Gazprom Admits Shale Gas Is A Thorn In Their Side

Rising shale gas production, which allowed the United States to surpass Russia as the world's largest gas producer in 2009, is a "problem" for state-run gas giant Gazprom, a government minister said on Monday.

The U.S. shale gas boom helped it to extract more gas than Russia last year for the first time since 2001. Russian output was also hit by declining European demand during the economic crisis, as customers switched to cheaper liquefied natural gas.

"The influence of shale gas raises the prospect of change on gas markets," Russian Natural Resources Minister Yuri Trutnev told reporters.

"We have a problem with shale gas. This is not only my position, but the position of Gazprom as well," he said, adding he had recently discussed the issue with Gazprom officials.

Earlier in the week, Gazprom also said an “abnormal” gap between spot fuel prices and long-term contracts is adding to their list of woes.

“The gap between gas prices is a destabilizing factor that puts long-term investments at risk,” Gazprom Deputy Chief Executive Officer Alexander Medvedev said in an interview near Vyborg, Russia. “It’s an abnormal situation.”

Shale gas is no joke

The popularity of unconventional gas has seemingly set in for Russia’s biggest gas company and Europe’s biggest gas supplier since a Gazprom spokesman called shale gas “a joke” back in December and dismissed concerns that a growth in the production of shale gas would pose a threat to the company’s foreign sales.

With the shale gas boom almost singlehandedly putting a Gazprom multimillion dollar natural gas extraction project in the Shtokman gas field on hold until 2016, the company has since changed its tone.

Together with partners Statoil and Total, Gazprom had planned to send as much as 90 per cent of Shtokman’s extracted natural gas to the North America, but the company said alternative gas suppliers and quickly developing markets for shale gas in the US and abroad is put Shtokman development plans in jeopardy.

Don’t pass go, don’t pay $200: Breaking the monopoly

Putting the brakes on Shtokman isn’t the only problem Gazprom has had to face over the last year or so in response to natural gas.

Traditionally, Gazprom held a gas monopoly in Europe, selling gas to countries under long-term take-or-pay contracts at prices pegged to world oil prices with a six-month time lag. The trading terms made economic sense for the Russian gas giant, but as the recession tightened its grip last year, consumers became frustrated with Gazprom’s inflexible price policy and started turning to natural gas as an alternative. By the first half of 2009, the company’s biggest European customers reduced Russian gas purchases to the minimum allowed by their contracts.

In February, German, French and Italian energy companies began renegotiating some of their long-term contracts with Gazprom. Tired of the take-or-pay arrangements that saw some them dishing out nearly 30 per cent more for gas based on their fixed contracts, the companies began forcing a change in the way Gazprom does business.

Though these contracts have only been re-negotiated for a three-year “crisis” period, according to Alexander Medvedev, deputy chief executive of Gazprom, many agree this is a much-needed move by the gas titan.

Energy Independence

Some European countries, however, are seeking energy independence and are taking giant steps to move towards relying on their own natural gas supplies rather than Gazprom’s.

Since 2005, Poland has been taking those steps.

Granting 30 companies the license to search for gas on its territory, companies like ExxonMobil, ConocoPhillips and Marathon have been studying the Polish terrain to assess how expensive it would be to access the country’s shale plays. Geologists estimate that there is approximately 1.4 billion cubic meters of untapped natural gas throughout the country.

Preliminary studies even suggest that Poland’s gas deposits are 100 times larger than its annual consumption – meaning the country is sitting on enough gas to potentially achieve its desire of cutting ties to Russia completely.

Just this month, Poland called on the European Union to give more weight to the role of shale gas in its energy policy in order to cut the region’s dependence on imports.

Flowing through Ukraine

Another country adding fuel to the fire for Gazprom is Ukraine. With pipelines running through the country, Ukraine transports about 80 per cent of Russian gas to other European countries.

In 2006, a dispute over natural gas and transit prices between Russia and Ukraine, eventually lead Gazprom to cut off gas supplies passing through Ukraine territory for three days. In January 2009, Gazprom cut off the supply again over further price and debt debates resulting in 18 European countries reporting major falls or cut-offs of their gas supplies. In October 2009, tempers flared again when Ukraine announced its intentions to import less gas from Russia in 2010 because of its economic recession – a move Gazprom believes breaks contractual obligations.

The arguments have lead Gazprom to develop plans to create two new huge European pipelines – Nord Stream and South Stream – bypassing Ukraine altogether although some analysts say these pipelines would become “wasteful white elephants” as it is far cheaper to use the existing pipelines through Ukraine.

“Oh, how the mighty have fallen”

With demands decreasing, countries renegotiating long-term contracts, and the recent boom unconventional natural gas like shale gas, Gazprom is taking some serious financial hits.

“Shale gas has really hurt the stock price of Gazprom,” said David Denning, a vice president at Wermuth Asset Management, which has about $1 billion invested in Russia and eastern Europe and doesn’t hold Gazprom shares. The “dash for shale gas” has hit prices, he said.

And for the European Union, Gazprom’s current weakness offers an opportunity to clean up gas trade with Russia potentially leading to a gas reform across the continent.

“Gazprom’s current crisis offers the best opportunity ever for Russian and European energy reform,” writes Anders Aslund, a senior fellow at the Peterson Institute for International Economics. “The arguments for a profound reform of the country’s gas sector have never been stronger. This is no longer a pipedream, while restoring the old Gazprom is.”

SOURCES:
Petroleum Economist: “EU: Gazprom bows to gas-price pressure”
The Moscow Times: “Gazprom is the Essence of the Energy Curse”
New York Times: “European Energy Giants Seek Lower Prices From Gazprom”
Financial Times: “Gazprom Renegotiates EU Contracts”
Bloomberg: “Gazprom Says ‘Abnormal’ Gas-Price Gap To Undermine Investment”
Reuters: “Russian Minister Says Shale Gas A Problem For Gazprom”
Bloomberg: “Poland Calls on Europe to Emulate U.S. Shale Gas Development”
Time: “Russian-Europe Gas Spat Ends – For Now”
KyivPost: “Ukraine, Russia Gazprom Disagree on 2010 Imports”
Business Insider: “Gazprom: Shale is a joke, and it can’t possibly compete with gas”
Barents Observer: “Gazprom might abandon Shtokman”
Polskie Radio: “Gas giants search for deposits in Poland”
New York Times: “Poland intends to cut reliance on Russian gas”