The Peter Zeihan Podcast Series - European Sanctions Cause Russian Natural Gas Collapse || Peter Zeihan

Episode Date: October 4, 2023

Most of Europe has been working to reduce dependency on Russian natural gas, and boy, did they deliver. Russia's natural gas state monopoly, Gazprom, has just reported its lowest output levels since 1978.Full Newsletter: https://mailchi.mp/zeihan/european-sanctions-cause-russian-natural-gas-collapse

Hey, everyone, Peter Zine here coming to you from Colorado, and the news today is a gas problem has announced. It's a full year output levels. Gas problem is the Russian natural gas state monopoly. And it is the lowest that it has been since 1978. So well predating the Soviet collapse. And the reason is pretty straightforward. The Europeans have tried to cut their dependence upon Russian natural gas to zero, and at least in terms of the piped natural gas. They've been pretty successful. Now, this is something that is not exactly a shock to people who are familiar with the industry. There are many aspects of the sanctions that are working better than others. This is one of the ones that's definitely working better.

And the reason is the nature of natural gas itself. Natural gas is a gas, and it takes a specialized system to produce it, to transport it, and to export it. And if there is a gap anywhere along the system, whether it's insurance or the pipes or the pumps or the legalities or whatever it happens to be, the whole thing stops. and it can't easily be redirected. And in a case of the Russian stuff that goes to Europe, almost all of it comes from an area called Urugu, which has been in production now for a half century, goes down a couple thousand miles of pipes through Ukraine and Belarus

into Poland, Germany, Slovakia, Hungary, and the rest. And since this can't be redirected when the Europeans stopped taking deliveries, the Russians had to bit by bit by bit shut everything down. There are other natural gas options that the Russians have. There's some that comes from eastern Siberia, well east of the Ural, so that goes south into China. There are a couple liquefied natural gas facilities, one on Sackland Island, primarily, which goes to Japan, and one on the Amal Peninsula, which primarily gets shipped to Europe.

And those are still working mostly, but we should expect even those to go offline in the not too distant future. The problem is that those other facilities, the Yars, the Yawks, Yamal LNG, Soklin LNG, and it's called Kovicta, which is a field in the general vicinity of Urquitsk out near Lake Bug Hall. Those are all much more technically challenging, and the Russians didn't do any of the work to bring them online. That was almost exclusively done by foreigners, with British major BP being the single largest player, but the Japanese, Mitsu and Mitsubishi are involved in Sokland, as was ExxonMobil. And most of those companies are now gone. The Japanese were still involved in Soklin, but ExxonMobil and BP have just cut their losses and left completely.

And the Russians do not have the technical skills necessarily to maintain those projects in the long term. As for whether or not the Russians can come back, you know, that's an open question. The Russians used to be the best in the world when it came to ice production and tundra production, but that was in the Soviet period. And the Soviet industrial educational system collapsed around 1985. and the Russian birth rate collapsed in a similar time frame. So not only do they have a significantly fewer people who could theoretically be trained up in engineering, the system that trained them is gone. So the youngest people who have the full suite of, say, petroleum engineering and reservoir management experience

are now in their early 60s, and there just aren't that many of them left. And for the last 20 years, most of the meaningful maintenance work that has been done in places like Uruguay, most of the work on improving recovery rates has been done by foreigners, with BP and ExxonMobil and, to a lesser degree, the Germans and the Dutch, being the major players. That's all gone. So Urangoy, being a mature zone, could probably be brought back as a significant production zone if you applied shale technologies in mass, but as the Americans have shown, shale works in areas that are relatively close to population centers because it requires a significant amount of labor,

and it doesn't work very well in places that, free sell it because you need a lot of water. And Urangoy is a thousand miles from anything that matters. So they will probably never come back online because the Russians can't do it themselves and the technologies that might allow it to work simply are inappropriate for the geography. In the case of exports to Europe, they are now down by 85% compared to the start of the war. What is left is just a trickle that is going to three countries, Czech Republic, Slovakia, and Hungary, who really don't have any alternatives to taking natural gas supplies from the Russians, which is one of the reasons why Hungary, Slovakia, and to a lesser-Rech Republic

have been the three countries that have been most opposed to the sanctions regimes in general, and most of the exceptions that have been carved out of the sanctions regime involve those three countries. That's not going to change this year. That might start to change next year as the Europeans are building out lots and lots and lots of interconnections so that they can cut their links to Russian natural gas for good. And when that happens, all that will be left of the Russian natural gas industry is what's going to domestic markets. And perhaps Soklin LNG, because the Japanese are involved there, and that's a completely separate political question. But that is crazy because you're talking about the world's largest producer and largest exporter of natural gas vanishing from global markets in less than four years.

and that is absolutely unprecedented. Honestly, it's more than a mild shock that the price shocks that the Europeans have felt to this point have been so mild. They really have been able to bring in liquefied natural gas from other suppliers, most notably a Persian Gulf in the United States. This has put a lot of price pressure on everyone else who used to get natural gas from those locations,

but to this point, I got to hand it to the Europeans. They have put together a sanctions regime that at least in part is doing exactly what they hope, cutting Russian exports, cutting Russian income without unduly shocking their own system. I honestly did not think they could pull this off, but so far, so good.