Shale Gas exploration impact pipelines

An article in the Financial Times reports that competition from shale gas and a fall in demand have cast shadow on planned pipelines that supply Europe with natural gas.

Construction is ready to begin next month on the Gazprom led Nord Stream pipeline that will bring natural gas from Russia directly to the European Union via the Baltic Sea after the group of shareholders secured financing two weeks ago.

But a big question marks hang over the fate of a handful of other big, politically important European gas pipelines, especially following the onset of the recession and the collapse of the gas price.

Nord Stream, together with South Stream, which aims to bring Russian gas to Europe via the Black Sea and Bulgaria are pillars of Russia’s policy to reduce its dependency on Ukraine and Belarus as transit states, by redirecting gas it sells to Europe through routes less prone to interruption.

While Russia is backing these pipelines, the EU is counting on another big one to improve the security of its supplies by reducing its dependency on Russian gas. Nabucco, which is designed to bring gas from the Caspian region to central Europe, bypassing Russia, is a cornerstone of EU energy policy.

But some analysts wonder whether it will be built.

Reinhard Mitschek, managing director of Nabucco, admits that the number of pipelines Europe will need has decreased since the recession reduced demand and higher volumes of imported gas from countries such as Qatar have been available.

In fact, Europe is at risk of being swamped by gas-loaded tankers no longer required in the US now that companies have figured out how to tap the country’s large shale gas deposits. “Pre-crisis, we thought there would be room for five or six big pipeline projects, plus LNG. Now, even in the case of increased LNG, we would need three or four big pipeline projects to meet market requirements,” Mr Mitschek says.

In 2009, European gas consumption was about 460-470bcm, 10 per cent lower than 2008 and forecasts for 2025 and 2030 consumption have been trimmed by as much as 100bcm to 650bcm. That is, none the less, a sizeable increase in demand and he estimates that European production will decline by about 150-200bcm.

Gazprom, Russia’s gas export monopoly, has had to delay its high-profile Shtokman liquefied natural gas project because demand has disappeared.

The situation will become even more difficult for gas suppliers and pipeline layers if the US shale gas revolution is repeated in Europe. It is a big if, because Europe lacks the infrastructure and perhaps also the political will to make it happen.

Nevertheless, several very large companies have made big bets that it will ExxonMobil in December announced it would pay $41bn for Houston-based XTO the shale gas specialist, so that it could use its technology and know-how in relation to Europe’s shale gas deposits. BP, Total and Statoil, the European energy groups, have each done smaller deals with Chesapeake Energy another US shale specialist.