The 800 Pound Bear in the Room

How the Kremlin figures into the future of unconventionals in Europe

Does Russia have the power to make unconventionals uneconomical?

“Yes” was the general conclusion of Andzrej Sikora, CEO, President of the Board at Poland’s Institute of Energy Studies at the Global Unconventional and Shale Gas Plays Forum in Vienna, Austria.

In preparing his presentation, he said some people asked him if he was a kamikaze.

“I’m not against Russia,” he defended, saying his speech would be more focused on strategy.

First, Mr. Sikora noted how Gazprom head Alexei Miller had revised his attitude towards shale gas. “Initially he said the role of unconventional would be only complementary, which is strange because 2-3 years ago he said it wouldn’t be a problem for them.”

“Who dares duplicate the American unconventional gas revolution?” asked Sikora. “Poland?”

He pointed out the lack of capitalist culture in Russia and noted the slide in major trade movements for the country’s hydrocarbons: “15 BCM were not delivered to Europe last year, and this problem is rapidly growing. They are going to focus on price,” he said of Gazprom. “For Central and Eastern Europe a minimum $352 per thousand cubic meters – for end users this is twice the price in Europe.”

According to him even though LNG had higher prices, it was better oriented to customers than Russian deliveries.

“It’s not a problem of deliveries, it’s a problem of price. You need to compete, and reopen discussion with Russia - with those who’ve decreased deliveries.”

He showed a slide from 2009 predicting 70 BCM of gas from Iran. “It means the future regardless of Nabucco or South Stream. I’m talking about possible resources.”

Sikora said that a forecast for the EU, revised in 2009, showed higher demand for natural gas, for all 27 countries.

“For Great Britan, Germany, Italy and so on – the expectation is always higher: 23 BCMs higher for every single country,” he said. “But we don’t have proper forecasts for the next 20-25 years and there’s not a single word on unconventionals.”

Addressing the delegates, he said: “You’re spending a huge amount of money and no one’s expecting it to be a success.”

He noted Russia’s lack of pipeline infrastructure for emerging markets like China and India. “Talks are well prepared for the Sakhalin oil and gas development project, but nothing exists.”

Sikora harkened back to a meeting between German Chancellor Angela Merkel and Russian President Vladimir Putin in November, in which they unveiled five blueprints, calling for “harmonious economic community.”

He said, “They want to add Russia to the EU, are looking for common industrial policy, an equitable and balanced relationship and close partnerships on upstream energy.”

“There’s no common Europe,” said Sikora. “You can go with your commodity, without liquidity to sell your goods. This is a great opportunity to reopen this market but it should be for 27 countries.”

Sikora outlined what he said would be a “Common European gas strategy,” showing a map of trading points in Europe and possible sources of natural gas supply for Europe. A chart showed that sources from Europe are forecast to go down from about 128 BCM in 2020 to 108 in 2025. Meanwhile, Russia’s production looks to stay nearly the same within that time period.

He noted that the price of Russian gas to Europe had doubled from 2008-2010. In terms of the contracts with Gazprom, Sikora said: “They are looking into possibilities but not sure they can sell additional volumes. The Russians are not a problem for Europe, they could be a solution.”

As evidence, he showed a chart of how prices look to drastically drop on long-term contracts with Europe in about 2030.

“If there is no cooperation with them the Russians can prepare for investments with China and India, but there is no infrastructure,” he added.

Sikora said that the argument for Polish shale gas was difficult: “You need to be a little bit cheaper, but you need to be higher than the lowest price on the market. We need to discuss this problem as one for 15 countries when we’ve got 80 BCM, not five.”

He briefly mentioned potential barriers to shale gas production in Poland, like licences in heavily populated areas, or when drilling was in conflict with Natura 2000 environment regulation.

“We need to have stable and long term energy policy, and we need to have strategy for the coal industry in Poland because we’re powered by that.”

He said Europe needed to address the huge expenditures for clean coal, carbon storage, and nuclear energy. “If we have the proper knowledge, technology, well trained people and science they will support gas beyond economics and politics,” Sikora concluded.