Saturday, June 14, 2008

Gazprom in Alaska?

Last week Gazprom the Russian state Oil and Gas monopoly announced interest in "helping" develop an Alaska to Canada to U.S. pipeline. According to the International Herald Tribune:

"Gazprom has made a proposal to BP PLC and ConocoPhillips, which in April submitted a bid to build a multibillion-dollar pipeline that would carry natural gas from Alaska's North Slope to the lower 48 U.S. states, Gazprom director Alexei Miller said.

"Gazprom has unique experience, knowledge and modern technology and is the most advanced company in the world in the realm of gas transport in trunk pipelines," Miller told an international business forum in St. Petersburg, Russia. "So participation in such a large-scale project as the construction of a pipeline from Alaska is interesting for us."

He did not say whether there had been a response from BP and ConocoPhillips. The BP-ConocoPhillips proposal, dubbed Denali, competes with a similar pipeline plan put forward by TransCanada Corp., which was given the nod by Alaska's state government in January.

State-controlled Gazprom has been aggressively increasing its presence in Europe, drawing concerns of over-reliance on Russia for natural gas."

This is even more interesting given Russia's recent decline in petroleum production as reported by the International Energy Agency, a previously rather conservative group when it came to the subject of Peak Oil, as reported in the Globe and Mail:

"But even as Mr. Miller waxed lyrical on Tuesday about the scramble for resources, equally alarming data about oil supplies was tumbling out of the offices of the International Energy Agency in Paris.

The IEA has been trimming its forecast of non-OPEC oil supply growth and it now reckons that the great might of the world's multinational companies, including Russia and China, will barely produce any extra oil this year - just 770,000 more barrels per day.

This is even less than the IEA's prediction for growth in demand, which has fallen below 1 per cent thanks to shrinking demand for oil in the United States and Europe. The weak supply figures make a mockery of the aggressive output ambitions of the West's leading oil companies - ambitions that are always frustrated by hurricanes, war, despots and technical delays.

But the key to Gazprom's warning is Russia, and its failure to continue raising its oil output. The steady rise in Russian oil output over the last decade has almost single-handedly fed the ravenous growth in demand for crude in China. Without Russia, China's economic boom would probably have stuttered to a halt several years ago. But the output growth rate is now fading fast and voices have been raised within the Russian oil fraternity that 10 million barrels per day may be as far as it can go. Russian oil production has declined for five months in a row to less than 9.5 million b/d. The IEA is still reckoning 10 million b/d for the year, an optimistic forecast given the turmoil at one of the country's biggest producers, TNK-BP, where a power struggle is being waged between BP, several oligarchs and, again, Gazprom.

Western investors are making ever more frantic warnings about Russia. Rex Tillerson, Exxon's chief, said recently that there was little confidence in the rule of law in Russia, and Tony Hayward, BP's chief, gave warning that the world's energy problems are political, not geological.

He is partly right and he speaks from recent experience. The oligarchs with whom BP shares ownership of its Russian affiliate have suborned Russia's regulatory and judicial system to gain the upper hand in a dirty battle for control of TNK-BP. Gazprom is waiting in the wings to see which side emerges triumphant. Either way, the state will take a large slug of the asset and in the meantime TNK-BP's oil output languishes.

Still, BP's plight would not be so great if it had many more irons in the fire. Oil output is not growing anywhere much. Three quarters of OPEC's meagre spare capacity of two million b/d is in the hands of Saudi Arabia. If Russia were found to be pumping at the limit of its potential - whether for geological, technical or political reasons - where should we turn?

That is scary stuff. Back in Deauville Mr. Miller beats his drums, but the bravado about $250 per barrel conceals a great deal of nervousness. It's great to be a player on a winning streak with a big pile of chips. But when the casino manager breaks out in a sweat as he watches the game over your shoulder, you might get a bit scared too."

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