Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on November 16, 2014
Russia and China’s new gas agreement will starve EU of natural gas
China continues to siphon cheap Russian gas that once went to Europe. Without a plentiful supply of affordable natural gas, Europe faces a looming crisis
Russia inked a second blockbuster deal with China that will starve Europe for natural gas in just a few short years. It’s now increasingly clear that 2018 will mark the beginning of the end for any hopes Europe had of returning to robust economic growth.
It was by far the biggest news of the day. While it did make headlines, you might have missed it because not much was made of the affair beyond the announcement. The story came and went as if Russia has oodles of natural gas (NG) to send to China.
It doesn’t. And the supplies it has now contracted to send to China will be pulled from supplies that currently go to Europe.
For the people who understand global energy markets — that energy is the one non-negotiable substance required for economic stability and growth — this announcement was a huge deal.
Here’s what was announced:
Moscow and Beijing signed an agreement to supply gas from western Siberia to China, in a deal that could eventually see more of Russia’s gas flowing to its vast eastern neighbour than to its traditional European markets.
Assuming crucial details such as price are agreed, the deal would mark another big step in President Vladimir Putin’s efforts to build a closer energy relationship with China to offset increasing isolation from the west.
It would see Gazprom, the Kremlin-controlled energy group, supply China’s state oil company CNPC with 30bn cubic metres of gas per year. That would be on top of the 38bcm/y Russia agreed to sell China in a $400bn agreement signed in May.
The basics of the story are very simple to follow. After backing a violent overthrow of the democratically-elected government of Ukraine back in February of 2014, the West, consisting of the US and Europe equally, chose to back the distastefully right-wing, oligarch regime that followed the downfall of former Ukrainian president Yanukovych.
Russia said nyet to that, and also did not like the breach of the prior agreement to not expand NATO “one inch to the east” made by James Baker in 1989. Russia knows all too well what happens when fascists arise on its western border, and they were not going to abandon the Russian speaking people in Crimea and the eastern provinces to the newly installed thugs in Kiev.
Somehow Russia’s invoking of a final line-in-the-sand over Ukraine proved to be upsetting to the western powers, and they have waged an increasing crescendo of economic and diplomatic war against Russia ever since. And a propaganda war too we should add.
And it was personal, too. Those closest to Putin were specifically targeted, seeing their private bank accounts frozen, travel restricted, and deals scuttled.
Such tactics are indeed war by any other name. The funny part of it all, is that nobody can explain what the US’ strategic interests the Ukraine even are, and therefore I have found no compelling rationale for alienating Russia, a major nuclear power. Lacking any reasonable explanation the only one left on the surface is that the US is angry that Russia does not simply allow the US to do whatever it wants, when it wants, and how it wants.
Even more puzzling is the position of Europe, which apparently values being a handmaiden of US petulance more than they value being warm in winter or having a robust economy. Because that’s exactly what’s at stake. And now, what we’ve been warning about since this all started, the critical loss of energy supplies from Russia, is coming to pass.
The most critical part of the above article is this next paragraph:
The May deal involved gas from yet-to-be-developed fields in the remote tundra of eastern Siberia. However, the latest agreement, which is based on what Moscow refers to as the “western” route, would supply China with gas from fields in western Siberia that is currently piped to Europe.
There it is. In black and white. Russia has inked a deal to send to China NG that used to flow to Europe. Interestingly, rather than just cutting Europe off Russia has chosen to go through the route of normal, capitalist, market mechanisms. Hey, this customer is offering me a better price, stability I can count on, and basic respect.
I guess in a world where Japan is ruining its citizens future and the other central banks are conspiring on a daily basis to drive equity markets to brand new highs, such a momentous thing could get lost in the noise. But we’re not going to let that happen.
This. Is. A. Very. Big. Deal.
Europe’s gas has just been signed over to China. Well, some of it at least. But even a tiny bit at this point is a huge deal.
Even worse, the above paragraph soft-pedals the situation by stating that the prior deal inked in March of 2104 involved gas from “yet-to-be-developed” fields in eastern Siberia. But there’s just one new field in that location coming on line, the Chayanda field, which is slated to begin production in 2015, and produce only 25 billion cubic meters (bcm) per year. China is expecting to receive 38 bcm per year on that prior deal — so there’s still some 13 bcm to account for.
Russian Production
As we’ve noted before, NG production takes time to ramp up, is not all that amenable to rapid increases, and Russia has been fairly stable in terms of output over the past decades:
1989-2007 Russian natural gas output has been almost constant
Note that dotted line sitting at about 600 bcm has been there since 1990. China has just inked two deals that, taken together, account for 68 bcm of Russia’s total output.
The above chart is just a little bit out of date, but the most recent data from the EIA says that nothing at all has changed in this story recently:
Gas output has not increased rapidly in recent years either
Again, the main issue here is that Europe is in a major bind.
Russia only has so much NG to sell. And they have decided to sell it to a different country than Europe (China), one that they suspect will be more likely to honor agreements and treat them well and rationally.
Europe is in a pickle now. Because not only are they about to lose a bit more than 25% of all their currently-imported NG from Russia, but their own domestic supplies are shrinking in concert.
Each green circle below represents a domestic source of NG that is shrinking for Europe:
Domestic European gas production is actually shrinking
The most critical of these is the Netherlands which is really just the Groningen field, which is way past prime and is being ramped down more quickly than originally expected. Why? Because it’s creating earthquakes as the field subsides. The local citizens are none too keen about earthquakes for some reason.
So Europe is being squeezed now by falling production on one side, and falling imports on the other.
Seen at the macro scale, here’s the situation in Europe:
Consumption is the black jagged line on top, production is the gray bars, and the deficit, which must be imported is in red below.
It’s clear that production has been falling for many decades, and that the decline in consumption (green circle) was coincident with weak economic activity (not so coincidentally, by the way).
The point here is that Europe cannot have both less NG to burn and the robust economic growth it needs to dig out from under the staggering debt burden that the Euro-crats have taken on to combat weak growth.
No matter how you slice this, Europe is in big trouble. It will either have to fast-track new LNG terminals (very likely) or have to figure out how to struggle along with a 25% reduction in NG imports beginning in 2018.
For those with a mind for this, now is the time to invest in those companies that can bring lots of LNG to Europe.
Conclusion
So sorry for your loss there, Europeans. And don’t expect the US to do anything tangible to help out, because there’s nothing we can do. The US won’t have any surplus NG to export until 2018 at the earliest, but the recent collapse in oil prices will certainly extend that date out a few years. So let’s average it all out and call that 2020.
For my European readers, you still need to think long and hard about your personal exposure to this news.
The easy part to predict is that the cheap NG from Russia will be replaced by much more expensive NG from elsewhere, because that’s the nature of LNG. It costs a lot.
The harder part to predict is what will happen as Europe’s economy has to shoulder the burden of higher NG prices, let alone the possibility of NG shortages.
While we can all expect (or maybe just hope) that the Eurocrats will immediately recognize the seriousness of this news and fast-track new LNG terminals to handle the new volumes, there’s always the chance that they won’t. Europe moves a bit slower on some things – especially contentious things – and there’s really nothing much more contentious than a new LNG terminal.
30 Comments on "Russia and China’s new gas agreement will starve EU of natural gas"
markopetrov on Sun, 16th Nov 2014 7:34 am
true story
paulo1 on Sun, 16th Nov 2014 7:40 am
re: “and there’s really nothing much more contentious than a new LNG terminal.”
That gives you a few choices to make, doesn’t it?
Access new gas supplies.
Ramp up renewables as fast as possible
Open up some Thatcherized coal mines
Subsidize sweaters
Nuke plants asap
Subsidize radiation minitors
Understand there are consequences for being beholden to others for food, heat, and lights.
paulo1 on Sun, 16th Nov 2014 7:41 am
monitors….sorry
Makati1 on Sun, 16th Nov 2014 7:47 am
“…Note that dotted line sitting at about 600 bcm has been there since 1990. China has just inked two deals that, taken together, account for 68 bcm of Russia’s total output…”
OK, is my math skills dull or is 68 bcm NOT less then 600 bcm?
One question: IF Russia is not going to have the NG to ship to Europe, why is Russia still pushing the South Stream pipeline?
“…Russia’s natural gas production in 2013 increased by two percent on the previous year to reach 668 billion cubic meters…”
https://www.oilandgaseurasia.com/en/news/russia%E2%80%99s-natural-gas-production-2-2013
“…Russia’s natural gas production increased by an annualized 2.11 percent during the first ten months of this year, having reached 516.684 bn cubic meters, while liquefied natural gas (LNG) exports to Asia-Pacific amount to 11.830 bn cubic meters, RIA Novosti reports…”
http://news.az/articles/region/93229
These articles tell me that new NG coming on line in Russia over the next few years, with China’s backing, will make their (sott.net) scare tactics only work on the really stupid, who deserve to be fleeced. Not that Europe is not acting like it wants to commit economic suicide. Oh, wait! That’s right! It does. Recent actions prove it. The US is just hurrying it along.
Davy on Sun, 16th Nov 2014 8:04 am
Off subject: in the Bahamas for 2 days. My parents are older and needed help getting moved in for 6 months. Internet and power are not reliable like the states. It is a good experience for me in preparation. I see changes coming within 5 years at home. I also wonder how long the family will have the private jet. Surely rationing will put an end to private aviation. Another side note. Jet A has not dropped in price as I have noticed diesel has not.
Nony on Sun, 16th Nov 2014 8:29 am
The Russians are looking for multiple places to sell. Good for them.
The Eurocoms need to look for multiple suppliers. LNG imports are expensive. Hmm…maybe they should frack their own shale and stop being so namby pamby.
Kenz300 on Sun, 16th Nov 2014 9:16 am
Nothing is as reliable as generating power locally.
It also has the side benefit of providing local jobs.
Europe needs to become more self sufficient in energy production. That will require a shift to more alternative energy sources like wind and solar.
——————
EU Leaders Agree To Tough Carbon Regulations to Spur Renewable Energy Development and Fight Climate Change
http://www.renewableenergyworld.com/rea/news/article/2014/10/eu-leaders-agree-to-tough-carbon-regulations-to-spur-renewable-energy-development-and-fight-climate-change
penury on Sun, 16th Nov 2014 9:44 am
What is the concern? As the previous articles have pointed out the pipeline thru Syria will mean that EU will no longer need Russian Gas. Besides the U.S. and Australia are poised to become the suppliers of Nat Gas to the world. We don’t need any of that stinking Russian gas. Let Putin keep it
JuanP on Sun, 16th Nov 2014 9:48 am
I just want to give proper credit to Chris Martenson of Peak Prosperity for writing this article. This is a reprint of a reprint of a reprint of the original one.
Chris Martenson rules!
Boat on Sun, 16th Nov 2014 10:13 am
Davy, did you go from doom at any moment to 2 years away to now a 5 year time span? Was it nat gas that expanded your horizon?
J-Gav on Sun, 16th Nov 2014 10:22 am
Paulo – I think subsidizing sweaters (and thermal underwear) is a great idea!
rockman on Sun, 16th Nov 2014 11:11 am
“We don’t need any of that stinking Russian gas.” It’s not a question of needing Russian NG or not…never has been. The EU could be importing all their NG requirements today from other countries if they had so chosen. They aren’t because Russia is the cheapest source. They buy from Russia for economic reasons…not because they don’t have other options.
Importing NG from Syria doesn’t necessarily mean the EU will be getting it cheaper then it does now from Russia. It will certainly be better to have more competition supplying NG to the EU. But that doesn’t guarantee it will be a cheaper or more secure source.
Northwest Resident on Sun, 16th Nov 2014 11:20 am
I sense that a major shift in energy supply and distribution for the Euro/Asian continent is under way. Fast forward into the future a number of years, and it is likely that Russia will be primarily supplying China and other Asian nations, and Europe will be getting its NG and gas through Ukraine, Turkey and/or Syria. Forcing these changes will be painful, which is why they need a war (Ukraine) and a bogeyman (Putin) — just to name the most likely suspects.
J-Gav on Sun, 16th Nov 2014 12:16 pm
Rockman – Which “other countries” do you have in mind?
Algerian production is down from its 2008 peak, Norwegian is down from its 2011 peak … That would leave who? The Gulf I guess … But that would be LNG, wouldn’t it?
dolanbaker on Sun, 16th Nov 2014 1:24 pm
Looks like European governments need to get more serious about energy conservation. There is still a fantastic amount of wastage when it comes to energy consumption. It should be easy to trim about 20% without putting any jobs at risk.
Perk Earl on Sun, 16th Nov 2014 1:35 pm
“Russia and China’s new gas agreement will starve EU of natural gas”
So was it worth getting all heated up about poor, obsolete Ukraine?
Davy on Sun, 16th Nov 2014 1:53 pm
Boat, doom is ever present for BAU and our personal lives. I see descent activity within 2-5 years. It is already in action but the noticeable parts is a few years yet. BAU has momentum and there are still bubbles and residual financial repression. Limits of growth and diminishing returns are cranking up to destroy the aggregate supply of liquid fuels and destroying demand in a codependent spiral down.
GregT on Sun, 16th Nov 2014 2:36 pm
“Pipeline-Istan: Everything You Need to Know About Oil, Gas, Russia, China, Iran, Afghanistan and Obama”
Pepe Escobar, May 2009
http://www.alternet.org/story/139983/pipeline-istan%3A_everything_you_need_to_know_about_oil,_gas,_russia,_china,_iran,_afghanistan_and_obama
PrestonSturges on Sun, 16th Nov 2014 3:59 pm
Maybe the EU should boycott China
J-Gav on Sun, 16th Nov 2014 5:36 pm
Maybe everybody should boycott everybody else – just as a symbolic gesture against financial crime and its globalization.
Makati1 on Sun, 16th Nov 2014 8:32 pm
Thanks for the reference. I’ll read it later. I like Pepe’s view of things but didn’t start following him until recently.
Nony on Sun, 16th Nov 2014 11:29 pm
Having alternate supply will almost certainly help the Euros have lower prices (competition does that). And reduce the danger of political disruptions (and Finlandization).
ulenspiegel on Mon, 17th Nov 2014 2:14 am
OK,
some additions or corrections of this propaganda piece:
1) At the moment Russia exports more than 50% of its NG to the EU, 17% to Ukraine etc.
The exports to China are <1%.
2) The new pipelines connects NEW fields to China, they do not allow the flow of "European" NG to China in a meaningful volume. To allow this, additional pipelines have to be built.
3) What would the price China pays in comparison to European customers? (Hint: it's lower)
4) Russia has invested into European NG infrastructure in the past. Does it make sense to cut the European exports?
Davy on Mon, 17th Nov 2014 6:32 am
Ulen, good clarifications. I get so tired of the propaganda bitches here and in the articles talking out their butts to advance an ideology.
JuanP on Mon, 17th Nov 2014 9:30 am
Ulen, Good points.
Regarding your second point, you are wrong about the new Altai pipeline in Western Siberia that they will build. That pipeline will be easily capable of sending gas that today goes to Europe to China. Check the layout maps. Your point is valid regarding the Eastern Siberian pipeline, though. That one would be expensive and complicated to connect to Russia’s Western pipeline system. http://www.gazprom.com/f/posts/59/990512/map_altai_eng.jpg
Regarding your third point, the truth is we don’t know how much that gas will sell for. It may be less than Europe pays or not. What is certain is that it is less than China pays for LNG imports right now. Gas in Asia is very expensive.
Northwest Resident on Mon, 17th Nov 2014 10:53 am
Russia Says U.S. Waging Economic Warfare to Subjugate Opponents
No way! America wouldn’t do that to anybody, would they?
Actually, I think it is all pure staged political theatre, based on no proof whatsoever.
http://www.bloomberg.com/news/2014-11-17/russia-says-u-s-waging-economic-warfare-to-subjugate-opponents.html?cmpid=yhoo
Laci on Mon, 17th Nov 2014 12:54 pm
With Netherlands and Norway entering decline, and with Russian suplies diverted to China, the EU could be facing a 200 bcm (6.4 tcf) per year deficit, which is equivalent to 1/3 of EU demand.
http://seekingalpha.com/account/authorboard_overview
J-Gav on Mon, 17th Nov 2014 2:00 pm
I would suggest, somewhat against the grain I daresay, give the
Russians their Southstream pipeline (at least it doesn’t include Turkey). The we’ll talk about Bluestream …
J-Gav on Mon, 17th Nov 2014 2:12 pm
Then we’ll talk about Bluestream, if Turkey accepts to be more compliant with efforts to stabilize the region i.e. retake Kobane and stop being a supporter of the Islamic State. Beyond the “pipelineistan” arguments though, Turkey, the Saudis, Iraqis, Gulf States et al will have to come to grips with their Sunni/Shia divide in such a way that it does not hold the West hostage to their stupid and petty religious quarrels over visions passed on by Bronze-Age warlords and epileptics pretending to be in direct contact with the divine.
JuanP on Mon, 17th Nov 2014 2:41 pm
This is the Kremlin’s English transcript of a German interview Putin gave yesterday. It has several interesting comments by Putin.
http://eng.kremlin.ru/news/23253