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July 23, 2012 (TSR) - Russia’s state-owned natural gas company says the US shale-gas boom is economically unsustainable — and it’s buttressing its claim with financial data collected by an American consulting firm located less than 20 miles from the White House.
Moscow-based Gazprom, the world’s largest gas company, has been working with Pace Global Energy Services, a consulting firm in Fairfax, Virginia, to analyze how much money US gas companies are spending on hydraulic fracturing and horizontal drilling.
Because the two technologies are facilitating the production of so much cheap gas from previously inaccessible shale formations in Pennsylvania and other states, some US firms now want to export their gas to more lucrative markets in Europe, Asia and elsewhere.
But Sergei Komlev of Gazprom Export, the Russian gas giant’s exporting arm, says those would-be exports are not likely to materialize for both economic and regulatory reasons … at least not on the grand scale that American firms are hoping for.
“We think the current US gas market model is unsustainable in the medium and long term,” Komlev told Platts via email. “We forecast that soon, the disparity between the shale gas costs and sales price will disappear. When it happens, it will make the US plans to become a major gas exporter economically unviable.”
But notably, much of the data that Gazprom is using to make that argument was collected by Pace Global, the Washington-area consulting firm. Gazprom first hired Pace about 10 years ago, before the US shale-gas boom began in earnest, when it saw what it believed was a lucrative business opportunity: exporting Russian gas to the US.
According to an official US government lobbying disclosure form filed on September 19, 2005, Pace’s mission was to advocate for “Russian LNG exports to the United States.” Of course, the US never did import any Russian gas, in part because American firms soon became more accomplished in the realm of fracking and horizontal drilling.
But Pace Global, which was acquired earlier this year by Siemens, the German-based engineering and construction conglomerate, is still helping Gazprom with its global gas business.
Based largely on Pace’s review of quarterly earnings reports and other financial data from US gas companies, Gazprom says the true costs of shale-gas production are upwards of 150% higher than the revenues its practitioners have been reaping in the last few years.
But companies are continuing to use the approach for now, Komlev says, because they are also producing some higher-priced gas liquids in the process.
Gazprom also believes that shale-gas drillers will incur additional costs to ensure that the chemicals they use in the fracking process will not contaminate underground sources of drinking water.
Komlev, who heads Gazprom Export’s contract structuring and pricing division, concedes that fracking “is not the incarnation of evil,” as some environmental groups argue. He also acknowledges that the US-instigated shale-gas boom has been “a godsend” for the gas industry in certain respects.
Still, Komlev argues that due to its relatively higher costs, fracking-based shale-gas drilling will eventually fizzle out in the US and other countries that are considering adopting it.
“One can produce gold out of sea water, but does it make economic sense?” he asked rhetorically, seeking to illustrate his point about shale gas.
Critics decry Moscow’s ‘scaremongering’
But Gazprom’s critics are deeply troubled by the company’s actions, saying it is using underhanded tactics — with Moscow’s blessing and financial support — to discourage European and Asian nations from developing their shale-gas reserves.
Aviezer Tucker, the assistant director of the Energy Institute at the University of Texas, says the Russian government is paying public-relations firms to spread “myths and misconceptions” about fracking so that Romania, Bulgaria, China and other countries will remain viable export markets for conventional Russian gas.
“Where does the money come from to organize such [anti-fracking] demonstrations and brochure writing?” he said in an interview. “All that seems to point to a common source, which would be Moscow.”
Tucker made the same point in a recent column published in the Washington Times newspaper, charging that “Russian-financed public-relations firms” are behind efforts to convince people in Bulgaria, the Czech Republic and other Eastern European countries that fracking will either poison or consume all of their drinking water.
“They use a fear of cutting their water; that’s the bottom of it,” he said in the interview. “The issue is the scaremongering about a new technology that the people in the East are not familiar with. And that kind of scaremongering is something that you will find in articles, in publications, in brochures, in chat rooms and so on.”
Tucker, whose professional research interests include “social aspects of shale-gas extraction through hydraulic fracturing,” says the “holy grail” for Gazprom would be a “European Union-wide ban or moratorium” on the practice.
France and Bulgaria have already banned fracking due to environmental concerns, and anti-fracking activists are pressuring other European countries to follow suit.
Komlev staunchly denies that Gazprom is bad-mouthing shale-gas production so that it can continue to export its conventional gas to European markets. But he sidestepped a question on whether Gazprom wants a European-wide ban on fracking, as Tucker claims.
“What Gazprom wants is fair-play rules and fair competition based on economic rationale and not on political agenda, which unfortunately is something we encounter while conducting business in Europe,” he said. “The decision either to allow or to ban either hydraulic fracturing or any other technology rests within the competence of respective national authorities.”
But to be sure, Komlev has made it clear that Gazprom does not want to see the US-instigated shale-gas boom replicated anytime soon in Europe, where Gazprom sells a lot of its conventional gas.
In a meeting of the Gas Exporting Countries Forum in Qatar last spring, for example, Komlev gave a presentation that included a slide captioned, “Multiple Handicaps Will Retard Shale Gas Development Outside US.” The notes to the slide — which bore Gazprom’s logo — showed that Gazprom and other LNG exporters welcomed these “handicaps.”
“Fortunately for LNG exporters, European shale gas development faces numerous economic, regulatory and political barriers before there are significant amounts of shale gas production, not sooner than in ten or more years,” the slide said. “For example, the lack of essential specialized equipment and field services outside the US will retard the rate of commercial shale development in Europe and Asia.”
Why inspect China’s shale?
Notably, Gazprom announced last week that it sent a team of “technical specialists” to a shale-gas field in China that is being developed by China National Petroleum Corporation, the country’s largest state-owned oil and gas company.
Gazprom, which has been negotiating with Beijing to export Russian gas to China, did not say in its press release why it was sending technical experts to inspect China’s shale-gas field.
Leslie Palti-Guzman, an analyst at the Eurasia Group, a New York-based research and consulting firm, speculated that Gazprom wants to get its hands on any shale-gas know-how that the Chinese may have developed.
“Gazprom have been in denial [about the global shale-gas boom] for a while,” she said, noting that Gazprom, unlike other European oil and gas companies, has no joint ventures with US gas-producing companies, no market share in US gas production, and no expertise in shale-gas development.
“They have an interest to maintain the relationship [with China] but … the primary purpose is they want to acquire the technology,” Palti-Guzman said.
Gazprom’s Komlev, for his part, said Russia has “enormous shale-gas resources at its disposal,” describing a sprawling swath of Siberia as “one huge shale-gas El Dorado.” But Komlev said it doesn’t make any economic sense to develop that gas now, since Russia has an abundance of much cheaper conventional gas.
“So, Russian shale gas has been left intact to serve as the resource base for the coming generations,” he said.
But Komlev did not directly answer when asked why Gazprom would send some of its technical experts to China to inspect that country’s shale-gas fields, when Gazprom has continually raised questions about shale-gas development and fracking. He said Gazprom “welcomes” China’s decision to develop its shale-gas reserves because doing so will allow Beijing “to make a proper evaluation of such gas.”
But Komlev suggested that the Chinese might be disappointed with what they find in their shale plays.
“China is in possession of large shale gas reserves, however, the cost of its extraction could be much higher than in the US,” he said, adding that China’s shale plays are located in areas of the country that may not have enough water to successfully engage in hydraulic fracturing.
Asked directly if Gazprom will try to convince China not to develop its shale-gas reserves so that Beijing would have a reason to buy more Russian gas, Komlev said: “Gazprom Group is studying this issue with the Chinese partners. No decisions have been reached yet.”