead ...  oh, and that EC investigation on Gazprom rumbles on.    The countries of the Orthodox faiths must think us western europeans have got it in for them.

A good job the Chinese have problems of their own.  More nervous days in Mariupol though, I'd suggest.

ND