Any Darwin Awards fans out there? For those few who have never heard of them, the Darwin Awards celebrate those individuals who have rendered a significant service to mankind by taking themselves out of the global gene pool. In preparing to discuss today’s subject, I am reminded of unfortunate 1999 award-winner ‘James’ from Missouri, who became so fixated upon his love interest that he tried to lop off his own head with a chainsaw to demonstrate his commitment to an outcome on his terms. Although he was ultimately unsuccessful on both counts, he did fatally injure himself, and died in hospital. Ashes to ashes; dust to dust.
My intent today is to demonstrate clear destructive similarities between the above emotional decision and the equally simpleminded decision of the US Senate to impose further economic sanctions on Russia, this time explicitly tying them to penalizing of European companies which do business with Russia – moreover, in a clear attempt to stop the latter from proceeding with the Nord Stream II gas pipeline project. This, in turn, is clearly an attempt by the USA to make Europe a captive market for its own energy products, in the form of shipborne LNG. Significantly, that goal is also finally becoming clear to Europe; or at least to the parts of it that matter, such as Germany.
Try to put aside, for the moment, the insufferable arrogance of American meddling in Europe’s energy market, with a view to restricting its choice while – laughably – pretending it is broadening European energy options.
The readers and commenters of this blog will be well aware, since it has been a topic of discussion for years here, that a critical underpinning of the western plan to seize Ukraine and wrest it into the western orbit was the premise that Russia would be forced by simple momentum to go along with it. As long as events continued to unfold too quickly to get ahead of, Russia would have to help supply the sinews of its own destruction. And a big part of that was the assumption that Russia would help to finance Ukraine’s transition to a powerful western fulcrum upon which to apply leverage against it, through continued trade with Ukraine and continued transit of Europe’s energy supply through Ukraine’s pipeline system.
But Russia slapped a trade embargo on most Ukrainian goods, and rescinded its tariff-free status as it became clear Brussels planned to use it to stovepipe European trade goods into the Russian market, through Ukraine – thus crushing domestic industries which would not be able to compete on economically-favourable terms. The armchair strategists nearly shit a brick when construction of the South Stream pipeline commenced, bypassing Ukraine and depriving it of about $2 billion annually in transit fees. But pressure ultimately forced Bulgaria to throw a wrench into the works, and the pipeline plans were shelved, to much victory dancing in the west. There was not quite as much happy-dancing in Bulgaria, but they were only ever a pawn anyway.
Sidebar for a moment, here; while the $2 Billion annually in transit fees is extremely important, Ukraine’s pre-crisis GDP was $163 Billion. The funds realized for transit fees are important because (a) Russia has to pay them and (b) the west will have to come up with the equivalent in aid if Ukraine loses out on them. But the real value intrinsic to Ukraine as a transit country is its physical reality as an interface for Russian gas transit to Europe – what is a bridge can be easily turned into a wall. Any time Washington thinks Russia needs some more shit on its face, Ukraine can be prodded to announce a doubling of its transit fees, or to kick off some other dispute which the popular press will adroitly spin to make Russia appear to be an unreliable supplier. Therefore, it is essential to western strategy that significant amounts of Russian gas continue to transit Ukraine. Sufficiently so that Europe continues to evolve ever-more-desperate contingency plans in order to keep receiving gas through the country which was known to have provoked the previous shutoff of European supplies by siphoning Europe-bound gas for its own use. That’s despite the assurances of Germany and western partners of Gazprom in the Nord Stream line that it will mean cheaper gas prices for Europe.
But we knew this was coming, didn’t we? Yes, we did, because as recently as last month, Democratic senator Jean Shaheen, who sits on the Senate Foreign Affairs Subcommittee on European Affairs, announced that the United States was considering involving itself in the Nord Stream II pipeline project, with a view to killing it stone dead. The purpose, as already mentioned, is to make way for LNG cargoes to Europe, cutting Russia out of the business, on the assumption that without energy sales the Russian economy will crumble and the country will collapse. Destroying Russia remains Washington’s overriding strategic objective.
So the stakes are high; high enough to provide context for Washington’s bizarre and aggressive behavior, and for its continued ridiculous insistence that Russia tampered with the 2016 US presidential election. What are the chances Washington will succeed with its latest adventure in global bullying?
Not good, according to multiple sources. Let’s take a look at how Platts views the prospects; Platts, a division of S&P Global, is headquartered in London and employs over 1,000 people in more than 15 offices worldwide. These include global business centers such as New York, Shanghai and Sao Paulo, and major energy centers such as Houston, Singapore and London, where Platts is based. Having hopefully established the firm’s credentials as someone who knows what they are talking about in the energy business, let’s see what Platts has to say about the potential American LNG market in Europe.
Mmmm….the review is mixed. At the outset, Platts is admiring of Cheniere Energy’s go-to-hell expansion. But a couple of things about that are cause to curb enthusiasm. One, only 8 American LNG cargoes had gone to Europe so far; that was as of April this year, when the report was released. Of those, 4 went to Spain, 3 to Portugal and 1 to Italy. Two, the Iberian Peninsula is acknowledged by Platts as not particularly significant in terms of gauging Europe’s welcome of American LNG.
“Indeed, the fact that Portugal and Spain were the first European countries to import LNG from the US is telling…The Iberian Peninsula is considered an “island market” with poor interconnection to the rest of Europe, so the delivery of US LNG into the region is not likely to be seen as a sign that it will take hold in the wider European market.”
The same passage points out that Russia does not supply the Iberian Peninsula with pipeline gas, and so is unlikely to be very concerned about the impact of US LNG on that market.
Three, Cheniere’s rapid expansion has come at a terrifying cost, and the company is currently – as of fall 2016 – overleveraged with approximately $20 Billion in long-term debt. It is unprofitable, with interest payments representing 60% of revenues, the living embodiment of ‘bicycle economics’; the second you stop pedaling, you crash.
For what it’s worth, few great business breakthroughs have occurred without risk, and while Cheniere is plunging ahead with what seems like recklessness, it could just as easily pay off with complete domination of the North American export market. That’s a hell of a debt load, though; not much margin for bad news. That does expose a flaw in the American strategy, as well – wrestling control of the European supply market from Russia would be frighteningly expensive.
Consider; apart from the ruinous expense of constructing LNG terminals and processing facilities and getting planning and development permission (which I imagine could be shortcut pretty quickly if such a juicy prospect as seizing control of the European market seemed an achievable possibility), you need tankers to ship your product. The average LNG tanker which can dock at most terminals (remember, the tanker has to be able to get to the terminal as well as berth alongside it, so you may need to dredge a channel all the way through a shallow harbour) can hold a little better than 3 Billion Cubic Feet (BcF) of natural gas, which is mostly methane. That equates to about .85 Billion Cubic Meters (BcM). But Europe uses about 400 BcM per year. That would be more than a full tanker cargo every day, assuming LNG could supply the whole European market, which is of course unrealistic. Especially considering the entire global LNG shipping fleet consists of about 410 vessels. No LNG carriers are currently registered under the US flag, and if the USA plans to be a serious exporter it is going to need about 100 new LNG carriers over the next 30 years, something which is frankly not practically achievable considering it takes about 2 years to build one, at a cost of about $200 Million apiece. Of course, miracles can be made to happen if you pour enough money into them. But we’ve already somewhat nervously mentioned how much all this is costing – how does the likely return on investment shape up?
Well, what the fuck? Platts comes right out and says that Russia has the option of cutting its prices to ensure it undercuts LNG costs in order to keep its share of the European market!
“Russia clearly does have the option to undercut the US LNG price to ensure it keeps its share of its key European markets and could flood the market with cheap gas, maximizing revenues and cash flow at a time when producers worldwide are suffering from the impact of such low prices.”
So, let me get this straight. All the attempts by the west, led as usual by Washington, to force energy prices down and keep them low…actually benefit Russia by putting the USA in an unacceptable profit/loss loop so that it cannot afford to sell its LNG to Europe and still make money? That appears to be pretty much how it shakes out.
“Russia, thanks to the bearish oil price environment and an enhanced export strategy from Gazprom, increased its exports to Europe by 15% (through the Nord Stream, Yamal, and Brotherhood pipelines) to 118 Bcm, taking back its place as Europe’s largest gas supplier in the process.”
Wait! I think I see a solution. All the USA needs to do is apply its global leverage to make energy costs rise!
“But US LNG could face problems of its own – the current low prices are forcing ever growing numbers of US producers into bankruptcy. According to a recent report by Haynes and Boone, 90 gas and oil producers in the US and Canada have filed for bankruptcy between January 2015 and the start of August 2016.”
Oh, hey; I just realized – if forcing energy prices back up were an option, how is that going to hamstring an opponent who was already able to undercut you at the lower price, and still turn a profit?
Platts closes out this dismal synopsis with the consolation prize that, while US LNG is less competitive with pipeline gas given narrow Henry Hub-NBP spreads, it is coming to Europe regardless. More of that old American can-do. It will have to be, though, on what is described as a short-run marginal cost basis. Would you feel comfortable with that forecast if you were carrying, say, $20 Billion in debt?
And it’s not just Platts who sounds a warning; Forbes has a similar, if slightly more mocking outlook of the situation.
“Most of this is just political posturing and noise. The U.S. is not now and nor will it be in the near future a key resource for Europe’s energy needs…According to EIAs Annual Energy Outlook, published in April, the United States remains a net importer of fuels through 2040 in a low oil price scenario. In a high oil and gas price scenario, the United States becomes a net exporter of liquid fuels due to increased production by 2021. A lot can happen in seven years. By then, Exxon will likely be back to its deal with Rosneft in Russia’s Arctic Circle.”
As well, Forbes adds the interesting perspective that foreign sales of American gas will be a tough sell domestically if the pressure remains on the American leadership to achieve greater energy self-sufficiency and reduced dependence on foreign sources. This situation can only be exacerbated by a rise in anti-American sentiment around the world, and is likely to spike if energy prices rise. But if they stay low, American LNG exports won’t make any money. If they go up, pipeline gas will undercut LNG prices and make it noncompetitive. Jeez, we just seem to be going around in circles. Say, did you notice that little item in there, in which the author mentions the only possible way the USA could compete with Russia in the natural gas market in Europe would be if it had national rights to substantial supplies of gas abroad? Did that give your memory a little tickle, and make you think of Burisma Holdings, and Hunter Biden?
The Brookings Institute, for God’s sake, warned that US LNG could not compete price-wise before the first LNG cargo ever left the USA. Given its sympathies, it seems probable it was intended as a sobering restraint meant to keep the United States from doing something stupid that might expose it to failure and even ruin; it is much less likely to have been an endorsement of Russia’s global business practices.
As so often happens, an unhealthy fixation on taking down a largely imagined enemy results in increased risk-taking and a totally unrealistic appraisal of the likelihood of success – it becomes worth doing simply to be doing something. The costs in this instance have included the alienation and infuriating of Germany, the European Union’s anchor economy, and angry murmurs from the Gulf States that Washington negotiated production cuts simply to make its own product more competitive. All for nothing, as it happens, because a nation with surplus swing production can always undercut your price, and the nation with the world’s lowest production costs should be last on your list of “People I Want To Start A Price War With”.
If you were opposed to official Washington’s swaggering, bullying modus operandi, this whole unfolding of events probably seems pretty delicious to you. But I’ve saved the most delicious for last – Trump dares not make any effort to overrule the Senate vote, or get it reframed, because of the successful media campaign to portray him as Putin’s secret agent. Any effort to mollify Germany’s fury will be seized upon by the reality-challenged Democrats as an opportunity to further discredit the Trump government, by making it appear to be negotiating in Russia’s behalf.
You couldn’t make it up.