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North American Shale Gas Gives Russia Serious Headache

North America’s shale gas boom is chipping away at the market for gas producers like Russia. What’s more, if the United States becomes a gas exporter, Russia’s customers (especially in Europe) could decide to cancel expensive contracts with Gazprom in favor of cheaper American natural gas.

Here’s the story from the FT:

“If the US starts exporting LNG to Europe and Asia, it gives [customers there] an argument to renegotiate their prices with Gazprom and Qatar, and they will do it,” says Jean Abiteboul, head of Cheniere supply & marketing.

Gazprom supplied 27 percent of Europe’s natural gas in 2011. While American gas is trading below $2 per MMBTU (million British thermal units), Gazprom’s prices are tied to crude oil markets, and its long-term contracts charge customers roughly $13 per MMBTU, says the FT. European customers would love to reduce their dependence on Gazprom and start to import American gas. Already Gazprom has had to make concessions to its three biggest customers, and others are increasingly dissatisfied with their contracts.

Worse, from Russia’s point of view: evidence that western and central Europe contain substantial shale gas reserves of their own. Fracking is unpopular in thickly populated, eco-friendly Europe, but so are high gas prices.

All this ought to give Russia serious heartburn. Eroding Gazprom’s dominance of the European energy market would be a major check on Russian economic growth and political influence.

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  • thibaud

    Not necessarily. This would certainly a headache for the band of thieves inside and outside the Kremlin who plunder Gazprom, but it wouldn’t necessarily hurt Russian growth and influence, both of which would benefit hugely from forced diversification of Russia’s lopsided, resource-heavy economy.

    A shock to the easy money that flows into (and right out of) Gazprom’s coffers would be the best thing to happen to Russia’s non-resource economy in 20 years. This would give hope to millions of Russians seeking to shake off the “resource curse” that causes so many oil-rich countries to stagnate economically and politically, as Russia has done for more than a decade.

    Were Russia’s elites to see the end of their Nigerian-style energy windfall, they might get serious about the root cause of Russia’s weakness, which is the lack of rule of law and intellectual property rights.

    It’s these barriers more than anything else which are preventing that nation’s extraordinary scientific, math and engineering talent from developing their own global technology powerhouses.

    Set these brilliant technologists free, make it possible for minority investors to give them money with confidence that minority shareholders’ rights will be protected, and you’ll soon see any number of new world-class Russian companies spring up in areas from materials science to big data to nanoscience.

    Russia has greater reserves of talent certainly than Finland, which produced Nokia, or Korea or China.
    Russia’s entrepreneurs could easily develop offshore IT companies to rival India’s Wipro and Infosys – provided they had a stable legal environment to operate within.

    One more aspect to this story is that, as the EU melts down, it makes more and more sense for Germany to deepen its already deep economic ties to Russia.

    These go way beyond energy. The Russian market is already the major source of growth and profits for European exporters, and it could be a major source of offshore, as it were, manufacturing as well – again, provided that Russia improves rule of law and protection of IP, at least to China’s level (which isn’t very high).

    As hundreds of German firms have already discovered, there’s a natural fit between Germany’s high-priced labor/manufacturing expertise and Russia’s huge supplies of resources and cheap labor.

    Given America’s increasing neglect of Europe, the shrinking of the EU project, and Germany’s own need for export markets, it makes perfect sense for Germany and Russia to emerge from this crisis much closer than before.

    Russophobes, be careful what you wish for.

  • Jacksonian Libertarian

    Natural Gas Powered cars are the next automotive growth area, forget electric cars they are an expensive loser.

  • Tom Richards

    Were Russia’s elites to see the end of their Nigerian-style energy windfall, they might get serious about the root cause of Russia’s weakness, which is the lack of rule of law and intellectual property rights.

    I think this is wishful thinking in the extreme. Why on earth would Russia’s elites wish to introduce the rule of law? And supposing the kleptocrats were to be toppled, what would replace them? A stable liberal democracy? Or neo-communist/ultra-nationalist loons? I know where my money would be.

  • Bibo

    Luckily Obama promised flexibility after the election so maybe he can make gas exports illegal for his new friends.

  • John W.

    What this does garauntees is massive, under-the-table, off-the-books donations from the Russians to all the politicians and “environmental” groups that want to shut down US production.

  • EvilBuzzard

    We can’t let Gazprom suffer! Shouldn’t the EPA be out there handing out the crucifixions?

  • Alice Finkel

    This sounds like a job for the World Wildlife Fund, and their lackey: The IPCC!

    Green riders to the rescue, never fear! Mr. Putin and his grand scheme to recreate the USSR is saved!

  • Jon Brooks

    Bibo beat me to my comment. Great minds think alike. The energy wars of the 21st century are progressing smoothly and will continue to progress unabated guided by the men behind the curtain.

  • J R Yankovic

    “North America’s shale gas boom is chipping away at the market for gas producers like Russia. What’s more, if the United States becomes a gas exporter, Russia’s customers (especially in Europe) could decide to cancel expensive contracts with Gazprom in favor of cheaper American natural gas.”

    So what – of all bizarre and unlikely things – do you suppose just might be on the medium-to-far global horizon (provided, of course, somebody has the wisdom to nurture it)? A new “brown economy” Atlanticism? I say, in that case, let the cancellations begin. And I also sincerely hope thibaud’s optimism is justified re Russia (and in any case, his thoughtful and farsighted comments are always appreciated).

    A more likely result, though, is that the usual assortment of pessimists, cynics, thugs, criminals and all-around anti-visionaries, both within and far beyond Russia’s borders, will prevail once again as they’ve done for roughly the past 90 years. With the upshot being a deepening of the largely satisfying results – a self-marginalizing, paranoid, kleptocratic and demographically imploding Russia – that we all enjoy at present.

    Speaking of which, I wonder if need new glasses. I keep on noticing 3 countries in particular about whose HEALTHY growth nobody important seems to care so much as a fig in a brandy barrel. At least not in the ways in which we all SAY we care about these things. Three countries in which, it would seem, global trading elites either have no interest in seeing develop, or would much rather NOT have develop, healthy, rule-of-law-based capitalist economies (as opposed to quasi-monopolistic pseudo-capitalist fiefdoms). These three are:

    Mexico (for obvious reasons?);

    China (whose brand of authoritarianism visionaries love to wax optimistic about);

    Russia (whose brand of authoritarianism visionaries love to use as justification for their pessimism, cynicism and “why should anyone care?” attitudes).

    Have a nice century.

  • thibaud

    @ Tom #3 “Why on earth would Russia’s elites wish to introduce the rule of law? ”

    Agreed that they would only do so when forced to. The point is that a collapse in natural gas export revenues would hit the banditti where it hurts: in their slush fund pocketbooks and numbered accounts.

    I forget the exact ratio, but ever tick downward in the oil price deprives the Russian treasury of some billions in hard currency reserves. Revenues from O&G make up nearly all of the Russian state’s revenues.

    There’s a precedent here: Brazil and much of the rest of Latin America, which used to be run by (completely) corrupt _ladroes_ and banditos in the days when their economies were almost totally dependent, as Russia is now, on commodity exports. When those goods’ prices collapsed in the 1980s, there was huge and compelling pressure for reform, and the democratic wave accelerated.

    Brazil today has a broad-based economy and much more sustainable prosperity. Its politics is still marred by corruption, but less so than Russia’s, the democratic process works, and the generals have left politics for good.

    If Brazil, with massive illiteracy and backwardness, can turn itself around, so can Russia. The latter has one of the highest literacy rates in the world, exceptionally talented and well-educated people, and next-door access to China and the rest of Asia.

    When/if the Kremlin faces bankruptcy, real reform will start in earnest.

  • Brendon Carr

    @ EvilBuzzard #6 — This calls for greater government and media scrutiny of the activities of the Romney campaign.

  • Rygor

    thibaud, it seems you’re so well informed ! Do you understand Russian ? (Говоришь ли ты по-русски, товарищ ?)

  • uncle john

    It seems to me that you have discounted Pu plausible actions to disallow the takeover of what he probably believes the markets that he and his buddy pwn. He had a history of resorting to what he had been taught in his grad school in a quite dramatic fashion. With a plausible deniability of cause. To discount them as pity third world kleptocrats is to ask for trouble.

    You also seem to discount a growing opposition down here to unpredicted consequences of the current shale extraction and contamination. Legal looters typically wait for a while prior to filing their lawsuits, but when they start filing, the trend can very well reverse to the opposite and prices rise.

  • Augis

    It is actually a headache for Putin personally who is believed to directly benefit from Gazprom’s operations.

  • thibaud

    @14 Augis – spot on. Putin is very likely the wealthiest man in Europe.

    The money flows through trading subsidiaries domiciled in Switzerland and Lichtenstein that do business with Gazprom and other Kremlin-aligned, resource-based cash cows and skim off billions flowing into Putin and his coterie’s numbered accounts.

    This is bad news for Putin. What’s bad for Putin is _good_ for Russia.

  • Thucydides

    Russia’s basic culture (Samuel Huntington’s “Civilization”) is not based on property rights, rule of law or other concepts at the heart of liberal democracies or free market capitalism.

    Nazi Germany and Imperial Japan had to have their basic institutions razed and totally discredited, and new civil, political and economic institutions imposed in order to integrate them into the Western Liberal Democratic order. I’m not sure there is any desire to undertake anything on that scale and scope to establish a liberal democratic society in Russia.

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