Shale gas revolution stares down Russian hostilities

Remember back in January of 2006 when Russia, in a pay dispute with Gazprom, cut off gas supply in the middle of winter and left Europe feeling vulnerable to their whims? Then came Belarus when Russia cut them off over a pay dispute. Remember when it was proposed by Iran that Russia, the United Arab Emirates and Iran form a natural gas cartel to try to wield its influence over price and supply, not to mention the implied threat against Europe to be left out in the cold? Well forget those fears. Russia no longer is feeling all powerful about natural gas mainly because of the Shale Gas Revolution in the United States.

The Energy Expert Center reports that, “Russia’s economic development ministry: “Shale gas revolution” in the United States will make it even more problematic for Gazprom to sell gas in Europe. For the first time ever the Russian authorities have admitted that Gazprom may have problems with selling gas in Europe. According to Market Leader, those in Russia’s Economic Development Ministry believe that in the face of the “shale revolution” in the United States and some other countries, Gazprom needs to find ways to make its investments more efficient. They in the Ministry say that the developing shale gas production in the United States and the growing number of spot contracts on the market may prevent Gazprom from keeping its prices high. In a letter released after a meeting in August, the Ministry mentions as decisive the year 2016 — the time when the United States will finish building terminals for exporting cheap shale gas. Gazprom may also face internal problems, like rising domestic gas prices and growing tax burden.

Now that the demand for liquefied gas is on the rise, the pressure on Gazprom in Europe is growing. Today the gas price on the spot market is $320 per 1,000 c m, while the gas sold by Gazprom under its long-term contracts costs as much as $400-450 per 1,000 c m. As a result, the share of Gazprom on the European market is shrinking, which may lead to reduced exports in the long-term future.

Now that the shale gas production in the United States is growing, gas in that country costs just $110 per 1,000 c m. Experts believe that the United States may start exporting gas in 2016, which means that the gas prices on the European market will get even lower. The first gas export terminals will appear in the US and Canada in 2015, with more terminals to be opened in 2016-2017. Canada is going to export 40bln c m of gas a year to South-East Asia and Japan.

In 2011 the share of independent gas suppliers on the Russian market grew to 25% due to optimized gas production costs and more aggressive marketing policies. In the meantime, Gazprom’s capital and operating costs are growing, which is leading to declining efficiency and lower competitiveness.”

The truth is that more gas means that Europe won’t be held hostage to a hostile Russia. Plus very bearish for gas as new pipelines are opening to move even more gas soon.

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