PREFACE/ISSUE
There is a geographical rule with geopolitics implication:
"Each exporter tries to diversify, each important tries to diversify as well at the same time"
The Russian Federation is The largest energy exporter.
The European Union is the Largest energy importer.
The geography is given and settles at the end relations.
The destruction of Nordstream pipelines combined with the sanctions have brought short, medium and long term damages to Russia. It has not been prepared for the attack and greatly improvised to manage consequences.
This post explores validity of "Russia as a state actor" Motives:
I. Basic data about Nordstream AG
Nordstream 1 twin pipeline system is The most modern pipeline ever built and put into operation.
From the official factsheet:
The Nord Stream 1 and Nord Stream 2 pipelines have combined capacity of 110 billion cubic metres per annum of gas — more than half of Russia’s typical export volumes.
II. A snip about old Soviet gas export pipelines and new Russian pipeline
The Ukrainian gas pipeline system is some 50 years old, some parts are older, some newer. In 1970–1980s, the Ukrainian gas transmission system was developed as a gas export route to Europe. The first large-scale export pipeline, the Dolyna–Uzhhorod–Western border pipeline, became operational in 1967. It was the first stage of the Bratstvo (Brotherhood) pipeline system. In 1978, the Soyuz pipeline (Orenburg–Western border pipeline) was built as the first Soviet natural gas export pipeline.
In 2009, Ukraine, the European Commission, European Bank for Reconstruction and Development, European Investment Bank and the World Bank signed a joint declaration on the modernisation of the Ukrainian gas transmission System.
A Finnish company Neste proposed in 1998 a Nordstream project to RU. Later it changed after the investment outlook and relationship between Russia and Ukraine worsened.
In September 2005, Gazprom, BASF, and E.ON signed a basic agreement on the construction of a North European gas pipeline. In November 2005, the North European Gas Pipeline Company (later Nord Stream AG) was incorporated in Zug, Switzerland. In December 2005, Gazprom started construction of the Russian onshore segment of the Nord Stream project, in order to connect Nord Stream with the wider Russian natural gas pipeline system. The construction was completed in 2010.
[M: From historical point it looks like the path through Baltics has been chosen to avoid political risks to pipelines and to save money from fees to different governments. Note that Finland and Sweden suggested also a land route on their territory.]
III. Economical/investment motive and ROI:
The minimal lifetime of NS pipeline is 50+ years, with proper maintenance easily much more. Compare that to the ageing Ukrainian system. It has the capability of partial substitution of the volume but not all.
The cost of pipelines is some NS1 €7.4B and NS2 €11B and sucked Gazprom investment money of last 7 years. All their profitability calculations etc. future profitability depended on it.
The transport fees different states get are over €2B a year of which Ukraine was getting €1.2B/y. So a nice ROI once pipelines will run on full capacity.
Source 1 here - (If NS2 goes online... the consequence will be for Ukraine to lose up to 4% of its GDP, with an effect on government spending of a cut of about $2.3 billion... removing that disincentive could allow it to increase its military aggression against Ukraine. / UK parliament discussion)
Source 2 here: Ukraine is a major transit country of current Russian gas pipelines into Europe. Transit fees are thought to account for almost 3% of Ukraine’s GDP, which will bring an expected revenue of $2-3 billion annually over the next five years. / UK parliament March 2022)
The ROI from the perspective of saving on transport fees:
If savings on fees are just € 2 Billions on NS1 per year...
...then the ROI is just some 4 years (!)
[M: Waiting a few years on idle pipelines, because of political disagreements or because of getting certification should not be a problem. Under right maintenance pipelines could be switched on at will]
IV. A few brief definitions in Insurance policies
A war exclusion clause
A war exclusion clause in an insurance contract refers to the protection of an insurer who will not be obligated to pay for losses caused by war-related events.
An act of TerrorismFor the purpose of this Insurance, an Act of Terrorism means an act or series of acts, including the use of force or violence, of any person or group(s) of persons, whether acting alone or on behalf of or in connection with any organisation(s), committed for political, religious or ideological purposes including the intention to influence any government and/or to put the public in fear for such purposes.
An act of sabotageFor the purpose of Insurance, an act of sabotage means a subversive act or series of such acts committed for political, religious or ideological purposes.An act of self-sabotage
A self-sabotage in an insurance contract refers to the protection of an insurer who will not be obligated to pay for losses caused by self-sabotage related events.
[M: No insurance company has announced their policy toward Nordstream case.]
10 Sept 2022 - Bankruptcy of Nord Stream 2 AG suspended until Jan 2023
The moratorium on the payment of loans will be valid from September 10, 2022 to January 10, 2023
According to the statement, the court in Zug, Switzerland, at the request of the company, extended Nord Stream 2 AG's temporary moratorium on the payment of loans for another four months - for the period from September 10, 2022 to January 10, 2023. Transliq AG remains as interim administrator.
On February 22, German Chancellor Olaf Scholz announced that the German government was suspending the certification of the Nord Stream 2 project after Russia recognized the sovereignty of the Donetsk and Lugansk People's Republics. On February 23, US President Joe Biden ordered his administration to impose sanctions on the company - the operator of the Nord Stream 2 AG project and representatives of its leadership in response to the actions of Russia in Ukraine.
The construction of Nord Stream 2 was fully completed on September 10, 2021.
[M: Why to risk blowing pipelines if Russia as a majority holder could just walk away from the court and not extend court battles?]
In its Global 2000 companies rich list, Forbes last year had Gazprom's market capital value stated at $73.5bn.
In The Nordstream AB Gazprom has 51% ownership
Gazprom's shareholder structure as of December 31, 2021 - statista.com
As of 2021, the government of the Russian Federation controlled over 50 percent of shares of the gas company Gazprom, mostly through the Federal Agency for State Property Management, but also through the companies Rosneftegaz (fully owned by the state) and Rosgazifikatsiya (nearly 75 percent of shares are owned by the state). Furthermore, around 16.2 percent of Gazprom's shares were controlled by American Depository Receipts (ADR) holders, or The Bank of New York Mellon.
[M: So Gazprom has 51% stake in Nordstream AG, and Russian state has over 50% in Gazprom. This means Russian state has some 25+% in Nordstream, remaining Russian 25% are belonging to other shareholders, Europeans have jointly 49% in NS AG]
VI. Gas wells and their shut-inn
Most decent wells can handle a week of shut-in without much (if any) consequence and return to prior production rates with ease, but it's not guaranteed. Pipelines are designed to handle temporary shut-ins.
The older the well, and the lower the gas rates, the more likely the well will struggle to return.
Shutting in Wells: Why It’s a Nuanced Process - paper
Shutting in a well in the oil and gas industry is not like locking a house without a tenant; turning the tap off is akin to demolishing the house in many cases.
If a marginal well is shut-in for a long period of time, it may either not return to production or can become uneconomical to produce due to high lift expenses. On the other hand, if a reasonably producing well is shut-in for a long time it can have its own consequences. Permeability variances within the producing set of inflow points (formation layers flowing into the wellbore) create groups of lower-pressure, higher-permeability zones, and groups of higher-pressure, lower-permeability zones. During production, the flowing bottomhole pressure will usually be low enough to maintain flow from all zones, but when flow is stopped, crossflow from high pressure to low pressure zones may start. Mixing of gases, oils, and waters from different zones can create many problems, some of which are extremely difficult to remove. Moreover, if a well is shut-in for a long time, the mixed fluids could lead to buildups of paraffin, asphaltene, or other emulsions both inside fractures and at the perforation.
In brief, consider the analogy of the real estate market for shutting in wells. If a house does not have a tenant, you would simply lock the house. However, in the oil and gas industry turning the tap off is akin to demolishing your house if you do not have a tenant. That house could have costed from $5-10 million to build. You are not just turning the well off, you are killing the well. You may be shutting off the economic life.
VII. UK statements about bringing costs to Russia
17 Feb 2022 - Russia must pull back, or there will be trouble in the pipeline: article by Liz TrussIt’s vital that the Russian people and the Russian government hear directly from us about the price they would pay for a further invasion.Not only would there be massive consequences bringing severe economic costs for Russia through an unprecedented package of coordinated sanctions.
It would also hit their other strategic interests including Nord Stream 2 - making it unconscionable for the pipeline to go ahead.
Alongside our allies, we are taking a hard-headed approach, which means being ready to accept short-term pain for long-term gain, whether through imposing sanctions or cutting strategic dependence.18 Feb 2022 - G7 leaders agreed this afternoon to work in unity to "maximise the economic price" that Putin will pay.
Johnson says this "must include" ending reliance on Russian oil and gas - hails Germany's suspension of Nord Stream 2.
23 Feb 2022 - Ukraine crisis: Putin has gone 'full tonto' and
...UK military can 'kick Russia's backside', defence sec says Defence Secretary Ben Wallace tells military personnel that Vladimir Putin has gone "full tonto" over Ukraine and left himself with "no friends". The British army "kicked the backside of Tsar Nicholas I in 1853 in Crimea", he adds, and "can always do it again".
9 March 2022 - Diplomatically, politically, economically – and eventually, militarily
...Putin must fail in his invasion of Ukraine. The world is united in condemning the invasion and taking action.
24 March 2022 - Spoke to @WBHoekstra
...about further coordinated sanctions against Putin and those who support him. The Netherlands and UK will continue to firmly and swiftly impose crippling economic measures on Russia’s war machine.
17 May 2022 - EU energy security: Implications for the UKHow EU dependency on Russian energy affects the UKThe UK is far less reliant on Russian gas than the EU, but security of EU gas supply matters to the UK because:
- it affects the prices of UK gas and electricity;
- it could affect the UK’s own security of supply if gas imports into the UK were re-directed to the EU;
- energy exports are economically important to Russia and changes may therefore affect geopolitical relations.
UK-EU cooperation
Russia’s invasion of Ukraine has stimulated UK and EU cooperation on the security of energy supply.
At the 30 March 2022 meeting of the UK-EU Specialised Committee on Energy, the UK and EU agreed to facilitate regular exchanges on the security of supply (PDF). They specifically discussed establishing a Working Group on Security of Supply as a matter of priority.
This is because there is insufficient LNG import capacity within the EU, but spare capacity in the UK as well as capacity on the pipelines from the UK to mainland Europe.
20 Sep 2022 - Liz Truss lands in US to reset ‘special relationship’ on first foreign trip as PM
“My message to the people of Ukraine is this: the UK will continue to be right behind you every step of the way. Your security is our security.”
She will also tell fellow leaders that they must put an end to Putin’s economic blackmail by removing all energy dependence on Russia.
“Too many lives – in Ukraine, in Europe and around the world – are being manipulated by a dependence on Russian energy. We need to work together to end this once and for all.”
21 Sept 2022 - UK Prime Minister Truss addresses the United Nations General Assembly (transcript here)
01:00 min: "...Geopolitics is entering a new era.."06:00 min: "We are cutting off the toxic power and pipelines from authoritarian regimes and strengthening our energy resilience.""We will ensure we cannot be coerced or harmed by the reckless actions of rogue actors abroad."
"The free world needs this economic strength and resilience to push back against authoritarian aggression and win this new era of strategic competition.
We must do this together."
We are fortifying our deep security alliances in Europe and beyond through NATO and the Joint Expeditionary Force.
08:30 min: "The UK is providing funding, using the might of the City of London and our security capabilities to provide better alternatives to those offered by malign regimes.The resolute international response to Ukraine has shown how we can deliver decisive collective action.The response has been built on partnerships and alliances and also on being prepared to use new instruments – unprecedented sanctions, diplomatic action, and rapid military support.There has been a strength of collective purpose – we have met many times, spoken many times on the phone, we have made things happen.Now we must use these instruments in a more systematic way to push back on the economic aggression of authoritarian regimes.The G7 and our like-minded partners should act as an economic NATO, collectively defending our prosperity.If the economy of a partner is being targeted by an aggressive regime we should act to support them. All for one and one for all.
12:00 min "In all these areas, on all of the fronts, the time to act is now. This is a decisive moment in our history, in the history of this organization and in the history of freedom...
The story of 2022 could have been that of an authoritarian state rolling its tanks over the border of a peaceful neighbour and subjugating its people.
Instead, it is the story of freedom fighting back.
In the face of rising aggression we have shown we have the power to act and the resolve to see it through.
But this cannot be a one-off.
This must be a new era in which we commit to ourselves, our citizens, and this institution that we will do whatever it takes – whatever it takes to deliver for our people and defend our values."
Britain’s commitment to this is total.
We will be a dynamic, reliable and trustworthy partner.
VIII. Why do energy companies flare gas?
Sometimes, it's essential to flare gas for safety reasons. Oil collects underground in reservoirs and gas accumulates around it, which has to be drawn off before the oil is drilled.If there are sudden increases in pressure as the gas comes to the surface, explosions may occur. Burning off the gas is a way of reducing the pressure.
This is known as "safety" or "non-routine" flaring.However, energy firms often also flare gas as a way of saving money.
If they are drawing off only small amounts of gas - or are drilling in a remote area - they may not think it worthwhile to spend money on collecting it and transporting it. Then, the gas is burnt off simply to get rid of it. This is known as "routine flaring".
29 Sept 2022 - Russia Is Flaring Less And Keeping Natural Gas In The Ground
Gazprom appears to have found a way to avoid permanent loss of gas production, and it’s not flaring, either. In fact, flaring in Russia—a major “flarer”—is down.
This is according to satellite data cited by a Bloomberg report on Gazprom’s production, which has declined substantially since the Ukraine invasion and the EU’s response to it.
IX. Consequences for Russia
The damage to internal market structure. The inability to export created oversupply in the domestic market, storages full and no large volume were agreed to export elsewhere, no other pipelines connected. Russia started immediately talks with Turkey to funnel volume through southern corridor, Blue Stream, South Stream.
19 Oct 2022 - Erdogan says he agreed with Putin to form natural gas hub in Turkey
Oversupply caused damage to other RU gas producers as well.
Gazprom makes some 30% of RU state budget.
Pension funds who owned shares, and foreign investors were also quite unhappy about the hit Gazprom shares got because both of their prime top export facilities were destroyed.
The domestic market price structure collapsed, the oversupply destroyed balance sheets of other producers, their loan structures, the domestic cost tanked, it helped industry and households but the economy got some domino effect as this external shock transferred the pain to other industries like banking , wealth asset management companies took hit, etc.
24 Nov 2022 - Gazprom unveils its biggest investment programme in eight years as it begins to reorientate to the east
After Gazprom’s ability to export gas to Europe was seriously curtailed following the explosions that disabled the two Nord Stream gas pipelines in September, the company is looking to switch its gas distribution from west to east. The Yamal Europe pipeline that runs through Poland to German has also been taken offline earlier this year by sanctions.
The most important of those is the traditional route via Ukraine, which under the terms of a new deal signed in 2019 can carry 32bcm a year, but currently volumes have been halved from previous years.
There is also the Turk Stream gas pipeline that supplies southern Europe and came online in January 2020. Turk Stream has a nameplate capacity of 31.5bcm, but half of that volume is dedicated to supplying the Turkish market, leaving little for Europe.
[M: Only TurkStream, BlueStream and pipelines through Ukraine are available now.]
X. The possibility of naval blockade
Three major trade ports of Russia in Baltic Sea are: Port of Saint Petersburg (nr2),Port of Ust-Luga (nr3), and Port of Primorsk (nr5). Since 1720, the Baltic Sea has frozen over entirely 20 times, most recently in early 1987.
For Russian trade it is crucial that sea trade lines are open. Getting locked inside Baltic Sea by causing environmental damage in Swediand and Danish economical zones is running a very high risk in times when West is looking at all possible ways how to contain Russian income.
XI. Answer to sanctions means Gazprom could just stop delivering
12 Sept 2022 - The Legality of Russia’s Indefinite Suspension of Nord Stream 1 Gas Pipeline Under International Law
[M: This article analysing impact of sanctions and what happened in early September shows that Russia could just stop delivering as a response to Sanctions imposed to it. Seems they did not need to blow they pipelines would they desire to chose not delivering to Europe. There will be a full new post about this.]
The aspect of sanction on Nordstream 2 AG and its boomerang effect on Nordstream AG delivering gas to European customers is explored: here.
2 Oct 2022 - Russia’s Novak Says Possible to Repair Nord Stream Pipelines
Two EU top politicians started to frame/define the event as a "sabotage". It would be beneficial to frame Russia with "it was a Russian terrorist act against European people to high their energy costs". Yet that did not happen. Russian frozen assets could be confiscated, an objective West was attempting. So in 2 days two EU top leaders had to KNOW who did it.
Another issue is that this is an ecological disaster. About 300k Metric Tons of Methane Gas leaked into the atmosphere - equivalent to 1 million cars - yet nobody is calling Russia or other state to compensate the loss on local fisheries, mammal sea life.
XIII. What now?
Now after NS pipes are damaged what now? Europe can not wean off completely, there is not enough LNG capacities, LNG boats to supply European needs.
So Ukrainian pipelines will be used, but who will invest in it? It is old.
Is Russia going to to agree of using the system for next 50 years so investors get return on their money? Who will finance the Ukrainian old network? Ukraine? Europeans? Gazprom money reserved for investments is no more. They now invest in pipelines to Asia. Europe is money stripped.
XIV. Consequences
Ukrainian pipelines must be used - for volumes which were flowing through NS1 and there is no worries that Ukraine will not get the € 2B/y and most likely Europe will need to invest in Ukrainian pipeline network.
Cost of piped versus Spot market - Piped contracts are closed for many years ahead, one can not compare them to spot prices which are now artificially elevated so a RU is saving by not exporting" is a very bad take. Prices fluctuate and for comparison some adjusted price could be used, not actual spot as I have seen several times dab takes.
European energy security is in shambles.
Customers do buy gas and often separately but the transport through different pipelines. The contract is not necessary invalidated by force majeure or when someone blows the pipe. Customers do demand what they bought to be delivered through different pipelines, now question is who will pay for higher transport fees? And RU is in a worse position as their storage capacities are at max.
Concluding question and appeal:
Have you ever worked in a private company?
The largest energy exporter destroying a joint NS1, NS2 projects with main customers (Germany, Austria, France, Netherland.. and the rest of EU) aka with most creditworthy and rich customers who are in bigger and bigger need to get energy?
Really?
I have asked many times but could not get coherent Russian motive so far.
If you find some motive, please let me know. I want to learn.
Because the truth matters.
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