Monday, 25 July 2011

The shale gas revolution could lead to the end of the Putin era

A new American study confirms, what this blog has brought up in  previous posts, e.g. here and here; the Russian grip on European energy is faltering as a consequence of the American led shale gas revolution:

The natural gas boom in the U.S. has weakened Russia’s influence on European energy supplies and could keep Iran’s influence in check for years to come, according to a new study from the Baker Institute for Public Policy at Rice University.
The study, “Shale Gas and U.S. National Security,” says the surge of drilling in shale formations will have an impact on global supply for years to come and limit the need for the U.S. to import liquefied natural gas, or LNG, for at least 20 to 30 years.
That means more LNG shipments from the Middle East will be available for Europe, which has been beholden to Russia for a large portion of its gas, supplied by pipelines.
The study, funded by the U.S. Department of Energy, predicts that Russia’s share of the natural-gas market in Western Europe will drop to as little as 13 percent by 2040, down from 27 percent in 2009.
“By increasing alternative supplies to Europe in the form of liquefied natural gas (LNG) displaced from the U.S. market, the petro-power of Russia, Venezuela and Iran is faltering on the back of plentiful American natural gas supply,” writes Amy Myers Jaffe, a fellow at the Baker Institute and one of the authors of the study.
The study challenges the notion that the U.S. natural gas shale is a short-lived phenomenon. It concludes domestic production will more than quadruple by 2040, from 2010 levels, and account for more than half of all U.S. gas production by the 2030s.

‘Game changing’
“The idea that shale gas is a flash-in-the-pan is simply incorrect,” writes Kenneth Medlock III, another Baker Institute fellow and study co-author. “The geologic data on the shale resource is hard science and the innovations that have occurred in the field to make this resource accessible are nothing short of game changing.”
A decade ago, U.S. companies were making massive investments to build LNG-import terminals based on the assumption that domestic natural-gas production would continue to decline and the country would need to draw on supplies from Africa, Russia, the Middle East and Australia.
But U.S. supplies did a U-turn over the past five years as companies perfected the combination of horizontal drilling and hydraulic fracturing — a process of injection millions of gallons of water, sand and chemicals into the ground to crack open shale formations – to economically access more gas reserves.
LNG terminals
U.S. gas production from shale has risen from virtually nothing in 2000 to more than 20 percent of domestic production today. That’s left the handful of new LNG import terminals – such as the Freeport LNG terminal southwest of Houston and Cheniere Energy’s Sabine Pass terminal in Louisiana – seeking permits and funding to build the capacity to export U.S. natural gas.
Help for Europe
By freeing up LNG shipments that might otherwise have been destined for U.S. consumption, Europe will be able to draw more heavily on Middle Eastern and other future LNG sources, cutting its dependence on Russian gas.
“A more diverse energy supply for Europe enhances U.S. interests by buttressing Europe’s abilities to resist Russian interference in European affairs and help border states in the Balkans and Eastern Europe assert greater foreign policy independence from Moscow,” Medlock writes.

Read the entire article here

In an editorial the Houston Chronicle focuses on the importance of the new report from a US point of view, but the the same conclusions also apply to Europe:

Only recently it appeared that the aggressive and hard-line Russian state gas producer, Gazprom, would have a virtual death grip over Western Europe as the major source of natural gas. Likewise with the dictatorial Chavez regime in Venezuela across South America.
As the Baker report notes, the benefits also include the significant economic ones of price stability, job creation and a significant impact on this country's dangerously negative balance of payments.
This report is as important as any national security document in recent memory, touching as it does on energy policy, economic policy and national security, and offering clear solutions to what have long seemed to be intractable diplomatic and political problems. It deserves wide circulation among Washington's top policy-makers — not least the president of the United States.
We urge President Obama to read it carefully and thoroughly. He will find solutions that can make all the difference in charting a prosperous, secure future for this country.

This passage in the study is particularly interesting from a European point of view:

Rising shale gas production in the Unitied States is already impacting markets abroad. In particular, LNG supplies whose development was anchored to the beliefs that the United States would be a premium market are now being diverted to European and Asian buyers. Not only has this immediately presented consumers in Europe with an alternative to Russian pipeline supplies, its also exerting pressure on the status quo of indexing gas sales in Europe to a premium marker determined by the price of petroleum products. In fact, Russsia has already had to accept lower prices for its natural gas and is now allowing a portion of its sales in Europe to be indexed to spot natural gas markets, or regional maket hubs, rather than oil prices. This change in pricing terms signals a major paradigm shift.

The study can be uploaded here

The shale gas paradigm shift makes it clear why Russia and Gazprom are desperately (like Medvedev last week in Hanover) trying to get Germany and other European countries to sign long term delivery agreements, however, without any great success. Why should European countries bother to agree to pay high Russian prices, when they know that prices are going down as a result of the shale gas revolution. And in addition, shale gas exploration in Poland and other countries will bring even more gas on the market.

The Germans are, of course, in a somewhat more difficult situation, since they have already (foolishly) committed themselves to the Russian-German Nord Stream pipeline (which now looks less and less enticing economically). However, the German (and some other western) companies who have entered into this project probably will try to minimise their long term involvement.

The most important change that the paradigm shift will bring about in Russia is, however, not economic, but political. The entire Putin edifice is built on the assumption that Russian energy exports will continue to grow and provide huge earnings, shared between a number of supportive oligarchs, the corrupted government elite and - to a smaller degree - the rest of the population. When, due to low demand and lower prices, the money is not coming in as planned, the former KGB spy Vladimir Putin and his henchmen will not be able to cling to power.  

From a western - and indeed also Russian - point of view, the end of the Putin era is more than welcome. At least there is then hope that the end result would be a better, more democratic Russia, able and willing to engage in a real political and economic co-operation with the west.

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