NABUCCO V. South Stream

If the secret to energy security is diversity of sources, then GAZPROM appears to be busy guaranteeing security of natural gas deliveries to Europe. In the past decade, they have built or initiated a number of gas pipeline projects: Blue Stream under the Black Sea to Turkey, North Stream under the Baltic Sea to Germany, South Stream under the Black Sea to the Balkans and the rest of Europe. The problem, of course, is that these pipelines represent a false sense of security. They do not promise diversity of supply, since all the pipelines are under the control of GAZPROM, an independent corporation that is owned by the Russian State.
These new pipelines actually will give Moscow the freedom to punish some states without affecting gas deliveries to others. In January 2009, Moscow cut fuel supplies to Ukraine only to be surprised by protests from Western European countries who were dependent on the same pipeline for fuel deliveries. With the new pipeline network, Moscow will be able to cut supplies to the "Near Abroad" and continue to deliver gas to its European neighbors. This could force countries of the former Soviet Union back into the Russian orbit.
With the exception of limited deliveries through the Baku-Tblisi-Erzerum pipeline, all gas from the Caspian basin reaches the world market through the GAZPROM pipeline network. To break this monopoly and give the countries of the Causcasus and Central Asia an independent alternative, the European Union has endorsed the creation of the NABUCCO pipeline. NABUCCO is designed to carry gas from the Caspian, through the Baltics, and into Western Europe. When completed, NABUCCO will be able to carry about 31 bcm of gas per year, twice the 2009 production of Azerbaijan. South Stream is designed to carry 63 bcm, more than four times Azerbaijan's production. In short, even when Caspian offshore fields come on line, there will not enough natural gas in the area to fill easily both pipelines.
GAZPROM is doing what it can to make sure that NABUCCO is never built, and that Russia will keep its hand on the spigot for natural gas supplies to Europe. NABUCCO has six partners, including the German utility company RWE and Bulgarian energy holding. GAZPROM recently approached RWE to discuss their potential involvement in South Stream, and a German newspaper reports that RWE is considering the offer (The Moscow Times, 13 July 2010). Similarly, Bulgaria has signed a "road map" to accelerate the construction of South Stream, in return for cheaper prices for its own gas deliveries from Moscow (The Moscow Times, 07 July 2010; Hurriyet Daily News 18 July 2010). Bulgaria had little choice in the matter, as it is almost totally reliant on Russia for its supply of natural gas. Russia reportedly also threatened to run its pipeline through neighboring Romania instead--denying Bulgaria of any transit fees. Bulgaria claims to be committed to both South Stream and NABUCCO, but the limited supply of upstream gas makes such equivocation problematic.
An independent delivery option for Western Europe would mean approximately 10% of its natural gas supply could come from the Caspian without Russian interference. This reduces Russia's ability to limit the freedom of action of America's European allies. In addition, if Europe burns natural gas from Central Asia, it would free North African gas to be converted to LNG and shipped to the United States.
For NABUCCO to succeed, new sources of natural gas will have to be found to fill the pipeline.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

How Much Is Enough?

In their magisterial report BP Statistical Review of World Energy 2010, BP documents that in 2009 world primary energy consumption (oil, natural gas, coal, nuclear and hydropower) declined 1.1%, the largest decline since 1980. This included a 1.7% decline in global oil consumption (1.2 million bpd, the largest decline since 1982); and, for the first time on record, a decline of 2.1% in natural gas consumption. As one would anticipate, not all areas declined at the same rate. In fact, Chinese energy consumption increased 8.7%. Indian consumption of natural gas increased 25.9%! Liquid Natural Gas (LNG) now accounts for 30.5% of all natural gas traded in the world.

Where does this energy come from? The Middle East continues to be the source of most of the world's energy. It holds 56.6% of the world's proved reserves of crude oil, and 40.6% of the world's proved reserves in natural gas. 2009 proved oil reserves, as percentages of world oil reserves, can be ranked as follows:
Middle East 56.6%
South and Central America (not including Mexico) 14.9%
Europe and Eurasia 10.3%
Africa (including North African countries of Egypt, Algeria and Tunisia) 9.6%
North America (U.S., Canada, Mexico) 5.5%
Asia Pacific (including India and China) 3.2%

The oil reserves do not match easily with 2009 oil consumption patterns:
Asia Pacific 31.1%
North America 26.4%
Europe and Eurasia 23.5%
Middle East 8.7%
South and Central America 6.6%
Africa 3.7%

Natural Gas tells a similar, but not identical, story. First, the 2009 proved reserves:
Middle East 40.6%
Europe and Eurasia 33.7%
Asia Pacific 8.7%
Africa 7.9%
North America 4.9%
South and Central America 4.3%

2009 Consumption
Europe and Eurasia 35.9%
North America 27.8%
Asia Pacific 16.8%
Middle East 11.7%
South and Central America 4.6%
Africa 3.4%

Among regions of "developed" economies, North America is most out of balance with the rapidly developing economies of China and India closing rapidly. The most balanced area, in the aggregate, appears to be Europe and Eurasia. This is a false impression, given that the distribution of oil and gas is not uniform throughout the region. Russia holds 5.6% of the world's proved reserves, and Kazakhstan has 3%. Azerbaijan and Norway tie at 0.5%. The economies of France, Germany, Spain, etc. don't even make the listing. In natural gas, Russia has 23.7% of the world's proved reserves, followed by Turkmenistan (4.3%), Norway (1.1%), Kazakhstan (1.0%), and Azerbaijan (0.7%). As in the case of oil, most of Western Europe is included under the rubric "other."

One most also be cautious in describing the "oil and gas-rich Middle East," as well. Most of these hydrocarbon deposits are found in the littoral states of the Persian Gulf, but not in equal quantities. Saudi Arabia has the largest share of the world's proved oil reserves, at 19.8%; the Kingdom is followed by Iran (10.3%), Iraq (8.6%), Kuwait (7.6%)United Arab Emirates (7.3%), and Qatar (2.0%). The formerly important oil producer of Bahrain is no longer on the list. In natural gas, the proved reserves are held by Iran (15.8%), Qatar (13.5%), Saudi Arabia (4.2%) and Yemen (3.4%).

The 2009 drop in oil consumption was met by a drop in OPEC production, so OPEC continues to provide the swing capacity needed to moderate world oil prices. Gas prices are not as flexible, since approximately 70% of natural gas is still delivered via pipeline and long-term delivery contracts. While Russia and the other Eurasian countries do not hold the same levels of reserves as the Middle East, they remain a major source of hydrocarbons for the world's economies.

Need for Trans Caspian Pipeline

Tengiz at Night
Eurasian oil and gas reserves are landlocked: unable to reach the world markets without the assistance of neighboring states. In Kazakhstan's case, that help has not been forthcoming.
According to the New York Times, the Russians built the Caspian Pipeline Consortium pipeline through Russian territory to the Black Sea to carry oil from the Tengiz oil field. The pipeline carries 420,000 barrels a day, but planners had anticipated sending 600,000 bpd. The pipeline capacity won't allow any additional oil to pass through, and the Russians refuse to expand the pipeline. (The Russian pipeline company Gazprom is a private company, but the Russian government is the primary shareholder. The government is insisting that private equity needs to be found to expand pipeline capacity.) The American oil company Chevron operates the Tengiz field, and have drilled 107 wells. Nine remain idle, since there is no way to market any additional oil.
The newspaper reports that another oil field, whose partners include Exxon Mobile, Shell, ConocoPhillips, Total and Eni, also lacks any way to deliver its oil to market. (Kramer, Andrew E. "In Asia, a Gulf's Worth of Oil Awaits Transport," NY Times, 22 July 2010)
There has long been a proposal for a pipeline across the Caspian Sea to Baku. Such a pipeline would allow Kazakh oil (and a separate pipeline would allow Turkmen gas to traverse the waterway) to link with the Baku to Ceyhan pipeline. This would give Kazakhstan a direct link to world markets.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Thinking Shortage in a Time of Plenty

It is hard to remember that oil has only been used for energy production for about 150 years, and for half of that time the industry was plagued with fear that the oil would run out. Daniel Yergin, in his Pulitzer-prize winning book The Prize, documents how the Royal Navy recognized the advantages of oil-burning ships, but on the verge of World War I hesitated to convert from coal for fear of having no fuel for the new fleet. the shortages were soon replaced with an overabundance of energy, for a number of reasons:
1. New technologies allowed new oil fields to be discovered. From examining rocks and ponds for oil seepage, to the use of satellite imagery, the ability to discover oil continues to improve.
2. The invention of the cracking process allowed raw petroleum to be broken into various petroleum distillates, making each barrel of oil more exploitable.
3. Blind luck: many fields have been discovered by wildcatters in areas the "experts" claimed had little or no oil or natural gas.
4. New technologies have allowed old fields to be better exploited. The introduction of gas and water infusion techniques have resurrected many played out fields.
5. Energy experts recognized that natural gas was more than just a waste byproduct of the oil industry, but an energy source in itself.
6. The investment in oil and gas pipelines, international and national, allowed the efficient distribution of these products.
7. Improvements in LNG technologies is allowing the use of natural gas to spread from pipelines to a worldwide market.
Fears of shortages remain, however. As World War II approached, the Royal Navy recognized that there was plenty of oil world-wide, but that much would be in the hands of the Nazis. There could be a man-made shortage created not by nature, but by politics.
When the Soviet Union invaded Afghanistan in 1979, U.S. President Carter was alarmed that bombers from Afghanistan could reach the Straits of Hormuz. The Russians had the theoretical ability to close off the free world from its access to Persian Gulf oil. This was such a concern that the President issued the Carter doctrine, a statement that access to Persian Gulf oil was a VITAL interest of the United States.
In another publication, Yergin argues that the main protection of a country's energy supply is diversification (Yergin, "Energy Security and Markets" in Kalicki and Goldwyn, eds. Energy and Security, 2005).
In search of such diversification in the 1990s, oil companies from the United States signed the "Deal of the Century" with Azerbaijan, opening Caspian energy to the West for the first time since the 1920s. The Caspian energy fields, however, are landlocked. Getting the oil and gas from the Caspian to international markets was quite a feat in itself. Azerbaijan shipped "early oil" out via the old Soviet pipeline system and continues to use this system for some of its production. Most of the oil, however, is shipped via the Main Energy Pipeline that was built at the dawn of the 21st Century.
This Caspian energy was important because it became another, diversified source for energy. Where, then, could the Main Energy Pipeline run? The easiest routing would have been to send all the oil through the Soviet pipeline system, but that would have placed control over this source in the hands of America's Cold War former nemesis. In addition, the oil would have to be transported by boat through the Black Sea and the Turkish Straits in order to reach world markets. It would have meant a massive increase in tanker traffic through the heart of Istanbul, a metropolitan area of 10-20 million people (depending on who'se counting).
The shortest route to the open sea would be through the Islamic Republic of Iran. This would put control of the energy in the hands of the mullahs who have elevated anti-Americanism into an art form.
To make sure that Caspian energy could be delivered to the world market independently of the influences of Russia or Iran, the decision was to route the Main Energy Pipeline from Baku, through Georgia, and into Turkey, ending at the port of Ceyhan. The Main Energy Pipeline is better known as the BTC, or Baku to Ceyhan pipeline.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Georgia Selling Gas Pipeline that feeds Armenia

Gazprom may soon own Armenia's main supply corridor for natural gas, increasing Russia's ability to control Armenian decisionmaking. According to the website Civil.GE, on July 6 the Georgian parliament endorsed a draft law to privatize state assets, including the North-South Pipeline. This pipeline delivers Russian natural gas to Armenia.

Georgian Prime Minister Nika Gilauri promised that if Georgia sold shares of the pipeline, that the government would keep controlling interest. The opposition tried to hold the prime minister to his word by offering an amendment that would limit the sale of pipeline shares to 49 percent. Had the amendment passed, it would have been impossible for the government to sell control of the pipeline to any outside investors. Parliament rejected the amendment, leaving open the possibility that either GAZPROM or a GAZPROM affiliate could snap up the pipeline.

Parliamentarians who backed the sale insisted that the pipeline would not be sold to Russia, but GAZPROM is not officially a part of the Russian government. GAZPROM has used its control of pipelines to increase the price of natural gas to downstream countries, and has also manipulated the gas supply when these countries take actions of which the Russian government disapproves.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Natural Gas: Alternative to Oil

While hydrogen-powered automobiles may still be in the future, there is a cheap, clean alternative to oil: natural gas. Often a by-product of oil production, natural gas was considered a waste material that was burned off at the well head.

Use of natural gas has doubled from 1973 (671 Metric Tons of Oil Equilvalent) to 2007 (1296 MTOE). Energy consumption has increased at such a rate, however, that this represents only a minor increase in the OECD percentage of fuel consumed. In 1973, Gas was 14.4% of the 4675 MTOE; by 2007 that share had only increased to 15.6% of the 8286 MTOE (International Energy Agency, Key World Energy Statistics 2009).

Natural gas has a major drawback: it is difficult to transport to the end user. Experts in the field such as Adam E. Sieminski (Siminski, World Energy Futures, in Kalicki and Goldwyn, eds., Energy and Security; Baltimore: Johns Hopkins Press, 2005, 40-43) and Daniel Yergin (Yergin, Energy Security and Markets, in Kalicki and Goldwyn, ibid, 58-60) describe the growth of liquified natural gas (LNG) as the solution to the transportation problem. But LNG has its own drawbacks: the equipment to cool natural gas to minus 240 degrees, keep it at that temperature during transit, and then reconverting the liquid to its natural form are all expensive. It is also dangerous: Sempra Energy wanted an LNG terminal to service Southern California, but residents' fears of LNG storage tank explosions forced Sempra to build in Mexico.

Trade in LNG is certainly increasing, but until these problems are resolved the major way of moving natural gas is via pipeline. Construction of these delivery networks are expensive and represent a fixed capital investment for the pipeline owners. There is therefore little competition in the natural gas market, as it is too expensive to build multiple pipelines to deliver product to the same location. This means that whoever controls the pipeline controls both the producer output and the consumer price.

Russia, through the semi-autonomous pipeline owner Gazprom, has used this situation to develop a monopoly over natural gas delivery from the former Soviet Union. In 2008, Russia produced 20.9% of the world's supply of natural gas, consumed natural gas domestically, but still exported 23.4% of the supply. (IEA, World Energy Statistics, 2009). Whether the gas originates in Kazakhstan, Azerbaijan, or Turkmenistan the only way to get the gas to the European market is through the Gazprom-controlled pipelines. Vladimir Putin, former Russian president and current Russian premier, has commented on this situation by noting that control of Gazprom is a matter of state policy. Pipeline projects to break the Russian monopoly represent, therefore, a direct threat to Russian economic interests.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Clinton Trying to Resecure American Ties

Hillary Clinton and Azerbaijani President Ilham Aliyev

Secretary of State Clinton has just returned from a five day, five country whirlwind tour of countries that Russian Prime Minister Demitri Medvedyev refers to as the Russian "zone of privileged interests." Specifically, Clinton called on NATO ally Poland and four countries of the former Soviet Union: Ukraine, Azerbaijan, Armenia and Georgia. All are countries that counted themselves as friends of the United States two years ago, but have either become neutral or rejoined Moscow's orbit. If the United States is interested in access to Caspian oil, the Clinton visit is long overdue.

Against withering criticism from Moscow, Poland gave former President George W. Bush permission to build part of a missile shield there. The United States said the missiles were to defend against the Iranian threat; the Russians pointed out that Iran was nowhere near Poland. President Barack Obama sacrificed the missile shield as part of his efforts to reset relations with the Kremlin. Poland found itself questioning its importance to the United States and to NATO.

Georgia and Ukraine had been considering joining the NATO alliance, but Germany dragged its heals on their applications. Since then, Georgian territories of Abkhazia and Ossetia have broken with the central government in Yerevan, and their separation is enforced by Russian troops. The United States did not respond to this use of Russian force, and America's ally in Ukraine, former president Viktor Yushenko, was turned out at the next election. The new president, long-time Moscow ally Viktor Yanukovich, has presided over a parliament that has extended the Russian lease on their Crimean naval base and -- hours before the arrival of Secretary of State Clinton with a reminder that NATO membership is still on the table -- passed a resolution declaring Ukraine a non-aligned country.

Armenia is unhappy because the United States has not forced the Turks to open its border and for refusing to accept the Armenian occupation of Nagorno Karabakh. Azerbaijan, by contrast, is unhappy because the United States encouraged Turkey to open its border with Armenia before the staus of Nagorno Karabakh was settled. Azerbaijan has signalled its unhappiness by signing new energy agreements with Moscow and with Tehran -- not with the West.

If one looks at where the region's energy resources originate, Azerbaijan, and how they get to the West, via Georgia and Turkey with the Ukraine as an alternative, it is interesting that the US has alienated large portions of the populations and governments of all these countries. Clinton's visit may be just in time; or it could be too little, too late.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

How Important is Foreign Oil to the United States?

The networks are inundating us with news of the offshore pipeline leak in the Gulf of Mexico. It reminds us once again that the United States is a major oil producer. Why, then, should we care about sources of oil outside the United States? Couldn't we develop domestic sources of energy and become energy self sufficient--as so many politicians discuss? The answer is no. The United States produces 25% of all the goods and services in the world, but it uses 33% of the world's energy to do so. America is an oil-thirsty country.

According to the International Energy Agency (IEA), in the first quarter of 2010 North America imported 28,368,000 Metric Tons of oil products (crude oil, NGL and Refinery Feedstocks.) Of these, 2,346,000 MT came from the countries of the former Soviet Union. Even with American, Canadian and Mexican domestic production, the NAFTA countries still required massive amounts of foreign oil. Europe, which lacks the North American domestic production capability, imported 78,830,000 MT of which 16,248,000 originated in the former Soviet Union. (IEA Monthly Oil Survey, March 2010)

How great is America's thirst? Well, in 2008 the United States produced 7.6% of the world's oil (300 million MT). In addition, in 2007 (most recent data available) the United States imported an additional 573 million MT, which was over 27% of the world's production. (IEA, Key World Energy Statistics, 2009) Interestingly, all of the top 5 net importers were Pacific Rim countries--United States, Japan, China, India and Korea--demonstrating graphically where economic growth is occuring.

Where did the oil come from? The top 5 oil exporters are all countries with which the United States has had differences over the past twenty years. These countries are Saudi Arabia (17% of world exports), Russia (13%), Iran (7%), Nigeria (6%), and the United Arab Emirates (5%). Clearly, reliable sources of oil are necessary for the United States and its allies.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Can Alternative Fuel Replace Gas and Oil?

Most people agree that use of hydrocarbons to produce energy is a terrible use of natural resources. It is expensive, it pollutes, there is a correlation between energy use and global climate change, and relying on hydrocarbons often means relying on corrupt or authoritarian governments that control the sources. Why, then, don't we develop other sources of energy? Can't we use clean technology such as hydropower, windpower, solarpower, etc.?

In a word, the answer is no, the technology does not exist in the near future to replace the world's reliance on gas and oil. To quote that National Intelligence Council in their prognostications:

All current technologies are inadequate for replacing traditional energy architectures on the scale needed, and new energy technologies probably will not be commercially viable and widespread by 2025. The present generation of biofuels is too expensive to grow, would further boost food prices, and their manufacture consumes essentially the same amount of energy they produce.
Other ways of converting nonfood biomass resources to fuels and chemical products should be more promising, such as those based on high-growth algae or agricultural waste products, especially cellulosic biomass. Development of clean coal technologies and carbon capture and storage is gaining momentum and—if such technologies were cost-competitive by 2025—would enable coal to generate more electricity in a carbon-constrained regulatory environment. Long-lasting hydrogen fuel cells have potential, but they remain in their infancy and are at least a decade away from commercial production. Enormous infrastructure investment might be required to support a “hydrogen economy.” An Argonne National Laboratory study found that hydrogen, from well to tank, is likely to be at least twice as costly as gasoline.
Even with the favorable policy and funding environment that would be needed for biofuels, clean coal, or hydrogen, major technologies historically have had an “adoption lag.” A recent study found that in the energy sector, it takes an average of 25 years for a new production technology to become widely adopted. A major reason for this lag is the need for new infrastructure to handle major
innovation. For energy in particular, massive and sustained infrastructure investments made for almost 150 years encompass production, transportation, refining, marketing, and retail activities.
Adoption of natural gas, a fuel superior to oil in many respects, illustrates the difficulty of a transition to something new. Technologies to use natural gas have been widely available since at least the 1970s, yet natural gas still lags crude oil in the global market because the technical and investment requirements for producing and transporting it are greater than they are for oil-based fuels.
Simply meeting baseline energy demand over the next two decades is estimated to require more than $3 trillion of investment in traditional hydrocarbons by companies built up over more than a century and with market capitalizations in the hundreds of billions of dollars. Because a new form of energy is highly unlikely to use existing infrastructure without modifications, we expect any new form of energy to demand similarly massive investment. (National Intelligence Council, Global Trends 2025, p.44)

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.

Introduction

Welcome to Eurasian Energy Analysis. At the dawn of the Age of Hydrocarbons, two areas reigned supreme: the oil fields of Pennsylvania/Ohio in the United States, and the oil fields of the Caspian. The early American fields have been long played out, but the past 15 years have seen a new oil and gas boom in the Caspian basin. This blog will explore the issues surrounding that boom: the importance of the area, quantities of oil and gas, how the petroleum products reach the world market, and threats to the distribution network. The thrust of this blog is neither engineering nor economics, however. It will address the twin questions of how world political forces influence energy production; and, how energy production influences world political forces.

I invite you to participate in the discussion, by sending me items for posting. If you have details on the Nabucco v. South Stream competition, or the geopolitical effects of the Russian actions in Georgia, or Chinese oil and gas purchases, etc. here is your chance to share them with a larger audience.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at jimcoyle@verizon.net.