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PRI's Environmental News Magazine

The Crimean Conflict and Energy

Air Date: Week of March 7, 2014

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Crimea is a subtropical peninsula jutting into the Black Sea. (Bigstockphoto.com)

Roughly one third of all Europe's natural gas arrives via pipeline from Russia, and the current standoff in the Crimea has European leaders worried about the reliability of energy supplies. Energy analyst Joe Stanislaw from Deloitte LLP tells host Steve Curwood that energy insecurity may prompt some European countries to explore domestic fossil fuel extraction.

Transcript

CURWOOD: From the Jennifer and Ted Stanley Studios in Boston, this is Living on Earth. I’m Steve Curwood. There’s much at stake in the standoff between Russia and the Western Powers over Ukraine and the Crimea. It’s a power struggle that dates back at least to the Crimean War in the 1850’s when Britain and France fought Russia over religious differences and for territorial hegemony.

Today the question of hegemony is intertwined with energy. Russia is currently the second largest producer of natural gas in the world after the US. And as Western Europe has reduced its use of coal and nuclear power, it has relied more and more on natural gas from Russia, and that complicates any possible economic sanctions - places like Germany need the gas. For more analysis, we turn to Joe Stanislaw, a long-time observer of energy markets and an independent senior advisor to Deloitte LLP.

STANISLAW: For Russia, the economy is oil and gas. That’s the starting point. Secondly, Russia and Europe are intimately linked by pipelines. Europe relies upon Russia for approximately 30 percent of its natural gas supplies, and those gas supplies are contracted out for another 15, 20, sometimes 30 years. Russia needs the European gas market. Almost 90 percent of all Russian gas exports go to Europe. Depending on how you count the numbers and whose numbers you use, oil and gas revenues account for somewhere around two thirds of the revenues of the Russian economy, the Russian government.

CURWOOD: So they have little interest in stopping oil and gas exports I’d imagine.

STANISLAW: That's the point. They need this as much or more than the Europeans need them.



Roughly one third of Europe’s gas arrives via pipeline from Russia. (Bigstockphoto.com)

CURWOOD: This showdown that Russia has set up here, how might that affect their long-term prospects for exporting fossil fuels?

STANISLAW: This is almost...it’s not the same degree, but it’s almost like 1973, ’74, when the Arab oil embargo took place. It’s a warning shot that, geez, geopolitics does play significantly in how global oil and natural gas markets work. So that says to most countries, the US included, how can we become more energy secure? What could happen as a result of this, in Europe in particular, is there are known deposits of shale gas in Germany and Poland, Ukraine, Romania, and other parts and even France maybe that will get the Europeans to revise their policy and the approach to allowing those developments to take place. And if the shale gas is there to the degree that some people think, that is a real change for the Russians in the gas market.

CURWOOD: So Russia's power move here may have put them in a tough business position going years ahead, huh?

STANISLAW: Yes, indeed. That's why I refer to the Arab oil embargo in 1973, ’74. What that Arab oil embargo did is unleashed this concern about the security of energy. As a result of that, the North Sea was propelled into dominance. Companies flocked to the North Sea that wouldn’t have done so beforehand, and that released how many millions and millions of barrels of production still in there. And it opened up areas that it wouldn’t have opened up otherwise where there are more benign governments who had resources but didn’t need to develop them because there was cheap middle eastern oil. That changed the attitudes of many many governments on the supply side, and that was underlying on the demand side too. Policies were put in place to use less of the stuff. In this case you’re going to find more policies to put in place to use less energy and less natural gas.

CURWOOD: It's ironic isn't it, Joe, that the Great Game...the contest for the oil resources in some respects began in Crimea back in the mid 1800s, and now we have a new version of the Great Game.

STANISLAW: Steve, you're absolutely right. The Great Game was Crimea and it was with the, what we all call now the east and the west, Cold War terms, Russia and Great Britain, and we’re right back there again. All things come full circle. This time a little thing called natural gas, and the changing driving force in the Great Game will be technology, and that's why I referred to earlier the issue of maybe the Europeans will change their attitude about this shale gas extraction. That's revolutionized the United States, which was about to become a major major importer of oil, now potentially exporter of oil, and a significant exporter of natural gas.

CURWOOD: Joe, to what extent does Russia depend on US technology to extract its oil and gas resources at this point?

STANISLAW: This is really an underlying critically important issue, Steve. What allowed Russia to reverse their declining oil production in the 1990s was using both software and hardware from US companies, both service and oil gas companies that they did not have access to before the fall of the Iron Curtain, and it changed how companies worked and operate in Russia to allow them to begin to increase what was a declining production curve. Don’t forget by the time the Iron Curtain fell, Russian production, which is well over 12 million barrels a day, had fallen to five or six. But when the wall fell and things began to settle down after four or five years, companies reorganized themselves, brought in western technology and revitalized the production curve in Russian. Going forward that's exactly the same - they need that technology. Equally, they’re sitting on mountains and mountains of shale gas which they haven’t even started to touch yet. And the same with some hard to extract oils that requires a lot of technologies that are called western technologies which they need to access those flow rates. So the way the world works, this is one big interdependent world. Their access to our technology is as critical to their energy industry as the access to the market they want to sell their energy to.

CURWOOD: So therein lies a critical sanction the US could impose, perhaps.

STANISLAW: It is, without question, but also it’s a driving force that goes back to just after World War II where if goods can't cross borders, armies will. Let’s let the goods flow, and armies won’t cross borders.

CURWOOD: So if the Russian invasion of the Ukraine escalates in the days, months, ahead, how might the prices of oil and natural gas be affected by that?

STANISLAW: Well, so far if you look at the markets, the biggest factor affecting natural gas prices in United States has been the weather where you're sitting in Boston and the whole northeast, the whole east of the United States. In Europe, the price of natural gas has gone up significantly because of fears of potential disruption of supplies for that Ukrainian pipeline. On the oil side, the oil really isn’t an issue here in the same way natural gas is. Oil, I think, moved up maybe a dollar. If you live in the oil market as I have over the past 30 years, a swing of 1 percent is...that's not even a sneeze. The energy markets, both the gas and oil markets, are used to this cyclical up-down behavior. That’s the part of the business, because the energy markets are very political markets and the market actors are used to it.

CURWOOD: Joe Stanislaw is the founder of the JA Stanislaw Group. Thanks so much for taking this time today, Joe.

STANISLAW: Steve, it’s been a pleasure speaking with you. Thank you for having me.

 

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Joe Stanislaw

 

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