Monday, 22 April 2013

Gazprom shale gas denial: The case of Alexey Miller

Alexey Miller - a case of denial

Alexey Miller, CEO of Russian gas monopoly Gazprom - "perhaps the most mismanaged and corrupt company of its size in the world" - owes his position, not to his prowess as an energy expert or a business leader, but solely to his close ties with dictator Vladimir Putin
Reading what this man, who would have been sacked already long ago had he been the in charge of a western energy company, has to say about the U.S. shale gas revolution, proves the point: 
The extraction of shale gas in the US is unprofitable and this “soap bubble will burst soon,” believes the CEO of Russian gas giant Gazprom Aleksey Miller.
“Currently, there aren’t any projects that we know of where shale gas production would be profitable,” Miller stated, adding that “absolutely all the boreholes” are in the red. --
The US “is not a competitor” for the Russian energy giant, Miller stated.
“We are skeptical about shale gas,” he said, as cited by Interfax. Therefore, Gazprom sees “no risks” for itself in the development of shale gas energy in the US. America still remains a country with a deficit of gas – it is the largest gas market and the largest consumer of this fuel, Miller said.
A psychologist could not find a better example of a person fitting the definition of being in denial:
Denial is probably one of the best known defense mechanisms, used often to describe situations in which people seem unable to face reality or admit an obvious truth (i.e. "He's in denial."). Denial is an outright refusal to admit or recognize that something has occurred or is currently occurring. Drug addicts or alcoholics often deny that they have a problem, while victims of traumatic events may deny that the event ever occurred.
Denial functions to protect the ego from things that the individual cannot cope with.
Miller, as well as his creator Vladimir Putin, are clearly in denial about e.g. these facts: 
We have seen a 40 percent increase in domestic oil production since 2008, the highest growth in oil output of any country in the world over that time period. As could be expected, net oil imports have plummeted, from more than a 60 percent share of domestic consumption in 2005 to less than 40 percent this year, the lowest dependence on foreign sources of oil in more than 20 years. Domestic oil production is booming, and the United States could even surpass Saudi Arabia to become the world's biggest oil producer by 2020.
The upsurge in U.S. natural gas production has been no less dramatic. The Energy Information Administration, or EIA, estimates that the U.S. has enough gas to last more than 100 years. What has become known as the "shale gale" has turned a shortage into a surplus, and now natural gas accounts for more than a quarter of America's total energy.
The abundance of cheap gas has helped reduce utility bills for consumers through lower electricity costs and lower costs for the millions of Americans who use gas to heat their homes. And the "shale gale" has sparked a revival in domestic manufacturing, mainly in the chemical industry but also in other energy-intensive industries like iron and steel. Because U.S. natural gas prices are now the lowest in the world, industries that once exported manufacturing facilities abroad are suddenly bringing them back home as they pursue new investments. All of this has increased economic growth, created jobs with good wages and produced revenue for governments at all levels.
Read the entire article here
Russia, which earns well over half its government revenue from energy exports, will eventually find itself in an exceptionally tight spot. As Aviezer Tucker noted in a recent article for Foreign Affairs, Gazprom, Russia's gas monopoly, sells 60 percent of its gas at home and at a loss. To earn even a modest profit, it must export to Europe at a price that is now four times higher than the current going rate in the United States. In addition, in 2007, Russia needed an oil price of US$34 per barrel to balance its budget. By 2012, the target surged to $117 per barrel. Easing demand in the United States and in Europe will erode Russia's finances in years to come, putting the current government to a significant test and perhaps forcing some of the reforms that Washington has long urged on Vladimir Putin's government.
Read the entire article here
But now Gazprom is under threat. Over the past five years, the technology known as hydraulic fracturing, or fracking, has unlocked vast amounts of shale gas in the United States, Canada, North Africa and the Middle East. Suddenly gas is in abundance, prices are falling and the possibilities of shipping liquefied natural gas, or LNG, on tankers around the world seem endless.
Five years ago, Gazprom was close to shipping gas from Russia’s Eastern Arctic to the United States. No longer. Thanks to fracking, the United States has so much shale gas it will soon be a gas exporter, and many other countries, including Qatar and Australia, are exploiting their LNG potential as well.
All of which has made Europeans less dependent on Gazprom and they are beginning to flex their muscles, demanding rebates on contracts and even launching an investigation into allegations of anti-competitive conduct by the Russians.
Gazprom’s shipments to Europe have been falling steadily and the company’s share price has dropped 60 per cent since the advent of the fracking revolution. Former Soviet stalwarts such as Romania and Ukraine, among the most dependent on Gazprom, have started looking into exploiting their shale-gas deposits as well, while others, such as Lithuania, are leading the European Union’s competition probe.
Mr. Putin has tried to hit back, deriding fracking as dangerous and warning the EU that its competition probe could result in less gas flowing to the West. There is much at stake for the Russian leader, said Dieter Helm, a professor of energy policy at Oxford University.
“Putin’s government depends on oil and gas, and this weakens his position very considerably,” Prof. Helm said. “Now if their finances fall away, there’s not the money to keep sections of the population happy. I think you are creating the conditions for, in three, four or five years, for considerable resistance to Putin’s authoritarian rule.” 
Read the entire article here
Curiously, in 2011 Gazprom was formally the most profitable company in the world with purported net profits of $46bn, but these profits were hardly real. Investment analysts opined that no less than $40bn disappeared through inefficiency or corruption. Gazprom’s cash flow was barely positive.
In their 2010 booklet Putin and Gazprom , Boris Nemtsov and Vladimir Milov, the opposition politicians, detailed how assets were being stripped from Gazprom through large kickbacks on pipeline construction and cheap sales of financial and media subsidiaries to Putin cronies. Since shareholders have realised that only their dividend yield is material, Gazprom’s market value has plummeted by two-thirds from $365bn in May 2008 to $120bn today.
Read the entire article here

A country with such huge natural resources as Russia, should be able to offer its citizens a standard of living on par with the most affluent countries in the world. Sadly, the reality of Vladimir Putin's Russia is a totally different story:

The richest slice of Russian society has doubled its wealth in the past 20 years, while almost two-thirds of the population is no better off and the poor are barely half as wealthy as they were when the Soviet Union fell, according to researchers.--
The huge gap between rich and poor "largely negates the economic and social achievements of recent years," the HSE report said.
Yasin added that the study indicated there were "two Russias". The wealthiest fifth of the population received a pay cheque equivalent to 198% of its value in 1991, while the poorest fifth made only 55% in real terms. In total, 60% of the population has the same real income or less than the average 20 years ago.

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