M-RCBG Associate Working Paper No. 23
Developments in Unconventional Gas: Challenges and Opportunities for Russia
The global energy market is undergoing a period of great change. The increasing production of shale gas and use of liquefied natural gas (LNG) for export/import are affecting gas markets globally. As a country whose economic and often political lifeblood is dependent on oil and gas economic rents, these market changes have real implications for Russia. Traditional economic and business strategies of Russia’s Open Joint Stock Company Gazprom (Gazprom), the largest extractor of natural gas, are coming under tremendous pressure from a number of sources. Shifting LNG trade patterns are impacting spot markets in Europe and Asia, partly as a result of the shale gas boom in the US, lack of investment in new fields are depleting Russia’s gas supply, all while the Russian domestic gas market is facing market liberalization pressures. In this context, our Policy Analysis Exercise (PAE) assesses the current global and local trends and analyzes their impact on Russia from an economic and geopolitical perspective.
The PAE is divided into four chapters: Chapter 1 discusses the current global gas market and Russia’s global market position; Chapter 2 analyzes current trends and developments in global and local gas markets that are or could impact Russia and thereby Gazprom; Chapter 3 further examines the effects of these developments on Russia and Gazprom, vis-a-vis Russia’s relations with Europe, the United States (US), and China; finally, Chapter 4 offers recommendations and options for Russia and Gazprom.
The PAE takes the perspective that unconventional gas and LNG will play an increasingly important role in the global energy market. Per the EIA, the US produced 7,994 billion cubic feet of shale gas in 2011, an increase of over 500% since 2007. Currently, the US government is reviewing requests for shale gas export licenses, which would have increase the impact of the US shale gas revolution beyond national borders. However, despite the physical abundance of shale and unconventional gas sources, there are structural, technical and political challenges to fully utilizing these resources. These challenges are related to industry regulations, the process and technologies needed for extraction, production and transportation, as well as the political and economic decisions to import and export LNG. In assessing the impact of unconventional gas on Russian natural gas markets, two general assumptions are made in the PAE: (1) Russia’s energy sector is instrumental to the nation’s wellbeing and many would argue serves as a tool in achieving foreign and domestic objectives (for instance, in 2009 Russia cut of Ukraine’s natural gas supply to allegedly send a political message to Europe in an effort to stifle EU and NATO expansion into Eastern Europe), (2) with changing global and domestic realities in the energy sector, Russia must adapt and innovate now to continue its advantageous position in the global energy industry.
The methodology of the PAE is twofold. We conducted qualitative interviews across Russia, Europe, the United States and China. Then we have analyzed open data and information from established sources such as the Energy Information Administration (EIA) and the International Energy Agency (IEA) while creating our own industry models given the guidance and advice of oil and gas research analysts based in Moscow and New York.