Russia, Gazprom, Change Their Tune On Shale Gas

Cross-posted to Al Fin Energy

Gazprom's top managers have for years said that shale gas production would never threaten demand for Russian gas. Gazprom has recently started to change its view...

Russia's economy ministry sees "serious" risks posed by shale gas to the revenue of Gazprom (GAZP.RS) beginning in 2014, as higher supply from the nontraditional hydrocarbons may hurt prices and demand for Russia's pipeline gas.

"Gazprom had undervalued the importance of shale gas, but is starting to look at it seriously," Deputy Economy Minister Andrei Klepach said Tuesday as he presented a weaker outlook for the country in 2012 and beyond.

Russia satisfies about a quarter of Europe's demand for gas, which generates revenue for the budget.

Mr. Klepach added that the ministry also saw a lower outlook for gas prices in Europe, driven by both the euro-zone economic crisis and a higher supply of shale oil and gas from other sources. _WorldOil

After years of denial by Putin and Gazprom's top executives, Russia is finally acknowledging what Al Fin energy analysts have been saying all along. But political deception is nothing new for Russia or Putin. It is only those who still give the Russian government credibility who were fooled.

Meanwhile, Russia is jumping into shale fracking for oil & gas big-time, despite all that Putin has said about the evils of shale fracking. I suppose the shale oil & gas bonanza would look evil to a corrupt pol such as Putin, when it threatened his corrupt system.

Present recovery rates at various tight oil projects across Russia are between 2 to 8 percent. However, tight oil reserves could account for as high as 62 percent of Russia’s total reserves.

In the face of all this, Russia looks eagerly to the success experienced by North America in its shale revolution. The geology of the Bazhenov is quite similar to that of the Bakken shale here in the U.S., meaning fracking could be the solution to Russia’s oil situation.

The Russian oil producer Rosneft has already paired up with ExxonMobil (NYSE: XOM) to jointly work the Bazhenov formation. They will begin drilling in the Bazhenov and Achimov formations in 2013, following completion of an ongoing geological study. Rosneft has also reached an arrangement with Norwegian firm Statoil (NYSE: STO) to develop Russian oil assets in Southern Russia and West Siberia.

Other major oil companies like Lukoil (PINK: LUKOY) and Gazprom (MCX: GAZP) are also exploring ways of developing tight oil reserves.

The Russian unconventional oil and gas market could be heading for a time of profit and success. _Energy & Capital

This development points out some interesting things about Russia's economic future:

1. Russia's "prosperity" depends primarily on its energy production
2. For Russia to maintain its production, it must attract the expertise of foreign companies
3. Everything that Russia has said about the dangers and the inconsequential nature of shale oil & gas, was nothing but a politically expedient smoke screen
4. Russia needs to exploit its own vast shale oil & gas reserves

There are other interesting tidbits that can be read from between the lines, but that is enough for now.

Meanwhile, Europe's emerging recession is already having an effect on Russian gas profits:

Russia’s Economy Ministry is reportedly cutting its gas export forecast for this year due to sluggish demand from recession-mired Europe.

The forecast is said to be reduced to 193 billion cubic metres (bcm) from an earlier 212 bcm.

A government source has told Reuters that it will also reduce its average export price estimate.

State-controlled Gazprom has a monopoly on Russian gas exports.

Earlier this week the Deputy Economy Minister Andrei Klepach had said the gas export forecast would be reviewed, in the face of competition from US shale gas and liquefied natural gas. _Euronews

This tells us that Russia is reluctant to admit its earlier lies, when it claimed that US - style development of the global shale gas resource was no threat to future Gazprom profits.

It is important to understand that Russia's budget (official and unofficial) not only depends upon oil profits, but also depends upon gas profits. If Gazprom profits begin to fall because its customers in Europe and Asia begin to develop their own tight oil & gas resources, Russia's government will come under serious financial pressure.