Sunday, August 13, 2006

[oil and gas] from australia to russia – oil is the key

Douglas Adams, in Dirk Gently’s Holistic Detective Agency, wrote of the fundamental interconnectedness of all things. So what possible connection could there be between today’s interest rate crisis in Canberra and Turkmenistan’s oil outlet dilemma?

Indirectly, a lot.

The Australian Reserve Bank decision to raise interest rates a quarter percentage point today is extremely damaging in the public perception and the average Australian panic, more common in recent years whenever things step just outside the box, could help bring on a recession.

That’s why John Howard took the unprecedented step today of talking up the economy. Of course Australia is a pebble in the ocean in world economic terms but it does have a habit of accurately pegging trends, especially in the USA.

"I heard some very misguided talk this morning from somebody ... about recession," Mr. Howard told reporters at the Glasshouse Mountains, north of Brisbane. "For anybody to be even uttering that in the present circumstances with the strength of the economy, they are being misguided to say the least."

Mr. Costello [Treasurer] has advised home owners to shop around for the best interest rates in the wake of the second hike in three months. [Melbourne Age] Mr. Costello said he expected the standard variable interest rate to move to about 7.8 per cent as a result but that it was possible to find better if you shopped around.Australians are now paying the highest percentage of income to service debt in history, according to the opposition.

There’s no doubt that public perceptions are at variance with the government and one good indicator [in Australia] is in car sales, which have nose dived in the last quarter. Fears of continued interest rate hikes and the general gloom over oil prices are going to be hard to counter.

It’s not a local phenomenon, as analysts from other developed nations know full well. The key to the whole business now is oil.

In Russia, there is a public perception, from a number of straw polls, that oil will hit $100 within the next year, not least due to artificial pressures both from the Finance and from Muslim nations fuelling the crisis in the Middle-East. The perception, in a country which essentially rides on oil for its security blanket, is to get what you can, while you can.

The current explosion of building projects in the regions and the plethora of western goods now on offer at discounted prices continually fuels expectations and realizes them through one simple little word – credit, with ordinary Russians flocking to sign up. Meanwhile, the traffic alone on the roads is estimated at 21/2 to 3 times what it was at New Year, 2004/2005. Debt is hardly spoken of.

The recent spat with the Ukraine over the natural gas, resulting Gazprom’s shutting down of Ukraine’s share of the Friendship Pipeline, is a very good example of what the west is up against. The pipeline carries about 80 percent of Russian gas exports through Ukraine to the West.

Also a result of that spat, Serbia lost half of its gas supplies, forcing rationing and some industries to switch to oil. Hungary, Croatia, and Slovakia also reported a 30 percent drop in supplies. Russia eventually restored full gas supplies to Europe but the quarrel threatens to escalate into a much wider confrontation. The gas conflict has its roots in Ukraine asserting its independence from Russia.

Gazprom set the 2006 price of gas for Ukraine at almost $230 per thousand cubic meters, up from $50 under an old contract that Kiev claims is still in force. Moscow says that's in line with the average $240 paid for Russian gas in the European Union. But Ukrainian President Viktor Yushchenko said Sunday that price "is unacceptable, because it is economically unfounded."

The Baltic states of Latvia and Estonia - now EU and NATO members - pay $110 for the same amount of Russian gas. Russia's loyal ally, Belarus, pays just $47.

German and US officials criticized the Russian cutoff as undermining its credibility as a European supplier. "Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure," said a statement released by the US State Department.

The new coalition currently being forced on Yushchenko shows that greed can rebound and it threatens to undermine his bid to seek membership in NATO and the European Union for his country and remove Ukraine from Russia's shadow.

Moscow says Kiev should follow the logic of the "Orange Revolution," in which Ukrainians broke free from Russian influence, and accept that the days of Soviet-era energy subsidies must end. Ukraine, while agreeing in principle to higher gas rates, argues that the nearly five-fold price hike demanded by Moscow is unfair, abrupt, and politically motivated.

"Everybody understands that this is not about market pricing, it's pure politics," Oleksander Shushko, an analyst with the independent Institute of Euro-Atlantic Integration in Kiev.

In late 2005, Gazprom said it charged its customers in Western Europe an average of $135 per 1,000 cubic meters, but expected that figure to rise to about $255 this year. Poland won't say what it pays, but media reports have said it pays between $200-$250, according to The Associated Press. Bulgaria now pays $180 per 1,000 cubic meters, but is expected to pay between $230-$260 in 2006.

At the conference for the western press on June 2nd, prior to the G* summit in Moscow, Vladimir Putin fielded this question about the issue:

М.Trota: Mr President, many thanks for agreeing to meet with us. I would like to come back to the energy issue. For over 40 years Russia and Europe’s energy relations were harmonious ones. However some partners are now arguing about the reliability of Russian deliveries of energy resources.

Europeans look a bit strangely at Gazprom’s efforts to start working in the European market. On the other hand, there are many countries who want more liberalization in the Russian energy market and I would say that they are trying to obtain their share of the Russian gas and oil markets.Is this a temporary phenomenon? Or is it the end of harmonious relations between Russia and Europe in the energy sector?

Vladimir Putin: I consider that our business partners, especially European ones, never doubted and today do not doubt that their Russian partners are responsible.And we see such issues and their positions as a means to incite us to make one-sided decisions which would satisfy our partners and but would not be in the interests of the Russian economy. In our opinion, this is just competition.

Russia has been delivering energy to Europe for 40 years. There was never a day or any hour that witnessed a failure. And at the beginning of this year Russia provided full, and I want to stress it, the full amount of deliveries to our western European partners and European consumers.To understand why Ukraine, a transit country, illegally siphoned off a significant part of European rescues you must not ask us you must ask Ukraine.

And let’s not complicate things unnecessarily. Let’s talk directly and honestly about this problem.Our western friends supported the ‘orange events’ in Ukraine in a very active way. We see perfectly well what is happening there the whole time. The country has been faced with many problems. But if you want to support what happens there in the future, then you will have to pay for it.

Why should we pay for that?

Everyone is well aware that over the last 15 years Russia subsidized the Ukrainian economy by a sum that amounted to three to five billion USD each year. I want to emphasize that we did this every year. And each year we raised the issue of whether we should change to the European regime for determining prices.Let’s work out uniform rules together. You, for example, represent a German news agency. Why should German consumers pay 250 USD for 1000 cubic metres and Ukrainians 50?

If you want to give Ukraine such a gift, why don’t you pay for it?Why do you want us to give such presents? Take these three to five billion USD, take them from the pockets of German taxpayers, and explain to them why you are doing so. We have nothing against this. Pay up. That’s the first thing.The second concerns access to our energy systems. I want to emphasize that they are our energy systems. The transport systems have been paid for by Russian money and the deposits belong to the Russian people.

We have a very responsible energy policy. We are very cooperative during this teamwork.But we will always look for mutually acceptable decisions.Just recently at the Russia-EU summit, we discussed these problems in a very frank, companionable and even friendly way, and this was very pleasant for me. I asked our partners a question and I can ask you the same question.What are we talking about when you try to convince us to ratify an energy charter and other agreements?

We are talking about access to two types of infrastructure – infrastructure used in extraction and for transportation, which is first and foremost our main pipelines.It should be a shared, mutual decision. So it is natural that we are asking the question: okay, our partners are allowed to use our infrastructure for extraction and transport but what will you let us do? Where are the deposits that we can help exploit?

There are simply none.As a matter of fact it is very one sided. And many of our partners with whom we met recently in Sochi at the Russia-EU summit agreed that, together, we need to look for methods of cooperation that would satisfy both sides.With the German company BASF we found such a solution. We allowed them to start extracting in one of the major Russian deposits. We evaluated their transport possibilities in Germany, actually an independent evaluation was made, and BASF allowed us to use its network for distributing gas.

We consider that this is a very good example of cooperation and establishes a really new level of trust that joins our economies and establishes the necessary conditions for teamwork and trust.But no one-sided solutions will be accepted.In that interview, the words were considered but the meaning clear. Russia has muscle and it’s flexing it. In political terms, Russia is sitting pretty because unlike the west, especially the US, it has guaranteed supplies.Russia's crude oil production increased by 2.4% in June and its natural gas output grew 3.3% year-on-year.

The high potential of oil and gas fields of the Russian shelves and thus the security of the hydrocarbon supply in Russia in the foreseeable future are beyond any doubt.Most estimates [Granberg et al., 1993; Malovitski et al., 1994] suggest that promising oil and gas bearing areas are found on about 90% of all Russian shelves. They cover 5.2-6.2 million square kilometers. Potential recoverable hydrocarbon resources of the Russian continental shelves are estimated within 90 to 100 billion tons of oil equivalent.

Natural gas resources account for 80% of them.Practically everywhere on the Russian shelf, the affinity between the offshore petroleum-bearing provinces and corresponding geological structures of the adjoining inland areas is found. Global experience indicates that in such cases, the oil and gas potential of the shelf fields is higher than that of the onshore accumulations.Two giant oil and gas bearing basins found in the West Arctic (on the shelves of the Barents and Kara Seas) cover a total area of 2 million square kilometers.They contain potential resources of at least 50-60 billion tons of conventional fuel (in oil equivalent).

The region exploration, including drilling, revealed the existence of ten prolific oil and gas fields [Dubinin, 1994; Malovitski et al., 1994].The resources of only two of them in the Kara Sea (Rusanovskoe and Leningradskoe) are estimated at 5 trillion cubic meters of natural gas. This amount is very impressive when taking into consideration that worldwide gas production at present totals 2 trillion cubic meters a year.In the Barents Sea, the Shtokmanovskoe gas condensate field and the Prirazlomnoe oil field in the area of Pechora Bay are of special interest.

The Shtokmanovskoe gas condensate field is probably the world's largest known offshore gas field. Its reserves total about 3 trillion cubic meters of gas and more than 20 million tons of gas condensate. Geological oil reserves of the Prirazlomnoe field amount to more than 200 million tons.The oil and gas developments in the region have been in progress since 1992. The large-scale industrial exploitation of these fields is planned to begin between 1998-2000. In the future, these activities might lead to significant changes in the world's system of oil and gas transportation [Parfenov, 1994].

Similar large-scale activities are planned in some other areas of the Russian northern shelves. For instance, in the Jamal area, a gas condensate field is estimated to produce up to 80-100 billion cubic meters of natural gas a year [Mazur, 1993].The shelves of the Far East and Eastern Siberia have especially good prospects for large-scale and long-term developments of the offshore oil and gas fields. The promising areas in these regions (excluding Sakhalin and its shelf) are estimated at about 1.5 million square kilometres.

Potential recoverable resources are estimated at billions of tons of conventional fuel. These reserves are concentrated mostly in the Sea of Okhotsk and the Bering, Chukchi, and East-Siberian Seas. Here, more than 20 oil- and gas-bearing and potentially oil- and gas-bearing basins of different geotectonic nature have been discovered.Similar activities are in progress on the shelf of Sakhalin.

Its rich oil and gas resources discovered a long time ago have been intensively explored for the last 20 years.A number of large oil companies (Exxon, Shell, Marathon, and others) have already accomplished the first preliminary steps of oil and gas developments in the eastern and northeastern areas of the Sakhalin shelf within the frame of the Sakhalin-1 and Sakhalin-2 projects.

Geological reserves of only one of five giant fields located here (Odopinskoe) amount to over 200 million tons of oil and 0.1 trillion cubic meters of gas.The projects of oil and gas development of the Sakhalin shelf stipulate to install large offshore drilling platforms, construct undersea pipelines going to the shore, build onshore complexes for the storage and processing of oil and gas hydrocarbons (including a plant for producing liquefied natural gas), and to lay an inland gas main on the island.

Realization of these projects may result in Sakhalin becoming a large oil and gas production center and an important oil and, especially, liquefied natural gas supplier. Exploratory and production developments of the offshore oil and gas fields on the other Russian shelves (the Caspian, Black, Baltic Seas, and the Sea of Asov) have been in progress for a relatively long time although in a smaller scale.

At the same time, it is important to stress that these resources are located mostly in remote areas characterized by severe climatic conditions (the Arctic and Far East).The geological and geophysical explorations of these resources have not been extensive enough. They cover, on average, only 0.17 km/km2. This is several times less than the scope of exploration on the shelves of the North Sea, Gulf of Mexico, and a number of other regions.

Forget Russia’s fall from grace in the 90s as a world power and influence broker. Get that right out of you head now. Russia has the clout and the huge capacity to skim off western expertise and adapt it to their own situation, with the added bonus of the low wage and salary burden. Its strategic agreements with China deserve far greater scrutiny than they’ve hitherto received.

It is involved at all stages upstream and downstream, unlike its oil rich neighbours eg. Turkmenistan and Kazakhstan, the new boys on the block.

In a nutshell, Turkmenistan is landlocked and neither environmentally safe, politically secure, nor economically viable in orde to deliver their oil and gas products to market. Both Azerbaijan, across the Caspian from Turkmenistan to the west, and Kazakhstan to the north both have immense oil and natural gas deposits with few attractive options for delivering the product to sea ports for expedient export.

A solution to this problem may involve a cooperative effort from all three nations, yet all options pose potential environmental problems which could be heavily exacerbated by political conflict in the region.

OPEC is monitoring this ultra-carefully and is fully aware of Russia’s muscle. With the decline in world oil prices in the second half of 2001, OPEC sought to prevent a price collapse and to shore up petroleum demand by limiting production. Now the situation has been reversed by events in the Middle-East, Russia sits pretty and reaps the benefit.

The newly independent nations are well aware of the situation. The Kazakhs want oil to be exported via the CPC pipeline but Turkish officials have expressed environmental concerns that the Straits, already a major chokepoint for oil tankers, cannot handle the strain of additional traffic. Ukraine already has constructed a new pipeline, the Odessa-Brody pipeline, specifically to transport oil from the Caspian Sea region to European markets.

Keep your eye on Russia because they are playing with a full hand.

posted by james higham originally on Thursday, August 03, 2006

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