Angry Planet - Oil's long good-bye and what comes next

Episode Date: January 20, 2016

Since the breakup of the Soviet Union, Russia has used natural gas as a weapon against Ukraine and Europe as a whole. Threatening to turn shut off the pipes as the weather turns cold is a pretty effective way to influence foreign policy. But now it looks like one of Vladimir Putin’s key weapons is losing some its punch. This week on War College we’re looking at how shifts in the production of oil and natural gas are effecting global security, and where that leaves the United States.Support this show http://supporter.acast.com/warcollege. Hosted on Acast. See acast.com/privacy for more information.

Love this podcast? Support this show through the ACAST supporter feature. It's up to you how much you give, and there's no regular commitment. Just click the link in the show description to support now. The opinions expressed in this podcast are those of the participants, not of Reuters' News. Well, I have to say the United States and its allies are the winners, really, in this changing global gas sector. Since the breakup of the Soviet Union, Russia has used natural gas as a weapon against Ukraine and against Europe as a whole. Threatening to shut off the pipes as the weather turns cold is a pretty effective way to influence foreign policy.

But now it looks like one of Vladimir Putin's key weapons is losing some of its punch. This week on War College, we're looking at how shifts in the production of oil and natural gas are affecting global security and where that leaves the United States. You're listening to War College, a weekly discussion of a world in conflict focusing on the stories behind the front lines. Here's your host, Jason Fields. Hello and welcome to War College. I'm Reuters' opinion editor, Jason Fields. And I'm Matthew Galt with War is Boring. Today we're talking to Agnia Griegas, author of of the forthcoming book Beyond Crimea, The New Russian Empire.

And also previously, she's published the politics of energy and memory between the Baltic states and Russia. Thank you so much for joining us. Well, it's a pleasure to be here. So today, what we were hoping to talk about is when people think of energy and geopolitics, they typically think about oil and the Middle East and the various struggles in petro states and conflicts there. But, Anya, you spent the last year studying natural gas. Can you sort of talk about why that is?

Well, it's true that when most people think about geopolitics and strategic commodities, they think of oil. And historically, gas has played a second fiddle to oil. And this was primarily because gas was considered little more than a waste product of oil because of its lower energy density and because of the difficulties in transporting it over long distances. And also because oil was used in the military and industry-based sectors,

while gas was more of using the consumer industry, and it was perceived as less of a strategic commodity. Now, for me, though, why I've been so intrigued by gas for a while and spent the last year working on a research project from my US book has been really primarily because of the nature of gas and the fact that regional, isolated gas markets make gas a commodity much more susceptible to political influence rather than oil. I mean, oil instead is traded quite freely as part of the global oil market.

Right, but typically countries are hooked up together with actual physical pipes to transport gas, right? Meaning there has to be some physical proximity? Exactly. I mean, the relationship between gas exporting and importing countries is much more intense and long term. countries have to build pipeline infrastructure. Often they co-invest together in that infrastructure, and they establish long-term relationships. I mean, these relationships last decades, the gas contracts last decades.

For instance, what we see in the case of Europe and Russia, Europe has been importing Russian gas since the 1960s because that's when the pipelines were first built. And this gas relationship between Europe and Russia has stayed in place pretty much for more than 50 years. So with this time and these direct long-term relationships comes political influence. So which, Agnia, which countries export the most gas? Who holds the most influence in this sphere?

Well, certainly Russia has been the largest gas exporter for quite some time. I mean, really, since the 1980s. It's followed by Qatar, which primarily exports LNG and Norway. And again, Russia first emerged as a gas exporter in the 1990. Now, however, today is a very interesting point in time, because we're really at a potential turning point. In 2011, the United States took over Russia as the world's greatest producer of natural gas. The US only last held that position as the largest producer in 2001 and has been competing

with Russia for this position for three decades. So today the US potentially stands as a country that can start exporting LNG, and you and it can become one of the leading LNG producers and exporters in the world, potentially joining the ranks of Australia or Qatar. So actually, we should explain to listeners. LNG means liquid natural gas. And in order to actually move gas from one place to another, not through a pipeline, it has to be compressed and turned into liquid.

Is that correct? That's correct. Yeah, liquefied natural gas. And liquefied natural gas really changes the game. because unlike natural gas, which could only be transported by pipeline, by fixed pipelines, LNG can be shipped in any direction on the seas from any country to any country. And it's really LNG that is creating what people talk about, a global gas market. I know with oil, you're talking about enormous tankers that move a lot of oil all at once.

I just wondered, as far as when you're talking about liquid natural gas, Are we talking about the same size ships? Are we talking about the same, you know, something comparable in terms of the amount of essentially energy that you can take from one place to another on a single ship? Certainly. I mean, the size of LNG exports have increased. I mean, and this is, again, not something that's completely new. LNG exports started in the 60s as kind of experimental shipments. But they really gained momentum in 97 when Qatar opened the largest LNG.

producing an exporting terminal. And by 2012, I think it was a real turning point when Japan essentially met all of its gas needs or its energy needs when it had to shut down the nuclear power plants through LNG. So it really demonstrated that countries can turn to LNG to meet their energy needs for the first time in 2012 in significant amounts. But we're also seeing developments in LNG that you can also have smaller tankers that can meet kind of short-term demand in case of emergencies. LNG is now being compressed at CNG. It can be even trucked, railed, and so on. So the flexibility and just variety of ways you can transport gas today is unparalleled to what it used to be.

So you no longer need these direct pipelines to sell natural gas efficiently? Well, natural gas pipelines are no longer the only means, no longer the predominant, let's say, means. But still, pipelines are often cheaper, oftentimes because the infrastructure is already built, so you don't have to invest once again into that infrastructure. But we've seen countries, for example, Lithuania, the perfect case in 2015, when it opened its LNG terminal.

So for the first time in history, the country will now be able to access non-Russian gas. Before that, the country was only able to import gas through the single Russian-controlled pipeline. Now it's importing gas from Norway. Oh, so, yeah, I can see how that really does have an immediate impact on the geopolitics of the situation, right? I mean, in the past, when Russia or the Soviet Union needed to apply pressure,

they just, and they have actually cut back supplies, right, of natural gas. Either cutting supplies or threatening higher gas prices have been one of the favorite tactics, really, of gas from. They've been using these tactics repeatedly. Or sometimes even if, let's say, cuts were not implemented, gas from would ask for political concessions for lower gas prices. And we've seen that very much in Eastern Europe. Specifically, states where gas from had a monopolist position.

So where gaspram had a monopolist position in the market, like the Baltic states and so on, it was able to drive a much harder bargain for that gas. And we should say that gasprom is the Russian state-controlled gas. company, correct? Absolutely, yes. Okay. I mean, you can really view it just as an arm of the Kremlin.

So isn't it something, it's a very large percentage of the natural gas that Europe uses comes from Russia? Is it more than half? I couldn't remember. Well, it's actually not quite half. It depends on the, you know, the data sets you use and how you define Europe. Here, you know, gas collars can quite debate about this, but it's about 30-40%. What is also interesting, how that gas arrives to Europe.

That gas primarily arrives through a pipeline through Ukraine. In fact, in the wintertime, 50% of the gas coming from Russia to Europe is coming through the pipeline in Ukraine. And that's why if we look back at Russia's gas halts to that pipeline in the winter of 2006, in the winter of 2009, this is really when the countries feel it and their populations feel it. Because let's not forget, gas is also used to heat household homes in the winter in Europe. So if you're cutting gas supplies to a country, the country is feeling

it immediately, its population is feeling it immediately in the cold winter months. Right, I guess because it's actually, if you're using a pipeline, it's a little bit more like electricity generation. When you stop the flow, it just stops, as opposed to, you know, you may have a stockpile of oil that then you can draw down on. Well, countries, this has been an issue. in Europe that has been urging countries to increase their gas storage facilities, primarily for these reasons. If there's a gas cut, you could potentially turn to your gas storage. Now again, gas storage, like other gas infrastructure, is expensive. It takes time to build. So a lot of countries hadn't really invested that much into it into the past. But tensions

were Russia, again in 2006, 2009, and since 2014 are changing some of those views. All right, well, as these gas markets expand, how are petro states such as Venezuela, Saudi Arabia, faring, how is their influence changing? Well, the changing energy markets and the boom and gas markets is really hurting petro states in several ways. I mean, first of all, the U.S. shale boom has boosted U.S. oil and gas production, and that has driven down oil prices. So it's directly hurting the bottom line of Saudi Arabia and Venezuela. But another aspect is the rising popularity of gas.

Gas is perceived as the cleanest fossil fuel. So gas is now increasing in the share of the energy mix of many countries and particularly developing countries. And it's often increasing at the expense of coal and oil. So again, this is hurting the bottom line of Saudi Arabia and countries like Saudi Arabia and Venezuela. But what's interesting also that countries like Saudi Arabia are looking into shale gas, development. They recently made an announcement that they hope to start commercial development by 2025. And this is really kind of in stark contrast to the perceptions towards gas in the Middle East historically.

I mean, really before the 70s, gas was simply kind of flared off if it was perceived to have no economic value. So now countries are also changing their perceptions and are more interested in developing gas. Something else I kind of wanted to circle back around to as we're talking about the way that these energy markets drive conflict. I thought a really good specific example for us to touch on would be Ukraine in the Ukrainian war. And what role gas really played in that, if you could kind of walk us through that? Well, you know, gas really played a very big role in relations between Ukraine and Russia overall. And not many people realize, but they have indirectly contributed to the current conflict in eastern Ukraine. And if we go back and we look in the 90s, and we look in the 90s,

Ukraine was really accumulating a lot of gas debt from Russia. So it was buying a lot of gas. It couldn't pay for that gas or didn't want to. But these gas debts were not forgiven by Russia. Instead, in 1997, Russia asked for Ukraine to, well, it said that it would cancel its debt. It was about $100 million at the time in exchange for the lease of the naval base in Sevastopol and other facilities in Crimea. So at the time, Ukraine agreed it got its debt written off, but Russia really got official access to these bases and an extension of those leases. And it's that presence of Russian forces and troops in Crimea that would really facilitate Moscow's eventual takeover of the peninsula.

Likewise, later in 2010, Ukraine again agreed to extend that lease, that lease agreement until 20, And for that, Ukraine was to receive a gas price discount. So again, here, Russia always dangled either writing off Ukraine's gas debts or, you know, cheaper prices in order to gain inroads in some of the most strategic territories in Ukraine, specifically Crimea. Now, of course, once Russia occupied Crimea, you know, gas from canceled that gas price reduction. If we look further, some of even Ukraine's relations with the EU have been very much influenced by Ukraine's fear that if it established closer relations with the EU, then Russia would increase gas prices to the country. And that was one of the primary reasons why President Yanukovych refused to sign the EU-Ukraine

Association Agreement, and that was the spark for the Medan Revolution that followed. So, I mean, Ukraine is extremely dependent on natural-dict. gas rather than oil? Is that right? Well, interestingly, some of this dependence on Russia is a little bit artificial, the dependence on Russian gas imports. First, Ukraine has its own gas resources, but because it was historically cheaper just to import gas from Russia rather than develop and invest in its own gas fields, the situation has evolved as such. Also, the Ukrainian industry has been highly inefficient and it has really relied on very intensive gas and energy usage. Now, since the conflict, since 2014, we've seen some changes. We've seen some changes for

greater energy efficiency or at least efforts towards that. We've seen also that Ukraine is becoming more interested in exploring its own gas fields, even plans for shale gas development. The problem here is that some of the fields were located in Crimea or around it. So now, Ukraine has lost those, or other fields are in close to areas of conflict in eastern Ukraine. So right now, during times of conflict, international companies have not been so eager to explore those areas, you know, to develop there. So as a counterbalance, you said earlier that the United States actually now produces more gas than any other country in the world.

Now, does the United States actually export? No, not in significant quantity. In the past, the U.S. has exported LNG to Japan, but that has been the only country. In 2016, their plans for the first time for the U.S. to export LNG beyond, and this is really the company Chenier is driving that initiative, their plans and their contracts in Spain, in Europe, and beyond. Is this going to be in significant amounts? And I guess we have to define significant.

but still? Well, plans are for significant amounts. Of course, the markets have been also not standing still. Prices have been low. Gas prices have been low, which has been reducing some of the incentive to export LNG long distances. I mean, because we have to take into account that to ship the LNG from United States to Europe, you have to add the liquidification costs, the shipment costs, then again the gasification costs. But many analysts are optimistic that American LNG will make its way in exports. The Energy Information Agency, a branch of the U.S. government, predicts that by 2025, the U.S. will be a major, major LNG exporter. All right. So that begs the question. So as America and other countries enter into the markets and

become big gas exporters and create more competition in these energy markets, what happens to a country like Russia who uses gas exports as a primary motive of influence on other countries in the region? Well, you summed it up, certainly. Their influence will wane, especially as they lose their monopolist position in specific markets. Overall, the gas market is becoming, I would say, a buyer's market, not a seller's market. That means that it is really buyers who will dictate the terms rather than the sellers. Or at least the sellers won't be able to exert the same type of political pressure or ask for political concessions as both sides draw up gas contracts. Now, I mean, this doesn't mean that Russia will not remain a large or even potentially the largest

gas exporter. And it doesn't mean that it will not be a significant supplier to Europe. I think really the most significant fact will be that it will lose its monopolist position in many European markets, as it did in Lithuania in 2015. Countries will build up LNG terminals, will turn to reverse flow, which is essentially when gas can flow to both directions in the same pipeline. And that's essentially what Ukraine is doing right now, since it's tensions with Russia. It's receiving gas reverse flow from European countries rather than Russia. So all of these developments will really reduce Russia's political clout.

And as that kind of economic and political clout wanes, do you see that. see, do you feel that they would become, they would use more traditional methods to exert influence in the region? Do you think they would use their military more? Or is that just pure speculation too far off? Well, I think, you know, it's tough to speculate the policies that the Kremlin will pursue. But I think what we see is that the current Russian government is, one, it's determined to hold on to its power. And two, it seeks very much to regain. And if it cannot regain, then it seeks to project a great power status. It seeks to be a great power on the international stage. So I don't see even as Russia's revenues may dwindle, as some of that

political clout may wane, especially in the European market. I think Russia will still seek in other ways, as we see now in Syria, to try to project that strong image and be a strong player. If I can ask about another country that I find kind of interesting, Iran, which is trying to get back into the oil business, is there any effect that might happen to them as well? Do they produce natural gas? Or are they solely dependent on crude? Well, Iran actually, interestingly, Iran and Qatar, they share the single largest gas field in the world. It's the north-south parts field. And in fact, Iran has possibly the second largest gas reserves in the world after Russia.

Now, in the past, because of sanctions and Iran's isolation, it hasn't been developed as much as Qatar. And certainly Iran hasn't been able to export the gas. Again, we have to remember with gas imports, infrastructure is extremely important. So it means that Iran would have to invest in significant either pipeline infrastructure or LNG terminals. Both of them are long-term, expensive projects, and it's uncertain who would be the investors in those projects to date. I'd say maybe the LNG terminal maybe is more likely in the medium term, let's say, but even then I would say the medium term than the near term. So, yeah, it's interesting. It doesn't sound like a number of different countries may experience somewhat negative impacts.

So who's the winner? Well, I have to say the United States and its allies are the winners, really, in this changing global gas sector. The U.S. is emerging as a significant producer. If the kind of the optimistic projections are met, it could become a large LNG exporter. this LNG could be used to secure Europe to help Europe diversify away from Russian gas sources. It could also be used to constrain Russia's kind of political cloud from gas exports.

I think LNG exports to Asia could also woo the Asian countries which are very energy-hungry, and they're specifically very gas-hungry because, again, it's a cleaner fossil fuel. So really, gas could make the 21st century, you know, once again belong to the United States and its allies. Yeah, I have a question to follow up on that. How important is fracking to the United States energy production?

Well, fracking has been one of the drivers of the shale boom. This is a technique that has been in, well, really perfected since the 70s, but first tried out in really even the 1820s. So this is a very old technique, but it has been much more modernized and become much more effective together with horizontal drilling to create some of these vast gains in shale gas production. Okay, so we have two final questions to sort of wrap up. There's certainly one, actually what you're talking about with hydraulic fracturing or fracking, there's definitely concern about the environmental cost to that. polluted groundwater is one, something that's certainly been talked about, even earthquakes. Yeah, I live in North Texas, and that is something that we've been experiencing frequently in the past few years,

is earthquakes when we used to not have them. I don't know if that's necessarily connected to fracking, but that is the speculation. Certainly there are environmental concerns associated with fracking. There have been a lot of studies, but I think it's very important for the United States and, you know, government regulation to ensure that the shale industry is successful without environmental disasters or without significant environmental costs. Because other countries are also looking to the United States example. You know, the United States has been most successful in this area,

but it has also faced some of the environmental damage. And I think if the United States can set a good example here and set some of the best practices, then there will be a lot of other countries that follow. and follow some of these best practices as they pursue their own shale development programs. When we talk about having natural gas as a cleaner alternative or perceived as the cleanest fossil fuel, how clean is it when compared to gasoline or other liquid products? Well, it certainly considered cleaner than gasoline or than coal and so on. I don't want to speculate how much. It's definitely considered the cleanest,

fossil fuel. It has the lowest carbon emissions linked to gas usage. Yeah, okay. I mean, it's still a fossil fuel when you get down to it. It certainly is a fossil fuel, and that's why it is perceived as a bridge fuel. Some people believe that we can rely on gas until we come to greater advancements with renewables, and gas can serve as this bridge fuel. Now, of course, critics say that if we focus too much on gas, then we're not making those necessary investments in greener forms of energy. So there's a bit of a debate about it, but really at this point in time, gas remains as one of the cleanest and most effective sources of energy. All right, so I want to thank Agnesigas for being with us today.

I think people are still used to thinking of this as an oil world and therefore having people at the mercy of the Middle East. But it's interesting to hear that it's changing. Well, it's been a pleasure to be here, and the International Energy Agency said in 2011 that we're entering the era of gas, and I think it may very well be true, at least for the first part of the 21st century. Thank you so much for joining us. Next time on War College. The reality is the old border in the Middle East, where the United States was a guarantor of certain countries, it's died because the fact that it was not sustainable beforehand. Regardless if it suited people's preferences, it just was fractious and it was not going to work.