A revolution in the gas sector? Once again, this much abused word – “revolution” – has recently been heard in the community of oilmen, and some of the many commentators who write about energy in the media, have spoken of “market disrupion” . And from several sides it has been pointed out – as a proof of a tide change in the world energy market – that the United States have, in 2010 overtaken Russia  as the world’s largest gas producer, and in the following year – last year – become a net a exporter of hydrocarbons for the first time in more than half a century.

The Turkish economista Fatih Birol, Head of the Paris-based International Energy Agency, which was created in the seventies as a kind of anti-OPEC watchdog supported this view “This is going to have big implications for traditional exporters of gas” he declared to the Financial Times. “All of them are worried. They have a competitor entering the market that produces gas at much lower cost.”

And indeed, according to the FT, “this development could recast a world gas trade long dominated by a handful of energy superpowers – countries including Russia, Qatar and Algeria.” Its geopolitical consequences could also be vet momentous: “The pipelines that connect Russia’s west Siberian fields with consumers in Europe and the LNG tankers that ply their way from the Gulf and south-east Asia to Japan have created a network of dependency that has evolved over generations.

Those relationships are facing an unprecedented challenge. ….. Suddenly, a new wave of gas producers looks set to emerge that could threaten the old oligopoly.

The changes mean that for producers such as Gazprom of Russia, the future looks a lot less certain than it did a decade ago. ….. China, too, has so much of its own shale gas that it could ditch long-standing plans to import big amounts from Russia through a new pipeline from Siberia.”

Russia – and Gazprom – have for decades has been the largest exporter of gas in the world and, in particular, in Europe. Not only a huge pipeline, known as North Stream, has just become operational between Russia and Germany, with the declared purpose of freeing the two countries of the interference of potentially politically hostile Ukraine and Poland, but its capacity – 27,5 billion cubic meters of gas a year – is going to be doubled soon. Moreover, the project of an even bigger pipeline, South Stream, (63 billion cubic meters a year) has been launched by Italy’s ENI and Russia’s Gazprom; a project that has been advancing fast and seriously enough to push France’s GdF  and Germany’s Rhurgas to push their way in, and to create major diplomatic problems to the Italian government with its anglosaxon allies.

The leading personalities in the senior management of Gazprom – the largest Russian company for mining, processing and distribution of gas don’t however seem to be very worried. And they  talk of a shale gas revolution as a delusion: and opinion which is doubteless interesting and worth analysing.

“There are some illusions that it is very difficult to abandon, and the shale gas is one of those illusions”, Sergei Komlev, head of the Gazprom’s Export Directorate for structuring of contracts and pricing, had een quoted to say. While Alexei Miller, Gazprom’s Board Chairman, in an interview with Süddeutsche Zeitung, Germany, as gone  as far as to say that “the so-called shale gas revolution is an American “Hollywood”.

A discovery, only for the general public

Their arguments to justify such a point of view are the following:

First, the existence of shale gas has already been know for quite a time. Aleksei Miller in his report on the XXIII Annual General Meeting of the European Business Congress (Cannes, France, 10-11 June 2010) affirms: “First of all, it should be noted that the shale gas and in general the “unconventional gas” extraction not is new to the gas industry. The “solid reservoir” gas production has been ongoing for several decades in significant quantities and only for the wide audience this issue has become a recent discovery. ” Thus, the so-called revolution has a perfect timing, taking into consideration the current financial crisis. Going forward, Aleksei Miller suggests that the shale gas use in the United States covers only the traditional sources decline: “With the political issues of energy independence and the resonance of the closure of imports also the shale gas leader– the United States – covers with this source only the production decline in their traditional areas. “

A second argument relative to the shale gas “revolution” consists in the stressing the serious risks and limitations of shale gas. In the first place, the economic aspects, and namely the cost of production. Vsevolod Cherepanov, Head of Gazprom’s Department for extraction of gas, gas condensate and oil, says in an interview that “the shale gas extraction is characterized by relatively low flow rates of wells and a sharp decline already in the early years of production , a significant amount of perforation, as well as the need for a permanent passage for new areas of development.” Then the huge profits are realized in the extraction with an immediate significant decrease thereafter, which obviously can not build a base for a long-term strategy.

There are legal and organizational limitations, as well. In many European countries’ legal limitations are associated with the characteristics of the land property and mineral resources rights, the use and disposal of waters “- was said at the meeting of Gazprom’s Board of Directors on the November 29th, 2011. And finally, not to be underestimated are the environmental and ecological risks. “The production of shale gas is associated with serious environmental risks. In particular, there is the danger of surface and groundwater contamination with chemicals used in the production process. This has already led to the ban on the shale gas exploration and production in France. In the South Africa and some regions of Germany a temporary moratorium on drilling and hydraulic fracturing of shale gas was announced until the completion of an independent evaluation of the impact on the environment. The moratorium also applies to the states of New York and New Jersey (USA)”- information collected at the above mentioned meeting.

Therefore, it appears that all the listed risks, according to the Russian companies representatives, limit the application of the shale gas use, particularly in Europe.

Here are the words of Stanislav Tsygankov, “Severneftegazprom” Director General, in an interview on June 23, 2011: “Wherever there are specific characteristics, and what is suitable for the United States, is not always applicable in Europe. For example, within the high population density, and the requirements of the existing systems of property management, property on soil and mineral resources, it makes impossible for a large-scale processing of the shale gas resources in the European region “. Taking into account the lack of equipment necessary for the development of deposits, we might conclude that the shale gas cost in Europe, according to preliminary estimates, is about two times higher as in the United States.

So, Vsevolod Cherepanov expresses the conclusion that the shale gas resource are only local and not global: “All these factors have determined the shale gas role as a source of local resources, offsetting the decline in the conventional gas production, or their absence in the regional markets. “

This means that the traditional natural gas remains the primary source and the number one energy resource on global scale and in particular that of the European Union. The already mentioned Stanislav Tsygankov believes that “in the face of growing demand for energy the main role is still played by traditional fuels, including natural gas which is currently the most promising in all its environmental, economic and technological characteristics”.  Increased reliability, according to Aleksei Miller, is an important argument in favour of the traditional source: “The traditional natural gas has a special niche market – production technology, proven with time, reliable methods for the recoverable reserves determination, as measured by decades of exploitation in terms of a stable level of production”.

An additional resource

Thus, which role, according to the Gazprom’s Senior management, is attributed to the shale gas? This of an additional resource. We report here the words of Aleksei Miller to create a metaphor “If you like foie gras, that does not mean that the usual burgers are no longer needed. The additional possibilities of gas markets balancing have never bothered anybody. ” Vsevolod Cherepanov talks  about all the additional sources as “a huge potential resource. This is not only the shale gas, but also the carbon gas and hydrates from gas. Although the competitiveness is far from that of the conventional gas, one must understand that the role of these sources of natural gas in the formation of the global energy balance is high. The study of unconventional gas sources enables us to evaluate and respond to the gas global export-import balance changes”.  Stanislav Tsygankov adds, “Without a doubt, the alternative energy sources will continue to develop actively, but a fully competitiveness with the conventional energy sources, and in particular a their replacement in the near future will not be possible. The alternative energy can only be a supplement based for the traditional fuels. “

Putting the question this way and talking about an additional resource, it is obvious that Gazprom carries out some research, but not only on shale gas, but on all alternative types. For example, a plant for the carbon gas is already in process. We quote the words of Vsevolod Cherepanov, “in February 2010, Gazprom for the first time in the Russian Federation has begun the gas extraction of carbon seam on Taldinskoye field. In 2011, Gazprom plans to begin development and production testing of 10 exploration wells in the area of another field (Naryksko-Ostashkinskoy) “.

Moreover, there is an ongoing scientific research for the gas hydrates, which according to the same Cherepanov, “have the greatest potential in comparison with other unconventional sources of gas, because of their considerable resources and wide distribution in nature. Gazprom VNIIGAZ (a scientific research institute of the company) is engaged in research in order to find the opportunity to develop additional sources of unconventional gas in the field of mining companies of Gazprom. The results allow a preliminary conclusion about the possibility of involvement in the development of additional resources in Western Siberia. “

Finally, although that of shale gas is not a revolution, it may still benefit to the whole gas sector, including that of conventional gas. Stanislav Tsygankov believes that “the development and introduction of new technologies and equipment, technical solutions and methods for the development of hydrocarbon resources can bring significant benefits for the entire field of oil and gas” and certainly leads to contribute to “the disclosure of the gas (of any of its kind) to the world as the most convenient and safest source of energy economically and environmentally beneficial ” which coincides with one of the main Gazprom company purposes.

The quotation for this analysis were taken from the official Gazprom website  www.gazprom.ru