European Shale Gas Threatens Russian Energy Position

Instead of adjusting to the shale gas revolution, Russia appears to be fighting it.

If the shale gas revolution reaches Europe, it would pose an immediate threat to Russian energy politics. The country currently supplies some 25 percent of the continent’s gas needs and its share in the imports of former Soviet satellite states in Eastern Europe is much higher.

Poland imports more than 80 percent of its natural gas from Russia. It also has among the most promising shale gas reserves in Europe, however, which it is readily exploiting to decrease its dependency on Russian gas.

Last year, the United States Department of Energy put Poland’s shale gas reserves at nearly five trillion cubic meters. In March, the Polish Geological Institute contradicted that estimate, saying that reserves were only around seven hundred billion cubic meters. ExxonMobil subsequently announced that it would pull out of its shale gas projects in Poland. Chevron and ConocoPhillips continue to operate in the country.

With a yearly consumption of seventeen billion cubic meters of natural gas, even Poland’s own estimate of its shale gas reserves implies self-sufficiency for decades.

Ukraine is similarly drawing up plans to develop its shale gas reserves. Last year, it imported the equivalent of forty billion cubic meters of natural gas from Russia, two-thirds of its total gas consumption. The United States Energy Information Administration estimates that Ukraine has the third largest shale gas reserves in Europe at 1.2 trillion cubic meters, some twenty times its annual needs.

What’s keeping shale gas from revolutionizing the energy sector in Europe as it has in the United States is technology. European shale reserves are less accessible than North America’s while countries lack the necessary infrastructure and hydraulic fracturing equipment to boost domestic production.

Long term, the mere abundance of natural gas in Europe jeopardizes Russia’s export position. Because oil and gas sales constitute the backbone of the Russian economy, an increase in Europe natural gas production would be extraordinarily detrimental to the country as well as its government. Taxes and income from fossil fuels provide up to 60 percent of the state’s revenue. The Kremlin is a majority shareholder in energy giant Gazprom which alone accounts for 12 percent of Russia’s exports.

Gazprom still reported a $44 billion profit last year but exports are starting to fall. Russian deputy economy minister Andrei Klepach warns that the company could run into trouble as early as 2014 due to competition from cheap shale gas.

Nevertheless, at the Kremlin’s behest, Gazprom continues to pursue hugely overpriced projects for political ends that are unlikely ever to pay for themselves. “Foremost among them are two ambitious undersea pipelines to Europe, justified neither by demand nor by supply,” reported Will Englund and Kathy Lally last month for The Washington Post.

Gazprom executives have been very slow to recognize the competition. Their company is large and sprawling and, with a seemingly eternal income stream, had no need to be innovative or especially adept at what it did. It opened the spigots and gas and money flowed in gushers.

Instead of adjusting, Gazprom is fighting. It is obliging its buyers to use Gazprom infrastructure and has tied the price of gas to oil so European consumers see no benefit from the natural gas revolution in the United States where prices are less than a third of those in Europe. President Vladimir Putin last month intervened in a European antitrust investigation into the very practice when he decreed that Russian companies do not have to comply with foreign official information requests unless sanctioned by the Kremlin.

Potentially Russia’s most powerful tool to fight the European shale gas revolution is the financing of local environmental groups that oppose fracking. Proof is scare but media companies that are owned by Gazprom appear unusually interested in the environmental risks of shale gas.

For Russia, the alternatives include diversifying its own economy, which has proven difficult in recent years, or finding new export markets in the East. Except China is estimated to have huge untapped natural gas reserves of its own. The International Energy Agency puts the country’s recoverable gas reserves at fifty trillion cubic meters, more than 70 percent of it in shale beds. At present consumption rates, that would be enough to sustain Chinese demand for more than three hundred years but Chinese gas use is growing 13 percent per year and the country has yet to develop a domestic shale industry.