June 26, 2010
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Home / Issue Archive / 2010 / June #6 / CERA's Gustafson: Russian Response to Tight Gas "Shale Gale" is Logical And United

№ 6 (June 2010)

CERA's Gustafson: Russian Response to Tight Gas "Shale Gale" is Logical And United

Speaking at the Russian Petroleum and Gas Congress expert discussion on "Unconventional Gas Resources in Russia and the World: Technologies and Prospects", IHS CERA Senior Director Thane Gustafson noted that the swift development of shale gas in North America has forced Russia to respond as LNG shipments are re-routed from the US to Europe. This massive arrival of gas in Europe resulted in a drastic drop in spot gas prices which in turn has encouraged European consumers to ask Gazprom to ease the conditions of its long-term gas supply contracts.

By Alexandr Halayko

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Gustafson noted that most LNG arrives in Europe via Spain and the UK, but pointed out that Britain - which has led the drive to buy gas on the spot market in the European Union - forwards much of its gas via the Interconnector pipeline to the continent, where pressure is being exerted on Russia's supplier. Turning towards Russia, Gustafson said the big question is whether the market will see direct competition between LNG and pipeline gas. Analysts will need to determine how such balances may develop over the next few years, he said.
The oversupply of gas in Europe, combined with severe drops in demand as a result of the recession, means Gazprom will be unable to deliver the volumes it has become accustomed to in the recent past. European importers have naturally put pressure on Gazprom to lower prices, Gustafson said, and Russia's response has been logical, timely and consistent.
However, he added, while this response has probably generated stability for Russia in the short-term, this coming winter and the winter of 2011-12 will show whether this is truly the case. And even if it is, there is no guarantee that Russia's policy will play out in the long-term according to Gazprom executives and Kremlin officials' expectations.
Much of the debate about how the influx of LNG to Europe will develop is centred around the historical fact that gas prices are linked to oil prices. Analysts point out that a consensus will have to be found. "Buyers", Gustafson said, "want to abandon the link to oil prices".
Russians however, see the debate in slightly different terms. Gazprom executives believe that spot prices for gas cannot be compared to the price of gas in long-term contracts, because long-term contracts include the reliability of stable deliveries over a significant length of time, and consumers should understand that they must pay for this reliability as well as for the gas itself.
Gustafson also noted the important role of environmental safety in fuel production. In response to a question about the ability to clean the water used in hydraulic fracturing to produce shale gas, he stated that he believed an important piece of news was being overlooked by the main-stream press. As public attention is focussed on the failure of a blow-out preventer which led to the Deepwater Horizon accident in the Gulf of Mexico, a blow-out preventer also failed on a shale field. Gustafson pointed out while a solution has still not been found for the GOM spill, the shale blow-out accident was solved in 48 hours and left no damage to the environment. He argued that if the public were aware of the contrast in the two accidents, a new view would be taken of shale gas environmental issues.
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