In Chess, Obama More Than Meets His Match; Russia Will Export MORE Natural Gas Each Year Than The US Has In Storage -- This Is Not Trivial; This Is A Game Changer; The Big Story Here: While The US Dithers, The Rest Of The World Keeps Moving On

Updates

May 23, 2016: Russia overtakes Saudi Arabia as China's leading supplier of crude oil -- EIA. 

November 16, 2015: look at the previous entry, dated July 1, 2015, just a few months ago. Now, the tea leaves suggest it's going to be a war of attrition between Russia and Saudi Arabia. 

July 1, 2015: is Saudi Arabia moving closer to Russia, now that the US has said it no longer will provide security for Saudi Arabia?

June 25, 2015: Russia becomes #1 supplier of crude oil to China; China falls to third place, below Angola. 

December 31, 2014: Platts -- China's November Russian crude imports hit record high

October 2, 2014: "Putin on his game face": shrugging off sanctions. I think he knows the EU, especially Germany and Italy have more to lose than Russia with the sanctions. 

June 16, 2014: Russia halts natural gas supplies to the Ukraine.

May 29, 2014: Ukraine says "nyet" to Russian proposal that the country actually pay its outstanding bills. 

May 26, 2014: isn't this interesting? Ukraine, which we were all told was broke (financially), has found make up all the back-payments it owes for Russian natural gas. AP is reporting:

A proposed solution to a dispute over Ukrainian natural gas debts to Moscow would see Ukraine's gas company pay $2 billion to Russia's Gazprom this week and trigger talks on the price Kiev should pay for future deliveries as it tries to avert a supply cutoff ...

...  "we are not done" but said he is optimistic of an agreement.

The proposal calls for Ukraine's Naftogaz to make an initial $2 billion payment to Gazprom on Thursday to settle part of Kiev's outstanding bills for gas delivered between November and March.

It looks like this chess game is all but over.

May 24, 2014: Russia may speed up the completion of that landmark Russia-Chinese natural gas pipeline. Reuters is reporting:

Russia's President Vladimir Putin said on Saturday a route to supply gas to China via western Siberia may be implemented faster than the eastern route.

"The second project, if Chinese partners are positive towards it, may be implemented even faster than the eastern one," Putin said on Saturday.

State-run Gazprom has yet to build a pipeline to carry 38 billion cubic meters of gas annually to China from 2018 through East Siberia. Russia and China have agreed a $25 billion prepayment under a supply deal.

Gazprom had planned to supply a further 30 billion cubic meters of gas per year to China through the western route. Putin said on Saturday the possible amount of gas for this route has yet to be decided.

May 20, 2014: priced at $9.50 to $10.00 per mcft. Other data points:

Russia is set to close a natural gas supply deal with China that Russian Prime Minister Dmitry Medvedev says will be 30 years, and valued around $400 billion. 

The pipeline will cost $22 billion and carry 1.34 trillion cubic feet of natural gas per year. If all goes well, Russia will begin supplying China with gas in 2019. It will carry 25 percent of China's current gas consumption, though by 2019, the proportion could be closer to 10 percent. 

As for the cost that has caused all of the negotiation trouble, Russia will charge China $335 per thousand cubic meters, or $9.50 to $10 per thousand cubic feet. Gazprom charges Europe an average of $380.50 per thousand cubic meters, so China is getting a good deal. Right now, China pays Turkmenistan $10 per thousand cubic feet. 

May 19, 2014: John Kemp, over at Rigzone, has a very long essay on the Russian-Chinese natural gas pipeline deal (I forgot to capture the Rigzone link; this link to Economic Times is the very same story):

Most evaluations of the bilateral relationship begin by reciting the historical border disputes, rift between Mao Zedong and Nikita Khrushchev, opening to China by Richard Nixon, and the perennial problem of reaching an agreement on gas pricing. But these are all essentially backward looking and ignore the growing community of interests between the two countries.

The case for a closer bilateral relationship on energy, trade, security and diplomatic issues is compelling. In the energy sphere, the two countries are an almost perfect match: the world's largest net energy exporter and its second-largest net energy importer (2011) with a long land border.

China is already Russia's largest single trading partner, with bilateral trade flows of $90 billion in 2013, and the two neighbours aim to double the volume to $200 billion by the end of the decade, according to Xinhua, China's official news agency.

The Obama administration's strategic pivot towards Asia and shifts in the energy market are pushing China and Russia closer together as both react to fears of encirclement and energy security.

Even without the crisis over Ukraine, Russia has been depending too heavily on oil and gas exports to Europe, leaving it vulnerable to pricing disputes with customers, pipeline disputes with transit countries, falling European demand and shifts in European energy policy.

Europe accounted for 80 percent of Russian oil exports in 2012, while just 18 percent went to Asia, according to the U.S. Energy Information Administration. Most of Russia's gas exports went to European countries in 2012, with just 19 percent delivered to Turkey. 

Relying so heavily on customers in Europe makes no sense strategically or commercially. Just as consumers need a diverse source of suppliers, producers need the security that comes from having multiple customers. Russia continues to export almost all of its oil and gas from east to west through pipelines built in the 1960s and 1970s at the height of the Cold War, even though the predominant flow of energy in the world economy is now from west to east as a result of the industrialisation of Asia and the shale revolution in North America.

Later, 12:52 pm central time:  How big was the Russian-Chinese natural gas deal? Let's look. A big "thank you" to Don who provided the research links. First, the deal itself:

Experts expect the agreement to include a 30-year delivery contract between Gazprom and CNPC for 38 billion cubic meters of natural gas per year, with the potential to expand the annual capacity to 61 billion cubic meters. If the deal can be inked next week, construction for the pipeline will likely begin by the end of the year, and with operations beginning in 2018 [before the Keystone XL is even started].

Now, from the our own EIA, weekly natural gas storage report:

Of the 57 states of the United States of Obama, the "lower 48 states" have this amount of working gas in underground storage: 1,160 billion cubic feet.

The conversion factor of billion cubic feet to billion cubic meters is 0.0283168. So, 1,160 billion cubic feet of US natural gas is equal to 32.847 billion cubic meters.

The Russians promise to deliver 38 billion cubic meters each year with potential to expand to 61 billion cubic meters. The first number, 38, is 16% more (38 = 32.847 x 1.16) than the total amount the US has in storage in the "lower 48 states." Russia has the potential to export twice as much natural gas as the US has in storage in the lower 48 states. (There are different ways to calculate the difference, but suffice it to say, Russia will export more natural gas to China than the US has in reserve. Every year. For 30 years. By the way, this tells me that the DOE cannot, in any meaningful way, cut back on fracking; we do so at the risk of "hanging ourselves" economically.)

By the way, the 1,160 billion cubic feet that the US has in storage is below the 5-year historical range, according to the EIA. 

Yes, this Russian-Chinese agreement was huge. I think Putin planned to do it all along; he was just waiting for the right moment.  

Sanctions = right moment.

Original Post

Heard on the street: Ukraine crisis is pushing Russia closer to striking a long-awaited deal to sell natural gas to China which now has leverage on price.

This story is the big story of the day, perhaps the week, and long-term it may represent one of the biggest stories of the century, the energy merger between Russia and China. Notwithstanding all the global warming talk, this merger is a bigger story than global warming, and few Americans will even notice. Fewer will care.

It is ironic then that R. James Woolsey's op-ed piece on the same subject is already DOA. I scanned the op-ed but his proposal to bring the price of crude oil down to $60 a barrel is ludicrous. He starts out with one data point: Russia needs $117 per barrel of oil to balance its budget. And from there, connecting a gazillion dots, no doubt, he somehow gets to $60/barrel as the right price of crude. To "destroy" Russia, or at least Putin.  A quick scan of the article does not mention Saudi Arabia. The princes need $100 oil to "be happy." And, even Canada, some folks say, requires $70 oil for its western Canadian heavy oil.

The bigger story, of course, is that the Crimean was part of a huge chess game.

The chess game began with Putin's brilliant handling of the Russian winter Olympics, an opening "knight" move to "F3." The Crimean was a pawn. Eastern Ukraine was perhaps another knight. Latvia is a pawn en passant. Losing Germany as an ally on sanctions, that's worth at least a loss of a knight for the US. The Chinese-Russian natural gas pipeline was at least a loss of a rook for the United States, possibly even worth the queen. The loss of Russian rocket engines was a bishop loss for Russia, but that was more than made up for by the Chinese-Russian hegemony, worthy of castling early.

So, as I see it right now: Russian has lost a couple of pawns and a bishop, and has two knights on the attack, in the center of the board, and has already castled. The US has lost several pawns, a knight, and a rook, or possibly the queen.