30 April 2007

Gazprom and European Energy Security

After a period of relative silence debate has flared again (sic) on Europe's dependence on Russian gas and whether Gazprom can produce enough gas to feed both Europe and domestic Russian demand.

The Economist started the process with a long-article on Europe's uncoordinated Russia policy, relationship(s) with Russia and demand for and supply of Russian gas.  Jerome responded on The Oil Drum, albeit belatedly, attacking the Europe-under-threat-from-Russia line which the Economist and FT continue to peddle, but which the facts consistently fail to support.

As I said in my comment (copied below in full) to Jerome's post I am not qualified to comment on the benefits, or otherwise, of the liberalization of Europe's distribution networks.  I might be being a little optimistic but I detect a subtle change in emphasis in the Economist article - which might just make it a more useful "newspaper."  On re-reading Jerome's article I note that his executive summary of his debate is more cognizant of the supply/demand issues than his subsequent critique of the Economist article.

But the most interesting thing, in fact, is that both in our papers, and during the debate, we ended up agreeing on many, if not most, things, the most important of which being:

    * European energy policy is inexistant and what passes for policy (the liberalisation of markets) is indeed considered insane by all;
    * Russian behavior is driven to a large extent by the personal strategies and interests of a few individuals at the very top. There is no overarching geopolitical plan, but a lot of political infighting and short term asset-grabbing strategies. That may be even more worrying in itself than purposeful strategies to use the "energy weapon", but the motivations are different. It is true however that the global energy situation allows Russia to be a lot more assertive, or even brutal, on the international stage, and there's little that can be done about that;
    * there is indeed a lot of uncertainty of what medium and long term production of gas in Russia will be - because of the decline of its existing "workhorses" (the huge fields that current provide most of its production) and the lack of incentives for Gazprom and/or its managers to invest in upstram assets. There are more or less optimistic views on this, but the question definitely exists for all - and brings us back to the lack of European strategy in the face of uncertainty.

Meanwhile this article from Ben Aris' increasingly good Business New Europe focuses more on the demand/supply conundrum which will impact both Europe and Russia over the next decade.

I will make no comment whatsoever on the gas cartel story - it's a piece of political theatre which is being kept alive for reasons that are entirely beyond me.

Jerome,

Your analysis of inter-national energy politics strikes me as being reasonable.  Whether liberalization of the European energy transport system is better or worse for Europe than national champions I am not competent to comment on.  Your analysis of Gazprom commitment to timely investment in upstream operations is clouded by your views of the big 4 as a political tool.

There is strong evidence already today that there is a significant shortage of gas available to the domestic market.  During the very short cold snap this winter businesses around Moscow were basically told to shut-up shop to prevent a brown out.  Three energo's in the Volga region (Samara, Saratov and Volgograd) cannot acquire additional gas at any price. They, like the better-advertised demand for gas from the Mayor of Moscow, state that they are willing to pay prices in excess of $100/mcm.  Not yet netback parity but getting close to it.  That Gazprom refuses to supply them at these prices should provide some comfort to worried Economist readers (and even more concerned FT readers). The price issue is important because it tends to negate the story that GAZP will only produce gas which it can sell at market prices.  Albeit that the politics of domestic gas provision requires a supercomputer to process all the competing claims.  My focus is on two; inflation and inefficient energy use.

This has policy implications for either Russia or the European Union, or both.  We would tend to agree that in the medium-term Europe will benefit ahead of Russian domestic demand.  There is strong evidence that Gazprom can, at the margin, increase gas supplies (winter of 2005-06) but with demand for electricity growing at in excess of 4%p.a. in Russia and with European Russia (the bit that’s really growing) being almost exclusively powered by gas-fired generating units – something has to give.  Note, that using BTU-equivalents an electricity producer in European Russia using coal would pay an equivalent of $180/mcm to produce the same kWH.  The Russian government’s response has been to apply pressure to non-GAZP producers to stop flaring associated gas and a statement (straight from the absurd) that independent gas producers will produce 60% of domestic gas demand by 2015, some price liberalization – immediately followed by the countermanding threat to increase extraction taxes to RUR700/mcm.

Knowing why GAZP behaves this way, personal enrichment as priority A, everything else as priority Z, does not alter the fact that there is an unmet demand for gas.  Also, and you have written about this previously, a lack of competent management at the highest level, which means that upstream plans are being missed on a quarterly basis.  Pipeline capacity (both absolute and access to) from the two main gas producing areas, Nadym and Surgut, is a much greater issue than the development of reserves themselves and there seems to be little evidence of more than holding maintenance.

For an eminently sensible primer on the demand supply issue I would suggest this article from
Business New Europe, which tends to promote the view of those actually doing business in Russia as opposed to pontificating from London and Washington.

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27 April 2007

Back Blogging Again

It is with some joy that I can announce that I am posting again - hopefully with some regularity.  It pretty much depends on SWMBO and her movements.

The month of May will include few observations from Russia, but a number on Russia.

In the Regions

There is a slightly masochistic joy to traveling to and out of Moscow.  Moscow is no more Russia than London and New York are the UK and US respectively.  This particular trip has me in Saratov a rather charming city on the Volga which, as the locals say, was unfortunately not invaded by the Germans in the Great Patriotic War.  The centre is being rebuilt slowly but, like the centre of London, suffers from a surfeit of small roads which were designed for horses and carts and not for Lexus 4x4's.

Having spent the past two weeks in business class bouncing around Europe and the US it was a bit of a sharp return to reality to shoehorn myself in an economy class middle seat of a YAK-42 for a 80 minute flight.  Given that I am not of excessive height and my knees are firmly wedged in to the back of the seat in front I would hate to be anything over dwarf size.

The trip though poses some observations;

  1. The funny combination of numbers and a letter on the boarding card indicates your seat number.  The stewardess has already explained that it is not "free/svobodnaya" seating so how is it that it takes 10 minutes of rubric cube movements to get everyone in to an appropriate seat?
  2. The curtains in the hotel room are there to perform a purpose, which is not to look pretty.  Such purpose is entirely undermined by making them out of see-through pink nylon.
  3. Each room in the hotel has its own outside line - which allows some of the more enterprising amongst the female population to make direct contact.  If there is no way of easily removing the cord from the phone or the wall - I will rip it out so that I can sleep.
  4. What materials are the walls made from such that anyone in the surrounding 4 floors who did accept the invitation proffered in point 3 above manages to channel their energy through the walls of my room?
Though as the sun is shining today (see point 2 above) the city looks good.  It will come as no surprise to Russia-followers to discover that an enormous Metro has opened close to the airport and that at 10.30 on a Thursday morning the car park was half-full.  The city centre itself is a building site and the global brands have been here long enough that their signs need a good post-winter clean.

I feel a subbotnik coming on.

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23 April 2007

Yeltsin

Even as I scribble this rubbish, leader writers the world over are penning (which is so much better than keyboarding) sympathetic obituaries of the man who stood on top of the tank to defy the coup, then used them to blow the White House apart, before failing to get out of the airplane because he was too inebriated.

This founder of democracy was so universally loved that his popularity hit a miserly single digit level in early 1997, thus causing him to strike a faustian pact with, inter alia, Khordokhovsky and the ultra-liberal democrat Anatoly "tons of cash" Chubais. With the economy effectively hocked for absolutely nothing July 3rd 1997 turned in to a nightmare only for SWMBO (it was (and still is) her birthday) whilst the rest of us had another 13 months to ruin our livers' and regret our failure to sell out earlier. If you can remember post-election Moscow in 1997, you weren't here.

Stability was the same policy being announced two months in a row, which beat the number of consecutive months which government employees were paid. Fun it was, nascent democracy it was not. And worst of all it laid the groundwork for the Fifth Directorate Thugs to return.

The embalmers are happy though; he has already thoroughly pickled himself.

03 April 2007

Hell Is

The Aeroflot / Alitalia merger where;

The onboard food is Russian
The baggage handling is Italian
Passport control is Russian
Timeliness is Italian
The airport design is Russian (well eastern German actually)
The stewards (or whatever they call themselves today) are Russian
And the prices are Italian
The rail/air link at Sheremeyteveo is built by Italians according to a Russian timetable with money from Berlusconi

Technorati Tags:

30 April 2007

Gazprom and European Energy Security

After a period of relative silence debate has flared again (sic) on Europe's dependence on Russian gas and whether Gazprom can produce enough gas to feed both Europe and domestic Russian demand.

The Economist started the process with a long-article on Europe's uncoordinated Russia policy, relationship(s) with Russia and demand for and supply of Russian gas.  Jerome responded on The Oil Drum, albeit belatedly, attacking the Europe-under-threat-from-Russia line which the Economist and FT continue to peddle, but which the facts consistently fail to support.

As I said in my comment (copied below in full) to Jerome's post I am not qualified to comment on the benefits, or otherwise, of the liberalization of Europe's distribution networks.  I might be being a little optimistic but I detect a subtle change in emphasis in the Economist article - which might just make it a more useful "newspaper."  On re-reading Jerome's article I note that his executive summary of his debate is more cognizant of the supply/demand issues than his subsequent critique of the Economist article.

But the most interesting thing, in fact, is that both in our papers, and during the debate, we ended up agreeing on many, if not most, things, the most important of which being:

    * European energy policy is inexistant and what passes for policy (the liberalisation of markets) is indeed considered insane by all;
    * Russian behavior is driven to a large extent by the personal strategies and interests of a few individuals at the very top. There is no overarching geopolitical plan, but a lot of political infighting and short term asset-grabbing strategies. That may be even more worrying in itself than purposeful strategies to use the "energy weapon", but the motivations are different. It is true however that the global energy situation allows Russia to be a lot more assertive, or even brutal, on the international stage, and there's little that can be done about that;
    * there is indeed a lot of uncertainty of what medium and long term production of gas in Russia will be - because of the decline of its existing "workhorses" (the huge fields that current provide most of its production) and the lack of incentives for Gazprom and/or its managers to invest in upstram assets. There are more or less optimistic views on this, but the question definitely exists for all - and brings us back to the lack of European strategy in the face of uncertainty.

Meanwhile this article from Ben Aris' increasingly good Business New Europe focuses more on the demand/supply conundrum which will impact both Europe and Russia over the next decade.

I will make no comment whatsoever on the gas cartel story - it's a piece of political theatre which is being kept alive for reasons that are entirely beyond me.

Jerome,

Your analysis of inter-national energy politics strikes me as being reasonable.  Whether liberalization of the European energy transport system is better or worse for Europe than national champions I am not competent to comment on.  Your analysis of Gazprom commitment to timely investment in upstream operations is clouded by your views of the big 4 as a political tool.

There is strong evidence already today that there is a significant shortage of gas available to the domestic market.  During the very short cold snap this winter businesses around Moscow were basically told to shut-up shop to prevent a brown out.  Three energo's in the Volga region (Samara, Saratov and Volgograd) cannot acquire additional gas at any price. They, like the better-advertised demand for gas from the Mayor of Moscow, state that they are willing to pay prices in excess of $100/mcm.  Not yet netback parity but getting close to it.  That Gazprom refuses to supply them at these prices should provide some comfort to worried Economist readers (and even more concerned FT readers). The price issue is important because it tends to negate the story that GAZP will only produce gas which it can sell at market prices.  Albeit that the politics of domestic gas provision requires a supercomputer to process all the competing claims.  My focus is on two; inflation and inefficient energy use.

This has policy implications for either Russia or the European Union, or both.  We would tend to agree that in the medium-term Europe will benefit ahead of Russian domestic demand.  There is strong evidence that Gazprom can, at the margin, increase gas supplies (winter of 2005-06) but with demand for electricity growing at in excess of 4%p.a. in Russia and with European Russia (the bit that’s really growing) being almost exclusively powered by gas-fired generating units – something has to give.  Note, that using BTU-equivalents an electricity producer in European Russia using coal would pay an equivalent of $180/mcm to produce the same kWH.  The Russian government’s response has been to apply pressure to non-GAZP producers to stop flaring associated gas and a statement (straight from the absurd) that independent gas producers will produce 60% of domestic gas demand by 2015, some price liberalization – immediately followed by the countermanding threat to increase extraction taxes to RUR700/mcm.

Knowing why GAZP behaves this way, personal enrichment as priority A, everything else as priority Z, does not alter the fact that there is an unmet demand for gas.  Also, and you have written about this previously, a lack of competent management at the highest level, which means that upstream plans are being missed on a quarterly basis.  Pipeline capacity (both absolute and access to) from the two main gas producing areas, Nadym and Surgut, is a much greater issue than the development of reserves themselves and there seems to be little evidence of more than holding maintenance.

For an eminently sensible primer on the demand supply issue I would suggest this article from
Business New Europe, which tends to promote the view of those actually doing business in Russia as opposed to pontificating from London and Washington.

Technorati Tags: , ,

27 April 2007

Back Blogging Again

It is with some joy that I can announce that I am posting again - hopefully with some regularity.  It pretty much depends on SWMBO and her movements.

The month of May will include few observations from Russia, but a number on Russia.

In the Regions

There is a slightly masochistic joy to traveling to and out of Moscow.  Moscow is no more Russia than London and New York are the UK and US respectively.  This particular trip has me in Saratov a rather charming city on the Volga which, as the locals say, was unfortunately not invaded by the Germans in the Great Patriotic War.  The centre is being rebuilt slowly but, like the centre of London, suffers from a surfeit of small roads which were designed for horses and carts and not for Lexus 4x4's.

Having spent the past two weeks in business class bouncing around Europe and the US it was a bit of a sharp return to reality to shoehorn myself in an economy class middle seat of a YAK-42 for a 80 minute flight.  Given that I am not of excessive height and my knees are firmly wedged in to the back of the seat in front I would hate to be anything over dwarf size.

The trip though poses some observations;

  1. The funny combination of numbers and a letter on the boarding card indicates your seat number.  The stewardess has already explained that it is not "free/svobodnaya" seating so how is it that it takes 10 minutes of rubric cube movements to get everyone in to an appropriate seat?
  2. The curtains in the hotel room are there to perform a purpose, which is not to look pretty.  Such purpose is entirely undermined by making them out of see-through pink nylon.
  3. Each room in the hotel has its own outside line - which allows some of the more enterprising amongst the female population to make direct contact.  If there is no way of easily removing the cord from the phone or the wall - I will rip it out so that I can sleep.
  4. What materials are the walls made from such that anyone in the surrounding 4 floors who did accept the invitation proffered in point 3 above manages to channel their energy through the walls of my room?
Though as the sun is shining today (see point 2 above) the city looks good.  It will come as no surprise to Russia-followers to discover that an enormous Metro has opened close to the airport and that at 10.30 on a Thursday morning the car park was half-full.  The city centre itself is a building site and the global brands have been here long enough that their signs need a good post-winter clean.

I feel a subbotnik coming on.

Technorati Tags:

23 April 2007

Yeltsin

Even as I scribble this rubbish, leader writers the world over are penning (which is so much better than keyboarding) sympathetic obituaries of the man who stood on top of the tank to defy the coup, then used them to blow the White House apart, before failing to get out of the airplane because he was too inebriated.

This founder of democracy was so universally loved that his popularity hit a miserly single digit level in early 1997, thus causing him to strike a faustian pact with, inter alia, Khordokhovsky and the ultra-liberal democrat Anatoly "tons of cash" Chubais. With the economy effectively hocked for absolutely nothing July 3rd 1997 turned in to a nightmare only for SWMBO (it was (and still is) her birthday) whilst the rest of us had another 13 months to ruin our livers' and regret our failure to sell out earlier. If you can remember post-election Moscow in 1997, you weren't here.

Stability was the same policy being announced two months in a row, which beat the number of consecutive months which government employees were paid. Fun it was, nascent democracy it was not. And worst of all it laid the groundwork for the Fifth Directorate Thugs to return.

The embalmers are happy though; he has already thoroughly pickled himself.

03 April 2007

Hell Is

The Aeroflot / Alitalia merger where;

The onboard food is Russian
The baggage handling is Italian
Passport control is Russian
Timeliness is Italian
The airport design is Russian (well eastern German actually)
The stewards (or whatever they call themselves today) are Russian
And the prices are Italian
The rail/air link at Sheremeyteveo is built by Italians according to a Russian timetable with money from Berlusconi

Technorati Tags: