Russia Rattled by Rising Importance of Shale Gas

Whilst it is exceedingly difficult to summon up much sympathy for either Russia's state-owned natural gas monopoly Gazprom or Russian President-elect Vladimir Putin, the dynamic rise of natural gas produced by hydraulic fracturing, or 'fracking," has raised alarm bells in the highest reaches of the Kremlin.

Why?

Because 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 Russian leadership is sufficiently unnerved by the prospect that on 11 April Prime Minister Putin told the State Duma in his final address before he takes over as president on 7 May, "We have to be ready for any external shocks. The likelihood of them recurring is, as you know, high. The world has entered an era of turbulence, and there's also a new wave of technological changes. The configuration of the global markets is altering. There have been questions from the various political factions, and I'm just going respond to some of them.

For example, the U.S. in recent years has been actively engaged in the production of shale gas. Colleagues from the Liberal Democratic Party asked about this problem. Do you realize how important this is - after the collapse of the Soviet Union, we inherited a whole series of intermediaries and transit networks. This could of course redefine the hydrocarbons market in a big way. Russian energy companies have to be ready right now to meet this challenge."

Underlining the seriousness of the issue, Putin's speech was broadcast live by the Russia 24 TV network.

Seeking to put a positive spin on his grim pronouncements, Putin continued, "I fully agree with the proposals of the Duma deputies that we need to establish a system for better long-term forecasting in the macroeconomic, financial, technological and defense sectors. This is especially important because the 21st century promises to be a new era of new major geopolitical centers in the financial, political and cultural and spheres. The last four years have brought into our national treasury of oil and gas riches the Vankor and Talakan developments and new fields in Yamal, Yakutia and Sakhalin. Work has begun in the Caspian and on the Arctic shelf. Construction has begun on the first phase of the 'Eastern Siberia - Pacific Ocean' oil pipeline as we come to supply the Asia-Pacific region, a very efficient, fast-growing area of the world. On the world oil market, Russia has even created a new grade of oil. Furthermore, last year, for the first time we went directly to the gas market in Europe with the imminent opening of the 'Nord Stream' natural gas pipeline under the Baltic Sea and by the end of the year should begin laying the 'South Stream' pipeline."

What Putin signally failed to tell the Duma delegates was that 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.

But, with Russia's natural gas oligarchs can rest secure now that Putin, who has just received another six-year term as president, is fully up to speed on the issue. In any case they doubtless noted his comment, "Domestic energy companies must now respond to this challenge." For those sluggard biznismeny who fail to respond to Putin's challenge - there's always - Siberia.

By. John C.K. Daly of Oilprice.com