Shale Gas Rush Presents Another Problem for Russia and Gazprom

by: Craig Pirrong

Perhaps taking a cue from Thursday's post “Telerconnections”, Bloomberg Friday reported on a shale gas rush in Europe:

Exxon Mobil Corp. (NYSE:XOM) and explorers including Chevron Corp. (NYSE:CVX) are securing land in Europe to exploit shale gas, a hard-to-extract deposit that could reduce global demand for liquefied natural gas, JPMorgan Chase & Co. said.

Exxon has shale areas in Germany, Hungary and had applied for permits in Poland while ConocoPhillips (NYSE:COP) and Chevron are in Poland and Royal Dutch Shell Plc (NYSE:RDS.A) in southern Sweden to exploit gas trapped in rock formations and impervious to conventional drilling techniques, JPMorgan said in a Feb. 9 report.

“A land-grab has occurred in Europe over the last two years with majors such as Exxon, Conoco, Chevron and Statoil ASA (NYSE:STO) all participating, not willing to miss out as they did in the U.S.,” said Mark Greenwood, a Sydney-based analyst with JPMorgan. “While it’s still early days for European and Chinese shale gas plays, its potential is yet another threat for the LNG supply-demand balance.”

Note to Putin: its potential is yet another threat to the pipeline supply-demand balance too:

The International Energy Agency said in November the world may have an “acute glut” of gas in the next few years because production of so-called unconventional fuel, which includes shale gas, is set to rise 71 percent between 2007 and 2030. Shale is a rock comprising layers of sediment from which oil and gas can be extracted.

The success of shale gas extraction in Europe and China may sap global LNG demand, reduce Europe’s dependence on Russian natural gas and force new Russian gas projects and Qatari LNG to compete with Australian LNG projects for Asian customers, Greenwood said.

. . . .

Qatar had earmarked 25 million tons a year of LNG for the U.S., which doesn’t “appear” to need the gas, according to the JPMorgan report.

Where’s that gas going to go? Europe and Asia, most likely–in direct competition with Russian gas. Combine this with the prospect for slow growth in North America and Europe (especially if the sovereign debt crisis continues, or turns for the worse), and it is likely that supply and demand will conspire to put a huge dent in Gazprom’s (OTCPK:OGZPY) prospects.

My, how the worm is turning. Which all goes to show the danger of putting all your chips on one number.

This shouldn’t be news. The historical experience in commodity markets has been of shocks making a complete shambles of confident predictions. In the 70s and early 80s, it was widely believed that oil prices would escalate inexorably, reshaping geopolitics as a result. The exact opposite happened. Geopolitics were indeed reshaped, but in a very different way.

Indeed, the USSR was the most prominent casualty of this shift. (See Gaidar’s book for a blow-by-blow account of how the USSR’s fortunes waxed and waned with the upward spiral and subsequent collapse in oil prices.) How soon some people forget.