Two Opposing Views In The Shadow Of War

Some thoughts on using natural gas within the shadow of the potential conflict in Ukraine

To get anything done in this world you need to be 100% focused on your goals. Single-minded. Focused. All-in. The problem with this mindset is we can lose sight of the bigger picture while trying to accomplish our goals. I see this playing out right now in how the world views our energy and materials sourcing and in this Oil and Gas issue of the newsletter I discuss what I see as the bigger picture and how it’s exemplified right now in Ukraine.

The Environmental View

If you are conscious of climate change and want the world to reduce carbon emissions you are likely focused on reducing the supply of fossil fuels amongst other things. Burning fossil fuels leads to carbon dioxide, extracting oil leads to methane escaping, and all of these things add up to a warming planet. Fossil fuels, the companies that profit from their extraction and refinement are often viewed as the problem for distributing misinformation or gaslighting the public. Why can’t they just change how their business has been operated since their inception? Just listen to the scientists! Fossil fuels are bad and ceasing our involvement with them is crucial in reversing our planet’s current state. This is the view of the environmental champions and a lot of people including myself. 

The Oil and Gas View

The “shills for the oil and chemical industry” would have us believe that fossil fuels and this extracted carbon is a pillar of the foundation that holds our world up. Fossil fuels are critical to ship goods from southeast Asia to North America and back again. Fossil fuels are how the majority of us get around to our jobs, the grocery stores to buy food, and to drop our kids off at school. Oil is used to mine and extract lithium to make the batteries that power our electric cars. Oil distillates are cracked to make the polymers and chemicals that make up our tires, the insulation in our houses, and the packaging that keeps our goods safe during transit. Natural gas is a large part of our electric grid and the heat in our homes. Fossilized carbon is how many of us support our families and enable us to live the lives we have always known. This is the view of those who believe that fossilized carbon plays a crucial role in our lives today and including myself.

Two Ends Of The Same Stick

These two views are typically voiced in opposition to each other, but in reality they are both part of the same truth. I accept both of these things as being true and I think things will change for the better, but perhaps not on the timeline that would make anyone happy. I think the trick is to see the merits in both “opposing views” and try to chart a path forward that acknowledges both. Massive change that happens on an extremely short time scale often looks like destruction. If you want to picture a society without fossil fuel production, think about when Texas froze over for a few weeks in 2021, but extend that indefinitely.

Right now in Europe, fossil fuels needs, NATO, and Russia are all converging on Ukraine. How did we get here? A big part of the story starts a decade ago.

Nuclear Plant Closures and Liquified Natural Gas

In 2011 Germany decided to shut down their nuclear plants by 2022 (hey, it’s 2022 now!) in the wake of the Fukishima Daiichi nuclear disaster, the worst nuclear disaster the world has seen since Chernobyl in 1986. The nuclear plant closures were viewed by some as a “victory” against a technology that produced radioactive nuclear waste while others viewed it as a significant risk to Germany becoming more dependent on fossil fuels. The Washington Post Editorial Board highlighted how this has put Germany in a vulnerable energy position despite pushing for solar and wind power:

Though Germany has invested heavily in renewables, it nevertheless has had to burn massive amounts of coal since 2011 to keep its economy running. Absent nuclear, Germany also depends more on Russian natural gas, a deep geopolitical vulnerability that gives leverage to Russia’s authoritarian government. 

In 2016 the US started exporting liquified natural gas (LNG). The shale boom boosted domestic production, caused prices to fall, and it enabled exporting natural gas without having to build new pipelines. The ability to ship LNG from the US to European countries has alleviated some of the dependence of Europe on natural gas. About half of the recent record high shipments of LNG have gone to Europe according to Reuters:

The gains reflected soaring demand for the home heating and industrial fuel that pushed prices in Europe and Asia to record highs. The United States has ample and cheap supplies as its shale oil and gas boom in the last two decades led to domestic production that has exceeded U.S. demand by about 10%.

Right now, the Dutch natural gas production has slowed due to earthquake concerns and there are talks of increasing output as we enter the depths of winter and demand is increasing. Germany is also attempting to close their coal plants due to coal being bad for the environment, but this means they will need to burn more natural gas which is cleaner than coal (but dirtier than nuclear). I suspect there is not enough production capacity to even produce the renewable energy needed right now in Europe in the next few years.

To complicate matters more there are pipelines of natural gas that flow from Russia to Germany in Nord Stream 1 and 2. Nord Stream 1 is currently delivering natural gas to Germany and Nord Stream 2 is finished, but has yet to be turned on and these pipelines have economic impact on Eastern European countries as well according to the BBC:

The US fears the pipeline makes Europe much more dependent on Russian energy, handing significant power over Berlin and the EU to Russian President Vladimir Putin.

Ukraine also wants the pipeline stopped.

Russia sends much of its gas to Europe through Ukraine. But Nord Stream 1 and 2 bypass the country.

That means that with the new pipeline Kyiv could lose out on €1.8bn in "transit" fees it earns on gas passing through its territory. Ukraine says it is being punished for its warm relations with the West.

The Shadow Of Multi-National War

If Ukraine joins NATO I suspect Russia views this the same way the US viewed Russia’s involvement with Cuba. If Russia invades Ukraine then economic sanctions put into place on Russia might trigger Russia to stop sending natural gas into Europe, which would send the price of natural gas to the moon. LNG exports gives the US a stronger interest in keeping Western European countries buying American gas as opposed to Russian gas, but I don’t think the capacity is there to supply Europe 100%.

It looks like NATO and the US will not back down from Russia’s security demands either so more troops are being sent to the borders of Ukraine. If war does break out it’s likely that the Russian natural gas pipelines that run through Ukraine to western Europe get damaged which would send the price of natural gas to the moon. Environmentally focused people might celebrate high prices because it makes renewables more viable, but the regular people of Europe have to shoulder the burden during such an abrupt price change. Higher prices in Europe may cascade to raising prices in the US as exporting LNG to Europe becomes more lucrative.

In either case natural gas prices go up, the cost of electricity goes up, and it likely becomes harder for energy intensive industries in Europe to operate such as the chemical industry. Steam crackers and catalytic reformers use an enormous amount of energy and the prices on commodity chemicals would likely go to the moon as well. Biobased feedstocks will become more viable, but this is not a switch we can flip on and off and higher prices might be the pressure to speed up what were once considered long term supply chain projects.

I suspect there will be no multi-national war in Ukraine, but there has been a protracted on-going conflict. There have been an estimated 13,000 casualties, 1.5 million displaced people, and a front line that spans 280 miles according to the Global Conflict Tracker. but I think that higher prices are likely and that inflation will start inflicting a toll on economies around the world.

Tony