Europe Urged to Re-evaluate Costs of Nord Stream

Upstream Online reports of Russian threat to scrap the controversial Nord Stream pipeline project, which would supply Russian gas to Germany via the Baltic Sea, bypassing the Baltic states:

Russia may ditch its Baltic Sea gas pipeline project, Nord Stream, and build gas liquefaction plants instead if Europe keeps delaying the pipeline, Russian Prime Minister Vladimir Putin said today.

“Europe must decide whether it needs this pipeline or not,” Putin told Finland’s Prime Minister, Matti Vanhanen, at a meeting in Moscow.

“If you don’t we will build liquefaction plants and send gas to world markets, including to European markets.

“But it will be simply more expensive for you. You are free to make the calculations yourself,” he added.

Putin’s advice is sound, and I imagine that several European countries are doing just that.  By purchasing Russian LNG on the open market, European consumers may well find themselves paying a financial premium, only in doing so they would be free from the risk of Russia meddling with the supply.  What’s more, as the Arabs found with oil, it would be impossible to isolate any one country were LNG to be sold to the worldwide markets, meaning that the Baltic states – whose approval is required for Nord Stream to be realised – would find themselves with as much access to Russian gas as anyone else.  It is hard to think of a reason why most European countries would not favour this option.

Unsurprisingly Germany, having invested serious political capital in the project, is defending Nord Stream:

“The German government sees the Nord Stream pipeline as a central project to the future assurance of European and German gas provision,” Germany Economy Ministry said according to Reuters.

To which the Baltic states and Poland might be entitled to respond with the question of “Which European states are you referring to?”  Germany is backing Nord Stream over LNG bought on the open market because it will be cheaper for Germans.  That this will likely deny other European states – supposedly in a political union with Germany – access to Russian gas seems to be a concern subordinate to Germany sourcing its own supply of cheap gas, as does any political risk Nord Stream may present in the form of Russia switching off the gas when it suits.

Up until now, the choice has always been presented as between Europe buying Russian gas through a series of pipelines or not buying Russian gas at all.  Now with a gas OPEC between Russia, Qatar, and Iran looking like a real possibility, Russia has introduced the option (which would make a gas cartel more feasible) of selling its gas as LNG on the open market.  European countries will need no urging from Putin to carry out calculations as to the benefits this arrangement would bring, and it is unlikely that many will be convinced that Germany’s backing of the pipeline is motivated by anything other than self interest at the expense of others.

In a few years time we may look back at Putin’s remarks as being the moment when Nord Stream was killed off before it ever really got going.

Have the Supermajors’ Russian Prospects Improved?

Following on from the previous post, it goes without saying that Russia is going to find it much harder to obtain financial backing for its oil and gas development projects now that the western financial institutions upon which they previously relied are themselves in such trouble.  The money promised by the government to major oil companies facing debt refinancing problems has started to flow, whilst Gazprom remains confident that its development plans will go ahead unchanged despite the global financial crisis.

So where might the cash needed to continue Russia’s oil and gas development come from?  Looking to the Middle East might provide us with an answer, something I mentioned once before in this post:

Most of the national oil companies in the Middle East have enormous reserves and massive production figures, but are loaded down with enormous debt from the days when oil was $10 per barrel, not to mention that these companies have elevated expenses due to them generally being inefficient, overstaffed, and used as a piggy-bank by the sitting government. It is not uncommon for the giant national oil companies of the Gulf States to partner up with a cash-rich western supermajor in order to provide the investment needed to develop a new project or upgrade a field.

Having spent the past few years reasserting their authority over the foreign oil companies operating inside Russia, might the Russian government now be tempted to turn to the cash-rich supermajors to stump up the funds necessary to continue with their development plans?  Such a move might raise questions amongst a population who has been continually told that foreign oil companies are neither welcome nor needed in Russia, and western oil companies – still bruised from wrestling with the Kremlin over control of existing projects – would need more than promises and verbal guarantees to once again pour billions into Russia’s oilfield developments.

But the fact remains that somebody needs to fund Russia’s development plans, and western oil companies are not only well suited to do this, but also – despite all – eager to gain greater access to Russia’s gigantic reserves.  Might we see the Kremlin once again warm to BP, Shell, and Exxon as the financial crisis takes hold?