The American Interest
Analysis by Walter Russell Mead & Staff
US Shale Gas Boom Undermining Putin's Gazprom

Vladimir Putin

The Russian energy firm Gazprom is increasingly off its stride in Europe, its largest export market. Bulgaria has managed to negotiate a 20 percent price cut in its new ten-year contract with the gas giant, an unprecedented reversal of fortune from only a short time ago. Gazprom had cut off gas to the Ukraine in 2006 and 2009 during contract negotiations, which left Bulgaria freezing for several days as they were on the same pipeline. Bulgarians are probably relishing their success now with no small amount of schadenfreude.

The cause of the turnaround, the Wall Street Journal reports, should come as no surprise: the shale gas boom in the United States. The US has begun exporting gas to Europe, and has also ramped up coal exports by more than 250 percent since 2005. The net result has been to knock Gazprom back on its heels. The WSJ reports that the negotiations with Bulgaria were heated, with Gazprom’s negotiators shouting in frustration on several occasions.

In public statements, however, the Russian company remains defiant (and perhaps in a state of denial) about the implications of the shale gas boom:

Speaking on state television on March 30, Gazprom Chief Executive Alexei Miller minimized the impact of gas from U.S. shale fields, extracted using hydraulic-fracturing techniques. He predicted that it was a “bubble that will burst very soon. We are skeptical about shale gas. We don’t see any risks [to us] at all.”

Gazprom spokesman Sergei Kupriyanov acknowledged that shale-gas development “does have an impact” on contract negotiations. “But we don’t see any tragedy here….Our main competitive advantage is that we can guarantee volumes for a long time.”

Maybe, maybe not. But the immediate impact on Russia should not be underestimated. Vladimir Putin’s plans for reclaiming Great Power status for Russia are predicated on the country’s continuing strong economic performance, and the energy sector is key. Gazprom accounts for more than 10 percent of the country’s exports, and hits to its bottom line this year, the WSJ speculates, will cause Russia to miss Putin’s target of 5 percent annual growth.

Putin’s hardball tactics in his near-abroad when Russia was energy top dog were instrumental in confirming him as an authoritarian bully in the minds of many Westerners. These tactics also inadvertently made Russia more vulnerable to shifts in the global energy market, with many of its main customers desperately seeking out alternative suppliers so that they would never find themselves backed into a corner again. So it’s easy to join the Bulgarians in gloating over this reversal.

But everything in moderation. As we’ve said before, a cagey, resentful and frustrated Russia facing economic decline and increasing powerlessness on the world stage is good for no one at all.

[Vladimir Putin image courtesy of Getty Images]

Published on May 1, 2013 12:30 pm
  • Corlyss Drinkard

    “a cagey, resentful and frustrated Russia facing economic decline and increasing powerlessness on the world stage is good for no one at all.”
    Okay. I’ll agree with you later. In the meantime, I want to savor yet another blow to the pompous, arrogant, savage, paranoid purveyors of so much misery in the 70 years the Russian tyrants masqueraded as Jesus delivering a modern Eden to impoverished peoples.

  • Jim Luebke

    Question: How does Russia stack up against Turkey these days?

    Would an alliance between Turkey and Georgia put Georgia in a position to reclaim Abkhazia and South Ossetia, or was the assertion that “Turkey has the strongest army in Europe these days” ignore Russia?

    • bigfire

      I won’t put too much stock on the Turkish army now aday. When Mustafa Kemal Atatürk established modern Turkey, he went out of his way to institute a secular military whose constitution charge include the duty to overthrow the government that stray from the constitution.

      The current Islamic government seemed to be able to by-pass that safeguard. I don’t see too much hope there.

      • Mr X

        A Swedish institute put our a study indicating that due to the costs of LNG infrastructure shipping shale gas via tanker to the EU from the US is not nearly as cost effective as advertised. That’s not to say Gazprom isnt in for very hard times but WRM misstates the source of competition it is Norwegian gas, not US LNG. And it is the desperation of much of the EU driving down prices, not Chesapeake or Cherniere Energy. Plus in the long term if Gazprom can modernize/strip down gas makes more sense as a transport/trucking fuel in Europe than in the US due to greater population density reliance on buses. Finally I think WRM and the anti Russia neocons who influence his thinking badly underestimate Russia’s growing clout as a global grain exporter, particularly if North American droughts persist for many years. Russian grain unlike Monsantos oligopoly is non GMO

  • ghark729

    About 60 or 70 years ago…

    …there was some guy standing in an oil field thinking, “Hey! I’ll bet there is more oil and gas
    down there. I’ll bet if we could figure out a way to expand the cracks and fissures in the rock it would start flowing like crazy.”

    Whoever that guy is, he changed the world. I wonder if he is alive and knows what is
    happening.

  • Guy Cocoa

    “Speaking on state television on March 30, Gazprom Chief Executive Alexei Miller minimized the impact of gas from U.S. shale fields, extracted using hydraulic-fracturing techniques. He predicted that it was a ‘bubble that will burst very soon. We are skeptical about shale gas. We don’t see any risks [to us] at all.’ ”

    Of course not now that the election is over Obama has more “flexibility.” Such as, the EPA determining fracking is harmful and shutting it down or that we should not be exporting coal and allow Europeans to put CO2 into the atmosphere. I expect the Kremlin still has full control of the Manchurian Candidate.

  • kk9909

    Interesting take on Russia’s role in natural gas. I found http://shaleoilandgasandthemiddleeast.org/ an informative read on the future effects of natural gas. Take a look.