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24 January 2013

Shale gas: Good news for Europe, bad news for Putin

The Deep End could feature a story on shale gas everyday and not have to change its name. For a start, this unconventional fuel is found in rock formations thousands of feet underground, but more to the point it promises to have a profound impact on the world order.

In an article for Foreign Affairs, Aviezer Tucker spells it out:

  • “We are moving away from a world dominated by a few energy mega-suppliers, such as Russia, Saudi Arabia, and Venezuela, and toward one in which most countries have some domestic resources to meet their energy needs and can import the balance from suppliers in their own neighborhood...Within the next five to ten years, regimes that are dependent on energy exports will see their power diminished. No longer able to raise massive sums from energy sales to distribute patronage and project power abroad, they will have to tax their citizens.”

In terms of actual extraction, the shale gas revolution is, for the time being, largely confined to the United States. But America’s example shows what could be in store for us in Europe:

  • “The low price has prompted changes throughout the U.S. economy, including the projected retirement of one-sixth of U.S. coal power generation capacity by 2020, the conversion of hundreds of thousands of vehicles from gasoline to compressed gas, and the construction and repatriation from China of chemical, plastic, and fertilizer factories that use natural gas as both raw material and fuel. By 2025, the professional services firm PricewaterhouseCoopers predicts, energy-intensive industries will create a million new U.S. jobs.”

It should be said that these changes aren’t all down to shale. Furthermore, there are no guarantees that formations in other countries will be as productive as in America. But with American demand already displaced from international gas markets, the balance of power is shifting away from gas exporting nations like Russia:

  • “European countries have a stronger position in negotiations over natural gas imports with Russia, from which they receive a quarter of their supply. The newfound leverage might have emboldened the European Union to open an investigation in September into a possible price-fixing scheme by Gazprom, the Russian energy giant.”

As noted last week on the Deep End, this is not before time – and is yet to go far enough. Still, the Russian government has every reason to be concerned:

  • “Given that Russia raises most of its federal revenue from energy exports – about 60 percent, according to most estimates – a reduction in natural gas sales would be politically catastrophic…
  • “...Gazprom's profit margins are low. Given that it sells 60 percent of its gas domestically at a loss, Gazprom must obtain wide profit margins from its European exports to stay afloat. (Currently, it sells gas in Europe at about a 66 percent profit margin.)
  • “On its exports to Europe, Gazprom needs to earn $12 per thousand cubic feet of natural gas just to break even. (The price of natural gas in the United States today is below $3 per thousand cubic feet.)” 

These are remarkable numbers and what they add up to may be the biggest geopolitical shift since the end of the Cold War.


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