Tuesday, July 17, 2012

Russia Reacts Against the Coming Global Gas Boom

This article was previously published on Al Fin blog

Multiple voices out of Russia have been condemning the global shale gas movement -- deriding unconventional gas as "unsafe," "uneconomical," and "irrelevant." In other words, Russia is running scared, hoping that irrational lefty-green influences over western governments will subdue Gazprom's unconventional competition, before Russia loses all of its lucrative, high priced natural gas contracts.
Poland is just one of many countries suffering under extortionate Russian natural gas prices, which would like to develop its own cheap shale gas resource:
If geologists are right, up to 768 billion cubic meters of natural gas sits trapped in shale deposits deep beneath the surface in Poland, enough to meet the country's needs for the next 50 years and more. The estimates have tantalized Poles with visions of ending their reliance on Russian gas, which warms them through harsh winters but puts them at the mercy of their former masters far more than they would like. _LA Times
Other of Russia's customers looking to slip the Gazprom chains from around their necks include the Ukraine, China, and a number of central and western European nations.
The unconventional-gas bonanza has roughly doubled the gas resource base, a measure of the total gas in the ground rather than what might be economically recoverable. In 2009 the IEA estimated the “long-term global recoverable gas resource base” at 850 trillion cubic metres (tcm), against 400tcm only a year earlier. The main reason for the rethink was shale gas and other unconventionals. Not just America but parts of Europe, China, Argentina, Brazil, Mexico, Canada and several African countries, among others, sit atop as yet unknown quantities of gas that could transform their energy outlook.

...Historical factors have led to another anomaly: much of the gas traded across borders is sold at prices linked to those of crude oil. When gas was first brought to market as a commercial fuel in the 1960s, as an alternative to home heating oil, it made sense to price it against a substitute. But there was also a more subtle reason. Oil was used as an independent price arbiter for Dutch gas in the 1960s and then for Algerian and Norwegian gas in the 1970s because neither side could influence the supply and demand for it. The system persisted as Russian gas came to Europe in the late 1970s. But the economics have changed, and valuing one commodity in terms of another now seems bizarre.

...A more competitive market the world over would doubtless make gas cheaper by breaking the link with oil, but that will be difficult to bring about. Gazprom, Russia’s huge state-run gas producer and supplier of 25% of Europe’s gas, is strongly opposed to dropping oil indexation. A tussle is under way between it and the continent’s big buyers. Some pundits say that gas must eventually become a global fungible product like oil, with regional price differences closing as more gas is shifted in the form of LNG, draining gluts and making up shortfalls in regional production in North America, Europe and Asia......

Gas producers are naturally happy with the high prices resulting from oil indexation, arguing that without them the economics of big gas projects would never work. But Rick Smead of Navigant, a consultancy, thinks there are good reasons for all concerned to want competitive gas prices. He points out that they would reduce regional price volatility and provide gas producers with a broad and flexible market instead of having to rely on a single consumer at the end of a pipeline. That should offer an incentive to make the huge investments required.

If the “shale gale” blowing through America can be replicated worldwide, the huge surpluses it would bring could hasten the advent of a global market. Just as the 20th century was the age of oil, the 21st could prove to be the century of gas. _Economist
In early 2009, at the height of winter, Gazprom withheld gas from Ukraine in a dispute over prices and payment, a shutoff lasting for days that also affected delivery to more than a dozen other shivering European nations. On at least one day in February of this year, Poland detected a sudden 7% drop in supply from Gazprom; some suspect Russia was holding back some of its gas for itself to combat a nasty cold spell. _LATimes

Russia not only stands to lose its ability to extort high gas prices from its customers -- it is in danger of losing many of its customers altogether. Since Russia's government depends upon Gazprom profits to finance many of its "unofficial" expenditures, the crony-ocracy at the highest levels of Russia's government is extremely concerned.

Losing China and Eastern Europe would be a significant blow to Gazprom. But the loss of western Europe might be the final straw, leading to revolutionary changes inside Russia.

These are basic, earth shaking trends which should be taught to every school boy and girl. Unfortunately, almost all school boys and girls are too busy being indoctrinated into climate hysteria and politically correct multicultural mind pablum, to have time to understand what makes the world go around.

Unconventional natural gas is just the beginning. Unconventional liquid fuels are closing in on economic production when oil sells for between $100 and $120 a barrel. As technologies continue to improve, that breakeven price is slowly but surely dropping.

If Russia is to benefit from its vast resources of energy wealth, it had best open itself to foreign investment and development as quickly and cleanly as possible -- cleaning out the destructive corruption and cronyism from top to bottom to make way for a better future for Russia's people.

For if Russia continues down its current path, it is certain to lose everything East of the Urals in a matter of decades, and perhaps everything else shortly thereafter.

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