Putin Defends Russia’s Unconventional Gas Stance

By Kevin Godier

As a number of countries across the world step up their unconventional oil and gas development, Russian President Vladimir Putin has claimed that his country has not fallen behind its peers by adhering to conventional gas production. Putin said in a recently televised question session that Russia held large unconventional gas reserves, in addition to its substantial conventional gas deposits that had yet to be developed. He was adamant that the country remained in touch with the ‘shale gale’ trends in the US and elsewhere. “I don’t think we’ve slept through it. But we need to follow its development very closely,” he said.

Putin’s remarks were made in response to growing concerns in Russia that Gazprom – the world’s largest natural gas producer and Russia’s gas export monopoly – could find itself struggling to maintain its market share as global energy companies accelerate their development of unconventional reserves. In particular, in a report released on April 12, Russia’s Ministry of Economic Development predicted that competition from North American exports of gas produced from shale would force Gazprom to lower its export prices by 2016.

Russia is the world leader in natural gas reserves and second in terms of gas production. Thus far, Gazprom has very successfully concentrated on its traditional gas fields across Western Siberia and the Pacific coast, shipping the resource to Europe through a series of pipelines. However, the global gas market has been undergoing significant changes as the advance of technology has made shale drilling economically viable in North America. In 2009 the US overtook Russia as the world’s leading gas producer as a result of its burgeoning shale gas sector. Concurrently Europe, which depends on Gazprom for around 25% of its gas, has increased its use of cheaper imported coal, pushing down prices and demand for Russian gas.

Upping the ante for Gazprom, the US is now so well supplied with natural gas that it is considering large-scale LNG exports. According to estimates from Goldman Sachs, up to 10% of US output could be sold abroad as LNG by 2016.

Taking up technology

Russian oil companies, faced with annual decline rates of around 2% in their West Siberian home base, have already started to step up the use of unconventional technologies to secure Russia’s position as one of the world’s top crude producers. Producers are starting to unlock conventional resources – both in Western Siberia and at greenfield projects in the east – with the increased use of horizontal drilling and hydraulic fracturing techniques that have come to be associated with the shale boom.

In March, Bloomberg reported that TNK-BP, Russia’s third largest oil producer, would use horizontal drilling and fracking for almost half the wells it would drill in 2013, representing a sixfold increase in two years. Rosneft, Lukoil and Gazprom Neft had similar plans, according to Bloomberg.

In the gas sector, Russia may hold up to 680 trillion cubic metres of unconventional resources, according to the director of the gas resources centre at Gazprom’s VNIIGAZ research unit, Viktor Skorobogatov. He said in a December interview published in the company’s corporate magazine that this figure included gas from shale, sandstone and coal beds.

Rosneft, Russia’s largest oil-producing company, is now considering drilling for unconventional gas. Rosneft’s vice president for gas strategy, Vlada Rusakova, said in London on April 23 that the company was intending to more than double its gas output by 2020, and similarly increase its share of the domestic market to 20%. She said that unconventional gas would form part of this effort if it was economically viable.

Live questioning

Putin previously urged Russia’s energy companies to “rise to the challenge” of shale in April 2012.

His recent remarks on the topic were in response to questions from a Channel One journalist, Mikhail Leontyev, who has produced a scathing and widely viewed documentary covering Gazprom’s position regarding unconventional gas. Leontyev asked Putin whether the company and the country had “slept through” the global shale revolution.

Putin replied: “It’s a hard question, whether we’ve slept through it or not. There’s no answer yet because gas extracted from shale costs several times more than gas recovered by traditional means. We’ve still got enough gas bubbles to produce it by traditional means.”

Putin also touched on the environmental hazards associated with shale. “Shale gas and shale oil are produced at huge – and I want to stress huge – environment-related cost. A lot of people who live where shale gas is produced get black slurry coming out of their taps and this technology needs major refinement at the very least,” he said on the TV show. Nevertheless “this does not mean we are turning our back on shale gas – international experts say Russia has big prospects,” he added.

Worries that Russia will be by-passed by, and lose out from, the shale gas revolution have regularly been dismissed by Gazprom’s CEO, Alexei Miller, who underlined in 2010 that he wanted to smash “myths” about “shale fever”. While Gazprom is undoubtedly monitoring global developments, its executives have subsequently argued on several occasions that production of shale gas lacks commercial feasibility.

A Gazprom board member, Igor Yusufov, said recently that the company’s 28 trillion cubic metres of booked gas reserves remained sufficient to meet its domestic and export obligations for “decades”. In an interview with Vesti FM radio, Yusufov said that shale gas was “a trendy topic” but was still a loss-making business.

Medium-term competition

However, the Ministry of Economic Development report – which outlined scenarios for Russian socio-economic development over a three-year period – projected that rising competition on the global gas market between Russia, the US and countries in the Middle East would have a significant medium-term impact on Russia’s energy industry. Competition to supply Asia would be the critical factor, the Ministry said.

Gazprom’s current export prices to “far abroad” markets outside the former Soviet Union are “inadequate”, said the report, predicting that the gradual introduction of cheap US gas would further increase price pressures on the company. Various disputes over Russian gas supply contracts have already prompted members of the European Union (EU) to pursue energy diversification strategies. According to the Ministry of Economic Development’s outlook, prices for Russian gas in Europe will gradually decline to US$329 per 1,000 cubic metres by 2016, falling by around US$70 from the current average of US$399.9 per 1,000 cubic metres.

Short-term prospects are better, said the report. The ministry expects average gas prices in Gazprom’s export markets to reach a peak of US$411 per 1,000 cubic metres by 2014. However, the ministry is forecasting that from 2015 the cost of producing unconventional gas in the US and elsewhere will decline and that output volumes will rise. As a result, the Russian company would have to compromise on its pricing schemes in order to remain competitive, the report said.

With Russia only just starting out on the path to using unconventional production techniques, the speed with which it will develop the sector is difficult to predict. To ensure that it does not lag behind the rest of the world, Russia can be expected to step up the pursuit of tight oil and shale resource development in the coming years, but economic imperatives will dictate the pace of progress.

Source, www.newsbase.com