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12 April 2014

Press review 12-04-2014 - Russia calls the bluff (2nd edition)

An unfinished version of this review was inadvertently left for automatically publication last night. Appologies for the mess up; there are a few more stories below the fold.

This week Russia has passed on the offensive over Ukraine. The Russian press issued clear hints of a definitive move away from the US dollar in the country's foreign economic relations. These news frame these actions within the design of a new world monetary system, together with the remainder of the BRICS. And Thursday came a letter furnished through diplomatic channels to 18 European leaders simply stating that if no one is willing to foot the bill for the gas Ukraine gets from Russia valves will be eventually closed.

Meanwhile Kiev seems to go from bad to worse, with Parliament paralysed and political institutions disaggregating. In eastern regions of the country unrest grows, russophone populations disprove the coupe d'état and are weary of the political and economic disarray the country has fallen into. In spite of repeated claims of a Russian military build up along the Ukraine border by the western media, Russia does not seem that willing to get further involved in the field, at least for now. The fact to no one is clearly taking responsibility for the survival of Ukraine may actually be the problem at this stage.

EUobserver
Putin threatens to cut gas to Ukraine, EU countries
Andrew Rettman, 10-04-2014

Russian leader Vladimir Putin has threatened to cut off gas supplies to Ukraine unless it starts repaying a huge debt and unless the EU agrees to joint talks on its economic future.

He said in a letter sent to 18 European leaders on Thursday (10 April) that “in the event of further violation of the conditions of payment, [Russian firm Gazprom] will completely or partially cease gas deliveries.”

He noted: “Undoubtedly, this is an extreme measure. We fully realize that this increases the risk of siphoning off natural gas passing through Ukraine’s territory and heading to European consumers.”

He added that “in order to guarantee uninterrupted transit, it will be necessary, in the nearest future” for Ukraine to buy $5 billion worth of gas to be pumped into its storage vats.

Putin said Ukraine’s gas debt for this year alone is $2.2 billion.

But he noted that Russian discounts for Ukraine gas since 2009 amount to $35.4 billion.
My cap off to Platts, this outlet is not taking the anti-Putin discourse bandwagon and is at least trying to provide something of the other side of the story.
Platts
Russia mulls more active crude, gas trading in ruble and euro
Rosemary Griffin and Nadia Rodova, 07-04-2014

Western sanctions have so far had an impact on more than just the business activities and travel plans of targeted individuals. Visa and Mastercard briefly suspended transactions made by customers of the Rossiya bank, sparking calls for Russia to develop its own national payment system.

Major Russian banks have already started consultations on the issue, Kostin said, and some officials said progress could be achieved within several months.

"It is time to change the entire international financial system that considers the dollar the key reserve currency," Kostin said.

"The world has changed. [China's] yuan and [the Russian] ruble have to take their place in international transactions," he added.

Russian officials have long considered the idea that transactions between two countries could be made in their two currencies, rather than the dollar.

"It's strange for Russia to sell its crude, say, to Kazakhstan for dollars," Kostin said.
Closing this article are two paragraphs that point to a far more reaching strategy from Russia. It is one thing to replace the dollar in international transactions, but another altogether to set up a non-dollar denominated petroleum benchmark. Especially at a moment when the WTI index is merely regional, and the declining production from Brent is exposing the British benchmark to speculative action.
Many officials in Russia have also spoken of the necessity to set up a Russian oil benchmark because the country is one of the world's biggest oil producers and its key export blend, Urals, accounts for a more significant share of the global crude market than Brent.

Urals price is assessed as a differential to North Sea benchmark Brent, while the new Russian export blend to eastern markets, ESPO, is assessed as a differential to Dubai, the crude benchmark for the Asian markets.
These actions by Russia are clearly calling the bluff on the US, whom has been drowning Europe with propaganda promising gas from its "shales" and petroleum from its strategic reserve. Case for laugh, were it not the dangers of an hypothetical confrontation with Russia. In any event, Europe might not be able to play the double game forever and be forced to definitely take a side at some point.
OilPrice.com
Russian Sanctions and the Negative Effect on Global Energy Security
Igor Alexeev, 07-04-2014

After a series of headline-grabbing statements about the possibility of “switching” European consumers over to American gas, the US media hastened to announce the launch of Obama’s oil and gas offensive against Russia. In reality the EU is not currently prepared, neither technically nor in terms of price, to buy its energy resources from the US. It would take at least ten years to adapt even the technically advanced German energy system to work with American gas supply. In a crisis, when it is particularly urgent to see a quick return on an investment, such projects are unrealistic.

Whether German industry is ready to pay more for gas from overseas just for the dubious pleasure of “punishing” someone is a big question. Unlike EU officials, the German government is not publicly calling into question either its long-term contracts with Russia or the future of the South Stream pipeline. On March 13, 2014, the chairman of the board of Gazprom, Alexei Miller, attended a meeting with the Vice-Chancellor and Minister of Economics and Energy of Germany Sigmar Gabriel. “Germany is Russia’s number one partner in Europe’s gas and energy market,” Miller stated. “Russian gas accounts for 40% of all German imports. And we’re also noting an upwards tick in the quantity of gas supplies coming from Russia. Last year, shipments totaled more than 40 billion cubic meters and we’ve seen a 20% annual increase.” Looking at these statistics, it’s clear that all the talk about Atlantic solidarity is having zero effect on the German government’s rational decision making. “We don’t need conflict escalation”, said Sigmar Gabriel during an expert roundtable on energy policy later in March. “Russia met its obligations under the gas contracts even in the darkest years of the Cold War”.
In another front Russia is talking up its cooperation with Iran, in a clear sign that the US may no longer count with it in international politics.
The Voice Of Russia
Concern about extending Russian-Iranian cooperation illogical – Iran's FM
12-04-2014

Russian Energy Minister Alexander Novak said earlier in an interview that Russia is negotiating with Iran an increase in the two countries' trade turnover through boosting energy cooperation, TASS reports.

The Reuters news agency said early this year that Russia is discussing with Tehran Iranian oil deliveries to Asia and the Pacific in exchange for goods. The amount of supplies may reach 20 million tonnes per year, while the overall cost of the deliveries, 20 billion dollars.

The US Treasury Department has voiced grave concern about a likely Russian-Iranian deal. The news agency quotes Afham as saying that Russia and Iran boast lots of opportunities to promote bilateral cooperation and extend their trade and economic ties. Afham added that developing relations this way is perfectly normal. Read more: http://voiceofrussia.com/news/2014_04_12/Concern-about-extending-Russian-Iranian-cooperation-illogical-Irans-FM-3127/
Euan Mearns has a few clues on the economics problems engulfing Ukraine. The country never really recovered from the break up of the USSR, and is another good example of the challenges resource poor economies face in the XXI century.
Energy Matters
Ukrainian Death Spiral
Euan Mearns, 03-04-2014

Russia has raised natural gas prices to Ukraine twice this week. The total rise is 80% bringing the price for gas in Ukraine to $485 per 1000 cubic meters [1]* which is well above the European average of $380 in 2013 [2].

Prior to the recent geopolitical crisis Ukraine was in a mess. With a population of 45 million, per capita GDP of $2100 is on a par with Egypt (Figure 1) and the country had crippling and mounting debts.

Since the dissolution of the Soviet Union in 1991, Ukraine has been in reverse gear. Energy rich Russia has seen relative prosperity on the back of a recovery in its energy industries and rising energy prices (Figure 1). Energy poor Ukraine, on the other side of the coin, has only seen its energy bills rise to the point it could no longer pay them. The gas price action this week is Russia’s response to sanctions imposed by America and the EU.
I can not possibly remember how many news pieces I have read through the years on delays with the Kashagan field. Eight years late, production finally started late last year, just to be halted soon after with an unforeseen gas composition. This seems to be one of the most serious hurdles ever encountered with the project, but above all, seems to be casting it definitely to unprofitable territory.
OilPrice.com
Kashagan Production Could be Delayed for Years
João Peixe, 07-04-2014

Last Week Oil Price reported on the mounting problems at the massive Kashagan oil field in Kazakhstan. The latest developments seem to be much worse than previously thought, as Steve LeVine at Quartz noted in an article on April 6. He wrote that the Kashagan field is in a state of commercial crisis, and the field could remain closed for two more years. This news comes as the field has already suffered several years and billions of dollars in delays and cost overruns. The consortium involved – including ExxonMobil, Shell, and Eni – have already dumped $50 billion in the project.

But, the problem of toxic hydrogen sulfide (H2S) is posing severe engineering problems that may be difficult to overcome. About 17% of the natural gas coming out of the field is H2S, which is corroding the pipelines. After briefly starting production last fall, the project was shut down after engineers discovered the pipeline damage. The consortium may have to replace two 55-mile pipelines with a special nickel alloy could take two years, meaning the Kashagan field could remain shut in until late 2016 at the earliest, and possibly not until 2017.
But worry not. Fantastic technological advancements of 70 years ago are unlocking vast amounts of petroleum from source rocks.
Wall Street Journal
Japan Starts Commercial Fracking for (a Little) Shale Oil
Mari Iwata, 09-04-2014

It’s hardly North Dakota, but Japan’s Akita Prefecture is making its own small mark in the oil business.

Japan Petroleum Exploration Co.1662.TO -0.45%, or Japex, said this week that it has started commercial production of shale oil in the northern prefecture, the first such case in Japan.

[...] Japex said it was also using hydraulic fracturing, with somewhat less impressive results. It said daily production at the Akita site was about 220 barrels a day.
With other energy sources things seem to be a bit more on the bright side, at least according to Bloomberg. This is just another data point demonstrating the economic viability of renewable energy sources as electricity suppliers. The hurdles to their penetration up to relevant levels in electrical grids appears mostly political at this stage.
Bloomberg
U.S. Wind Power Blows New Records. Again. And Again.
Tom Randall, 07-04-2014

[...] America’s rising wind power feels unstoppable. That’s because in many areas of the country wind has reached an important tipping point: becoming cheaper than coal and natural gas. In fact, states getting the most electricity from wind include gas-rich Texas, Oklahoma and Colorado.

Onshore wind power has come of age, and not just in the U.S. This next chart shows the levelized cost of energy worldwide, using data from Bloomberg New Energy Finance (BNEF). Average onshore wind power now costs the same as gas worldwide, at about $84 per megawatt hour. That’s without subsidies.
Have a nice weekend.