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Shale gas in China a new 'problem' for Russia

Disputes with Europe mean eastern markets crucial; Qatar’s LNG also eroding Gazprom’s western markets

SHALE-gas development in China will cause another headache for Russia’s gas sector, says the head of an influential Moscow-based energy institute. Konstantin Simonov, general director of Russia’s National Energy Security Fund (NESF), tells PEU that shale-gas production in China would be “problematic” for Russia. “We’re anxious about it,” he concedes.

At the same time, the erosion of Europe’s confidence in Russia – a legacy of bitter gas disputes with Ukraine that cut supplies to many EU countries – has put pressure on Gazprom’s exports to the West. Europe views Russia as an unreliable supplier, admits Simonov. This has left Russia with “no choice” but to turn to the emerging Chinese market.

“For Russia it’s a problem. China is a very difficult market. It’s not so profitable and it means serious political change for Russia.” But a more profound threat would come from development of Chinese unconventional-gas resources. In addition to small-scale coal-bed methane production, the government reckons China’s total shale-gas reserves could top 150 trillion cubic metres (cm).

State-owned Sinopec has identified six potentially large shale gas deposits and has begun drilling an unnamed seventh area that contains “a huge amount of shale gas”.

Foreign firms are also eyeing China’s unconventional-gas prospects. With partner PetroChina, Shell began assessing shale-gas reserves in the southwestern Sichuan basin in 2009. Sinopec has also forged a deal with Chevron to assess resources near Guiyang City, in southern Guizhou province. The government wants shale-gas output to reach 30bn cm/y by 2020.

Wood Mackenzie, a consultancy, forecasts total Chinese unconventional gas production will reach 112bn cm/y by 2030, equivalent to a quarter of forecast demand. Such growth will make Gazprom, which has planned but never completed exports to China, uncomfortable.

The unconventional-gas revolution that has swept across North America and created a global glut of supply, says Simonov, was a surprise for Russia’s state-owned gas monopoly. And it has dealt two blows to Gazprom’s plans to capture 10% of the Atlantic basin’s liquefied natural gas (LNG) trade. The effective disappearance of the US as an LNG importer has made cargoes available for buyers in Europe, Gazprom’s main export market.

At the same time, LNG from Qatar can be produced almost with no cost, because the country can sell valuable associated liquids produced from its North Field. Gazprom’s gas, much of it in costly Siberian and frontier Arctic regions, is much more expensive. The company has already delayed plans to develop the large Shtokman gasfield, in the Barents Sea – once a lynchpin in Gazprom’s LNG strategy.

Gazprom, says Simonov, has had “no choice” but to sell its gas into Europe at discounted prices. “For us it was a problem because Europe began to use Qatar as a political argument,” he says. “They would say they had cheaper gas from Qatar so they wouldn’t pay Russian prices.”

Nonetheless, Simonov says Russia is “pessimistic” about the prospects of unconventional-gas developing in Europe, which will be undermined by low prices and environmental concerns. Some voices within Europe agree, up to a point.

Mikolaj Budzanowski, Poland’s deputy finance minister told a conference in Poland this week that there would “always be room for gas from Russia”. Poland is trying to develop its own shale-gas sector, but still relies on Russia to supply 70% of its natural gas. In October, the country signed a new contract with Gazprom that will guarantee supplies until 2022.

Europe shouldn’t yet count on shale gas to yield a shift in the geopolitics of gas supply, Budzanowski said. Countering the voices of some bullish analysts who believe Polish unconventional gas would soon break the country’s dependence on Russia, he added that the government “doesn’t want to speak about it as a Polish energy-security strategy before we know if it is economically viable to extract gas from the rock.” 

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