Shale Gives Gazprom a Headache

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Today, Europe is mostly dependent on imports and receives most of its gas from North Africa, Norway, and Russia. Russia alone contributes approximately 30 percent of European gas, with about 80 percent of that gas being supplied via Ukraine.
Russia’s state gas company, Gazprom, which supplies much of Europe’s gas, is also known to be used as an instrument of Moscow’s foreign policy. Following Russia’s longstanding strategy of divide-and-conquer politics, Gazprom chases contracts with European countries on an individual basis – drenching one country with favorable energy deals while completely isolating another – as a means of pursuing state objectives. The result of key European economies dependent on Russia on one hand and serious misgivings by other states on the other makes a coordinated Russia policy in Europe virtually impossible to engineer. However, recent events may upset this Kremlin-orchestrated arrangement.
Shale gas production in the US has reached approximately 4.8 billion cubic meters (bcm) per day, or about 20 percent of total daily production. Experts foresee this rate quadrupling in the future and
shale gas production is expected to see about 74 percent growth worldwide. As the amount of gas supplies increases, the unit demand falls accordingly – an occurrence that has been tied to falling gas prices from Gazprom. In March, Gazprom announced that prices were being dropped by 15 percent in response to a more elastic gas market. Previously, Russia has sought to negotiate long-term energy deals with fixed prices pegged to oil futures. It seems that Gazprom did not count on the sudden and rapid emergence of shale as a viable alternative.
The response in Europe has also been swift as investors and prospectors alike begin to realize the potential of shale-derived natural gas. Major potential sources of shale gas have been identified in Poland, Bulgaria, Sweden, the United Kingdom, and Hungary. According to the calculations of Advanced Resources International, Poland could have recoverable reserves of up to 3 trillion cubic meters of shale-derived gas, or possibly enough to meet demand for the next 200 years. At present, Poland consumes 14 bcm of natural gas per year, with about 70 percent of this coming from Russia. However, if the estimates prove correct, not only would Poland’s energy dependence on Russia cease, but Poland could quickly go from being an importer to a natural gas exporter in the region. In fact, such high reserves could fully satisfy the natural gas demands of the entire 27-member EU for six years.
Hoping to strike gold, a slew of companies have already obtained licenses in order to commence prospecting for shale gas, including: Exxon in Germany, Hungary, and Poland; Conoco Phillips and Chevron in Poland; and Royal Dutch Shell in south Sweden. However, despite the promising estimates, there remain a number of obstacles. The technologies needed to extract shale-derived gas are expensive, making the profitability of shale gas an open question. That question is further compounded by lingering uncertainty over the process’s environment impact, especially near densely populated territories. Environmental and ecological issues were directly responsible for impeding the extraction of shale gas in some regions of the US.
However, Hans-Martin Schulz of the Potsdam-based GeoForschungsZentrum (GFZ), a German geological research center, notes that shale gas reserves in Europe, and particularly in Poland and Ukraine, tend to be concentrated in agricultural areas – far from densely populated regions. In addition, pipeline networks are already well-developed in Europe and supplying the extracted gas to consumer markets takes little time and comparatively less additional infrastructure. Although far from certain, some early estimates of shale gas reserves in Europe were pegged as high as 500 tcm.
Skeptics point out that indicators suggest that the resources in Europe may be of poorer quality than that of the US. Additionally, according to the International Energy Agency, North America is said to have as much as eight times as large shale gas reserves as Europe, which also distantly trails estimates for Central Asia and China. And Shulz himself believes that while shale may play an important role in the future, it will not be a “game changer” for Europe.
Gazprom, for its part, has responded by touting the advantages of liquefied petroleum gas (LPG) and has called shale gas less promising. Alexander Medvedev, Gazprom’s deputy executive director, has even gone on record saying that shale gas is “dangerous.” However, at the same time, Gazprom has begun making its own entry in the North American shale boom, giving itself an opportunity to gain experience in shale extraction.
The Russian energy sector was struck hard after the development of the Shtokman field, considered to contain one of the world’s largest reserves of natural gas at 3.8 tcm, was postponed in February 2010 after a collapse in gas prices. The gas derived from Shtokman was to be shipped to Europe via the planned Nord Stream pipeline’s second stage, but its future development remains mired in uncertainty.
In the US, the progression from prospecting to extraction took many years, and it is expected that Europe will not see the effects of its shale gas for at least another 20 years. However, the rapid advance of shale-derived energy in North America today will have an impact on international gas and oil prices. According to research from the Baker Institute for Public Policy at Rice University, the gradual increase in shale gas production will erode the comparative influence that Russia and Gulf states currently have over prices. Such a scenario is a hopeful one for Europe, given its energy dependence, but the full outcome has some ways to go.
Either way, shale’s possible challenge to Russia’s energy strategy is certainly giving Gazprom a headache. Though it still prefers delivering energy through immobile infrastructure like pipelines, it cannot simply dismiss the rise – and the attraction – of alternatives in Europe and worldwide. If it is to retain its commanding position in the energy sector, Gazprom will have to change its strategy. On April 19, Russian minister of natural resources Yuri Trutnev conceded that shale was proving to be a conundrum to Moscow. “We have a problem with shale gas,” said Trutnev. “This is not only my position, but the position of Gazprom as well.”
 

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