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STILL MORE ON RUSSIAN GAS

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
September 1st, 2008

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

Almost a year ago Professor Jonathan Stern of Oxford University visited the Stockholm School of Economics, where he presented a ‘pop’ version of Russian gas intentions in both their own country and regions west of the Russian border. So many dubious statements were launched by Stern and local ‘researchers’ during that low-level get-together, that I found myself painfully aware once more of the macroeconomic and political catastrophe that may someday arrive because of a sudden shortage of energy resources – a condition that has its basis in the grotesque failures to teach and/or promote realistic versions of energy economics.

In the wake of the ‘Georgia Incident’ that began around the opening of the 2008 Olympics, it appears that there has been a large-scale pilgrimage back to cloud-cookoo land – both to gage and examine Russian geopolitical intentions, and to a lesser extent to circulate some bizarre opinions about the availability or non-availability of Russian energy resources. Recently a short article appeared in Newsweek claiming that oil and gas passing through Georgia was supposed to “free Europe from Russia” but, according to its author, “NOT ANYMORE”. How anyone could believe that the prevailing gas superpower, Russia, was capable of having its ambitions thwarted by a few pipelines from the interior of central Asia, is something that deserves the attention of psychologists or psychiatrists and not readers of a weekly news publication.

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

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

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

I know enough about this pipeline to believe that the persons in this country (Sweden) who study this project should learn to ignore the precious wisdom dispensed by Oxford University pundits and certain journalists. There has been some delay with this conduit that is at partially due to strange ideas in Sweden as to the ulterior purposes of the Russians, when the most likely agenda of those good people turns on collecting as much money as possible, and sooner rather than later. What needs to be understood is the relationship between the amount of Russian gas coming into Western Europe, and the price of e.g. electricity in most of Europe – a price boosted by the absurd electric deregulation desired by the European Union, in addition to the decision to promote the sale of electricity on the electricity exchange NORDPOOL, which is a sophisticated version of what George Orwell termed an “indoor welfare scheme”.

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

According to the Newsweek article, a recent Rice University Energy Program modelling exercise found that Russian efforts to deprive Germany of gas would likely be futile, as market deregulation would allow other suppliers to fill the gap. What this half-baked conclusion by the Rice University know-nothings missed is that there are no other suppliers in the short-run, nor perhaps inexpensive suppliers in the long-run. On the other hand, in the short-run Russians could rush to completion any pipelines that they are constructing in the direction of China, and possibly beyond, in which case Germany, perhaps other European countries, and also the United States would find themselves bidding for progressively larger increments of gas.

The running mate of presidential candidate John McCain, Ms Palin, is ostensibly positive to larger investments in Alaskan (and perhaps Canadian) natural gas, which would eventually find its way to the U.S. Midwest. This scheme was being discussed in some detail well before my gas book was published twenty years ago, and the cost was generally considered excessive at that time. At the present time the estimated cost is about 40 billion dollars, as compared to the 10 billion that several Russian pipelines toward Asia will ostensibly cost. In these circumstances the ignorant bluster originating with persons like Ms Merkel and Ms Rice should be restrained, because where energy resources are concerned, Russia’s position is so enviable that its government does not have to be impressed with voodoo economics or voodoo politics. Instead of contemplating investing in gas from Alaska and Canada that may not exist in sufficiently large and sustainable quantities, more attention needs to be paid to ascertaining the amount of gas that may eventually become obtainable from shale deposits in or near the US.

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

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

A CONCLUSION

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

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
September 1st, 2008

REFERENCES

Banks, Ferdinand E. (2007). The Political Economy of World Energy: An

Introductory Textbook. London, Singapore and New York: World Scientific.

______ ´(1987) The Political Economy of Natural Gas. London & Sydney: Croom-Helm.