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№ 1 (January 2010)

Gazprom, The Unlikely Environmental Evangelist

The quality of drinking water in France or Texas is not something you’d expect to be troubling a top executive from one of the world’s mightiest energy companies–Russia’s Gazprom.

By By James Herron

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Yet time and again at a press conference yesterday in London, Alexander Medvedev, head of the export arm of the world’s largest gas producer, expressed his concern about pollution of the water table in Europe and the U.S. resulting from the production of shale gas.

“Not every housewife is aware of the environmental consequences of the use of shale gas,” said an exasperated Medvedev. “I don’t know who would take the risk of endangering drinking water reservoirs.

Gazprom is following with great concern a review by the U.S. Environmental Protection Agency into whether the production of shale gas in the U.S. is a threat to clean drinking water, he added.

But this isn’t pure environmental altruism. A huge boom in the production of shale gas, which is released from rock by blasting a mixture of water and chemicals into tiny fractures, has created a supply glut in the U.S. that has edged Gazprom out of what it hoped would be an important new market for its shipments of liquefied natural gas.

Gazprom has already been forced to divert cargoes from its Sakhalin-2 LNG project from the U.S. to China and push back the startup of the huge Shtokman LNG project high in Russia’s Arctic because of the big and unexpected changes in the U.S. gas market shale gas has wrought. It is dreading the effect that a similar shale gas boom could have on its most important export market–Western Europe.

This isn’t the first time an environmental cause has happily, albeit temporarily, coincided with Gazprom’s business interests.

Gazprom gained a controlling stake in Russia’s Sakhalin-2 LNG project after the original operator Royal Dutch Shell came under sustained attack from the Russian authorities for alleged damage to the pristine local environment. When Shell finally gave in to the pressure and ceded control to Gazprom, Russia’s then-President Vladimir Putin announced that the Sakhalin environmental problems had magically been resolved overnight.

However, despite his evident self interest, Medvedev has a valid point. There are genuine concerns about the impact of shale gas production in the U.S. New York City is pushing for a ban on shale gas production within its watershed, worried that the chemicals used in the fracturing process could contaminate its drinking water. The EPA is looking into whether the production of shale gas should be subject to federal regulation–a move the industry is dreading.

For all its gas import dependency problems it does seem unlikely that Europe–more densely populated and heavily regulated than the U.S.–could embrace shale gas with quite the same speed and vigor.

“There are shale gas reserves in Europe, but I honestly don’t think anybody would launch themselves into production using existing techniques,” said Medvedev. “Even the French would never agree with the replacement of their drinking water with wine.”

Gazprom has already seen the recession dramatically reduce gas demand in Europe and fears a boom in local supplies that could rival its own exports. It must be ardently hoping that in this case environmentalism can thwart commerce.

Copyright 2010. The Wall Street Journal. All rights reserved.



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