From Russia with Love: Germany’s Energy Imports from Siberia!

Men of Struggle.

Germans are painfully aware that U.S. sanctions aimed at Russia will have repercussions on a much wider scale. Germans conveniently ignore the staggering consequences this has on German manufacturing, because Russian gas markets are tightly intervowen into the fabric of the European economy.

Russia, the World Island.

It is important to remember that Russia is an entire civilization onto itself. The nation  administers and exploits 30% of all known natural resources on this planet. The resource-rich Krasnoyarsk and Sakha oblasts are located in Asia and it makes good business sense to add some new customers. So the Russians brought the Chinese, Koreans and Japanese into the fold.

After sanctions were imposed on Russia, the resource-rich nation has looked to other countries to trade with and given its relative geopolitical isolation, there weren’t many options available. One option for the Russian national government was to increase bilateral trade with the Europeans. The problem was that the European Union sided with the U.S. federal government on almost every energy-related issue. The international media expected U.S. shale gas reserves to be found in large amounts. As we now know, U.S. shale gas  is a drop in the bucket.

In the Temple of the Red Dragon

China’s predicament is that it needs to find new enery suppliers in order to increase its economic output. Russia can deliver a high volume on a long-term contract and guarantee a high quality. The main problem  is that the Chinese government is a good negotiator. For the Russian government the Chinese are for now at least the only game in town. The Chinese government knows this, and adjusts prices accordingly. So China has filled the ‘void’ left by the Europeans. China now imports a growing share of natural gas from Siberia. Once the Power of Siberia 2 pipeline is fully completed, China’s share of Russian natural gas exports will rise dramatically.

A Precautionary Tale- if you are buying a flamethrower.

Its impact is keenly felt in Europe. Oil refineries in East Germany are going nuts because the quality of Ural heavy crude send from Mother Russia just aien’t good enough anymore. They are missing the good old days. The good stuff goes to China now.

Life Finds a Way.

The Russian question boils down to this: Will they obtain all relevant operational permits so the pipeline can pass through the territorial waters of the Baltic Sea, so they can continue building the new NordStream 2 pipeline? They require the consent from Denmark to do this, but Germany and Russia have a plan B to go around Denmark. The new NordStream pipeline will cut out many transit nations currently making a lot of money from the Jamal pipeline. That includes Poland and Belarus. There is already a lot of noise from Warsaw and Washington. Just a few months ago Germany, Sweden and Finland have given the green light to start construction on the Nord Stram 2 pipeline. Will Denmark follow suit?

And given the fact that the North Sea natural gas reserves decline year-on-year, how long will it take for other countries such as Denmark and Sweden to look for alternative supplies of natural gas? It is also not clear that the US will be a long-term supplier of LNG in the future. LNG terminals are planned in many European ports, but this is a lengthy process and it depends on availability and prices. The first LNG terminal in Germany will be build in the northeastern city of Rostock and will link the Leningrad Oblast to Mecklenburg.

The LNG terminal will be operational in 2022, it can  hold up to 700.000 cubic meters. But it will compete with American LNG. Besides that, there is absolutely no need to build any additional LNG capacity in Germany, because LNG is imported from Rotterdam. The Dutch LNG terminal opened in 2011. Given the fact that Russia possesses the largest natural gas reserves in the world, and a large proportion of these reserves remain unexploited, highly industralized countries like Germany will likely further embrace Russian energy deliveries, to the detriment of US energy policy.

It is said that if you know your enemies and know yourself, you will not be imperiled in a hundred battles; if you do not know your enemies but do know yourself, you will win one and loose one; if you do not know your enemies nor yourself; you will be imperiled in every single battle,  孫子, Sun Tzu, The Art of War, Chapter I, Detail Assessment and Planning. Chapter titles from Chow-Hou Wee (2003).

The Chinese government is the real winner in this geopolitical chess and Russia is the kingmaker. The Chinese played their cards well. Germany will loose out because of rival alliances and its own dependance on international trade and manufacturing.

Many thanks for the shared interest in the energy world!

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