The Russian Gas Whip

Editor’s note: The things are changing fast, while this article was written, the situation on the oil market became a bit more pessimistic. For Russian Federation.

The understanding of how real is the threat of gas extortion from Russia gives you an answer to the big question: are the tentacles of the Russian gas monster that scary as they are pictured by Russian and some Kremlin=controlled foreign media?

At first glance, the Russian potential of gas and oil production, which was publicized recently by the Minister of Natural Resources and Environment of Russia Sergey Donskoy, is impressive. The deposits of oil category C1 total to 17.8 billion tons, gas deposits total to 48.8 trillion m³; under category C2 oil deposits estimated on 10.9 billion tons, gas deposits — 19.6 trillion m³. With current amount of production, the deposits of the country will be enough for almost 80 years.

In addition, the Russian government gave out a license for development and producing of the oil and gas from the annexed Crimean deposits; and in May of 2017 PJSC Rosneft Oil Company got licenses for two sites (Tuapse Trough and West Black Sea area) for geological survey and search of oil and gas deposits. It should be noted that these sites are off the Russian zone of Black Sea and inside the Ukrainian economic zone.

As Western economists summarize, despite the apocalyptic prognoses, at this moment Moscow is in much better form than few years ago. We can witness the (paradoxical, at first glance) economic growth of Russia: Ministry of Finance of the Russian Federation revises the budget performance, revenues of budget are growing, and the real income of the citizens are growing as well. And the reason behind the economic wonder is simple: a notable growth of world oil prices. Let us remind that the price of oil on the world market have grown 20% since August of 2018, which is connected with introducing of sanctions against Iran and the consequences of hurricane Michael, which hit the US state of Florida. In particular, a price for a barrel of Brent oil in December equaled to $81 (+1.1%), while barrel of WTI oil in November was priced at $71 (+0.94%).

The second reason would be a new dynamic of Russian ruble. Contrary to former tradition of Russian currency being linked to oil prices, at this moment Russian economy tries to get rid of US dollar dependency. Though ruble lost much since 2014 to 2017, now the oil prices fluctuations do not influence the currency that much. But these changes are explained not with reforms in economic sphere, but with a monetary policy of Central Bank of Russia and Ministry of Finance of the Russian Federation, which artificially prevent the falling of Russian ruble through the injection of economic with ruble supply and through the active participation on the interbank market.

Some positive stirrings can be seen in the real sector of Russian Federation economy as well — in third quarter of 2018 the positive surplus equaled 26.4 billion USD, or 6.5% of Gross domestic product (GDP), which again is explained with increase of oil and gas exports to Europe and the increase of fuel prices. All in all, Central Bank of Russia expects the additional income of 98 billion USD.

But how long this kind of dynamic can hold?

Russia is too dependent from export of raw materials, and one of possible reasons for economic and political crisis in Russia can be another drop in oil prices. To make the trend of “Russia is the World’s Gas Station” hold for long, a simple waiting for high oil prices would not be enough, as it changes constantly for numerous reasons. As we already noted, at October 11^th 2018 the oil prices were on the rise, and at October 12^th the prices of Brent oil dropped because of the collapse of stock markets of Asia, Europe, Northern and Southern Americas, which in turn were instigated by the International Monetary Fund prognosis of world economy growth slowing down.

On one hand, the high oil prices are good for Russian budget. On the other hand, peak prices destabilize the market, as the high revenue to the budget for 1-2 months will be followed by a drop in next half of year. For the economy laws peak prices are not important, what’s important is the level at which prices can hold for a long time. In addition, in case of inadequately high prices the laws of competitive economic come to play: that could be shale oils and gas, and the electric cars. In the end the demand decreases, which makes prices to fall down.

Summarizing all this, we can claim that considering the situation on the fuel market, Russia is resilient enough and for some time it can sustain the minimal level of economic growth. Still, the winnings from high oil prices for Russia are temporarily. Russian economy is still stagnating, the non-energy sectors of economic are not developed, and the economic sanctions of US and EU seriously affect the growth of GDP. A proof of stagnancy of Russian economic would be the fact that since 2001 to 2008 Russian economic grew per 6-8% per year, while in 2017 the growth was only 1.5%. At it is highly improbable that the high prices on fuel will let Putin get back to the same level of economy and his own rating of approval which he enjoyed with in 2000s.

All in all, the near future prognoses for oil business of Russia are unfavorable. As Bloomberg predicts, Russian oil companies will suffer a hard blow in 2020, because of ban of usage of high-sulfur fuel oils as a ship fuel. Russian refineries which refine the high-sulfur oils will not be able to prepare themselves for the expected changes in sea shipping in 2020. That’s because approx. two thirds of Russian fuels contain over 2.5% of sulfur. This contradicts to new rules of International Maritime Organization (IMO) which prohibit the usage of fuel oils which contain over 0.5% of sulfur. After the introducing of new rules Russian fuel oils will drop in price significantly. According to the estimates of Wood&Co. Financial Services AS, in 2020 the profits may drop by 3.5 billion USD.

In this light, it is obvious that in near future the natural gas will still be a political instrument of Russia. Introducing of the alternative energy sources, energy saving technologies, an active usage of renewable energy sources or creation of the regional gas hubs — for example, Latvian or Polish — will contain the Russian influence to some degree, but we cannot expect a complete independence from Russian energy supplies, not yet.

What to do in a situation like this? Only a search for the alternative sources to Russian energy supplies can limit Russian imperialist intentions to scare the world with its gas and oil noose.

For example, Republic of Poland consumes approx. 16 billion m³ of natural gas every year, 10 billions of which are imported from Russian Federation. Polish state-controlled oil and gas company PGNiG signed two long term contracts with USA on supply of 2 million tons of liquefied natural gas per year for 20 years (2 million tons of American liquefied gas are equivalent to almost 5 billion m³ of Russian gas) — which brought down Polish dependence from Russian Federation for almost one third. And though the demand of importing of 7 billion m³ of Russian natural gas remains, the contract on liquefied gas supply from USA left little interest for Poland to construct the gas pipeline Yamal-2 through the Poland circumventing Ukraine — which was advocated for by Kremlin powers.

Aside from the already mentioned Poland, a good example of this approach would be Estonia, Finland, Lithuania and Latvia, which recently was completely dependent from Russian gas. At the moment though the states of Baltic and Northern Europe try to relieve themselves from the dependency of Russian gas import. Finland and Estonia construct a new large gas pipeline “Balticconnector” between the two countries, which will allow for US natural gas, and gas from other countries to be supplied to Finland. That will make it the first pipeline in Finland which is not coming from Russia. This decision was profitable for Baltic states in both political and economic aspects, because a Russian gas giant “Gazprom” was forced to bring down the artificially inflated prices because of construction of such gas pipelines.

United States have enough natural resources and ambitions to minimize the amounts of Russian gas and oil supplies on the European markets. The US aim to be the largest exporter of liquefied gas in Europe is supported by constructing six new LNG terminals in Europe, which gives the chance to increase the amount of liquefied gas exports to Europe, which are currently at 4%. (Compare to the export of American liquefied gas to Asian market which totals to 59% of total natural gas export.) If the USA intents to build six plants for natural gas liquefying with the designed capacity of 67 million tons until 2020 will be successful, Forbes estimates the country to head the top of the list in 2019-2020 with the increase of power by +54 million tons — beating the Australia (+17 million tons) and Russian Federation (+12 million tons). In addition, American liquefied gas will be approx. 30% cheaper than Russian gas through the pipelines. In fact this will end the Russian hegemonic monopoly on natural gas and LNG markets.

No doubt, that with US being ready to supply European countries with fuels on big scale, Washington will use some more radical measures for the entering on European market with the goal of its redistribution. For the traditional producers of oil and gas (Russia and the countries of Near East) this will mean a strict policy on squeezing them out from European market. With this aim USA created a Near East military block (Saudi Arabia, United Arab Emirates, Kuwait, Qatar, Bahrain, Egypt and Jordan). So the gas wars for the consumer in Europe are to come.

There is little doubts that American liquefied gas will compete with Russian gas expansion, in particular with Nord Stream 2 gas pipeline, and “Gazprom” should not expect the excess profits it had in 2012-2014 — if the prices on long-term contracts will become higher then spot prices, its share of market may start to decrease. But US liquefied gas will not be able to completely dominate the market and become a true alternative to Russian gas, because of the costs of transporting across the Atlantic ocean.

For Ukraine, the priority should be increasing of its own gas production, a large scale implementing of energy saving technologies. A neighboring Poland strategy of energy sovereignty gives a real chance for Ukraine to get rid of its dependency from “Gazprom” — as it will have an opportunity to be supplied not only with US gas through the LNG terminal in Świnoujście, but also through the Baltic Pipe gas pipeline (with capacity of 10 billion m³ per year), which would let to get access to Norway gas deposits. To get this direct access to gas from Polish LNG terminal Ukraine needs to build an interconnector between the Polish and Ukrainian gas networks, with an estimated cost of 245 million dollars. That’ expensive, but completely worth it, as the construction of interconnector will let to pump up to 8 billion m³ of gas to Ukraine, and 7 billion m³ back.

Summarizing everything said, we must note that the very existing of each country of European Union depends from the energy security. The energy dependency from Russian gas and oil monster threatens the economic development and the stability of European society, which calls for Europe to join the efforts for creation of large energy market, where countries would be able to share their capacities and the currently present fuels.

It is understandable that Russia is actively opposes the plans of European consumers on lowering the dependency of Russian gas pipelines and securing of necessary gas supply on the acceptable price. That’s what lobbyists are used for, and bilateral contacts, and such tool as Gas Exporting Countries Forum, which Russia tries to turn into a kind of “gas OPEC” for last ten years.

Still we should not forget that though the actions of US and their allies in EU can be predicted, the actions of Russia are completely unpredictable.