The Putinization of Gas
Oil is the essential fuel of every modern economy, but it isn't the only hydrocarbon that's important to Russia or its neighbors. And being the biggest player in the oil patch isn't enough by itself to give Russia the power to squeeze world energy supplies that Putin wants. After oil, there's also the fuel you can't see: natural gas. The gas fields of Siberia have been yielding over 50 billion cubic feet (Bcf) per day of natural gas for the past two decades. In 2014, production rates are approaching 60 Bcf per day. At current European prices, that's more than $100 billion worth per year.
Cheap gas from Russia was one of the glues that held the old Soviet Union together, and today much of Europe, as well as the USSR's former satellites, depends on Russia to keep delivering. Selling gas means revenue for Russia, of course, but Putin is focused on the glue factor, the political leverage that comes from being a customer's irreplaceable source of energy.
The European Union as a whole relies on Russia for a third of its natural gas. Several countries, including Poland, Finland, Romania, Bulgaria, and Serbia, depend on Russia for well over half their supply.
Figure 8.1 Largest Proven Holders of Natural Gas Reserves
Source: Energy Information Administration. © Casey Research 2014.
The strong production so far is only the start of what Russia can do. The country sits on 1,600 trillion cubic feet (Tcf) of natural gas, roughly one-quarter of the world's known reserves and five times what Russia has produced in the past 20 years. And those big numbers don't include stores of unconventional gas. All told, Russia may well control as much as one-third of the world's natural gas. (See Figure 8.1.)
Delivery infrastructure is the make-or-break factor in the natural gas market. Unlike oil, which can move by truck or railcar, natural gas goes nowhere except by specialized, dedicated facilities.
Two infrastructure strategies are positioning Russia to dominate the Eurasian gas market. First, build pipelines that bypass unreliable countries, to ensure Russia's ability to deliver gas to customers in Europe and Asia. Second, build facilities on the coasts of the Pacific Ocean and the North Sea to handle liquefied natural gas (LNG), which can go where pipelines can't.
The pipeline system Putin inherited from the USSR was big and dumb. Many key lines crossed countries that just couldn't find a reason to stop demanding higher transit fees. Some would take "No" as an excuse for siphoning off gas intended for other customers. For Russia, it was one headache after another.
And the pipelines were concentrated in Russia's west—good for reaching customers in Europe but useless for delivering to buyers in Asia.
Measuring What you Can't See
Btu stands for British thermal unit.
MMBtu stands for 1 million British thermal units and is equal to 1,000 cubic feet of gas.
As a matter of industry practice, the size of a natural gas deposit is usually stated as the number of cubic feet the gas would occupy at the standard conditions of 60 degrees Fahrenheit and a pressure of 14.7 pounds per square inch (which is atmospheric pressure at sea level). The customary abbreviations are:
Mcf: 1,000 cubic feet of gas MMcf: 1 million cubic feet of gas Bcf: 1 billion cubic feet of gas Tcf: 1 trillion cubic feet of gas
An Mcf (1,000 cubic feet of gas) will meet the needs of most households that burn natural gas for heating and cooking for three or four days.
Natural gas is predominantly methane, but the actual composition—and the heat content per cubic foot—varies somewhat from source to source. Accordingly, natural gas is usually priced not in cubic feet but in British thermal units, or Btu. As of August 2014, the price of natural gas in the United States was approximately $3.90 per MMBtu and in Europe $6.50 per MMBtu.
A cubic foot of natural gas provides about 1,000 Btu, depending on the field it came from and on how it has been processed. Thus a Tcf of natural gas contains about a quadrillion Btu, also known as a quad.
The energy content of a barrel of crude oil is roughly equal to the energy content of 5.8 Mcf of natural gas.