This Is Worse (Because I've Already Had a Post in the Last 4 Months Called 'This Is Bad')

 

I had connectivity problems. Wrote this Monday and Tuesday but just getting it posted today.

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A couple of days ago something happened to the Nord Stream 1 and 2 gas pipelines.

Today they are saying it must have been sabotage. A few people are saying it is an act of war (not me).

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You may have noticed that the war in Ukraine has had a lot of macroeconomic repercussions. This is an upgrade to that stress level. I don't really want to post about military geopolitics for a macro class, but this is what we've got in 2022.

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You've no doubt gathered that Russia produces a lot of natural gas, which is piped to western Europeans. For gas, pipelines are a lot more economical than ships.

There are a number of pipelines doing this. Nord Stream (now called 1) and Nord Stream 2 are a couple of them. Nord Stream 1 is operational, but has been shut down since mid-summer. The Russians claim this is for maintenance, but few believe them: it's more of a bargaining position. Nord Stream 2 is not operational yet, and progress on it was stopped by Germany after Russia invaded Ukraine. But it was pretty close to ready to go when the war started.

Both run along the bottom of the Baltic Sea. Naive people worry about putting pipelines on the bottom of the ocean. Don't. This is safer: away from people, out of harms way, and well-insulated from the rest of the world. Pipelines routinely last several decades without much maintenance or leaks on the ocean floor. And they're probably way more common than you'd guess.

These are big infrastructure projects. Costs are estimated at $15B (not sure if that is for one or both). Each pipeline's underwater part is about 800 miles long, the pipes are steel, 4 feet in diameter, and 1-2 inches thick, with a 4 inch coating of concrete around the whole thing (tweak the recipe a bit, and it's not hard to make concrete that really resistant to salt water).

They are mostly debt-financed by western bank syndicates. They are owned by the Russian company Gazprom through their German subsidiaries.

Potential revenue from these is highly volatile due to volatile natural gas prices, but $20B/yr is a reasonable estimate right now. Note that this is revenue not profits, so figure a few billion in profits in a good year.

One could also estimate that if a big fraction of the $15B cost was financed with debt, that interest payments are in the $2B/yr range due to risk. Those payments have to be made whether the gas is flowing or not (and the Russians have been pretty good this year about making payments on their debts to western banks).

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Sunday night, starting about 6 pm, when it was the middle of the night in the Baltic Sea, 3 4 events took place along the 2 parallel pipelines, in international waters, at different times, in a region where the pipelines are actually a few miles apart.

These were recorded by seismometers, and appear to be substantial explosions. Estimates are for the equivalent of at least 100 and probably 200 Kg of TNT.

N.B. These were not natural occurrences. Natural gas doesn't burn (or explode) under water. (It can form fireballs when it hits the surface).

During the day, Danish planes found a bubble field on the surface of the ocean about a kilometer in diameter. Neither pipeline is running, but they do contain some gas in them as routine.

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This is an act of terror, but terrorists seem unlikely.

These pipelines are 200 feet deep. Despite what you see in movies, working at this depth is expensive and rare. It takes ships, submersibles, but probably not divers. But bottom line it takes money.

The pipelines are steel and 1-2 inches thick (remember they are under pressure), so this is in the range of medium armored military vehicles like armored personnel carriers. Bottom line, explosives won't budge these. You need armor piercing or shaped charge munitions.

You can't really "shoot" anything at that depth either, other than an actual torpedo with a homing mechanism. That seems unlikely because they leave wreckage.

In addition, it seems odd but not that surprising when you think about it, but metal reflects explosive shock waves. Not completely to be sure, but partially. And curved metal does an even better job at reflecting damaging shock waves. Shaped charges are used for this: the explosive is packed around a metal cylinder that liquifies, and cuts straight through the steel due to pressure and heat. Things like this are not the stuff terrorists make in the kitchen with a few household chemicals.

I also learned today that anyone doing this would have to get quite far away before setting off the devices. This is because the escaping gas would upset the buoyancy of any vessel with a mile or two.

So, speculation is a submarine or submersible, using unmanned vehicles, to attach specialized charges in multiple spots, that cruised away and detonated from a safe distance.

But once you admit to that scenario is likely, then it's also possible that the charges were set a long time ago, and someone just waited for an opportune time to hit the switch. 

Another possibility is that the Russians did this by sending a "pig" down the pipeline with a bomb attached. A "pig" is a robot that checks the interior of the pipe for damage. Not hard to load it up with a bomb ... and most things are easier to damage from an explosion on the inside going out rather than from the outside going in.

On Wednesday, a German publication reported that German security officials believe both pipelines have irreparable damage.

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Who has the capability of doing this? 

The United States. Russia. That's the short list.

The medium list would include the UK, France, presumably China, possibly Israel, possibly richer more militant oil states like Saudi Arabia, and Iran ... and that's about it.

It is not clear if Ukraine has this capability at all. Of course, they've been getting cool new military hardware for months, and they seem willing to use what they've got. But submarines?

It's definitely possible that some other countries — Germany, Poland, Japan, South Korea, maybe others — could probably cobble together all the different pieces required to pull this off.  

It is also remotely possible that this is industrial espionage. Could a rogue actor in a pipeline company do something like this? Maybe. Shaped explosives aren't just used in the military. They'd have submersibles. They'd know where the sensitive spots are. But the motive is hard to come up with. Insurance fraud? Some Bond-worthy fantasy about driving up natural gas prices?

Could it have been environmental monkey-wrenchers? The scale of the attack would seem to preclude that.

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Who would benefit and who would be harmed?

This is not straightforward at all. In part, this is why this is such a big deal.

First off, this is a provocation more than an attack. No one was hurt. Nothing visible was wrecked. The pipelines weren't running. But they have been a center of controversy all year.

Certainly the syndicate of western lenders is harmed: they volunteered to turn their financial wealth into a physical asset on the promise of getting a steady stream of payment checks. No doubt they are insured, but acts of war, terrorism, and industrial espionage are usually not covered.

A key here may be that the Russians won't be harmed much by this. Their gas wasn't moving through the pipelines. If anything, they'd probably like them open and running. But (aha) they weren't the ones who closed them. In short, the value of the pipelines to Russia was taken away, and with it their incentive to leave them unharmed.

I'm projecting here, but this all sounds like an escalating criminal spat. The Russians get belligerent. The Germans say "Hah, we'll just close down the second pipeline". Then the Russians say "Nice pipelines you have there. It would be a shame if something were to happen to them." And then something did.

If this is the case, sabotaging the pipeline is a way of boxing in western Europeans (mainly Germany). You had this bargaining chip. And now you don't.

I also think it's reasonable to think that the Russian company that owes interest payments on the pipelines, and has no cash flow from them, could claim force majeure if they can keep their hands clean, and get out of future payments.

Another interesting theory is that Putin is losing. He probably can't lose to Ukraine and stay in power. But, could he tweak NATO enough that Russia backs down, and declares a ceasefire? Putin might come out of this smelling like roses in that situation.

Who would be threatened most by this sort of attack. Actually, it's probably not the users of Russian gas. Instead, it's the alternative suppliers of gas to western Europe who use underwater pipelines. That would be Norway and the UK. Perhaps the signal is for them.

The German government might have motive here too. They cut off the gas for political reasons. But their public doesn't like that, and is willing to throw Ukraine under the bus to get Russian gas. In fact, there were big protests in Germany last week to open Nord Stream 2 and get the gas flowing again. If the pipelines are blown, then no more domestic political problem. Hmmm.

Lastly, Schelling won a Nobel Prize in 2005 for working out the theory of how destroying your own options pro-actively can make your other bargaining chips more valuable. Maybe this is what Putin is doing: cutting his own options.

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Uh-oh. Turns out the CIA warned the Germans about a threat of sabotage to the pipelines a couple of months ago. Wonder what they knew?

And President Biden made a veiled threat that we could and would shut those pipelines down if needed. When this first came out on Tuesday, I think most people thought it was just blowhard Joe mouthing off again. But today it surfaces that an Undersecretary of State made a similar threat a few months back. Both of those were in official statements, video of which is easy to find on the internet.

And then there's the accusation. Almost immediately a Polish politician declared on Twitter that the U.S. were the only ones with both incentive and capability to do this. News articles are dismissive of him: characterizing him as a former defense minister. Wow. This is possibly propaganda on our part. The guy is not just a former defense minister (2 years). He was also foreign minister (7 years), a member of their parliament, then the analog of our Speaker of the House of Representatives (currently Nancy Pelosi), and then he got elected to the European Parliament in Brussels where he's still serving. This is all publicly known, but I have yet to see an American media outlet note any of it. Basically, he's not a crank. Oh ... and he worked in DC for a couple of years recently at a major market-oriented think tank. And oh ... he's married to Anne Applebaum, a well-known historian of 20th century Eastern European history, who currently has a column published in most issues of The Atlantic. In short, the guy is dialed in, and was on top of this right away. Maybe he knows something.

And if that's the case, perhaps it was the CIA saying "Nice pipeline you've got there. It would a shame if something were to happen to it.".

There's an interesting clue that might support this. Intel sites on Twitter have posted radar tracks of both American and German surveillance planes over the pipelines at the time of the explosions. Hmmm.

In my heart, I don't really believe this section. But as a professor, do I have to tell students that we shouldn't be emotional and dismiss this too quickly? Yes.