Gazprom and the G8

As the G8 finance ministers have been discussing the state-of-the-world, prior to the meeting of the principals in mid-July, our friends at Gazprom seem to be adding a little more sand to the gears of international diplomacy. The first problem that arises is, as has been noted by several of us over the past year, that Gazprom has been acquiring controlling interests in the distribution networks of an increasing number of countries. It has recently negotiated to take a share in the second gas pipeline to run from mainland Europe to the UK, and is trying to acquire Centrica, the British gas supply company. There is some resistance from the British Government to this move, though that is not universally supported in the UK. Now the second shoe is hanging, rather openly, in the air.
It relates to the Energy Charter.
The treaty governs energy investment and transit among 51 signatory nations, including Russia, which signed the treaty in 1994 but has yet to ratify it. The treaty would require Russia to allow other Energy Charter countries access to unused pipeline capacity, which Gazprom fiercely opposes. Such a step would effectively break up Gazprom's monopoly on gas exports to Europe.
Not only to Europe (there is legislation just introduced that would give Gazprom a monopoly on gas exports from Russia) but given the network control that Gazprom has achieved, potentially Gazprom now has the assets to control gas distribution throughout Europe. Further, without ratification of the Charter, Gazprom can deny the pipelines to others (such as for example Turkmenistan). As the French Minister Breton noted:
Breton stressed that Russia had signed off on the final communique, which stated "the importance of the principles of the Energy Charter, of diversification of energy markets and supply sources."

"If these principles are recognized, they need to be applied," Breton said.

"Unfortunately, we were unable to reach agreement with our Russian partners" about ratification, he said.

And, from the Times story,

The EU is concerned that Gazprom's monopoly position could make it difficult for Russia to meet Europe's growing energy needs. Marc Franco, head of the Commission's Moscow office, said: "Gazprom is underinvesting in production, but isn't letting anyone else export. It's bad for Russia, and it's not good for us."

Gazprom and its controlling shareholder, the Kremlin, refuse to consider opening up the export system to foreign companies. Dmitri Medvedev, the Deputy Prime Minister and chairman of Gazprom's board, said this week: "Gazprom is a unique company because of its importance to the Russian economy. It would be naive and foolish to destroy this system just to create opportunities for competitors."

There is that Monopoly theme again, out front and unabashed.

Interestingly, at the same time, BP are selling more of its Russian assets to a consortium that includes both Russian Rosneft and Chinese Sinopec. It is interesting to note that while

The potential deal involves the Udmurtneft part of TNK-BP, which produces 120,000 barrels a day of heavy crude and holds reserves of 1bn barrels but is in need of new investment.
that the article goes on to comment that
Udmurtneft is a producer of heavy oil and, while analysts speculate the price could reach $3bn-$4bn, this would be a high value for mature Russian assets far from export markets. Gazprom's Sibneft plus Hungary's MOL and India's ONGC are also in talks to buy the firm.

This is the same BP whose Chairman has, as has been discussed in earlier comments, recently forecast the return to $40 oil. Since the Russians have occasionally commented that they are not expecting their exports to increase very much, one is left wondering where the good Lord (Browne that is) expects it to come from - other, of course than from the planned developments that Chris Skrebowski and CERA have previously listed, and which appear to be less than likely to reach the production levels for such a forecast.

Speaking of our good friends at CERA (grin) I note that they are predicting that the global LNG market will double in the next few years.

"CERA's 2004 projection that the LNG industry would grow in the eight years to 2012 by the same amount as in the first 40 years of its history now looks, if anything, overly cautious," CERA's Senior Director for Global LNG Michael Stoppard said in the report, "Progress in the Face of Adversity."

"The industry will probably double in six or seven years relative to 2004," he added. More than 25 million metric tons of new liquefaction capacity has been commissioned since October, adding 18% to global capacity, according to Stoppard.

There is a concern with this, and it relates to:
CERA said global LNG supply capacity will rise 60% by 2012 or earlier, with almost half the construction occurring in one country and on a single site--Ras Laffan in Qatar.

The combined capacity of Qatari LNG investments focused just on the US is broadly equivalent to the proposed capacity of the Alaskan pipeline,

The concern, of course, is related to the condition of the North Field, which Dave caught in his recent excellent post on the moratorium over there. Interestingly, however, a gas to liquids (GTL) plant has just been inaugurated, with others planned.

And if I raise further evidence that mining companies and their governmental overseers are not totally insensitive to the environment, it should be noted that Syncrude has had to shut down it's new third stage operation because the "cat pee" smell was offensive to local inhabitants. The loss in production is cited at 2 million barrels of oil over the time taken for the projected repair. In addition the company is adding additional flue gas desulfurization (FGD) to their existing plant to further lower sulfur dioxide emissions.

Lord browne says $40 even $25 5 -10 yrs from now. Just think this is probably the best opertunity you will have in your life time to buy a hummer a these prices.  In 5-10 yrs you will be glad you did.
As they say, actions speak louder than words.  What I find interesting is the continuing pattern of Western oil companies selling their Russian reserves.  First Marathon, now BP. Political concerns?  Concerns about decline rates in very mature oil fields?  Probably both.

Re:  price projections.  I suspect that some major oil companies are just trying to ward off punitive taxation.

Two News Stories

I thought that these two stories were interesting.  

Mexico, as Khebab has pointed out, is going to have problems with their export capacity.  Today, they are producing about 3.4 mbpd, consuming 1.7 mbpd, and exporting 1.7 mbpd.   Cantarell, producing about 2 mbpd, accounts for more than half of the production.  The 825' oil column in Cantarell is thinning at the rate of about 300' per year, which suggests annual decline rates of as much as 40% per year. But even if we just go with the more optimistic production number in the article below, of about 2.8 mbpd in three years, and assume an increase in consumption to about 2 mbpd, the "optimistic" scenario indicates about a 50% decline in net exports within three years.  The more pessimistic scenario would suggest something in excess of a 75% decline in net exports.

I wonder if the Western oil companies are concerned about Cantarell type declines rates in some of the older Russian oil fields.   According to Lord Browne, Russia offers "good production potential," and he has some Russian production for sale if you want to buy some.  In regard to the "better technology" mantra, the North Sea peaked at the same HL point as the Lower 48, 29 years after the Lower 48 peaked.
Monday, June 12, 2006 · Last updated 10:13 a.m. PT

Mexico stands at a crossroads on energy



With Mexico's domestic consumption approaching 1.7 million barrels, and Lopez Obrador's plan to use more of Mexico's crude to supply domestic refineries and petrochemical plants, that would leave a lot less for export.

Calderon espouses more focused subsidies, like helping poor families or communities with their energy bills.

"Whoever wins the election will probably put a radical imprint on energy policy," said Mexico City-based industry analyst David Shields. "This election is about ideology. You're voting for someone who's way on the left, or someone who's way on the right."

Lopez Obrador criticizes Fox's administration, saying "the only thing that matters to them is selling more and more crude to foreigners, neglecting exploration and new reserves and above all, abandoning refining and petrochemicals."

One thing that's clear: Business as usual isn't an option anymore.

Shields predicts Mexican oil production could fall from 3.35 million barrels per day to as little as 2.8 million barrels per day within two or three years, if nothing is done.

"The current organization and course of the oil industry in Mexico are unsustainable," George Baker, an industry analyst with, wrote in a research report.
BP's Browne Sees Cheap Oil Again Staff


BP's boss acknowledged that oil prices were likely to stay at that level in the short term, but he foresaw oil falling as low as $25 in the long term as new sources of supply come into production.

Oil companies were finding large new deposits in the Caspian Sea, he noted, while Russia and western Africa offered good production potential. Oil companies were also getting more efficient at extracting from their reserves, he said.

On TNK/BP and Marathon selling.  I see two very different motivations here.  Marathon because they seem to have a Russia policy that lasts at least two years before going through 180 degrees.  They'll be getting dizy soon.

TNK/BP are selling Udmurtneft because they are old mature fields and per chance it might help them get a deal on Kovytka.  Remember when negotiating in Russia it is wise to make links to previously unconnected deals.

I am not sure that the political risk has changed since either of these parties did their deals.  It is harder to do business in Russia today than it was 3 years ago - but that is not political risk it is greater control over what was previously uncontrolled.  The pendulum has swung too far in favour of control - as markets do....

At a conservative 5% inflation rate that $25 will only be $15 in ten years. Buy two Hummers.
Excellent post, HO. Your's an Dave's posts have re-ignited some questions I've had.

When we talk about global oil production every month, or 'total liquids,' we usually use a figure of 85 million barrels per day. But that 85 is actually composed of four different things. About 74 are oil, 1 is 'Refinery Processing Gain,' 2 are 'Other Liquids,' and 8 are NGPL's or Natural Gas Plant Liquids - sometimes referred to as NGL's.

I'd like to know what exactly all these things are. Way before I ever become an expert in the different EROEI's for different types of ethanol. Maybe someone can help me out.

Here I give you a breakdown of NGL's. Qatar only places tenth.

Are NGL's part of this whole thing, or something different?


Natural gas liquids are the liquids that, combined with methane, form unprocessed natural gas. These liquids include ethane, propane, butane, isobutane and natural gasoline (sometimes called condensate). These liquids are used as petrochemical feedstocks, home heating fuels, refinery blending, and can be injected as solvents to enhance heavy oil production.
Right. But when are they liquid, when are they not? Can they flow through the same pipes? Do they? Do they travel together?

But the most important question is - why are they considered OIL? Leaves burn. We don't call leaves oil. Corn makes gasoline(or basically the same thing) - we don't call corn "crude." Why do we call NGL's "oil" ?

I've asked these questions before. It may be a case for RR - although I hate to waste his time on such trivialities.

Oil CEO...

O.K., here we go with one of those great petroleum industry stories that sound too good to be true, but here is the way the official history gives it:

"In 1910 Dr. Walter O. Snelling, a chemist and explosives expert for the U.S. Bureau of Mines, was contacted to investigate vapors coming from a gasoline tank vent of a newly purchased Ford Model T. Dr. Snelling filled a glass jug with the gasoline from the Ford Model T and discovered on his way back to the lab that volatile vapors were forming in the jug, causing its cork to repeatedly pop out. He began experimenting with these vaporous gases to find methods to control and hold them. After dividing the gas into its liquid and gaseous components, he learned that propane was one component of the liquefied gas mixture. He soon learned that this propane component could be used for lighting, metal cutting and cooking."

1912     "Dr. Snelling and some colleagues established the American Gasol Co., the first commercial marketer of propane"

"1913     Dr. Snelling sold his propane patent (#1,056,845, issued Mar. 25, 1913) for $50,000 to Frank Phillips, the founder of Phillips Petroleum Company."

1925     "Propane sales reached 404,000 gallons -- nearly doubling sales in just three years."  (They had only recently began keeping statistics in 1922)

Now, back to your inquiry.  Notice the combined facts in the discovery of propane by Dr. Snelling, and the fact that that what would be called propane are "condensates".  Think of condensation on the side of a glass, that is, it is water that has vapored and then recondensed on a cooler surface.  Thus, it has all the properties of water, except that it is a bit less stable due to being so sensitive to tempeture, and has condensed.  All water will do it under correct circumstances.  Thus it is with petroleum condensate.  It is essentially relatively high quality (that is, clean in that it is closer to methane and not carbon heavy) but a bit prone to condensation.  This is why the "anes" propane, butane, will flash to vapor without some pressure above atmospheric applied to them.  

Two great sources are, for propane:
For Butane:

Compare to the most simple hydrocarbon, Methane:

So we could almost say that the Natural Gas Liquids  (which is a COMPLETELY DIFFERENT ITEM than LNG (or liquified natural gas) the NGL's or condensates, are a slightly dirty methane that condenses away from petroleum, both crude oil and natural gas.  This is what makes the NGL's all the more interesting, is that they can be seperated from both oil and gas production and processing.

You ask, "But the most important question is - why are they considered OIL?"

For both historical and technical reasons:
 First, history:  As we saw above, in 1910, it was in company with refined crude oil that  condensates were first discovered.  However, later it was discovered that they were also present in company with natural gas (the "NGL's ", or natural gas liquids).   But by then, historically, they  were already seen as an associated oil product and a marketable one at that.

The second is technical:  Whether associated with oil or gas (factually, with both) they are an accepted member of the hydrocarbon petroleum family  (gas and oil are associated in many cases, and so is condensate) and having already found a marketable opportunity for sale, the petroleum companies counted them as product  (a good deal different indeeed than your examples of corn or leaves!)

So there you have it, a brief history of the strange life of the condensates, or NGL's.  And yes, they travel through the same pipe, but due to the "pop corking" condensation of NGL's, they have to be fractioned off, handled and processed, and then placed back under pressure (not a lot, but some) to be easily handled, stored and marketed.  The future of NGL's, for so long ignored by most in the energy buying community, is bright, and interest is growing daily in ways we can use these to offset waste and inefficiency.  It may be an interesting time for the old pesky gas in a bottle first discovered in a model T tank!

Roger Conner  known to you as ThatsItImout

You ask, "But the most important question is - why are they considered OIL?"

Perhaps a more important question is why are they considered liquids. Both propane and butane are gases at room temperature and pressure. They don't condense under there conditions. To condense them they need to be cooled or pressurised. See the phase diagram here.

Propane condenses at -39°C at atmospheric pressure and at 913kPa (9.13 x atmospheric pressure) absolute at 25°C. Butane condenses at 0°C at atmospheric pressure and 221kPa (2.21 x atmospheric pressure) absolute at 25°C

Not only do Americans call a liguid fuel gas they also call a gaseous fuel a liquid.

They're liquids at pressure, and that's the way they have to be sold.  It makes a considerable difference whether you use a cylinder or a tank to hold the fuel, or what the pipeline looks like.

It's what we used to call the whole family of "anes", for realist says, "liquids include ethane, propane, butane, isobutane and natural gasoline (sometimes called condensate)."

have you ever wondered where they often go?....take a look:

Oh, by the way, was someone complaining about the looks of windmills?  Or about "carbon release"?  Or about windmills being"obstructive" to navigation?
You think they are worse than....

That's right folks, flared up the is an incredible testament to the marketplace gap and to people's outright ignorance.

And yet, if I were to say, "maybe we can use these NGL's for Propane for cars or boats in the summer, I will be ripped to shreds by the ever vigilant holier than though "never fossil fuels for THAT!!", instead of creating a balanced market, what do you think the oil and gas producers do with these gases once their storage tanks are full and the prices are givaway cheap in the off demand season?  They BURN IT AND GET IT OUT OF THE WAY.

How many people you think get benefit of those valuable BTU's and the carbon release from burning them when the go up the flare stack?

The truth is, we do not suffer from a problem with so called "peak" because we are "advanced" or technically sophisticated....we just flatter ourselves when we say that CRAP....we suffer because our technology is still so damm primitive in is sometimes even embarrassing to the primitives themselves!

Roger Conner  known to you as ThatsItImout

Refinery processing gains exist because the process of cracking hydrocarbons to create lighter products creates lighter products. That means that the volume of products that come out of a refinery is greater than the volume of crude that went in.

I expect that refinery processing gains have increased as refineries become more complex. In a simple refinery most of the light products that are produced are distilled. They essentially were in the crude before and are separated, not created or manufactured. In a complex refinery, heavier crude elements are broken down molecularly and converted into lighter - higher volume -products.

Most commonly this results from converting the low value fuel oil that results from distillation (and other processes) to either gasoline or diesel through cracking.

As to what this all means I am not sure. I do think that the volume increase is a legitimate contributor to vehicle fuel supply. A more complex refinery can produce more useable products from the same crude slate.


The feeling I'm getting is that some LNG proposals may not  take off but will be held in check by several factors;
  1. domestic NG demand in the producer country
  2. NIMBY opposition to LNG import terminals
  3. reluctance to build costly gas burning powerplants
  4. GTL conversion to easily sold liquid fuels

Examples seem to be on all continents.
From WSJ over the weekend... Two letters addressing last weeks article about Saudi production (the second letter is right on that statements in the article were clearly contradictory):

Saudi Arabia's Baffling Oil Policies
June 10, 2006; Page A13

Reading between the lines of "Saudis Cite Market Forces for Lower Crude Output" (June 5) offers some interesting insights into the current state of the oil market. The good news is that with Saudi Arabia cutting back production there is now clearly spare production capacity. This realization should help deflate fears, which is one of the causes of the high oil price. The bad news is that the Saudis may be happy with oil prices around $70 per barrel, compared with their long-gone desired range of $30 to $36 per barrel. If true, this would indeed be bad news for consumers because a widespread belief continues that the Saudis would like prices below the level at which renewable energy and other sources would affect their long-range production potential.

It is also interesting to note that while Iran has joined Saudi Arabia in keeping oil off the market, the Iranians are forced to store their oil in tankers, as opposed to simply cutting production, as the Saudis do. This is, of course, because of Iran's inability to replace lost production in the absence of spare production capacity and implies that the loss of this oil to the market is only temporary.

Less explainable is the support that is given to the Saudi thesis that the movement of their light crude oil and, in particular, heavy crude oil has been curtailed because they are having problems finding buyers. It is amazing that the Saudis won't discount by a dollar or so to move the oil when oil is earning as much as $70 per barrel, choosing instead to forgo the sale rather than "leave money on the table." It is fundamental that any grade of oil will be sold in the marketplace only if it is priced to meet the current market clearing price of its grade. The Saudi position is in stark contrast to that of the producers from the tar sands of Venezuela's Orinoco oil belt, or from Syncrude Canada Ltd., and others, who routinely produce and move large volumes of very heavy tar.

The Saudi inability to move crude oil in this market is almost as inexplicable as the inability of the current U.S. administration and International Energy Agency members to move the promised 60 million barrels from their strategic reserves to relieve high prices during the Katrina crisis. It appears that only about 22 million out of the planned 60 million barrels was actually released, and it is surprising that this issue hasn't been the subject of any media or congressional scrutiny. Perhaps the Congressional Budget Office should be asked to assess the effect of the additional supply of 38 million barrels on the then-market price, and the cost to consumers of the failure to release the oil.

Robert B. Almeida
Almeida Oil Co.
Mount Kisco, N.Y.

Statements by Ali Naimi, Saudi Arabia's oil minister, contradict the basic principle of supply vs. demand and call into question Saudi Arabia's forthrightness.

Mr. Naimi confirms that Saudi oil production has fallen recently, but he attributes the decline to an inability to find buyers. Surely market forces that keep oil at more than $70 per barrel indicate extremely strong demand. Mr. Naimi's position makes even less sense when he states that the lower demand is due, in part, to a shortage of refining capacity.

If the refineries are the bottleneck, but oil is in oversupply, then oil would surely decline in price, while gasoline (and other derivatives) would likely remain expensive. The truth may be that neither Saudi Arabia nor the Organization of Petroleum Exporting Countries can actually meet burgeoning world demand.

Michael Zuckerman
New York

[ The article these letters reference to can be found here: ]

It is amazing how little economists seem to know given their pronouncements on markets. This from the IMF at a lunch of the National Press Club here in Australia:

"Rodrigo de Rato told the NPC in Canberra that problems over supply and demand were just a part of the surge during the past eight months in oil prices which now sit around the $US70 a barrel mark. ...Mr de Rota said one of the problems was the way the energy system in some countries was an extension of the government. Government priorities, rather than market forces, were driving important elements of the overall oil industry. ...Mr de Rota said OPEC was not the only problem in terms of transparency with oil contracts.He said other countries had engaged in efforts to mask the true cost of oil. " tml

So what is the 'true price of oil' if some people are presently willing to pay US$70 per barrel- even if IMF and OPEC think it is too high? And if government-run companies aren't part of the market, who is- just BP, Chevron...?

The UK keeps calling for the full liberalization of the energy market, even when Gazprom tries to take over Centrica.

It's incredible, after the Iron Maiden sold the North Sea assets to whom ever offered most, without taking in account Britain's own needs, UK leaders just ask everybody else to do the same.

The other 'smart' western European countries that followed the ultra-liberal moves privatizing the energy sector now face a strained market monopolized by a foreign state owned company. Very 'smart' indeed.

And through Energybulletin of today we learn that Gazprom Eyes $2Bln Investment in Bolivia
A nitpick: the company preparing an IPO that, together with Sinopec, may buy Udmurtneft from TNK-BP is called Rosneft, not Russneft. There really is a Russneft, but it's much smaller.
Sorry, I have corrected the original - I just, unthinkingly, copied from the article.
RE: Lord Browne and his "25 dollar oil".
You can imagine people thinking "Perhaps I'll buy the big SUV I don't really need instead of a car that's actually big enough for me, that does 30-40mpg.  I can put the extra gas bills on the credit card until the price goes back down."  At best, many people will be confused at the mixed messages coming from different oil companies, even from different people in the same one - then they are likely to do nothing different to their previous behaviour, just go on the way they are.  It's bad news for both peak oil preparations and for climate change.

But what is he up to, why is he saying this when other oil companies are much more cautious, issuing statements that read like they are preparing us for much worse news?  It's as if they are trying to steer people's expectations to a particular level - down a little, oops too much, now up a little.

Seems like BP has joined Exxon in a chorus of "it's all okay, just let us keep on racking in the dough!"

Beyond Petroleum, my ass....

Generally, when talking about natural gas, I have found this picture useful.

Natual Gas Processing
Click to Enlarge

This schematic really does contain a lot of information and explains a very confusing process to the layman. Dry gas is methane.