2 Pieces of Impact of Shale Gas and Oil Revolution on Fossil Fuel Market/Russia

Summary of (1) “The New Power Map: World Politics After the Boom in Unconventional Energy” by Aviezer Tucker, web site of Foreign Affairs, 01.09.13 and (2) “The Foreign Policy Uses of an Energy Bounty,” Robert Johnston and Leslie Palti-Guzman, WSJ, 01.10.13.

1. “The New Power Map: World Politics After the Boom in Unconventional Energy” by Aviezer Tucker, web site of Foreign Affairs, 01.09.13.

Bottom-line: Hydraulic fracturing are driving world energy prices down and Putin’s Russia will  soon have to increase taxation of citizens and push through structural reforms to make economy more efficient and competitive. This argument has been made before, but the stats cited in the article are worth glancing through:

See key points below:

  • Within the next five to ten years, regimes that are dependent on energy exports will see their power diminished as we are moving away from a world dominated by a few energy mega-suppliers 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.
  • No longer able to raise massive sums from energy sales to distribute patronage and project power abroad, they will have to tax their citizens.
  • Hydraulic fracturing has been used widely for only about the past five years, but already:
    • price of natural gas in U.S. has plunged to a quarter of what it was in 2008;
    • share of U.S. oil consumption that is imported from abroad has fallen sharply, from about 60 percent in 2005 to less than 45 percent this year;
    • projected retirement of one-sixth of U.S. coal power generation capacity by 2020;
    • conversion of hundreds of thousands of vehicles from gasoline to compressed gas;
    • construction and repatriation from China of chemical, plastic, and fertilizer factories;
    • By 2025 energy-intensive industries will create a million new U.S. jobs.
  • Decreasing demand in U.S. for liquid natural gas, oil imports, and domestic coal is already reducing global prices for these commodities. As a result:
    • Russia has already granted some EU countries roughly ten percent discounts on existing contracts, but Gazprom still sells gas in Europe at about a 66 percent profit margin.
    • European countries have been negotiating fewer long-term gas contracts with Russia and are opting for spot purchases;
  • Given that Russia raises most of its federal revenue from energy exports — about 60 percent, a reduction in natural gas sales would be politically catastrophic and all of Putin’s options in a world awash with cheap energy are bad:
    • Reduction of prices that would mean accepting drastically smaller revenues. On its exports to Europe, Gazprom needs to earn $12 per thousand cubic feet of natural gas just to break even while the price of natural gas in U.S.today is below $3 per thousand cubic feet.
    • Chinese are tough negotiators and China possesses the largest deposits of shale gas of any country in the world.
  • Russia is attempting to block or at least slow expansion of use of hydraulic fracturing:
    • Moscow might have pressed ExxonMobil to pull out of Poland (a serious researcher would back this claim with at least some evidence), but Chevron has stepped in and Soros invested $500 million in unconventional energy projects in Poland.
    • Russia finances environmentalist groups to lobby against shale gas. Following a swell of environmentalist protests, both Bulgaria and the Czech Republic recently imposed moratoria on the use of the technology.
  • Era of lower global energy prices appears inevitable, and for Russia, the best scenario is that the energy glut will force structural reforms. Such changes could eventually lead to the establishment of real democracy and the rule of law, but there is little hope for that.

The author is assistant director of the Energy Institute at the University of Texas at Austin.

(2)“The Foreign Policy Uses of an Energy Bounty,” Robert Johnston and Leslie Palti-Guzman, WSJ, 01.10.13.

  • U.S. will export about six billion cubic feet per day of natural gas or or 16% of global LNG production in would
    • help rebalance relationships between producers and consumers, largely to the advantage of America's allies;
    • make it easier for Washington to convince allies not to do business with rogue states and decrease interest in riskier Iranian and Venezuelan LNG export projects;
    • encourage the decoupling of international gas prices from oil prices, and push down gas-market prices;
    • In Europe, American LNG exports will be a welcome source of diversification to cut energy dependence on Russia.
  • Russia's Gazprom is now positioning itself in anticipation of more competition from the U.S:
    • launching a gas program in eastern Russia with the development of the Chayanda field and new export infrastructures to increase its market share in Asia
    • investing in the offshore section of the South Stream.
  • Through its power to permit exports of U.S. gas and set the regulatory and environmental framework for domestic production, the White House will effectively say yea or nay to the emergence of the U.S. as a global gas superpower. The world is waiting for its answer.

Mr. Johnston is director of global energy and natural resources at Eurasia Group, where Ms. Palti-Guzman is a global gas analyst.