Context is Everything.
Before we jump to conclusions about who is to blame for the Nordstream explosions, let's consider the context.
Since the explosions on the Nordstream pipeline, pundits and politicians have cranked out all sorts of sensational theories ranging from a CIA plot to Putin’s henchmen sabotaging a major natural gas artery into Europe. On a major network, a pundit with a national following opined that the destruction of the Nordstream pipeline took away Putin’s last bargaining chip, backing him dangerously into a corner. According to some, this might be the opening shots of WW3.
Here at Blue Cow Reports, there is little possibly of inventing a new theory that someone hasn’t already concocted. Instead, this letter intends to provide some context to the energy situation in Europe and the role the explosion of the Nordstream pipeline plays.
For decades, European central planners have encouraged and subsidized wind and solar while simultaneously shutting down nuclear, banning natural gas fracking, and closing coal fired plants. And while Europe has spent hundreds of billions over the decades to achieve this green dream, the reality is that Europe is still incredibly dependent on fossil fuel. The problem is simple: wind and solar only work sometimes and they are unreliable. Europe needs almost an entire grid on standby for when the sun doesn’t shine and when the wind doesn’t blow. For Europe, a large portion of that ‘backup’ grid is natural gas. In addition, coal and oil still play a massive role in Europe’s energy mix.
As you can see in the graph below, natural gas is the second largest source of Europe’s energy mix. The graph based on 2022 BP statistical review:
While fossil fuels are the lion’s share of the energy mix (despite decades of a ‘green transition’), what may be more important is who supplies Europe with natural gas. One of the largest suppliers Gazprom.
Unfortunately for Europe, Gazprom (the Russian government owned gas giant) has a long history of cutting gas flows to Europe. In 2009, Gazprom completely shut off gas flows through Ukraine during a financial dispute with Ukraine. At that time, Ukraine’s pipelines delivered 80% of Europe’s Russian gas imports. So, this wasn’t just shutting off the gas to Ukraine, it was shutting off the gas to a large portion of Europe. To add injury to insult, Gazprom shut off the gas in January.
This wasn’t the first or the last time that Gazprom threatened to or reduced flows to Europe during disputes with Ukraine. Russian has reduced or threatened gas flows in the 1990s, the 2009 crisis, 2013-2014, and again in 2015.
But it seems as if the lessons of history are forgotten as quickly as ice melts in summer. Over the past 10 years, Europe has become significantly more dependent on imports for natural gas. In 2010, Europe produced 35% of its natural gas. By 2020, Europe’s producing had dropped to a mere 20%. Here is a nice chart from the EIA depicting this decline:
But…. The US will ride in and save the day. Right? We’re shipping LNG to Europe so it’ll all be ok?
Before we do, lets cover a few basics on how natural gas is transported. Oil is relatively easy to transport. You can put it in a simple barrel then you’re good to go. Natural gas is not a liquid in its natural form. It is a gas that will quickly escape any change it gets.
Natural gas is often transported via pipeline. With pipelines, a turbine compressing the gas and forcing it through the pipeline. While the Nordstream pipeline system is important for Europe, it is not the only route for Russia to send gas to Europe. With the Nordstream pipeline offline, two major Russian Routes remain: one through Ukraine and the other through Belarus.
However, transporting natural gas across oceans becomes tricky. Gas comes in a low dense form at normal temperature. Perhaps the most practical way to transport it by ship it to chill the gas to negative 260 degrees F. For reference, the coldest temperature recorded on land was in 1983 at the Vostok Antarctic station. They recorded a bone chilling 128.6 degrees F.
At that insanely cold negative 260 degrees F, the gas becomes liquid and it shrinks down to 1/600th of its initial volume. At that point, it’s placed onto specialized ships that constantly keep the gas extremely cold during the transoceanic voyage. When the ships arrive at port, they can only offload the gas at specialized facilities that can handle such cold natural gas.
This is no small feat of engineering. One major facility requires $10s of billions in investment in the liquification process, not to mention the ships, and the re-gasification plant. And it typically takes years to design, acquire, and assemble the vast array of equipment necessary.
And this brings us to Europe’s ability to import LNG.
As you can see, the peak LNG imports are a few BCF/d higher than they were in 2020. Yes, Europe has run the LNG plants more aggressively during the off-season time to build up storage. But this highlights a key point: It is very difficult to quickly expand LNG export, shipping, and import capacity.
In addition, Europe’s natural gas market is very fragmented. A great example is the different in LNG import utilization by region. The increased LNG imports are stretching capacity in Northwestern Europe to the max. Running LNG import plants at such high capacity runs a risk of breakdowns or catastrophic issues since it means the LNG plants cannot shut down for regular maintenance.
As you can see in the chart, Southern Europe has spare LNG capacity. However, it lacks the pipeline capacity to ship gas to the rest of Europe. The UK’s problem is it doesn’t have a place to put the gas once it imports it. For example, in 2021, the UK only had enough storage for 4 or 5 winter days worth of natural gas.
.
In the wake of the Russian Invasion of Ukraine, the West announced rounds of sanctions against Russia. And with the sanctions and turmoil, gas flows from Russia to Europe via pipeline have fallen drastically.
Yet Gazprom recently announced their operating results for the first half of 2022. To the surprise of anyone who thought that Europe held the cards in the energy fight, Gazprom’s profits jumped by a whopping 250% compared to the first half of 2021. The reality is that Russia can profit nicely on reduced flows and higher prices.
In an attempt to ‘combat’ Russian profits, US Treasury Secretary Janet Yellen said in June of 2022 that “A price cap on Russian oil is one of our most powerful tools to address the pain that Americans and families across the world are feeling at the gas pump and the grocery store right now. A limit on the price of Russian oil will deny Putin revenue his war machine needs.”
But that begs the question, if we need Russian oil, why are we trying to force them to sell it to us at below market prices? Or, if we don’t need Russian oil, then why are we still buying it? The start reality is that Russian supplies 10% of the global oil supply. Russian is under no obligation to abide by a G7’s price cap. In addition, oil is much easier to transport via ship than LNG and China and India seem all too happy to buy up Russian oil, regardless of the G7’s goals.
While the G7 talked of a price cap over the summer, Gazprom claimed ‘maintenance’ problems with the Nordstream pipeline and significantly reduced gas flows through the pipeline to Europe. Gazprom said it was a turbine issue and claimed that sanctions were interfering with its ability to fix the turbine.
On Friday September 2, 2022, the G7 finance leaders (France, Germany, Italy, Japan, UK, Canada and the US) announced a much-anticipated plan to cap the price of Russian oil. Perhaps by coincidence, the day after the proposed price cap was announced, Gazprom decided to take the Nordstream offline ‘indefinitely.’ Again, Russia claimed it had to do with a turbine leaking oil and it claimed the pipeline no longer was safe to operate. Putin said that if the West lifted its sanctions, the pipeline could be fixed and gas flows resumed.
And then the pipeline exploded.
While it is too early to tell who is responsible for the explosion, it is important to understand the role that the Nordstream pipeline provided to Europe and Europe’s continued dependence on imported fossil fuels. In addition, Gazprom’s history of shutting off gas during disputes is nothing new. Unfortunately, it seems as if Europe did not pay attention to reliability when it spent years building out its ‘green transition.’ Now, perhaps the West will finally learn that relying on unreliable sources of energy is a recipe for disaster.
Thanks for reading!
Sources and Additional Readings:
https://www.seattletimes.com/business/crippling-energy-bills-force-europes-factories-to-go-dark/
http://naturalgassolution.org/natural-gas-pipelines-work/
https://www.eia.gov/energyexplained/natural-gas/liquefied-natural-gas.php
https://www.theguardian.com/business/2021/sep/24/how-uk-energy-policies-have-left-britain-exposed-to-winter-gas-price-hikes
https://euroweeklynews.com/2022/09/27/russian-energy-company-gazprom-reveals-profits-of-first-half-of-2022/
https://www.cnbc.com/2022/07/14/yellen-says-price-cap-on-russian-oil-can-help-address-inflation.html
https://www.reuters.com/business/energy/eu-countries-odds-over-possible-gas-price-cap-2022-09-28/
https://www.eia.gov/todayinenergy/detail.php?id=51258.
https://www.naturalgasworld.com/nord-stream-taken-offline-for-annual-maintenance-99494
https://www.cnn.com/2022/09/02/energy/nord-stream-1-pipeline-turned-off/index.html
https://watt-logic.com/2022/09/16/nord-stream-1-closure/
https://bisoninterests.com/content/f/gas-to-oil-switching-%E2%80%93-winter-is-coming