Pipeline Wars or Pipe Dreams?
To believe press releases, the Eurasian landmass is undergoing an explosion in the construction of gas and oil pipelines comparable to the building of railways in the nineteenth century. Russia is completing Nord Stream to Germany under the Baltic Sea. Russia plans to construct South Stream to connect directly to Southern Europe, under the Black Sea and into Bulgaria and through Serbia to Austria and Southern Europe. To prevent Russian monopoly on energy supplies to Southern Europe a competing consortium offers to build an alternative pipeline, nicknamed Nabucco, to deliver gas from Central Asia. Another planned route to Europe from Central Asia is via the Trans Adriatic Pipeline. More recently, Russia announced a plan for a new pipeline from Eastern Siberia to China.
These plans are reminiscent of the last stage of the arms race during the Cold War in the eighties. Today’s pipeline wars are quickly becoming obsolete because of new economic and technological realities.
Future spot prices for Russian natural gas are likely to be considerably lower than their current prices, even if they do not fall to one-fifth of their current average European price, as in the U.S. Consequently, customers refuse to commit to long term contracts at prices pegged to the price of oil, as had been the case until recently. The price of natural gas has been falling in Europe and it buys less of it from Russia. Future prices of natural gas may not justify economically the cost of building many of the proposed pipelines. If Russia does not build Southstream, there is no reason to build Nabucco.
Demand for energy has fallen in Europe as a result of the economic slowdown, especially in Southern Europe, the target of Southstream and Nabucco. Demand for Russian gas has fallen also because Europe buys cheaper coal to produce electricity. Some coal is produced locally. More coal can be bought at bargain prices from the United States. U.S. demand for coal plummeted following the glut in cheap natural gas produced from shale.
The glut of natural gas in the United States eliminated U.S. demand for liquefied natural gas (LNG). Global supply will increase following the likely granting of export licenses to American producers of LNG.
Russia’s gas monopoly, Gazprom, must sell today less natural gas for a lower price. The weakening of the Russian position has emboldened the European Union to open an investigation against Gazprom for price fixing.
Gazprom’s declared strategy is to substitute exports to Asia, especially China, for its losing market share in Europe. Russia and China have agreed about almost everything, except for the price. With abundant coal, China does not depend on natural gas and it will not pay Russia a European price.
According to the U.S. Energy Information Administration June 2013 report, China has the largest deposits of technically recoverable shale gas in the world. Europe has less, but enough to release it from the need to import much natural gas. It would take a miracle for unconventional shale gas and oil drilling technologies to succeed exclusively in North America. Technological, economic, legal, and geographical constraints will delay global exploitation of shale energy. In parts of Europe, social and political aversion to mining in general and fossil fuels in particular, may further delay exploitation of unconventional energy resources. But building pipelines across Siberia also takes time, and even more so money.
Political more than economic considerations determine Gazprom’s pricing of gas. The price of energy in Russia is still incredibly cheap and must be subsidized. The various prices Gazprom charges foreign customers serve often as reward and punishment for obeying or defying Moscow.
Gazprom’s extraction of conventional gas is cheaper than by hydraulic fracturing and horizontal drilling. Still, there are financial drawbacks to being one of the two seriously profitable businesses in Russia (the other being the oil monopoly Rosneft). Energy is the main source of income for the Russian state and more significantly for the Russian elite. Analysts estimate that corruption added about 30% to the cost of Nordstream. Pipelines to China would be longer and technologically more challenging. Adding the cost of corruption may well put them beyond the reach of Gazprom.
China offers advance payments for Russian energy that can cover some of the costs of pipeline construction. But without an agreed price for sales of Russian energy to China there are no advances, and if the Russians agree to pay Chinese prices, the pipeline would be too expensive.
The planned pipelines projects appear like a later day versions of the Cold War arms race. As in the Cold War, Russia may not be able to keep up with it competitors before going bankrupt. In the end, it may not matter; the race itself will prove obsolete.
Aviezer Tucker is assistant director of the Energy Institute at the University of Texas in Austin. First published by Fuel Fix Related Reading from Aviezer Tucker HERE.