Shale gas weakening Russian petro-power

Amy Myers, Director

Energy Forum at Baker Institute

US natural gas production from shale formations and LNG local production increase can significantly reduce Russian pipeline gas consumption in Europe.

According to the recent study of our institute, published in July, shale gas production can weaken Russian position at the market. The study projects that U.S. shale production will more than quadruple by 2040 from 2010 levels of more than 10 billion cubic feet per day (283 million of cubic meters), reaching more than 50 percent of total U.S. natural gas production by the 2030s. At present US shale production reached 1000 billion cubic feet (28,3 billion cubic meters), which is enough to meet the domestic demand within 45 years.

Shale gas significantly changed US LNG market: in mid-2000s Middle East countries made intensive investments in the construction of natural-gas liquefaction infrastructure, concomitant with investments in regasification being made in the United States, but the rapid growth in shale gas production has since turned such expectations upside down and rendered many of those investments obsolete. In Europe the capacity of LNG terminals has essentially increased over the decade. If in 2000 regasification LNG terminals could storage 200 million cubic meters per day, so today this amount reaches 410 million cubic meters per day and by 2012 it can exceed 480 million cubic meters per day.

Shale gas can significantly weaken Russia’s ability to wield its «energy weapon» over its European customers. The shale gas potential is also high in China, Australia, Canada and some European countries (Poland, Austria, Germany and Switzerland). Shale gas deliveries to the European countries in LNG form and further development of regional shale gas production may dramatically reduce Russian pipeline gas consumption. The market share for Russian gas in non former Soviet Union (FSU) Europe may fall from 27% (2009) to 13% by 2040 with possible rising share of China over the European market in the Russian gas export structure by 2030. Future share of the world gas supply from Russia, Iran and Venezuela will be reduced to33% by 2040 and in case of new shale to 26%.

US shale gas surplus is already delivered to European and Asian markets providing big impact on the current pricing in long-term contracts. It makes gas suppliers to change their pricing policy towards lower prices. Russia will probably have to accept lower prices for its natural gas allowing a portion of its sales to be indexed to spot natural gas markets.