Spring Fund Drive
goal: $30,000
Given so far: $17,640
Days left: 7
Pledge goal: $300,000 (What's this?)
Pledged: $13,720

EU Hurts Itself Much More Than Russia by Applying Energy Sanctions

[node:field-sub-title-]

MORE: Politics

This is an excellent analysis by Chris Martenson on the long term implications for Europe of fumbling away energy imports from Russia.  We highly recommend his site, Peak Prosperity.  You have to pay to read it, but its excellent.

Its a long analysis, so we'll list some of his conclusions from the end of the article to start:

Conclusions:

For some reason Europe has decided to follow along with the US, and is risking both current and future access to Russian gas. I have literally no clue what the strategy is here on Europe's part, but I am beginning to suspect that there isn't one ...

For our European readers, you should really be getting prepared for a sustained energy shortage if not crisis, and it could begin at almost any time. And that's just over the short haul ...

If Europe succeeds in either/both driving Russia permanently away and into the arms of China and/or harming the Russian energy industry, there will won't be enough gas for everybody that wants it in the future ...

Europe's own gas production is past peak and declining. So Europe needs access to more gas, not less. Russia only has so much to deliver and, of late, China has been behaving in a predictable and businesslike manner with Russia. So my best guess is that Russia, if it had to choose a partner to sell to, would choose China ...

This all leaves Europe very much in doubt as to how it's going to get the gas it so desperately needs over both the short and long term ...

... there's a 0% chance that Russia will 'begin to behave acceptably' in the eyes of (the EU) by giving Crimea back to Ukraine. Russia does not want that, Crimea does not want that, and it's not going to happen ...

Similarly, neither will the eastern provinces of Ukraine be abandoned to Kiev. They are gone, too. Which leaves us with what exactly, then, in the set of things that the West would need Russia to do before these latest sanctions are lifted? ...

Taken all together, there is a looming energy crisis that impacts Europe without a doubt, but also potentially the world a bit later on.

 

Here's the full text of the article:

After last week's new round of Russian sanctions, courtesy of Europe and the US, the ball was in Russia's court to see how they would respond.

For several months now, we've been running with the hypothesis that Russia would wait until fall arrived and then begin to crimp off EU gas, possibly even just cutting it off.

Well, even though fall is still officially a few days away, Russia has begun to retaliate, subtly, by diminishing the flows of gas to several European countries.

Last week, we reported on Poland's complaint that it was receiving 45% less natural gas than it expected. Russia pretty much said Well, that's what you get for doing an end-run and reversing flows to Ukraine, with whom we are having a rather bitter and protracted contract dispute over gas deliveries.

Now as of today, four countries (including Poland) are reporting slowing gas deliveries from Russia:

Russian gas flows to EU slowing amid sanctions

Sept 12, 2014

Austrian energy company OMV said Friday that it was receiving between 10 and 15 percent less natural gas from Russia for a second day. An OMV spokesperson told the news agency Reuters that the utility was informed about the reduction by Russia's Gazprom, but was not given a reason for it.

Austria is the fourth EU country to report a slowdown in Russian gas deliveries this week, afterSlovakia, Germany and Poland were also hit by reductions.

While Germany's largest utility RWE and Slovakia said the cuts were insignificant, Poland recorded a shortfall of a quarter on Tuesday and almost half on Wednesday.

All four countries started to pump gas to Ukraine after Moscow cut supplies to the countryin June over unsettled debt claims related to gas deliveries from Russia.The "reverse flow" transfers have angered Moscow.

(Source)

For now, these cuts seem to be in response to the reverse flows into Ukraine. But I'm expecting even more cuts to be announced in the wake of the new sanctions levied last week.

The sanctions are specifically targeting Russian energy companies, which is a very big deal:

Fresh sanctions will freeze big foreign oil projects in Russia

(Reuters) - Fresh U.S. and EU sanctions imposed on Moscow will bring an abrupt halt to exploration of Russia's huge Arctic and shale oil reserves and complicate financing of existing Russian projects from the Caspian Sea to Iraq and Ghana.

On Friday, the United States imposed sanctions on Gazprom, Gazprom Neft, Lukoil, Surgutneftegas and Rosneft, banning Western firms from supporting their activities in exploration or production from deep water, Arctic offshore or shale projects.

The new measures, designed to put further pressure on President Vladimir Putin over Russia's actions in Ukraine, are a major broadening of the previous sanctions, which only banned the export of high technology oil equipment into Russia.

Projects now in jeopardy include a landmark drilling program by U.S. giant Exxon Mobil in the Russian Arctic that started in August as part of a joint venture with the Kremlin's oil champion Rosneft.

Now this and dozens of other projects that Rosneft and Gazprom Neft agreed with Exxon, Anglo-Dutch Royal Dutch Shell, Norway's Statoil and Italian ENI will have to be put on hold.

"Cutting off U.S. and E.U. sources of technology and services and goods for those projects makes it impossible, or at least extraordinarily difficult for these projects to continue...There are not ready substitutes elsewhere," a senior U.S. administration official told a briefing on Friday.

The companies will have 14 days to wind-down activities.

"There is no contract sanctity," the U.S. official said.

(Source)

Okay, this is a very big deal. Why? Because Russia is the #2 oil exporter in the world, and keeping the oil flowing from Russia requires constant re-investment and new drilling.

Most of Russia's conventional fields are old and showing signs of advanced age. No more drilling equals a fall off in production:

(Source)

So the message from the US and Europe is simply this: We are willing to cut off our nose to spite our face. Well, everybody's noses, actually.

The US and Europe are willing to guarantee a future of diminished oil exports for the globe in order to force Putin and Russia to do...something. Exactly what is not clear. I've not yet read a single article or statement that outlines specifically what Russia should be doing differently.

Usually it's just a blustery charge stating that Russia's behaviors are 'unacceptable' as the outgoing EU president is fond of saying. But what exactly would be acceptable is never said.

Well, it doesn't matter because Russia wouldn't respond at this stage. Things are too far gone.

Now, the above article notes the impact on the oil industry; but the real action is in the gas industry. There, as we've noted many times, Europe is very dependent on Russian gas. And Russia has recently inked a number of very high profile deals to sell a huge proportion of its current production to China and India.

And these are not some future fantasies, but a reality that Russia and China are moving ahead with at a very rapid pace:

Putin breaks ground on Russia-China gas pipeline, world's biggest

Russian President Vladimir Putin and Chinese Vice Premier Zhang Gaoli have launched the construction of the first part of Gazprom’s Power of Siberia pipeline - which will deliver 4 trillion cubic meters of gas to China over 30 years.

The 3,968 km pipeline linking gas fields in eastern Siberia to China will be the world's largest fuel network in the world. Both Putin and Vice Premier Zhang Gaoli have called the project the world’s largest construction project, as investment from both countries will be more than $70 billion.

Last year, China consumed about 170 billion cubic meters of natural gas and expects to consume 420 billion cubic meters per year by 2020. Europe still remains Russia’s largest energy market, buying more than 160 billion meters of Russian natural gas in 2013.

(Source)

Let's do some math here. 4 trillion cubic meters divided by 30 years is 133 billion cubic meters per year.

That's 83% of the amount that Europe currently buys. Is the idea that Russia will increase its production by 133 billion cubic meters per year to have additional gas to send to China?

If so, how is that going to happen under a sanction regime? In fact, Russia has only so far identified one new field, the Chayanda field, slated to begin production in 2015, and produce some 25 billion cubic meters per year.

Beyond that nothing has been announced of which I am aware. Which means that out of the 133 billion cubic meters that Russia has committed to sell to China beginning in 2018, only 25 billion cubic meters has been accounted for.

Historically speaking, increasing gas production by a lot has not been something that Russia has demonstrated it can do. Note the consistency of Russian output over the past several decades:

(Source)

And since 2007? Has Russia expanded output since then? Nope. It seems to be bouncing around between 600 and 700 billion cubic meters per year (I'm translating from the cubic feet represented in the chart), only some of which is available for export after domestic uses take their share:

(Source)

Well, if Europe knows that Russia has pivoted firmly to the East and has locked up a long-term gas deal with China for ~20% of its total current gas production, and Europe is now cutting off Russian energy firms from both capital and technology markets hindering (if not utterly stopping) those firms from increasing production any further, then we can only surmise that Europe has a really strong hand to play here.

Surely Europe must be in a situation of being able to rapidly increase its own production of gas? Well, this is the awkward part. It turns out that Europe is approaching being ten years after its own gas peak and has no chance at all of reversing that situation any time soon, if at all:

(Source)

Once producing nearly 300 billion cubic meters, Europe is now producing just under 200 billion cubic meters. Ouch. That's a 33% loss in just ten years. What are the next few years going to bring? One easy prediction is "more declines."

Well, then surely Europe must have a plan to increase production perhaps from Shale gas? Here again we have awkward news. France and Germany have both implemented long-term bans on fracking, so they're out. Poland was thought to have vast shale reserves, but those turned out to be a complete bust as the shale rock was far too tight to be profitable once the test holes were bored.

England is giving limited fracking a go, but their mineral rights laws and population density suggest that will be anything but a US-style wild west drilling show.

So much for shale gas rushing to the rescue.

Well, the perhaps the US will export LNG to Europe?

Again, as noted here many times before, the US currently is a net importer of natural gas, which means it is literally in no position to export anything at present.

In fact, under current trends, it won't be until 2018 that the US might become net neutral on the natural gas front, which means it won't have appreciable quantities to export until 2020 at the earliest. And that's only if the US shale plays don't all peak out before then:

(Source)

Conclusion

For some reason Europe has decided to follow along with the US, and is risking both current and future access to Russian gas. I have literally no clue what the strategy is here on Europe's part, but I am beginning to suspect that there isn't one.

Nonetheless, and even beyond the gas situation, the reality is that Russian companies are now hampered in their ability to explore, drill and produce more oil and gas.

For our European readers, you should really be getting prepared for a sustained energy shortage if not crisis, and it could begin at almost any time. And that's just over the short haul.

If Europe succeeds in either/both driving Russia permanently away and into the arms of China and/or harming the Russian energy industry, there will won't be enough gas for everybody that wants it in the future.

Europe's own gas production is past peak and declining. So Europe needs access to more gas, not less. Russia only has so much to deliver and, of late, China has been behaving in a predictable and businesslike manner with Russia. So my best guess is that Russia, if it had to choose a partner to sell to, would choose China.

This all leaves Europe very much in doubt as to how it's going to get the gas it so desperately needs over both the short and long term.

On a longer horizon yet, Russia's energy exports are essential to the world, and so the West's insistence on hammering the Russian energy industry here is really something that potentially effects the whole world.

For those who continue to harbor the suspicion that Russia has been an aggressor here, specifically around the Crimea 'annexation' I strongly encourage you to watch some or all of this one-man project to explore the actual situation in Crimea by going there and asking people questions.

You know, like a reporter from a major western newspaper or show might do (but isn't): Crimea for Dummies

My main take away from that video is that there's a 0% chance that Russia will 'begin to behave acceptably' in the eyes of Barroso by giving Crimea back to Ukraine. Russia does not want that, Crimea does not want that, and it's not going to happen.

Similarly, neither will the eastern provinces of Ukraine be abandoned to Kiev. They are gone, too. Which leaves us with what exactly, then, in the set of things that the West would need Russia to do before these latest sanctions are lifted?

I cannot think of anything short of Putin resigning in disgrace, an event to which I also assign a 0% chance of happening.

Taken all together, there is a looming energy crisis that impacts Europe without a doubt, but also potentially the world a bit later on.

We shall see. But for now, this is all very troubling because I cannot make any sense of the European position, and I know there has to be a very compelling rationale lurking just out of sight somewhere. At least I hope there is.

MORE: Politics