The Weekly Wrap — Feb. 3, 2012

Russia, Ukraine and Europe’s big chill: It is that time of year in Europe, when a serious chill sets in, Russia and Ukraine bicker, and a lot of people freeze to death. No one has attributed any of Europe’s fatalities — 139 reported at the time of this writing — to the routine winter row between the former Soviet neighbors. But customers such as Italy (pictured above, St. Peter’s Basilica at the Vatican), Hungary and Poland say their imports from Russia — which supplies 100 percent of the gas consumed by some European nations, and a quarter of the continent’s demand as a whole — are down considerably during Europe’s worst cold snap in some six years. Russia is blaming Ukraine, reports Reuters. Gazprom deputy CEO Alexander Medvedev says that Russia has actually stepped up gas exports to Europe, but that Ukraine is siphoning off more than its fair share. Ukraine replies that it is meeting its contractual obligations. Thus, neither country answers the question — are they or are they not supplying the gas that Europe requires to stave off the cold? The backdrop is mostly that Russia simply cannot handle all the demand in such extreme temperatures. But another dimension is the continuing contractual warfare between Russia and Ukraine — Ukraine wants to reduce the volume of gas it’s contractually required to buy from Gazprom, which it says charges too much when compared to the spot market. Other European countries also gripe about Russian gouging, and Gazprom has responded by cutting gas prices for some of them (not Ukraine).

Edward Chow, an analyst at the Center for Strategic and International Studies, suggests that much of the problem would be resolved if Ukraine’s corruption was reduced, and it pumped more of its own natural gas. As it is, the bickering is directly responsible for a tense pipeline rivalry between the West and Russia — Russia is building new gas export pipelines in order to bypass Ukraine, Poland and other unfriendly neighbors, and the West is trying to build and fill up its own new pipeline from the Caspian Sea to serve Europe. One suspects that Russia will again be the loser in this game of tit-for-tat. Scenes such as Hungarian villagers "scavenging for coal with their bare hands," as Reuters’ Marton Dunai reports, will make Russia look heartless.

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The U.S. gas glut solution: Oil and gas companies are moving fast to eradicate a scourge — fire-sale natural gas prices in the United States. The latest to move is Shell, which says it will carry out a dual strategy of exporting some of its U.S. shale gas in the form of liquefied natural gas, since prices in Europe and Asia are far higher, and meanwhile produce more lucrative oil from shale in North Dakota and elsewhere. As discussed previously, Chesapeake Energy and ConocoPhillips have announced they are dialing back on their shale gas production.

Then there is Alaska, where the gas equivalent of some 6 billion barrels of oil is stranded for lack of an export pipeline. For a long time, companies such as BP, ExxonMobil and Conoco had sought to build an expensive gas pipeline to the Lower 48 States, but they have been stymied, most recently by lack of demand. In November fall, Alaska Gov.  Sean Parnell urged the companies to instead ship their gas to Asia in the form of LNG. Now, these Big Oil companies say they have seen the light — they will export their North Slope gas to Asia, reports Reuters. So serious are they taking this issue that last month, the CEOs of all three companies themselves flew up to Alaska to meet with Parnell and nail down the decision. The line they are discussing to the port of Valdez could move 3 billion cubic feet of gas a day and cost $26 billion.

Oil prices and Sudan: Shell CEO Peter Voser says that oil prices could fall to around $70 a barrel in the coming 12 months. For market observers, that outcome seems likely only if turbulence such as that currently under way in Sudan vanish. Oil prices are hovering near $100 a barrel based largely on political risk — uncertainty surrounding Iran’s response to oil sanctions, Israel’s threat to attack Iran, instability in Nigeria, and the loss of some 350,000 barrels a day of crude from South Sudan. On the latter point, South Sudan’s volume does not on its face appear high when the world consumes nearly 90 million barrels of oil a day. But since oil prices are determined by spare production capacity — the volume of idle oil capacity that can be activated in a pinch, such as a hurricane that destroys oil platforms; an explosion that destroys an important pipeline; or a civil war that cuts off supply from a petro-state — the truth is different. Currently, the world has roughly 3 million barrels a day of spare capacity, almost all of it in Saudi Arabia, which means that South Sudan represents some 10 percent of the total defining price margin. South Sudan shut off its oil production in a row with Khartoum over 1.7 million barrels of stolen oil, plus the habit of both sides of meddling in each others’ civil conflicts. There is no sign of the oil flow being resumed soon. Hence, for some time, Voser’s forecast will remain just that — a forecast.

The petro-state of Uganda: U.K. wildcatter Tullow Oil — which has pioneered western oil development in west Africa’s Gulf of Guinea — has finalized agreements to produce oil in Uganda, in eastern Africa. Tullow says it has discovered 1.1 billion barrels of oil near Uganda’s Lake Albert, sufficient to qualify as a super-giant, reports Reuters’ Elias Biryaberema. The company is now seeking partnerships with China’s CNOOC and France’s Total, which appear likely to carry most of the actual costs of production since Tullow assumed the risk of achieving agreement with the Ugandans. The development is notable as Africa is rapidly becoming a prime source of global oil, which depending on how the wealth is managed could help considerably reduce the continent’s chronic poverty.