In one of his final acts as Russian Prime Minister, President-elect Vladimir Putin has spoken out on the issue of shale gas exploration – something that poses a potential threat to the Russian economy should Poland become self-sufficient in terms of energy production:

Russian Prime Minister Vladimir Putin has urged his country’s gas industry to “rise to the challenge” of shale gas as the United States and some European countries forge ahead with developing the energy source.

US shale gas production may “seriously” restructure supply and demand in the global hydrocarbons market, Putin said yesterday in his final address to the Russian Duma before he takes over as president on 7 May.

Putin said Russia must be prepared for “any external shocks” and “a new wave of technological change” that was “changing the configuration of global markets”.

Source: Canada Free Press

While the consequences of Poland becoming energy-reliant from its Russian neighbours have been discussed in Polish circles before, The Moscow Times now looks at what it could mean for both countries.

When Wieslaw Radzieciak took office as the mayor of Lesniowice in the gently rolling farmland of southeastern Poland 26 years ago, the Soviet garrisons that dotted the region were a stark reminder of which superpower was in control.

The signs of Russian occupation have vanished, but over the past year a new superpower has moved in, its presence spelled out on the distinctive logos plastered on the trucks used by U.S.-based oil services company Halliburton.

It’s all part of Poland’s ambitious goal to exploit Europe’s biggest estimated deposits of shale gas. Beginning in 2014, Warsaw wants to tap an estimated 5.3 trillion cubic meters of recoverable reserves of gas — enough, according to the U.S. Energy Information Administration, to supply Poland with more than 300 years of its domestic energy needs.

But the shale gas push is about more than energy. Poland wants to break its reliance on Russian energy and reduce Moscow’s power over Europe. That is one reason why Warsaw has welcomed U.S. oil majors such as Chevron, ExxonMobil, Conoco and Marathon, even though it risks igniting tensions with Russia.

“If this thing comes true, if the American technologies deployed here at some point are really able to produce this gas, then this means a winning situation for the whole of Europe really,” Radzieciak said in an interview in his small office filled with sports trophies, banners from local teams and a large map of Poland on the wall. “It would create more competitiveness on the gas market, which is now dominated by Russia, and one side would not be able to force anything unilaterally anymore.”

Western European capitals are just as eager as Poland to diminish Russian influence over supplies. Russia currently supplies 25 percent of deliveries to the European Union. Daniel Yergin, a Pulitzer Prize-winning author and energy historian who included a chapter on shale gas in his latest book “The Quest,” sums up Warsaw’s thinking: “They’re motivated to develop it economically and they’re motivated to develop it politically.”

But Russian officials, publicly at least, dismiss the challenge, arguing that it will prove Russian gas is cheap.

“Oh, we’re so thrilled that they are starting to produce shale gas!” Sergei Komlev, head of contract structuring at Russia’s state-controlledGazpromtold Reuters last week. “Look, we do not believe in this myth of shale gas, that it is cheap gas. It is not true.”

Fracking? No Problem

There is one good practical reason that Poland has turned to U.S. companies to unlock its huge shale fields: American firms dominate shale gas technology.

The breakthrough came in 2003 when independent U.S. drillers, led by Devon Energy Corp, combined drilling at once-impossible angles, known as horizontal drilling, with hydraulic fracturing, or “fracking” — an older technology in which shale rock is cracked open by chemical-laced water blasted underground along with sand to prop the cracks open.

The United States produced 4.87 trillion cubic feet of shale gas in 2010, up from virtually nothing in 2000 according to the U.S. Energy Information Administration. The agency estimates that shale gas will account for about 46 percent of U.S. natural gas production in 2035 — an encouraging sign for Poland and other Eastern European nations exploring unconventional gas.

But the torrid pace of shale development has also sparked a public backlash in the United States and elsewhere over fears that fracking pollutes groundwater and may cause earthquakes. Similar worries have led to a ban in France and Bulgaria and suspension in Britain. Fracking is also the subject of public debate in Germany.

A European Union-commissioned study found in January that EU law was enough for now to regulate shale gas exploration, although changes might be needed once Europe enters the development phase.

In Poland, so far, energy security concerns have trumped environmental worries. In comparison with countries such as Britain or Germany, the green movement is less powerful in coal-reliant Eastern Europe. A late 2011 poll found that 73 percent of Poles backed developing shale, while only 4 percent opposed exploiting the unconventional gas.

A short drive outside Lesniowice, workers at a Chevron-operated wellhead keep a massive drill running 24 hours a day in search of the natural gas trapped in rock deposits.

“I have no worries at this stage, the technology seems 100 percent safe,” said Mayor Radzieciak, who estimated that potential revenues from shale could mean a more than tenfold increase of his office’s current annual budget of 10 million zlotys ($3.15 million). “People here are more opposed to wind farms than this.”

The Fears In Moscow

A Poland awash in gas could mean dwindling revenues and further loss of influence in a region Moscow once controlled with an iron fist. Are Russian officials too dismissive of the threat?

Moscow, some diplomats and oil analysts say, believes that Poland’s weak infrastructure, among other problems, will slow the country’s ability to exploit its gas.

“They are aware of the dangers,” one Western diplomat said. “But they really don’t believe shale will happen in Europe.”

That could be why Gazprom felt confident enough to cut supply to Europe during the recent cold snap.

Others say Russia is only too aware of the shifting dynamic. Poland’s investment in shale gas since 2009 has already shifted the terms of trade, according to Robert Hormats, the U.S. undersecretary of state for economic, energy and agricultural affairs. One obvious change is that Russia and Poland renegotiated Poland’s gas contract last year at terms very favorable to Warsaw.

Amy Myers Jaffe, an energy policy expert at the Baker Institute at Houston’s Rice University, sees rival gas sources as a factor behind Russia’s April deal with Exxon in which state-runRosneftbrought in the U.S. giant to accelerate its development of deepwater Arctic oil and gas.

Other analysts say Poland and other rivals were not a factor in that deal.

A Baker Institute report showed that Russia’s market share of European gas fell from about a quarter to a fifth in the decade to 2010, partly due to increased use of natural gas diverted from the oversupplied U.S. market.

“Especially in gas, countries like Russia that were slow to the mark are losing market share and are going to lose more market share,” she said. “There’s a finite market that is going to go to shale, because I can do that quickly, and it doesn’t require a $10 billion [liquefied natural gas] installation, where I have to put all that money at risk.”

Poland currently relies on coal for most of its energy needs; natural gas, most of it Russian, accounts for about 13 percent of its supply. That gives Poland more leverage over Russia than is sometimes apparent.

“The last thing they [Moscow] want is anything that upsets their monopoly on gas,” said William Perry, a former U.S. secretary of defense, after a trip to Moscow to discuss nuclear proliferation. “I think it’s fair to say they are very concerned about it.”

The Russian Energy Ministry declined to comment.

Poland’s Bumpy Roads Ahead

Much needs to be done in Poland if it is to wean itself off Russian supplies. Any boom will require thousands of skilled workers to build and operate wells and construct the roads and pipelines required to transport gas westward.

“For Poland to move forward, the key thing is going to be the scale-up,” said John Claussen, Chevron’s country manager for Poland.

One incentive for outside investors is the fact that gas prices in Europe are more than two times higher than in the United States. And with long-term contracts in Europe and Asia tied to oil prices, shale gas remains attractive despite worries about a weak economy that could cap future demand.

Poland’s government has so far granted more than 100 exploration licenses and hopes the eight currently active wells prove that extracting gas is viable — even though the first two have so far been disappointing.

Malgorzata Maria Klawiter, an official from near Gdansk in northern Poland, remains optimistic. Gdansk has distributed 89 concessions covering about 85 percent of the region. In total, licenses cover 58,565 square kilometers, or some 18 percent of Poland’s land.

Polish Deputy Foreign Minister Beata Stelmach said the next step is to enact legislation needed to attract investors and give them assurances that they will see returns for exploration that can cost hundreds of millions of dollars.

“If we move to the production level, then Poland’s international position can change from a gas importer, to producer, or maybe eventually even exporter,” Stelmach said. “This changes not only the domestic situation by improving energy security, but also strengthens the competitiveness of our country.

“Our Gazprom contract runs until 2022, and let’s until then move within the framework of this contract. But, at the same time, we have to keep our fingers crossed to develop the shale gas project.”

John Buggenhagen, the Warsaw-based exploration director for San Leon Energy, said that while other former Soviet-bloc nations such as the Czech Republic, Hungary and Ukraine are exploring similar developments, it is Poland that offers the most promise.

“Look at the history of Poland,” Buggenhagen told a recent shale gas conference in Warsaw. “We are only 23 years from the fall of communism, and we are in an energy rush with a country that has been reliant on coal and on supplies from the east.”

At Chevron’s site outside Lesniowice, head of drilling Tim Nowak and his crew are doing all they can to make that happen. The site is a hive of activity with trucks owned by Halliburton parked in the lot, and drill parts and pipe casings strewn across the ground. The low rumble of the drill drones on in the background.

Nowak acknowledges the challenges of creating an industry from the ground up. But as he guides a tour around the first of Chevron’s five exploratory wells in Poland, he remains positive. “Right now Poland is an exciting place to be,” he said.

Source: The Moscow Times

Prime Minister Vladimir Putin has said that Russia would begin pumping the first gas through the Nord Stream pipeline on Tuesday, with European clients receiving gas supplies next month or in November.

“Tomorrow we will start pumping technical gas near Vyborg,” Putin said on Monday.

“Gradually, in a calm manner we are departing from the diktat of transit states,” Putin remarked, alluding to past and present difficulties with Ukraine, through which 90 percent of Russian gas to Europe transits.

Nord Stream consists of two 1,224 kilometre natural gas pipelines through the Baltic Sea, linking Europe to Russian gas reserves. When fully operational in the last quarter of 2012, the twin pipeline system will supply 55 billion cubic metres (bcm) of gas annually.

Source: Natural Gas for Europe

According to the report, current trends suggest the growing demand for energy is expected to exhaust the world’s crude oil reserves in another 40 years while global oil shale resources can supply more than 2.8 trillion barrels of nonrenewable energy – almost three times the capacity of crude oil reserves.

Though the “shale boom” got its start in the United States, over the past year the impact of shale gas has been felt around the world. This revolution in unconventional gas – dubbed “the quiet revolution” by some – has recently helped the US surpass Russia as the world’s largest natural gas producer and has kick started a move by oil giants to seek out shale plays in Europe for the purpose of exploiting its rich resources.

The result is the emergence of a new worldwide market, moving shale gas to the front of new energy sources.

“It’s becoming increasingly clear that the days of natural gas being solely a continental commodity dependent on the weather and economic fundamentals in one part of the world are coming to end,” said a recent article in the Calgary Herald. “The shale gas revolution [has] changed the landscape [of global oil and gas].”

SOURCES:
PR Hub: “Markets and Markets: Global Oil Shale Market Worth US$12.01 Billion by 2015″
Calgary Herald: “Gas market goes global”

Unconventional gas is shaking up the energy world. That much is true at the corporate level, at least. ExxonMobil’s December take-over of XTO, a big shale-gas player, was the most obvious sign of that. Other independent producers will probably also be gobbled up soon.

But at what point will the world’s conventional gas producers, such as Russia’s Gazprom, begin to worry that their business models are under threat? The shale-gas optimists, such as BP boss Tony Hayward, talk of a “revolution” under way in the energy sector because of the new unconventional resources that are now considered exploitable (including coal-bed methane, which is already causing excitement in Australia, and so-called tight gas).

But there are sceptics. If it ever began developing its own potentially huge unconventional resource, Russia would remain the world’s leading gas producer. Yet Gazprom is cautious. Alexander Medvedev, the head of the company’s export division, told Petroleum Economist in October that many “myths” surrounded shale gas. It would remain expensive to develop, he said, because of the number of wells needed to produce the gas. Stop drilling, he added, and a field’s productivity drops almost instantly.

But as one executive from a shale-gas operator recently told Petroleum Economist, “Gazprom would say that, wouldn’t it?” After all, should the nascent shale-gas drilling in Europe prove half as fruitful as it has in North America, the energy-security anxieties among the continent’s consuming nations will quickly dissipate.

It was only a few years ago that US natural gas production was considered to have peaked and its reserves were thought to be in decline. Developers planned dozens of liquefied natural gas (LNG) receiving terminals to meet the forecast import requirement. The handful that came on line are now scarcely needed – and stand as testaments to the power of technology (in this case the advent of horizontal drilling and hydraulic fracturing) to change markets and the inability of the corporate world to predict “black swan” events.

Gazprom’s export-oriented strategy has relied on its partners in Europe making a cold calculation about their need to co-operate – or risk antagonising the supplier of their most important fuel. It works, so long as Europeans continue to perceive that Russia will remain their dominant supplier of natural gas. Even Gazprom’s difficulties in financing expensive upstream developments support this: give us long-term contracts, the company can argue, because they are vital to future supplies.

For the time being, there is little evidence to question this model, notwithstanding a drop in EU demand last year, because although unconventional gas has changed the dynamics of the North American energy market, drillers in Europe have yet to unearth the same riches in the continent. The earliest results of exploration in countries such as Poland and Austria, where the resource could be large, are only likely later this year.

So the continent’s importers can’t yet start looking beyond the existing paradigm, even if analysts are predicting a global gas glut. Furthermore, the dip in European natural gas demand brought by the recession could be ending. A spokesman for Germany’s E.On says the company does not foresee the “substantial pressure” on supply markets persisting.

“At present the European gas industry is undoubtedly in an oversupply situation,” he said. “This constellation is likely to shape markets for some time to come. However, we do not assume that this high liquidity will last permanently.” Indeed, E.On says improved prospects for economic growth in Europe and Germany mean gas consumption could grow this year. “It seems we have come out of the trough and it will probably not take too long until the present low level of demand is completely overcome.”

In theory, that would put Gazprom and other suppliers back in the driving seat. It would also re-establish the logic for Europe’s drive to build new infrastructure to meet its rising demand. This week, the US special envoy for Eurasian energy, Richard Morningstar, reiterated his government’s support for the Nabucco pipeline, while also pointedly mentioning that “questions have been raised” about Russia’s two rival proposals, South Stream and Nord Stream. Yet Europe needs more gas import infrastructure, he said, to guarantee its security of supply.

Yet all of this sounds dangerously similar to the debate in the US a few years ago about how to ensure more liquidity and greater gas supplies to its market. Yet that was all before the shale “revolution”.

Will things change in Europe? Greg Pytel, an analyst from the Sobieski Institute, a Polish think tank, and the UK’s Royal Institute of International Affairs, predicts that shale-gas development in Europe could render Nord Stream a white elephant. South Stream, he says, “has no prospects”, while Nabucco would make sense “in the other direction” as a “reversible pipeline balancing European gas distribution”.

“A lot of supply from Russia will be replaced by local shale gas production driven by multinationals,” claims Pytel. In the longer term, output from Gazprom projects such as the Shtokman gasfield in the Barents Sea could be destined for the Chinese market, not the European one.

All of this is speculative, because no one has cracked shale gas in Europe yet. But also speculative were the independent firms in the US that blasted open the market with their hydraulic fracturing. Unconventional gas is now drawing the majors to the European upstream. As the battleground for the gas wars of recent years, Europe offers a great prize for shale-gas developers. And if demand in the continent is recovering, as E.On predicts, there are sound financial reasons for the developers to exploit the shale, too.

from Petroleum Econonomist – February 4, 2010

SOURCE:
Petroleum Economist: “Shale gas could alter European market dynamics, as demand rebounds”

Gazprom, Russia’s biggest gas company and Europe’s biggest gas supplier, said this week they would have to reassess its plan to develop the 3.8 trillion cubic meter Shtokman gas field in the Barents Sea.  Together with partners Statoil and Total, Gazprom has planned to send as much as 90 per cent of Shtokman’s extracted natural gas to the North America, but the company admits that alternative gas suppliers and quickly developing markets for shale gas in the US and abroad is putting Shtokman development plans in jeopardy.

Andrew Neff, an energy analyst at HIS Global Insight says shale gas is “playing havoc” with Gazprom’s prices and projects.

“The potential spread of the shale gas production revolution to Europe, which is believed to have significant untapped reserves of its own, would clearly have a profound impact on Gazprom’s production and marketing strategy,” he told The Guardian.

In an interview with Russia Today television in December, a Gazprom spokesman called shale gas “a joke” and dismissed concerns that a growth in the production of shale gas would pose a threat to the company’s foreign sales.

But the reassessment of the Shtokman fields demonstrates that Gazprom is now taking the threat of shale gas and energy independence very seriously.

Over the past two years, gas exports and revenues fell dramatically for Gazprom. While high monopolistic prices and European dependency on the Moscow-based company certainly played a role in causing country’s to look elsewhere for gas, the role of shale and the desire for energy independence by some countries in Europe such as Poland has undoubtedly been affecting Gazprom.

Oddgeir Danielson, an oil and gas expert in the Norwegian Barents Secretariat, said the repeated postponement of the Shtokman project illustrates current uncertainties in that market and highlights Gazprom’s conflict with shale.

Directors at Shtokman Development will meet again on February 5, 2010 to agree on a new marketing plan for the offshore field. There is a possibility the directors may also delay a final investment decision on the venture.

SOURCES:
Alaska Dispatch: “Gazprom eating crow on shale gas?”
Barents Observer: “Gazprom might abandon Shtokman”
The Guardian: “BP chief hails American breakthrough in gas supplies from shale rocks”
The Moscow Times: “Shtokman Meeting to Consider Gas Buyers”
Business Insider: “Gazprom: Shale is a joke, and it can’t possibly compete with gas”