Saturday, March 27, 2010

Gazprom Rejects 'Shale Gas Revolution' That Could Shake Up Its World

The talk these days is of a natural gas revolution shaking up political and economic assumptions everywhere. Not surprisingly, Gazprom – among the biggest beneficiaries of the prior state of affairs, and one of the greatest losers should the ostensible revolution play out – says it’s much ado about nothing.

The debate is over technological advances in drilling that have opened up an estimated 100-year supply of gas that had been hopelessly locked into shale in Texas, New York, Oklahoma, Pennsylvania and elsewhere. It is said that, because of this sudden surge in gas supplies, the political and economic calculus around the globe – in Europe, Russia, China and the Middle East – can no longer be taken for granted.

The scenario goes like this: The arrival of the shale gas has created a glut in the U.S., and thus freed up otherwise-contracted Qatari liquified natural gas supplies for shipment to Europe. That’s made Europe less economically reliant on Russian natural gas supplied by Gazprom. In Russia, this loss of projected U.S. and European gas demand has stirred doubts about an economic model largely dependent on Gazprom, and also about Gazprom’s continued ability to serve as the spearpoint of Russian foreign policy. Moving on to China, the natural gas surplus could result in a breakout of battery-operated electric cars, to be recharged from natural gas-fired power plants, built as substitutes for currently planned coal-burning plants. If that happens -- if a large number of new Chinese cars are electric, and not gasoline-burning -- it would much-reduce China’s projected skyrocketing oil demand. Which brings us to the Middle East, whose future earnings projections – largely reliant on increased Chinese oil demand – would thus be upended.

As a piece, it may sound too grand. But it isn’t. Should shale gas plays work outside the U.S. – specifically in Europe and China – look for the scenario to shake up the equation somewhere along these same lines.

Back to Gazprom. Ultimately, asserts Gazprom chief Alexander Medvedev, the so-called shale gas revolution will peter out, cut short by imperiled water supplies. There is something to what Medvedev says, as Abrahm Lustgarten has been reporting for a year or so over at ProPublica. The industry will have to demonstrate that the gas can be produced safely.

Medvedev is showing the courage of his convictions. This week, he crossed a crucial milepost in Russia’s quest to forever end its reliance on uppity Ukraine and ship its natural gas directly to Europe. This is Gazprom’s announcement that it has raised $5 billion in loans to begin the construction of the Nord Stream natural gas pipeline from Russia to Europe. That 26 banks and three government lending agencies from France, Germany and Italy are party to the loan shows that they, too, are exercising caution before jumping on the revolution bandwagon.

Yet the oil industry is equally demonstrative -- it is putting down a multiple of that loan in investment to back up its conviction that the revolution is real....

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