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by Professor Natasha Udensiva
The U.S. shale gas revolution is spreading: more and more countries are talking about developing their own shale gas resources. How is this relevant for Gazprom? It is relevant because, with more countries developing their natural gas resources, Gazprom’s once-powerful monopoly may soon lose its hold on the European market. So far, the company’s strategy has relied on the exclusiveness of its vast resources. But shale development is undermining this very quickly. Soon, access to technology will trump resource access. Then, Gazprom’s only chance of reasserting its presence will be to lower its prices.
Gazprom may not see it that way. The company is likely taking comfort in the fact that the U.S. shale revolution seems hardly replicable —in China and Poland, for instance, shale gas exploration and production is not going according to plan. China recently acknowledged that it will not make its target of 6.5 bcm of production by 2015, and Exxon Mobile had to pull out of Poland last year because Poland’s geology turned out to be more challenging that had been expected. Should Gazprom breathe freely? Maybe, but not for long.
Other countries with potentially large shale deposits are turning to shale development despite the experiences of Poland and China. The possibility of decreasing dependence on natural gas imports is too tempting. In June, Argentina, which has one of the world’s major shale gas basins, struck a deal with Chevron for the exploration and production. In June, a report by the British Geological Survey concluded that the United Kingdom has far more deposits of shale gas than previously estimated; the U.K. government has been touting shale development, going as far as to propose a tax regime that would stimulate it. Also in July, Romania allowed Chevron to start drilling shale gas exploration wells in three areas in the Eastern part of the country, and Ukraine is currently working with Chevron and Shell Co. to facilitate its shale development. Of course, these advances are nascent, but the trend is there: global shale gas development is not going away.
If Gazprom can dismiss (at least for a while) Argentina’s shale gas development because the country is far from Russia’s major consumer market, it will be difficult to disregard the developments in Europe. For example, Gazprom has been targeting the U.K. as a potential market for some time—the company was planning to extend the Nord Stream pipeline there and worried that potential LNG exports from the U.S. may impede its plans. But the real competitor may be the U.K. itself, as the country is on the way to developing its own shale gas. The U.K. is not a stranger to the fossil fuel industry, as it has a history of thriving on coal. Its natural gas infrastructure is strong—similar to the U.S. The mere presence and development of the natural gas industry in the U.K. is going to change the geopolitical atmosphere in Europe.
Ukraine’s shale gas development is potentially even more devastating for Gazprom. Ukraine has traditionally been one of the company’s largest markets. While the country has already managed to cut its Russian imports considerably—up to 40 percent in 2012—these current shale development efforts may eventually stop Ukrainian imports completely and turn the country into a natural gas exporter instead. Of, course, this is not happening tomorrow, but it may occur sooner than Gazprom expects.
So what should the gas giant do? It is well known that Gazprom is by no means a commercial company, as it serves to the Russian government in a various social and political needs. For a while, it successfully served Russia’s geopolitical ambitions in becoming a world energy power. But that was in the past. Lately, Gazprom has become somewhat of a geopolitical embarrassment, making irrational decisions about numerous pipeline constructions. While Gazprom will continue to be the major natural gas exporter to the European market for some time, consumers will be looking for better alternatives: new LNG exports, Mediterranean gas (which has already been developed by Israel and will be developed further by Cyprus), and, of course, their own shale development.
Ironically, this grim picture may be the best-case scenario for Gazprom. With all its assets, knowledge and experience, the company may be forced to restructure and turn into a viable commercial entity. Energy monopolies are not really in trend lately.
The author is a lecturer in the “Geopolitics of Russian oil and gas” at Columbia University
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