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Disarming Putin's Energy Weapon

Politics / Energy Resources May 12, 2014 - 08:59 AM GMT

By: Andrew_McKillop


Never Give Up
Writing in the UK 'Independent', 9 May, Oliver Wright said: “Britain is drawing up plans with the US and other European countries to disarm the threat of President Vladimir Putin using Russian gas and oil supplies as a weapon against Ukraine and its East European neighbours”. 

No logic has to enter this “highly political” strategy. World gas and oil supply factors, energy infrastructures, energy technology and the costs and timelines to build new capacity, count for little or nothing in an uber-political thrust.

The UK 'Independent' also said that “Next month, David Cameron and other G7 leaders are expected to sign off on an emergency response plan to assist Ukraine this winter if Russia restricts gas supplies”. This plan, Wright said, was designed  “To eliminate Europe’s reliance on Russian oil and gas over the longer term and prevent energy security being used as political bargaining chip by the Kremlin”.

Russia currently supplies around 30 – 33 percent of all gas consumed in Europe and almost exactly the same percentage of EU28 oil demand. In some cases, like Ukraine, Russia supplies more than 50 percent of the gas used, and in the Baltic States this rises to 100 percent.

Under the G7 proposed plan discussed in Rome Friday May 9, support would go to building new LNG port terminals across Europe and the US would lift restrictions on exporting shale gas as LNG. Other parts of the plan may or might include increasing trans-Mediterranean gas pipeline capacities for bringing Maghreb gas to Europe, and even the longer-term integration of West African gas supplies for Europe, by north-south pipelines, to link with and bolster Maghreb gas supplies to Europe.

To be sure, neither the outline costs nor the timelines for achieving this “energy security” plan are presently established or disclosed, but with conventional technology the costs will be astronomic and the time needed to complete infrastructures would be in the 25 – 30 year range.

The only way out, to make both a decisive and rapid change to EU gas supplies, and to Ukraine's as supply, will need innovative technology.  Concerning oil, the options are much lower than for gas, simply due to world upstream oil supply tightness.

The Energy Weapon

Ed Davey, the UK Energy and Climate Change minister who represented Britain at the emergency G7 talks in Rome, told European media that unless emergency action was taken now Russia would “undoubtedly continue to use energy as a weapon”. He added that: “It is completely unacceptable for President Putin to use Russia’s gas and oil supplies as a weapon to exert control and power over Ukraine – or any other country. Davey also said he thought that unless the G7 countries take a stand, Putin “will undoubtedly continue to use energy as a weapon.”

The so-called “energy weapon” has a direct counterpart in energy prices. For the EU28, as of present, LNG terminal building is on the backburner after several years of fast growth is certain countries, mainly due to price uncertainty. This uncertainty is driven by EU28 gas demand trends – which are falling - dragging down prices. It is also driven by the potential for current major pipeline suppliers – Russia, Norway, Algeria by rank – to cut their gas prices anytime they face serious market challenges from LNG suppliers or locally produced shale gas in Europe.

Conversely, Asian gas prices are typically $16 per million BTU and in some markets higher. This favors the continued rapid growth of LNG supply in Asia. In Europe, gas prices presently around $12 per million BTU are eroded by oversupply problems for Europe's stagnant or declining gas markets.

When or if there is a gas price-demand spiral on the downside, in Europe, late entrants to the LNG supply market will be heavily penalized. Governments will therefore have to prevent gas price erosion, and turn it around, to enable the G7 emergency plan for energy security in Europe to have any market credibility.

Concerning oil, European import supply is basically much “tighter” than gas supply – because LNG terminal building, in some markets such as France, is already mature and capable of covering a large percent of national gas demands – if the price is right. Oil supplies for Europe face a different external supply context. They heavily depend on Russian supply and any sharp reduction in Russian oil supply to Europe will only, and can olny dramatically raise oil prices. Alternate supply sources for European oil are far more restricted than alternate gas supplies.

Innovation is Best
The Dec 2008 European energy plan voted by the European Parliament and transposed into the energy laws and regulations of all 28 member countries after this vote, called the “climate-energy package” seeks to reduce both gas and oil import dependence of the EU28. In fact, due the “climate pillar” of this policy package, this translated to heavy support by EU28 governments to renewable and alternate energy development, especially wind and solar energy.

Natural gas was excluded from policy support, due to it being “high carbon”. This in fact is a travesty of real world technical factors including emissions-per-kWh of generated power, but has also resulted in coal-based power production actually growing in Europe due to the near-collapse of the EU's ETS emissions trading scheme or system, initially designed to penalize “high carbon” fuels. European power producers prefer to use ultra-cheap coal despite its emissions, only weakly impacted by very low ETS permit prices, instead of using much cleaner but high-priced gas.

European coal import dependence on Russia is also significant, we can note.

The continental effort to financing and then building LNG terminals, typically costing about 1 billion euros for 30 million cubic metres/day capacity, or 0.9 billion cu. m. per month,  stalled by 2010-2011 as the ETS was revealed as unsure and unable to “penalize high carbon”. Other factors like stagnant or declining gas demand in Europe aggravated the anti-gas context. In addition, technology innovation in LNG handling now enables smaller, less infrastructure-dependent reception terminals, particularly offshore moored LNG-conversion (regasification) ships. These permit a large reduction in costs, to 500 million euros or less, for 1 billion cubic metres-per-month capacity.

The G7 emergency plan will certainly increase its credibility rating with investors when or if it features new and innovative LNG technology.

Specifically concerning Ukraine its current gas consumption near 80 billion cubic metres-per-year, close to Germany's total consumption for a population size two times Ukraine and a GDP output four times that of Ukraine, can be easily reduced without harm to the economy – but will need intelligent energy economic planning. Locally-produced gas, in Ukraine, is for example a higher priority than attempting to find stopgap import supply band-aids.

We can hope G7 deciders take a look at real world factors and energy options, before plowing ahead with an uber political set of decisions that will meet with failure.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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