Dr. Thane Gustafson, a political science professor at Georgetown University and one of the world’s foremost experts on Russian energy, said the surge in U.S. natural gas production has undercut Russian gas exports to Europe and prompted executives to scuttle their plan for shipping liquefied natural gas (LNG) to America.
Additionally, Russia’s longtime reliance on traditional natural gas production methods involving dry storage, steel pipeline transport, and long-term contracts linked to gas prices will hamper its attempt to transition to cutting-edge markets such as East Asia, he said during a lecture at Johns Hopkins University’s School of Advanced International Studies.
“The Russians are going to find themselves in the position of global gas price takers,” he said. “Their capacity to influence the market there is going to diminish.”
Gustafson said the Russians were slow to realize the potential of their gas reserves but ramped up production after the fall of the Soviet Union. Russian gas giant Gazprom completed deals with German energy companies to construct pipelines and ship gas to Northern Europe, while also buying distribution centers farther down the production chain in Romania and Bulgaria.
The strategy was enormously successful for Russia and three-term President Vladimir Putin, who first began serving in 2000. Hydrocarbons have accounted for half of Russia’s GDP growth since 2000.
However, the advent of the innovative natural gas extraction technique of hydraulic fracturing, or fracking, in the United States has depressed global gas prices and provided Europeans with more options, blindsiding the oil and gas-centric Russian economy, Gustafson said.
Fracking, which Gustafson described as a “remarkable story of entrepreneurship” inspired by “the freedom to fail,” has placed the United States on the path to becoming a net exporter of natural gas by 2020 and energy independent by 2035, according to the World Energy Outlook’s 2012 report.
Gazprom’s exports to Europe decreased by 8 percent in 2012 to the lowest level in a decade.
“Even as this policy succeeds, the world is moving on,” Gustafson said. “In the future, Europe is going to get its gas from a wide variety of sources,” he said, referring to LNG imports and the potential extraction of its own gas from shale rock formations.
The emergence of fracking also “smashed” the profit potential of Gazprom’s plan to export natural gas to the United States, prompting it to shutter its project last year for LNG production at the Shtokman field in the Arctic Barents Sea, he said.
The dramatic changes to the global gas market have plunged Russia into a recession. The International Monetary Fund (IMF) recently revised its forecast for Russian growth downward, for the third time this year, to 1.5 percent in 2013 and 3 percent in 2014. That compares to average annual growth rates of 7 percent before the 2008 global economic crisis.
Experts have said the IMF’s recommendation of “improv[ing] the investment climate, governance, transparency, and property rights protection” in Russia is unlikely to occur because it would loosen Putin’s grip on power.
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The US shale gas revolution is of course a bitter pill for Putin and his henchmen to swallow. That is why they are busy trying to talk it down. Here is one Russian "expert" talking to Putin's propaganda outlet The Voice of Russia:
The expert warning that the US shale gas reserves were largely exaggerated, while the deposits were quickly depleted due to the specifics of the production technology was obviously ignored. Now they have more problems, says the chief of the analytical research service of the UNIVER Capital Company, Dmitry Alexandrov.
"The surge in the interest in shale gas is clearly over. Given the US budget problems, shale gas production companies should expect no more funding. Therefore, shale gas deposits are no longer financially attractive. And finally, the cost-effective subsurface sites have been depleted. So, to go ahead with shale gas production, they have either to resort to a lot of extra drilling, or call into question the existing gas production."
Experts believe that after the shale gas peak of 2011, gas production will grow stable at best. But the US will certainly not be able to export its cheap shale gas to Europe or Asia, Dmitry Alexandrov says.