16 April 2014
Investors may yet get another crack at the energy complex.
Alternatively, for risk-averse investors, the U.S. Treasury Bond
ploy has regained its allure, as funds seek safety in the wake of
the past several weeks of alarming developments.
The escalating political risks around the world just went into the
realm of actual armed conflict, as Ukrainian forces shot and killed
some armed occupiers of an airfield in the east of the country.
Russian special forces have infiltrated Ukraine, as they did in
Crimea, and orchestrated inauthentic separatist 'movements' in
order to provoke armed retaliation and then official Russian army
intervention to 'protect' linguistic or cultural kin in almost half
of what remains of Ukraine, in the east and south. This
strategy may yet be successful for Russia -- in the short term,
Subversion, Intimidation, Stall Tactics; Perhaps...
This is exactly what Hitler perpetrated in the Sudetenland crisis
of 1938, leading to the Munich agreement with Britain and France,
which he subsequently abrogated, taking over the entire nation of
Czechoslovakia, and, the following year, after the contrived armed
conflict over the Polish Post Office in Danzig (now Gdansk),
attacked Poland on September 1st, 1939, plunging Europe and the
British Empire and Commonwealth into World War II.
The bankrupt and ill-armed Ukrainian government has, thus far, been
reluctant to hand Vladimir Putin, the president of Russia, an
excuse to invade and occupy eastern and southern Ukraine.
However, several city and town administration buildings and police
stations in those areas have been occupied by armed, uniformed, and
masked men claiming to be local independists, but show all the
signs of the sorts of covert forces that were used in Crimea in
March. The central government in Kiev has now declared that
it will not accept this situation, nor allow it to expand or
Sanction and Other Paths for Nato
Despite their desperate wish to avoid action, the members of the
European Union and the members of the North Atlantic Treaty
Organization (NATO) -- which are not the same countries, but have
considerable overlap -- will be compelled to follow through on
their stated promise to enact severe sanctions against Russia,
should the invasion and occupation take place.
Russia's main exports of any consequence are oil and gas. Oil
is readily available on international markets, although it may be
harder to ship it to certain Eastern and Central European nations
via tanker and thence pipeline from Western Europe versus the
pipelines that come from Russia.
So, while there will be practical, logistical problems in dealing
with changes in oil suppliers, aside from a likely jump in prices,
the actual accommodation to the oil sanction may not be too
severe. Gas, though, is a knottier issue.
Vlad Frost Nipping at Your Nose
While it is far from clear that the EU or NATO have any motivation,
resolution, or imagination for a substantial pressure tactic
against Vladimir Putin, they have the means to do so, not just on
oil, but even on gas.
Winter is now past, heating demand, even in the northern nations,
is now low. There are at least another five months, perhaps
six or seven, before they become high, again. Should Russia
threaten to cut off or at least slash gas shipments to Central and
Western Europe, and raise prices, just as they already have to
Ukraine, the EU can call that bluff, at least temporarily.
To prepare for winter, interconnection pipelines can be approved
for construction, reducing the dependence on Russian gas in some
states. Low interest loans, grants, loans, tax credits, and
other measures can be taken to encourage major steps toward higher
insulation levels and smart metering in homes, offices, factories
and other buildings.
Insulation and smart metering alone, even if it were to just reduce
natural gas use for heating by 50%, would virtually eliminate
supply deficit from having no Russian gas. Gas in pipelines
from Algeria and Libya can be expanded, and a new one from Israel's
big new offshore field can be built to Greece, but it will take a
Plans to take nuclear power plants in Germany can be
suspended. If there were to be sensible energy and
environmental policy, France and other nations would remove their
moratoriums and restrictions on hydraulic fracturing and other
techniques that could bring abundant shale gas and liquids to
waiting consumers. Europe as a whole is estimated by the U.S.
government to contain shale oil and gas reserves of almost North
American magnitude, and still nearly entirely untapped.
Latvia, alone among the Baltic states, all of whom also have
substantial Russian minority populations at risk of Vlad the
Invader's 'protection' strategy, has a huge gas storage
capacity. Potentially, this could be expanded, and shared
with Estonia, Lithuania, and even Poland. Other storage
capacity can be constructed over the next several months and years
elsewhere in Eastern and Central Europe.
Most of these things would not be brought to full fruition by
winter, or even before the end of the season. However, they
could make a difference in redistributing the temporarily scarce
natural gas flow to Europe around to those nations that are
uncomfortably dependent on Russian gas. This will moderate
the price rises, which will inevitably occur with the increased
scarcity of the commodity, but will not eliminate those increases.
These price rises will not fully lift or put a floor under prices
in North America or Asia, but they could help accentuate the idea
that natural gas is a valuable product, and should become more
fungible across oceans and continents. It is interesting that
gas has not fallen below $4.00 per million BTU in the past several
months, and that storage levels in North America remain much more
depleted than usual at this time of year.
Lafayette, We Are Here
The crisis in Ukraine and the confrontation with Russia will not
automatically bring new U.S. Liquified Natural Gas, 'LNG,' projects
through approval, development and commercialization, even in the
medium term, let alone substantial, lucrative exports to Western,
Black Sea and Baltic LNG import terminals. Nor is such gas
entirely available, although politicians, and producers, on both
sides of the Atlantic wish it were already so.
Fortunately, many of those import terminals already exist, and
could be expanded to accommodate more imports from abroad:
Africa, the Middle East, and Latin America, along with (eventually)
North America. There is also enough North American supply to
send overseas at a profit at the current price differential.
The probability, and the opportunity of more U.S. LNG plants being
constructed have certainly increased. The good thing is that
there is abundant North American shale and coal bed gas, several
pipelines to the Atlantic coast, and many motivated companies with
capital eager to fund such projects. However, political
support has been lukewarm, particularly in New York State, Quebec
and in Washington, DC, but the geopolitical situation could change
minds and attitudes, or at least reduce some of the
obstacles. Ottawa and Mexico City are entirely onside.
The main beneficiaries continue to be the best shale operators, for
); pipeline companies such as
Kinder Morgan Partners
Enbridge Energy Partners
); and the LNG, refinery, and pipeline builders, like
Chicago Bridge and Iron
We're Moving at a Faster Pace
It takes a year or more to get environmental and other approvals,
and another two to three years and billions of dollars to construct
new LNG liquifaction plants and export terminals. Some
players have been burned in the past, and there is no assurance to
them that these projects will be as lucrative as they appear on
paper. However, nearly twenty of them are already mooted for
the U.S. East coast.
Thus far, Canadian action on the Atlantic side has been muted, but
two oil pipeline projects with high chances of approval and actual
construction are in the works. None of these plans nor the
U.S. gas plants, will be fully realized before 2018, at the
earliest, so, in the short term, the EU, and the Ukrainians, will
be mostly on their own. Nevertheless, as indicated earlier,
they are not without options, or bargaining power and resources of
Watch Out, Vlad - We're Building a Better Place
Ronald Reagan and Margaret Thatcher warned West Germany, France and
other European nations against becoming dependent upon what was, in
the 1980's, the alluring appeal of cheap, very abundant and
clean-burning natural gas from what was then the Soviet
Union. After the Berlin Wall came down and the communist
regime collapsed in Russia, it appeared that such fears were
Preliminary geopolitical signs in the invasion of Georgia, the
intimidation of Armenia and Moldova, and machinations in Central
Asia have been joined in recent years by economic and commercial
risks, as the BP-TNK rupture, the Yukos expropriation, and
Gazprom's use against Europe and Ukraine in recent years.
Russia has proved to be unreliable, dangerous and now entirely
Venezuela, Ecuador and Bolivia in the Western Hemisphere have
already taken themselves out of the running for reliability or
stability. Some Central Asian, Middle Eastern and African oil
and gas producers are also showing signs of erratic policy and
If matters do not become too violent and extreme in Ukraine, this
whole episode may be salutary if it compels the EU, NATO and other
players such as the U.S., Canada, and Mexico, to take political
risk, intelligent energy deregulation, and extensions of energy
cooperation seriously in the future.
Then, repressive despots will not find it so easy to impose their
will on peaceful neighbors. The side benefit will be
increased security and prosperity for those who pursue rational
development and commerce. In the meantime, oil and gas prices
are unlikely to fall, unless tensions ease substantially.
Investors should remain exposed to this long-term attractive
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