Russian natural gas supply to EU crushed by Western sanctions

Everyone, Peter Zion here coming to you from Colorado. And the news today is a Gazprom has announced its full year output levels. Gazprom 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 it’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 with the pipes, or the pumps, or the legalities or whatever it happens to be, the whole thing stops at it can’t easily be redirected. And in the case of the Russian stuff that goes to Europe, almost all of it comes from an area called Uruguay, which has been in production now for half century, goes down a couple 1000 miles of pipes through Ukraine and Belarus, into Poland, Germany, Slovakia, Hungary and the rest. And since this can’t be redirected when the European stops 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 Urals that goes south into China. There are a couple of liquefied natural gas facilities, one on Sakhalin Island primarily which goes to Japan, and one of the Yamal 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, is that those other facilities, the y’all Yamal, LNG, Sakhalin LNG, and it’s called Kawika, which is a field in the general vicinity of Irkutsk, out near Lake Baikal, 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 Sokolove, as was Exxon Mobil. And most of those companies are now gone, the Japanese are still involved in cycling and but ExxonMobil and BP are have just cut their losses and left completely. And the Russians do not have the technical skills necessary 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 birthrate collapsed in a similar timeframe. 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 urengoy, 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 urengoy, 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 solid, because you need a lot of water, and urengoy is 1000 miles from anything that matters. So that 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 degree Czech Republic had 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 lots and lots of 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 cyclin LNG because the Japanese are involved there. And that’s 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, Persian Gulf in the United States. This has put a lot of price pressure on everyone else who used to get natural gas from this locations. But to this point, I gotta hand it to the Europeans. They have put together a sanctions regime that at least in part, is doing exactly what they hoped have been Russian exports cutting Russian income without unduly shocking their own system. I honestly didn’t think they could pull this off but so far, so good.