Russia Faces Crucial Threat from Shale Gas

This article is cross-posted from Al Fin blog

Now and again Russian President Putin has warned Russian gas-giant Gazprom that it must face the growing threat of abundant shale gas. Shale gas is a massive and newly accessible energy resource ranging from North America to China to South America to Europe. But it is the shale gas resources in Europe and China that Putin is most worried about, for those resources represent a huge and devastating threat to Russia's ability to finance its government. Putin's ambitious plans to make Russia into a world superpower, like the collapsed USSR, are at stake.

Could the boom in shale gas challenge the leadership of Russia in gas? Until now, Moscow and Gazprom have seemingly been nonchalant about the threat. But as the impact of the boom in US natural gas production becomes clear, depressing prices to levels not seen in 10 years and increasing the prospect of the country becoming an exporter, the Kremlin is beginning to pay attention. The change in attitude is led by Vladimir Putin, Russia’s president-elect. He told the Duma last week that the boom in shale gas can “seriously” reshape the global energy market. “National energy companies, obviously, must respond to these challenges,” he said, in a clear reference to Gazprom. ...The biggest risk for Russia is not the US shale gas but the potential of the development of similar reserves in neighbouring Bulgaria, Romania, Poland and Ukraine. Eastern European countries are racing to tap shale deposits using the same technology – hydraulic fracturing, known as fracking, and horizontal drilling – used in the US gas industry. Gazprom supplies Europe with about 20 per cent of its gas needs, so the development of shale deposits in its backyard is a serious long-term threat. Until now, European companies have found it difficult to renegotiate their expensive contracts with Gazprom because the lack of alternative suppliers. Over the next decade, the development of the European shale industry could give the Continent’s natural gas consumers a bit more leverage. _FP_via_GWPF

China is another Gazprom customer which will soon be in a good position to re-negotiate its contracts, based upon the development of its own native shale gas resource. All of these re-negotiations will be extremely painful for a corrupt energy oligarchy such as Russia, which depends upon high energy exports to finance its very existence -- an existence already threatened by an ongoing demographic collapse, a worsening public health disaster, an industrial infrastructure that cannot keep up with the west, and a military that is increasingly seen as a "paper tiger" by its ambitious neighbor to the southeast. Putin has green activists well in hand, in his battle to keep Russia's energy customers helpless and dependent upon their Russian energy suppliers. But governments are being pushed to the wall by energy prices and ongoing budget deficits. Most of Russia's customers are not overly fond of the aggressive bear, and do not care to pay for Russia to re-develop its nuclear and conventional threat.

...Gazprom’s European customers, tired of being ripped off by Gazprom, are avidly exploring the possibilities of undertaking fracking to develop their own sources of the “blue gold,” and nowhere is interest higher than in the Russian Federation’s neighbors Ukraine, Poland, Romania, Bulgaria and China. ...the rapid growth in U.S. shale gas production has already led Gazprom to postpone the launch of its massive Shtokman gas condensate field development in the Barents Sea, which contains an estimated 3.9 trillion cubic meters (tcm) of natural gas. In 2009 the U.S. overtook Russia as the world’s biggest producer of natural gas as expanded fracking activity to extract fuel trapped in shale rocks. Even worse, by 2016 the U.S. plans to become a net exporter of liquefied natural gas, with initial sales of 31.1 million cubic meters (mcm) a day doubling within three years. Gazprom’s exports to Europe are already falling because of increased competition. Moscow’s National Research University Higher School of Economics Center for evaluation of commodity assets director Valery Kryukov noted that while Gazprom previously supplied 37 percent of Europe’s natural gas needs, that had slipped to 25 percent and concluded, “Russia risks losing its main source of income - the export of natural gas.” Perhaps the weirdest aspect of Russia’s views on shale gas is that it has criticized recent interest in Rumania, Bulgaria and Poland in shale gas development as environmentally irresponsible, a somewhat surreal complaint given the USSR’s ecocide inflicted by more than seven decades of headlong industrialization. _GWPF

China's situation is even more threatening to Russia than the prospect of losing its European customers. Because China is a clear and developing threat to Russia's very possession of its vast East Siberian resources -- from timber to minerals to oil & gas to uranium. If China becomes self-sufficient in gas production, not only will Russia lose a lucrative customer, it will also be faced with a more dangerous competitor -- on many levels.