Ukraine - The Trouble With Natural Gas

By: Andrew_McKillop

Cinderella Gas at the Thieves Ball

Simple questions can have complicated answers, but for Cinderella Gas the clock has a habit of chiming 12-midnight all too often. The simple question is how come natural gas in the USA has grave problems to even attain $27.50 per barrel of oil equivalent – but in Japan it can fetch about $100 per barrel equivalent? Do Japanese like expensive things, or what?

Germany's riotously shizophrenic treatment of the Russia-Ukraine sanctions issue, with Angela Merkel being the first G7 leader to cast out Russia from the G8 group, while her Vice chancellor Sigmar Gabriel says that Germany's “rational-based decision making” treats Russia as a key energy partner, can also be explained to a large extent by gas supplies – and gas prices.

No use for 'The Economist' magazine, 19 April, to chime that world gas offers everything a rational decider could want. It is cheap and simple to extract, ship and burn with a “low carbon footprint”. It is abundant, and present proven reserves amount to 109 years of current consumption, according to BP. The oil equation is at best 40 years. Oil is expensive worldwide, as expensive as gas energy in Japan. 

While US and European mainstream media have overworked the subject of Ukraine and energy security in Europe, as Germany's Sigmar Gabriel almost said out loud, April 7, the Ukraine gas issue only concerns pipelines. It has nothing whatsoever to do with gas reserves. World gas reserves are in fact certain to go on growing a lot faster than consumption, but for oil that is a long way from sure. World gas supplies from a fast-rising number of countries – not many of them dictatorships, mostly not belonging to OPEC, and not located anywhere near Ukraine – are growing, and will go on growing. Many are “politically stable places”, as 'The Economist' puts it.

The Lignite Revolution

In fact a counter-revolution. In the bizarre and schizoid playground of European energy policy, today, lignite has a better place, than gas.  As Bloomberg Business Week reported, 15 April, German power companies – especially the Big 4 – have obeyed Angela Merkel's 180-degree switch on nuclear power, following Fukushima, as German elections approached, and started shutting down their Cash Cow nuclear power plants. These NPPs were previously given generous (or foolhardy) operating lifetime extensions by Angela Merkel herself. On a regular basis.

What the beleaguered utilities are doing, now, when forced by government to close their Cash Cows is simple. They turn to lignite - a cheap, soft, muddy-brown colored form of sedimentary rock riddled with pollutants and spewing (as Al Gore and the Climate Crazies like to say) more greenhouse gases than any other fossil fuel. Number 2 in Germany's Big 4, RWE now generates 52 percent of its power in Germany from lignite. And RWE isn’t alone. Utilities all over Germany have shut down gas-fired plants and ramped up coal and lignite use as the nation watched the mix of coal-generated electricity rise to 45 percent last year, the highest level since 2007. Beat that for Carbon Correct!

The counter revolution, for some observers like Joe Parson writing in 'Moscow Times', 17 April, could even embolden pro-Russian separatists in eastern Ukraine. The reason is the Donetsk (locally called Donbas) giant coal basin, ranking with Poland's USB or Upper Silesian Basin, and three times larger than the Ruhr coal basin. With increased tension in eastern Ukraine, coal basin cities like Donetsk and Luhansk could win a reprieve from almost certain decline and death. Rising coal use in the EU28 to generate power – because gas is too expensive – could be supplied from the Ukraine. Alternately, locally-produced power using coal could be shipped to Europe with relatively low capital costs and lead times, the key term “relatively” of course needing caution. If the eastern regions of Ukraine were to shift to Russia’s orbit, Ukraine could potentially lose control of about 45 percent of its coal reserves. The loss of the Donets coal basin would deal another substantial economic blow to Ukraine.

The Shale Gas and Coalbed Methane Revolutions

Almost certainly unknown to Yoko Ono and her “Fracking Kills” star consortium, including Sean Lennon to show its a family business http://www.nydailynews.com/new-york/fracking-kills-yoko-fights-drilling-article-1.1238624,  of overpaid stars peddling dumb music and dumber ideas while they spew (to use Al Gore's terminology) aviation jet fuel kerosene residues worldwide on a very regular basis, shale gas “fracking” attempts date from the first decade of the 19th century – not 20th or 21st. Today however it works, and putting that genie back in the bottle is beyond Yoko Ono. Coalbed methane can be compared to lignite and coal – people know about coal but not lignite, and have heard about “fracking” but know nothing about methane extraction from coal beds, avoiding and eliminating the need to physically dig, then burn, almost always dirty coal. Net energy performance is good, although recovery of energy in place as coal, versus gas energy extracted, is low. Due to world coal resources (not reserves) to a depth of 3000 metres being roughly estimated by Beijing's University of Petroleum at probably 200 trillion tons (200 000 billion tons), resource depletion is no problem. Yoko Ono will certainly disappear first, although she's taking a lot of time to do it! We can she hope she speeds up.

Overworked and hyped shale gas potentials in Europe, to be sure, have left a bad dirt line in the bath tub when the water of initial investor support ran out. This however certainly does not mean shale gas cannot be produced in Europe – nor coalbed methane. European gas prices have not reached the giddy heights of Japanese gas prices, but are high.

Ukraine's massive coal reserves in place, in the Donbas, overworked and aged in conventional-extraction terms, like the Ruhr basin, are an attractive prospect for shale gas and coalbed methane extraction. Only the political decision making factor is negative – to say the least. World gas prices, as the Japanese will surely appreciate can only decline, while oil will tend to stay high, Cinderella Gas will at some stage get her LPG or CNG-fuelled limo at 12 midnight!

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.