Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19
ADL Predictive Modeling Suggests A Big Move In Silver - 7th June 19
US China Trade War Will Start a Recession, or Worse… - 7th June 19
Land Rover Discovery Sport Brake Pads Expected Life, Worn Pads Dash Warning - 7th June 19
The Post Room Selfies Fun at Meadowhall Sheffield, From Game of Thrones to Desert Island... - 7th June 19
SAMSUNG - South Korean Electronics Giant - Investing in AI Stocks - Video - 7th June 19
Gold Price Rally or New Bull Market? - 7th June 19
Digging into the Rising Gold: Trade Tensions, Recessionary Worries and Dovish Fed - 7th June 19
The Risky Stocks Big Lie That Keeps Many Investors Poor - 7th June 19
Gold and HUI Short-term Strength Is a Strong Call to Action - 7th June 19
Fear Drives Stock Market Expectations - 7th June 19 - Chris_Vermeulen
Next British Prime Minister Tory Leadership Betting Markets - 6th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

The Great Geopolitical Battle Over Energy Transit Routes

Commodities / Energy Resources Nov 19, 2009 - 12:57 AM GMT

By: OilPrice_Com

Commodities Best Financial Markets Analysis ArticlePhilip H. de Leon writes: As we all live in the present, it is very hard to fully assess the future implications of decisions supported or made by political and business leaders. An extraordinary game of geo-strategy is under way to lock in long-term agreements, notably in the energy sector.


At a global level, the transit routes of future oil & gas pipelines become the object of a power struggle involving not only the suppliers and end-users but also the transit countries. Intensive courtships are under way where a ménage à trois, or more, may be the best option to prevent any country from being in a dominating position to rule a region and exercise political or economic pressure.

Let’s take a practical example and look at some of the dynamics behind the Nabucco pipeline and at the different interests involved.

Nabucco and the competing projects

Nabucco is a 3,300 km natural gas pipeline going East to West, with a capacity of 31 billion cubic meters (bcm) per year that would reduce Europe’s dependency on gas supplied by Russia. It will go from Turkey to Austria via Bulgaria, Romania, and Hungary. That project would be in direct competition with the Russian-endorsed South Stream pipeline, with a capacity of 63 bcm per year, that would start from Russia and end in Austria but with two prongs: one via Bulgaria, Greece, and Italy, and one via Serbia, Hungary and Slovenia. Nabucco’s estimated cost is about €8 billion with a completion date of 2014 while south Stream’s estimated cost is from €19 to €24 billion with a completion date of 2015. South Stream was launched in 2007 when Russia’s President Dmitry Medvedev was then Chairman of the Board of Directors of Gazprom, Russia's largest company and the world's largest gas producer.

Nabucco and the supplier countries

Formidable battles have been taking place between the Nabucco and South Stream backers to sign supply agreements, not only to guarantee that the much needed gas will be made available - as underutilizing the pipelines is not a viable option - but also to secure a political and financial will for the projects. Gazprom is engaged in a battle to preempt gas supplies and to keep European countries from what it considers as a Russian natural chasse guardée such as Azerbaijan and Turkmenistan, though both countries have pledged to supply Nabucco as they understand their vulnerability by not having several export routes.

The courtship is ongoing and in October 2009, Alexey Miller, Chairman of Gazprom, personally went to Baku, Azerbaijan to sign a long-term natural gas purchase and sale contract with the State Oil Company of the Azerbaijan Republic (SOCAR). Following the signature, Miller made a statement, which gives a good insight on what is at stake: ”Russia and Azerbaijan have a common border and have already been connected by the unified infrastructure. This enabled Gazprom to propose the State Oil Company of Azerbaijan Republic the most attractive commercial terms and conditions of gas purchase. Our partnership is logically consistent and fully meets our mutual interests. I am confident that in the coming years the volume of Azerbaijani gas supplied to Russia will increase.”

This statement and contract are interesting because the agreement provides for a supply of 500 million cubic meters starting in January 2010, with potential increases depending on Azerbaijan’s export potential. This comes at a time when Gazprom has interrupted its deliveries of gas from Turkmenistan since April 2009, arguing a lesser demand from Europe. A few days after being in Azerbaijan, Miller was meeting with the President of Turkmenistan but no decision was reached regarding resumption of gas imports from Turkmenistan.

Who is holding whom by the tail?

The dynamics around Nabucco when looked at closely highlights a web of sweet deals corresponding to a complex reality of entangled needs.

Russia has very aggressively pursued locked-in supply agreements for extensive periods of time. The initial idea is that getting a deal in first could work towards keeping other players out. That approach did not end up creating exclusive relationships as countries such Azerbaijan and Turkmenistan appear to have enough supplies to satisfy multiple parties. Pricing agreements were also locked in for specified periods of time but the tumble in world energy prices put Gazprom in a dire situation: Gazprom is reported to have been paying $375.50 per thousand cubic meters (tcm) for Turkmen gas while only paying $217/tcm for Kazakhstani gas and $210/tcm for Uzbek gas. An “unfortunate” explosion in April 2009 that the Turkmens blame on Russia hit the pipeline connecting the two countries and deliveries have stopped. Gazprom stated it had not intention to resume purchasing Turkmen gas in 2009.

Turkmenistan is said to be losing $1 billion/month over this issue. With Turkmenistan, Gazprom has a 25-year sale and purchase agreement Turkmenneftegaz signed in 2003. Prices were locked below world market prices, at less than half the price Europe was paying for its gas. Subsequent price increases were negotiated but in exchange for the promise of higher delivery volumes with 60 bcm of gas in 2007, 60-70 bcm in 2008 and subsequently export up to 80 bcm annually through 2028.

Needless to say that Turkmenistan’s announcement in July 2009 of its willingness to provide gas to Nabucco does not come as a surprise in this context. Similarly the completion in October 2009 of $400 million 188-km section in Turkmenistan of a 7,000 km natural gas pipeline that will reach China is an important step towards diversification. The Turkmen government stated: “Getting gas supplies to China will mark another important milestone in the successful implementation of Turkmenistan's strategy of diversifying energy export routes to world markets.”

Turkmenistan has been assiduously courted because of it immense gas reserves. In 2008 the oil advisory firm Gaffney Cline & Associates (GCA) conducted a study on the South Yolotan-Osman field and determined that that field alone was the fifth largest in the world, with an estimated 4 trillion to 14 trillion cubic meters of gas. That good new was tampered in October 2009 when reports surfaced that GCA may have been misled (see article: “Turmen Gas – Caveat Emptor” http://www.oilprice.com/article-turkmen-gas-caveat-emptor.html In any event, the potential of Turkmenistan should not be underestimated.

Nabucco and the transit countries

Several Eastern European countries have been turning their back to Russia and have joined the European Union, espousing the EU’s energy security objectives to reduce its dependency on Russia gas. The January 2009 showdown between Russia and Ukraine, which resulted on the gas supply to be cut to most of Europe in the midst of winter, could only serve as a wake-up call for the need to diversify energy routes. Bulgaria - which has the ambition to become an international gas hub and that is a party to both the Nabucco and South Stream projects - will benefit from that situation, notably by increasing its bargaining position to negotiate better energy agreements with Russia. It could, among other things, threaten to raise transit fees.

Ukraine is using this threat against Russia and in September 2009, Gazprom expected Ukraine to increase gas transit fees by up to 58% in 2010. The stakes are high as transit fees represent a bonanza. While visiting Bulgaria in 2007, Vladimir Putin estimated that Bulgaria could earn up to $2.5 billion per year in transit fees alone.

Russia: just another shrewd player but…

One may think that Russia pockets the difference from rates below market prices, but the reality is that Russia uses the discounted gas for its own domestic needs. It also has been using it to supply Ukraine under very favorable terms, and Ukraine has been very vocal in resisting Russia’s attempts to raise prices. Note must be made that Ukraine imports the bulk of its natural gas from Turkmenistan via Russia. Countries like Russia and Ukraine have been resisting passing on price increases to end-users to avoid social unrest and have been struggling to keep non-competitive industries afloat. One way of doing so is by keeping the cost of energy low. The adverse effect is that Ukraine is one of the most energy inefficient countries in Europe.

A point must be made that Russia should not just be perceived as a natural bully but more as a wounded bear. Russia, like any country, is looking after its own interests and is not always subtle about it, even more so as it feels that everyone is ganging against her, rightfully or not. Russia is also confronted with its own economic reality, most notably the over reliance of its economy and state budget on oil & gas revenues. Efforts to diversify the economy have failed to generate visible results. It is therefore essential for Russia to secure a guaranteed income flow from the sale of it oil and gas, and from the oil and gas of its neighbors, that it buys to resale at a profit or that it routes through its extensive pipeline network for a fee. But things change: sourcing oil and gas from or routing it via Russia is no longer the only option.

… a new transportation mode is emerging

As the gas pipeline battles are under way, a new trend is emerging which is the transition towards Liquefied Natural Gas (LNG). That transportation mode of natural gas through seaborne tankers will open new markets, alleviate the dependency of some countries on existing pipeline routes, and reduce the number of players able to impact proper delivery and pricing.


This article was written by Philip H. de Leon for OilPrice.com - Who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules