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Putin Has Squandered Soviet Energy Legacy

Public Policy

This is part two of a condensed and lightly edited transcript of an interview with Soviet and Russian energy specialist Thane Gustafson. In part one, he described the evolution of the Russian energy industry under President Vladimir Putin until the eve of the war in Ukraine. Part two picks up with him describing the impact of the war on Russia’s oil industry.

Denning:  You say Putin’s war has set in motion a process that will drag down the long-term competitiveness of Russia’s oil industry. How so?

Gustafson:  The big question is the long range effects, beginning about five years out. How the withdrawal of the services companies; the interruption of supply lines, of equipment; the exit of the Western majors; and the financial difficulties that the Russian government is going to have — all of those are going to act as drags on the ability of the Russian oil industry to continue modernizing. And yet it must continue modernizing because, like all natural resources, the initial resource gradually gets used up and you have to move out to increasingly marginal development opportunities, while constantly using new technology

The traditional core of the oil industry in West Siberia is clearly in decline. The Russians even now are fighting a rearguard action there. Hence the importance of those three techniques I mentioned earlier. But the big thing to focus on as an example of the tests that lie ahead is [Rosneft CEO] Igor Sechin’s favorite project, Vostok Oil.

LD: Why is Vostok so important and what makes it so challenging?

TG: Vostok is a mixture of things, but the main thing to know is that it lies outside the administrative boundaries of West Siberia in a place called the Taymyr Peninsula, but it is the northeastern edge of the geology of West Siberia.  Some of that, such as the Vankor field, is already producing. The big question concerns the fields now being explored, of which one of the best known is the Payakh field. Sechin has said to Putin: If you grant me the full support of the state, I will produce for you a hundred million tons of oil a year from Vostok Oil — two million barrels a day — by 2030, and I’ll keep going from there.

But here’s the thing: Vostok Oil is a pile of challenges. It’s virgin territory. You’ve got to build a new port system to be able to export the oil to Asia by tanker. So that’s tied to the rate of global warming. You have to build an entire infrastructure with buildings that have to be reinforced against permafrost melting. Novatek sank 60,000 piles into the ground to support the buildings at Yamal LNG [another Arctic project].

Then you need a whole network of new pipelines to bring the oil to that new port on the Arctic coast. But those pipelines and the port don’t yet exist. You’ve got to bring in maybe a hundred thousand workers. Now, the good news is that’s a hundred thousand jobs, but the bad news is that’s a hundred thousand people you’ve got to induce to go up there either full-time or part-time. And you realize that all of this adds up to infrastructure — and investment. It’s not so much the impact of the sanctions per se, directly.

The one place where the sanctions probably have a direct impact is in the supply of oil tankers and such. Sechin’s got a plan for that, too. He’s directly responsible for the development of a new shipyard called Zvezda, or “star.” He had, until the invasion, support from South Korean shipbuilders. They are now pulling back and the project is behind schedule. No Zvezda, no tankers; no tankers, no Vostok Oil.

LD: Back to gas. Another theme of The Bridge was that Europe expected the far-reaching changes it enacted in its own gas industry would give it an advantage in dealing with Gazprom. Now, those expectations are pretty much dashed. Can you talk about what things look like beyond this war?

TG: In retrospect, you can fault the European Union and the Germans for three major things. One, I think the EU had too much faith in the power of its new regulatory and market mechanisms. Take, for example, the doctrine of the Single European Market, which took the concrete form of three far-reaching gas and power directives. I think the EU believed that if you enforced those directives — with the Russians kicking and screaming the whole way, by the way — and applied the whole panoply of regulatory, neoliberal weapons, that Europe would have the advantage in any bargaining relationship. That the burden of risk would shift onto the supplier and that Europe would be able to control the show.

You have to give the Russians credit for having been very candid on this. Gazprom explicitly warned the EU, saying: Are you sure that you want me to be on my computer screen every day, setting the level of Russian gas exports to Europe on the basis of the day-ahead spot price? Be careful what you wish for.

Number two is the Germans had too much confidence in the Energiewende [Germany’s energy transition program] and the rate at which they would be able to shut down nuclear, and ultimately coal, and increase renewables. And then, in the fullness of time, cut their dependence on gas. Exhibit A is the way they waved away all talk of an LNG terminal in Germany up until just recently. But their strategy depended crucially on the continued availability of Russian gas.

Third is the over-optimism of the European business community, particularly in Germany. Ever since Soviet times, there had been a strong faith, shared with much of the German political establishment, in the power of “Wandel durch Handel,” or “Change through Trade.” That good business relations would favor the transition of Russia to a “normal” political system. The depth of that relationship [with Russia] was extraordinary. There’s a whole generation of people whose entire careers in Germany were built — think of Wingas, for example — on the reality of partnership; close, intimate, friendly partnership. They couldn’t believe that the Russians would just commit gas suicide.LD: In a way, given the gas relationship began under the Soviet Union, you could almost understand that the Germans might look at that experience and say: look, we were able to do business even with those guys. So surely these are the same people, just a different government. What did they get wrong about that?

TG: What they got wrong is that they held onto those three items of faith too long. Basically, all three come out of the neoliberal view of the world, despite the growing signs by about the mid-2000s that Putin himself and the Russian political center of gravity were shifting away from collaboration, cooperation and friendship, toward a stance of hostility and resistance. The key date is 2007 when Putin made his famous speech at the Munich security conference and his bitter denunciation of the US and secondarily of Europe. That should have been a wake-up call.

And yet, think of the major Western projects in the automotive sector, Renault, think of the partnership between Total and Novatek in LNG, think about Siemens modernizing the Russian locomotive system. All of those were at the express invitation and encouragement of Putin himself. He made himself the ambassador for these projects, so you were getting dual messages out of Russia.

LD: There was a great line in your last book, “ Klimat: Russia in the Age of Climate Change,” where you said Russia is already one of the chief causes of climate change but, as time goes on, it will also be one of its chief victims. You published that a few months before Russia invaded Ukraine. What did you mean by that, and how does the invasion, this new landscape, interact with or change that thesis?

TG: That book is very much a thought experiment about a set of hypothetical futures. The central question is: what if peak oil demand turns out to be real and it is followed by a decline? What would be the impact on Russian revenues and, by extension, the budget of the Russian government and the whole political system that is underpinned by those revenues?

So I went on a systematic tour of all the possible alternative money earners. There’s a chapter in there on nuclear power, on agriculture, coal, renewables. And then I added it all up and you come to totals that don’t even compare with the last peacetime — and pre-pandemic — revenues from oil and gas. Oil accounting for four fifths of the hydrocarbon revenues, by the way, and gas, only one fifth at the time.

As to benefits of climate change, the one Putin keeps talking about is opening up the Arctic Ocean, the Northern maritime passage. That is the basis of Russia’s policy on LNG, and also Sechin’s Vostok Oil. Putin also talks about possible benefits of climate change for agriculture. The jury’s very much out on that. The biggest question concerns Russia’s grain exports. But even at their best, Russian agricultural exports are unlikely to add up to more than $40 billion a year — that’s Putin’s target — and that’s far less than the roughly $425 billion that oil and gas generated in 2019.

Based on the various modeling exercises of the oil companies and others, the consensus on the eve of the pandemic was that Russia’s hydrocarbon revenues would remain strong during the 2020s. But that the impact of a possible peak in oil demand, and a possible leveling-off of gas demand by 2040, would start to kick in by the beginning of the 2030s. So you have two periods: one of reprieve, so to speak, and the second of increasing stress on the system.

How does the invasion affect that? The first consequence is the self-destruction of Russia’s gas market in Europe. The second is the likely decline in Russia’s oil exports to Europe, as the embargo kicks in, forcing Russia to accept discounts and higher costs to move its oil to other markets. Both of these will affect Russia’s revenues in this decade.

There has been a good deal of talk that the sanctions aren’t working because the price spike has more than offset any decline in export volumes. It is true that the immediate result of the spike has been an increase in Russia’s dollar revenues, but that is turning out to be a mixed blessing for Moscow, causing the ruble to appreciate. That’s awkward because if you sell your oil in dollars but your ruble is overvalued, you get fewer rubles. And the revenues of the Russian budget are in rubles. So you get indirect financial hits that arise in the wake of the invasion and the sanctions.

I think the net effect of all that will be seen in retrospect as having blown a good deal of that favorable decade of the 2020s. And Putin will have only himself to blame.

Then the final question, and this brings us back into the orbit of Klimat: For the time being — say, the next two to five years — energy security will be the main priority. But at what point does climate change come back to the fore? I think Germany is ground-zero on that question.

LD: In what sense?

TG: Take LNG. For years the Germans rejected LNG, saying we won’t need it because Europe’s gas system is nicely interconnected and, besides, we’re not going to need gas for very much longer. Now they’re saying, wow, we’ve got to build some LNG terminals here and some new pipeline connections. And we’ve got to rent some floating LNG re-gas vessels. All that investment is, in effect, locking in a long-term dependence on LNG, which is driving the German greens crazy.

So there, you have a good example of the competition between the green agenda — God save us from global warming — and then the energy security agenda, which is God save us from the Russians. Which of those two agendas is going to win out? And when?

We know the answer for this winter: It’s all energy security all the time.

But meanwhile, very quietly in the background, Brussels keeps on pushing its climate change agenda with things like reform of the emissions trading system. That has inched its way through the endless European labyrinth. It’s gone through the parliament. Now it’s going to be submitted to the “trilogue.”(1) And then that will have to go back to Brussels for coordination. Then it’ll be resubmitted. But the point is that the climate-change agenda keeps inching along. It is not dead. Will it ultimately be strengthened or weakened by the measures taken to improve energy security? That’s not yet clear.

LD: Coming back to where we started, Gorbachev is regarded by many as the perhaps unwitting undertaker of the Soviet Union. Will Putin be remembered as the unwitting undertaker of the Russian energy sector, and the political system that it supports?

TG: Certainly on the gas side. Revenues from LNG are not going to come close to replacing what Gazprom will be losing. It’s hard to construct a scenario under which Gazprom’s business is reborn in Europe.

LD: Can China compensate?

TG: Partly that’s an infrastructure question. The pipeline capacity doesn’t exist yet. Nor, it would seem, does the political will, for all the professions of no-limits friendship between [Chinese president] Xi Jinping and Putin.

The test question is whether the [proposed gas pipeline] Power of Siberia 2 goes forward. The current Russian plan is to run it from West Siberia, through Mongolia and into China. And every time you turn around, there’s a press release from Gazprom saying hurray, hurray, we’re on our way. And the Mongolian government has adopted policy arrangements that point in the same direction.

Not one word from the Chinese. Until you see a fast-track Power of Siberia 2 project actually putting pipe on the ground, I think there’s your answer to the prospects for a serious pivot to the east of Russian gas exports. At best, it’s 10 years away, and probably more. As Putin ruefully admits, the Chinese are tough negotiators.

LD: And oil?

TG: The core answer is the same for both gas and oil: that Putin had a tremendous opportunity to use the reconsolidated and modernized production of energy, and to put those revenues to work in reshaping the Russian economy in a modern direction and reversing the misshapen Soviet economy, which is still the essential structure of the Russian economy today.

Exhibit A on this point: Look at a map of the distribution of Russian cities compared to, say, Canada. You’ve got over a hundred cities with populations of one million, and they’re all separate dots. They’re like the pimples in a bad case of chicken pox. Those are what the Russians call millionniki; they are there mainly because of the military-industrial facilities they supported in Soviet times. They have no viable economic function in a market economy. They are capitals of cold. Places in the Urals like Chelyabinsk or Perm, or even worse, in Siberia, like Omsk or Novosibirsk.

This is ironic, of course. The world is worried about global warming, and rightly, but Russia still suffers from the curse of cold, and from the pattern of urban settlement inherited from Soviet times. Nothing has been done to change that structure. Instead, Putin mostly encouraged investment on the far Arctic Ocean coastal frontier. This will worsen that imbalance.

LD: How so?

TG: Because all of that new investment is concentrated up there in the capitals of cold. If those oil and gas assets end up as stranded assets, that’s more Soviet-style wasted investment. So I think the bottom line is that Putin has blown, economically speaking, the tremendous opportunity afforded by the remaining energy endowment, to say nothing of the geopolitical legacy.

(1) An ad-hoc group made up of representatives of the national governments, the Parliament, and the Commission.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy and commodities. A former investment banker, he was editor of the Wall Street Journal’s Heard on the Street column and a reporter for the Financial Times’s Lex column.


15 Comments on "Putin Has Squandered Soviet Energy Legacy"

  1. makati1 on Mon, 12th Sep 2022 5:20 pm 

    looked at the headline. Looked at the source.

    More bullshit propaganda from the US MSM.

    If Russia has nothing, why is the West making war to get it?

    Not worth reading.

  2. Zeke Putnam on Tue, 13th Sep 2022 8:32 am 

    US media is one vast propaganda machine which Americans devoutly believe.

  3. makati1 on Tue, 13th Sep 2022 5:17 pm 

    For Biden’s:

    “As it avoids openly undermining the European Union, Washington has been doing its utmost in recent years to not only stealthily govern it, but also to contribute to its disintegration. It is doing everything possible not only to avoid losing Europe, but also to eliminate the EU as a potential rival in the dispute over geopolitical influence.

    In this regard, the placement of Washington-trained personnel such as Ursula von der Leyen, Charles Michel and Josep Borrell in leading positions in the EU states and in its governing bodies has become an important tool in subjugating the EU. The above politicians have long been guided in their actions only by instructions from the United States, with complete disregard for the interests of the whole Europe and their native countries in particular….

    The economic and energy crisis in Europe, exacerbated by the US, is steadily increasing the protest movement in the EU countries, destabilizing the political and social situation there and thus further reducing its competitiveness with the US, which is precisely what Washington wanted….

    IF… Russia was to “invade” the EU, (not likely. There is nothing there they want except customers for their resouces.) they could walk right in. Every country, but a few, has depleted their weapon supply and the US will not be able to replace them for years, if ever. Suckers!

  4. why did elite whitey supertard Kat support the meat grinder in UKE elite whitey supertard president paul would sue for peace right away no foreign entanglement why did elite whitey supertard Kat support killing of elite whitey suprtards in UKE on Tue, 13th Sep 2022 7:06 pm 

    this is dumb

    one would expect smart and intelligent elite whitey supertard Kat to learn from total war of WW1 and abandon war forever.

    supertards plese change ur undies after 3 weeks

    please be at ease among friends we’re all lovers of supremacist muzzies here

  5. FLAGLE on Tue, 13th Sep 2022 9:58 pm 

    The American media is a vast propaganda machine in Americans wholeheartedly trust. Their influence is immense

  6. Notifification d'exexecution by facial skin cancer for [email protected] on Tue, 13th Sep 2022 10:20 pm 

    I think I will send a notification d’execution by deadly facial skin cancer to [email protected]

  7. question for elite whitey (((supertard))) FamousDrScanlon when r u gonna submit to (((supremetard))) the goyims know bitchute aReCfiW9UzWj on Tue, 13th Sep 2022 11:31 pm 

    In the global fight against COVID-19, the Jewish people who make up a tiny percentage of the world’s population have had an outsized impact in the difficult battle to protect lives, as scientists. chief medical officers and top health care officials. Yet the contributions of one extraordinary person tower above the rest. That extraordinary person is fighter chairman and Ceo Dr Albert bourla, Dr bourla led his team to deliver a Covid 19 vaccine in record time. Well taking a risk by declining U. S. Federal funding to avoid government bureaucracy and expedite vaccine production. A child of holocaust survivors from a greek jewish community destroyed by the nazis. He’s proud of his jewish heritage, is active in holocaust remembrance and education and a strong supporter of Israel. The pandemic is certainly not over, but the world is infinitely better off with dr borland helping lead the charge to save lives. With more than 2.5 billion Fizer vaccine doses already distributed

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

  8. makati1 on Thu, 15th Sep 2022 4:13 pm 

    Amerika a “Democracy”? LMAO!

    “America’s billionaires, themselves, collectively control the insatiable global-hegemonic-control-obsessed U.S. imperial Government, which systematically is forcing-up economic inequality throughout the entire world. They refuse to see what they don’t want to see; and, so, it gets censored-out of every organization that they control….

    In February 2014, the U.S. Government’s coup taking over control of Ukraine’s Government occurred, and the breakaway of two regions of Ukraine which had voted overwhelmingly for the democratically elected President of Ukraine that Obama had just replaced with a racist-fascist anti-Russian Government, produced the war in Ukraine, which has continued ever since….”

    If you think the “war” will stay in Europe, Amerikans, you better think again. This is the second half of “The Forth Turning” and the worst is yet to come to your shores.Buckle up!

  9. Theedrich on Sat, 17th Sep 2022 1:56 am 

    The Ukro proxy war is now turning more dangerous. Russia’s Wagner force, a “PMC” (Private Military Company), is now fighting in the northeastern suburbs of Bakhmut (Бахмут).  The U.S. has a big stake in stopping the Russians in this critical city.  If lost, the whole of the Don Basin (Donbass) will be permanently severed from Ukraine.  Hence the largely failing Ukroid “offensive” against Russian forces, waged while also incurring significant losses attempting to shell and conquer the nuclear power plant at Energodar (Енергодар) in Zaporizhzhia (Запорiжжя).  Hence also the new Russian destruction of the dam at Kryvyi Rih / Krivoy Rog (Кривий Рiг / Криво́й Рог), causing water from its reservoir to flood the Ingulets (Ингулець) river and cut off Ukro forces on its east side.  Ditto for another dam and many power stations used to provide electricity to the trains Ukraine is employing to transfer Yankee weapons to the front.

    In response, the American Deep State is in panic.  Even while taking over territory the Russians had abandoned in the north near Kharkov, the Ukroids lost a great many not only of their own men, but of NATO mercenaries as well.  To boot, the economic “sanctions” against Russia have backfired on Europe, which is now facing industrial and economic collapse, not to say freezing in the coming winter.  Russia, on the other hand, is surviving quite well, plus gaining massive support not only from China but from the entire global south along with India, Pakistan and even NATO member Turkey.

    Therefore we can expect the crime syndicate called America to try to threaten nuclear war in order to stave off the inevitable.

  10. the number of elite whitey (((supertards)) who MUZZ-19 is too grate its gonna be a holocaustianity on Sat, 17th Sep 2022 8:31 am 

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

  11. the number of elite whitey (((supertards)) who MUZZ-19 is too grate its gonna be a holocaustianity on Sat, 17th Sep 2022 7:23 pm 

    it will be blamed on elite whitey supertards anyway

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

  12. the number of elite whitey (((supertards)) who MUZZ-19 is too grate its gonna be a holocaustianity on Sun, 18th Sep 2022 11:07 am 

    it will be blamed on elite whitey supertards anyway

    remember elite whitey (((supertards))) are talkers. If supremacist muzzies kill kafir, supremacist muzzies are victims of backlash

    if elite whitey supertard kill supremacist muzzies, muzzies are victims

    elite whitey (((supertards))) talkers win in either case

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

  13. Biden’s hairplug on Wed, 21st Sep 2022 2:31 am 

    Russia mobilizes, has ultimate capacity of 25 million men:

    And if this isn’t enough to destroy Ukraine, then Nazi bulwark Lvov will be nuked (pre-announced, so they all can flee to Europe).

    And then there is China.

    The time to strangle the US empire to death has arrived.

    Meanwhile energy prices in Holland:

    1 kWh = 1 euro
    1 m3 gas = 5 euro

    The entire economy will crash, which is good, give us ample time to kill our enemies.

  14. supremacist muzzies Imam Azhar Subedar in dah whitehause ouch when will this muzzie detonates on Wed, 21st Sep 2022 8:56 am 

    elite whitey (((supertard))) joe kauffman reports

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

  15. the number of elite whitey (((supertards)) who MUZZ-19 is too grate its gonna be a holocaustianity on Wed, 21st Sep 2022 9:46 am 

    On This Day…
    Sep 21, 2013: Nairobi, Kenya
    Gunmen mow down patrons at a shopping mall,
    while occasionally taking prayer breaks: 67 Killed

    supertards please change ur undies after 3 weeks

    please feel at ease among friends we’re all lovers of supermacist muzzies here

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