by The Ister for The Saker Blog
We can see the ongoing war against Russia’s energy industry as an act of revenge from the Empire – but a war which it is losing.
After Putin prevented the looting of the country’s energy reserves in the early 2000s, this economic war was launched, designed to cripple the nascent Russian Federation’s oil and gas industry and by extension the Russian economy as a whole.
This plan began with the planning of the Trans-Caspian, Nabucco, and Baku Tbisili Ceyhan (BTC) pipelines. The BTC pipeline was erected in 2005, pumping oil from Azerbaijan’s Caspian Sea fields through Georgia to Turkey. Next, the planned Nabucco pipeline would have brought Azeri gas from the BTC to the Baumgarten gas hub in Austria, where it would circumvent Europe’s need for Russian energy. As a final blow by NATO, the Trans-Caspian pipeline was intended to cross the Caspian Sea, bringing Turkmen gas and oil to Azerbaijan and eventually to Europe through the BTC and Nabucco routes, isolating Russia.
The Russo-Georgian war can also be understood through this lens. Two days before the outbreak of the conflict, the BTC pipeline suffered from a mysterious explosion. Putin’s victory in the war and subsequent occupation of South Ossetia and Abkhazia held the Nabucco and Trans-Caspian projects at risk, as Western energy corporations would no longer invest in such an expensive undertaking only miles from a conflict zone. The plans were scuttled. Russia’s oil giant Gazprom now signs deals to purchase Turkmen gas directly in order to disincentivize Turkmenistan from taking part in such a future project.
And while we see the reintegration of Crimea as the return of historically Russian territory, it was also a major victory in the energy war. In the Crimean conflict, Putin’s nightmare was that the overthrow of Yanukovych would be followed by the eventually weakening or removal of Russian military positions on the energy-rich Black Sea. A strengthened position in Crimea was leveraged in the creation of the TurkStream pipeline, which then allowed Russia to bypass Ukraine by shipping gas under the Black Sea to Europe.
Russia’s standing in the pipeline battle has been further cemented by recent events regarding the NordStream 2 pipeline, which will bring Russian gas through the Baltic Sea to Germany. Naturally, America is not a fan of this project and has sought to delay the construction by any means possible.
But even Germany, no friend of Putin or Russia, has pushed ahead with the project. Gazprom will now complete the pipeline alongside partners from British, Dutch, Austrian, and German energy companies. And while America may disapprove from afar, all America exports is its fiat dollar which can offer no substitute for the Russian gas and oil required to power Germany’s industrial clusters.
In December of 2020, Gazprom resumed construction on the pipeline despite America’s protestations. In fact, the German-Prussian state of Mecklenburg Vorpommern has recently voted to create a sanction-proof legal structure that would preempt future attempts by America to interrupt the project.
What a turn of fate: to see America’s omnipotence fade as the Empire’s geopolitical meddling is simply circumvented by peaceful trade
So while Russia’s victory in the pipeline battle has been unequivocal, the war has been fought in other domains. For the last 6 years the Empire has won the pricing battle, with its two primary weapons being the oil of Saudi Arabia and the natural gas produced by the shale revolution.
The oil price battle began when John Kerry and the Saudi King met in September of 2014. An arrangement was worked out where the Saudis would suppress crude prices to weaken the Russian economy in exchange for America’s military support in overthrowing Bashar al-Assad. Because Saudi Arabia has the lowest extraction costs of any major producer (3$ per barrel as of 2020), it can profit at prices much lower than its higher-cost oil-producing opponents such as Russia, Iran, and Syria. Under this new arrangement, crude prices fell to new lows as ISIS was spawned in Eastern Syria, and the Free Syrian Army was given American heavy weapons.
The Russian economy shrank almost 40% over the next two years. By comparison, America’s “Great Recession” almost crushed the entire financial system after a mere 2.5% drawdown in GDP. Russia was able to withstand the enormous contraction because under Putin the country’s monetary policy is focused on maintaining net-zero debt: a far cry from the 1990s when Saudi price-suppression (intended to punish Russia for fighting Islamists in Chechnya) hammered down crude prices and resulted in the 1998 Russian financial crisis. Now that Russia operates without external debt, these price tactics are harmful to the populace but no longer imperil the functioning of the state.
While 2020 has seen a renewal of price suppression by the Saudis, the Kingdom’s long-term prospects are plummeting. Below Saudi Arabia sits the state of Yemen. As the high birth rate outstrips the supply of natural resources, Yemen produces an excess of poor and radicalized young men. In response to Saudi and American airstrikes, the Houthi movement has united Shia and Sunni Muslims in Yemen under a common banner against their northern neighbor. Now Yemeni rebels are targeting Saudi oil facilities with increasingly frequent drone strikes, one of which spiked oil prices by almost 20% in Sep 2019.
Another problem for Saudi Arabia is resource depletion. The Saudis are systematically lying about the amount of oil that’s remaining. Leaked communications showed the former VP of Aramco warning the US that their oil reserves could actually be 40% lower than claimed. Consensus used to be that the Ghawar field had 5 million barrels per day capacity. The IPO filing for Aramco revealed a maximum capacity of 3.8 million barrels per day: and that’s their biggest field, producing a third of the nation’s oil output.
If their oil reserves are fine, why has the Kingdom been panickedly talking about economic diversification for the past 5 years? Why did Aramco even have to IPO? America’s vassal state in the crude oil battle seems to be drying up.
Another weapon in the energy price war has been the shale gas revolution. New advancements in horizontal drilling and hydraulic fracturing have allowed America to access previously hard to reach “tight” oil and gas reserves. As many small and mid-sized fracking operations rapidly set up shop in the mid 2010s this flooded the world with cheap natural gas and lowered Russia’s energy earnings. However, many of these firms were unprofitable and existed only due to the ultra-low interest rates available at the time, which enabled companies to operate at a loss for several years: meaning that the profitless shale revolution which hurt Russia was de facto financed by the Federal Reserve.
The fall of US shale seems to be on the horizon, as the industry showed signs of huge weakness in 2020. Oil and gas bankruptcies have quadrupled from 2019 to 2020, and production levels from America’s largest fields have dwindled. The Eagle Ford field is down 30% from 2019, Niobrara is down 35%, and Anadarko is down 40%! The best case for America is that these were voluntary production drawdowns due to cheap prices. The worst case is that these are symptoms of the end stage of depletion – the same fate befalling Saudi Arabia.
Even if the large American fields return to their previous production levels, this wave of bankruptcies will remove many small producers from the market who were essentially drilling at an operating loss for years.
There are other developments that suggest that the Empire is losing the energy war
1. Nikol Pashinian, who targeted Gazprom in Armenia with spurious lawsuits, has been given a black eye by Putin. By brokering the Armenian-Azeri peace deal the Russian military now permanently occupies the Caucasus. Anyone who seriously believes it is limited to 5 years should look to the “temporary peacekeeping operations” that have kept Russian troops stationed in the tiny nation of Transnistria for almost 3 decades. Russia’s position in the region – a crucial energy hub, is now stronger than at any other point since the Soviet Union.
2. In defiance of US sanctions, Iran has restarted its domestic shipbuilding industry by constructing new oil tankers with natively sourced parts. New Aframax size tankers have the capacity to hold 750,000 barrels of crude oil and will be used to surreptitiously deliver oil to Iran’s trading partners
3. Despite feeble efforts by Washington to install Juan Guaido in Venezuela – the only country with comparable energy reserves to Saudi Arabia, Maduro is still in power, and Russia and China are now collaborating to circumvent US sanctions. Throughout 2020, crude from Venezuela arrived at Chinese ports, having been snuck past American detection with the aid of Russian state oil company Rosneft, which made the oil appear as if its port of origin was Malaysia.
So what are the takeaways from these events?
First, we can see that Europe is waking up to the necessity of Russian energy. Despite all America’s bluster, it cannot provide a viable alternative even for the countries with which it aligns ideologically. Sure, there will be haphazard attempts like squirreling tight gas from cracks in the Mediterranean Sea, but those are at best partial solutions. Second, sanctions have backfired: the Russian economy is now fully resilient and profitable. There is no further way to wage economic warfare on a nation that has already been isolated from the global financial system. As far as oil trading is concerned, the willingness of America to impose restrictive sanctions has been matched by the creativity of those hoping to bypass them. Finally, the toughest period of the price war seems to be over and the pipeline battle has been won.
The Ister is a researcher of financial markets and geopolitics.