How The US Shale Gas Revolution Hurts Russia Increased world supply cuts into Gazprom's monopolistic practices

By Paolo von Schirach

June 6, 2013

WASHINGTON – Russia’s claim to be a significant world power rests mostly on its huge hydrocarbon reserves. Selling abroad massive amounts of oil and gas generates a lot of revenue. This is money President Putin can use to reinforce his semi-autocratic regime. But the economic value of all this energy is largely based on global and regional scarcity. And this is changing, at least as far as natural gas exports are concerned.

Shale’s ripple effects

As the FT explains, Gazprom, Russia major gas exporter, is no longer capable of imposing its gas prices and conditions to its European customers. In part this is due to Europe challenging Gazprom anti-competitive practices. But the real reason is that gas dependent Europeans are beginning to realize that they have choices. They can get their gas elsewhere.

Indeed, a key ripple effect of the US shale gas revolution is that many Middle East and other gas producers who were gearing up to export Liquefied Natural Gas (LNG) to America now have to make other plans. Thanks to shale gas exploitation, America now produces and will keep producing all the gas it needs. Therefore it is logical for Middle East exporters to look at Europe as a likely alternative for all the excess gas that America will not buy.

Europe’s new bargaining power

This dramatic shift amounting to additional world supply reinforces Europe’s bargaining position vis-a-vis Gazprom. The Russians have already been forced to make concessions on prices and other terms that have dented their profits. These unfavorable trends, coupled with unimaginative management, have reduced the profits and the strength of Russia’s gas giant.

Going forward, assuming future US LNG exports to Europe and brand new shale gas production in Britain, Poland and elsewhere in Europe, Russia’s position will become even weaker. Once energy is no longer scarce, Russia’s huge advantage as the  default supplier who can impose its own prices on a captive market will be over.

Putin should start thinking quite seriously about diversifying the Russian economy. But I would not expect sudden miracles from a brittle, unimaginative regime mostly concerned with its own self-preservation.


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