Gazprom Rethinks Shale as European Gas Prices Sink

September 21, 2012

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Gazprom has admitted it might yet adjust its attitude towards shale gas, as Russian policy makers assess new dangers to the country’s petro-dollar economy. First, Russia’s Economic Ministry warned that the increasing supply of shale gas on world markets will start hurting Gazprom’s pipeline sales to Europe in 2014. And it seems Gazprom might now be weighing the pros and cons of jumping onto the shale gas bandwagon.

"Gazprom had undervalued the importance of shale gas, but is starting to look at it seriously," Dow Jones quoted Deputy Economy Minister Andrei Klepach as saying last week. Gazprom's top managers have for years said that shale gas production would never threaten demand for Russian gas. Now, they’re not so sure.

“Shale gas production in the U.S. is already having a negative impact on gas prices in Europe and on Gazprom,” Chris Weafer, Chief Strategist at Troika Dialog, told Oil&Gas Eurasia. “Even though there is as yet no actual U.S. gas imports to Europe, the high domestic (U.S.) gas production has displaced coal as a major fuel source and that coal is finding its way into Europe and other world markets. The greater availability of cheap coal has already very significantly undermined the gas market and Gazprom’s ability to price gas.

“That is why Gazprom is under pressure to negotiate existing contracts and also why it is in a hurry to build Nord Stream and South Stream,” Weafer said. “It wants to at least lock in the customer base before European and/or U.S. shale gas arrives; at least then it will be an issue of price bartering rather than market share.”

While Klepach was telling reporters that his ministry predicts that the euro crisis and rising gas supplies will keep driving European gas prices lower; the IMF’s Russia rep was painting a similar picture for the Association of European Businesses – only his comments focused on oil.

The IMF’s Odd Per Brekk warned that Russia had better lower the oil price forecast it uses in budget planning.

In September, the Duma agreed a new budget rule to anchor Russia’s annual fiscal policy to a lower price of oil than in previous years. RIA Novosti report that Russia’s Ministry of Finance will calculate the federal budget based on an average 3-year price of $91 per barrel oil beginning in 2013. The 2014 budget will be based on an average of $92 per barrel, climbing to $93 per barrel in 2015.

The IMF’s Brekk agreed this would defend against short-term effects of the Euro crisis but the plan would not support long-term economic growth.  Brekk cited the IMF’s annual Russia report that envisions an $80 per barrel oil price. At this price, Russia’s GDP would grow by approximately 4 percent in 2012, Brekk said. That assumes, however, that nothing else goes wrong.