Can Shale Gas Beat Russian Gas in Europe?
Can shale beat Russian gas is Europe?
The answer is yes, according to Mikhail Korchemkin, unless Russian Gazprom giant scraps its pipelines program.
“If Russia stops building, shale is in trouble” said Korchemkin, managing director of Eastern Europe Gas Analysis (EEGAS), a Pennsylvania-based consulting firm.
Speaking at the Unconventional Gas and Oil Summit conference in Warsaw, he assessed the chances of Gazprom competing with Polish unconventional gas in the next decade.
The head of the EEGAS observed that Gazprom currently enjoys high profit margins and has already secured a guaranteed export of 158bcm per year in the first half of the 2020s.
However, Korchemkin drew attention to the fact that from 2013, investment spending of the Russian firm is going to reach 50% of revenue. Most of that new investment is going to new pipelines delivering gas from Yamal Peninsula to the Black Sea.
Korchemkin suggested that Gazprom suffers from “maximization of profits of contractors and intermediates rather than shareholders,” so the huge costs of linking Siberia with the Black Sea, over 3,000 kms away, will leave Gazprom with little room for price maneuvering.
“For some reasons Gazprom always chooses the most expensive options for its investments,” said the Russian-born expert, producing a table comparing costs of pipelines in Russia and Germany.
Data given in the table indicated that construction cost of pipelines of similar parameters were significatnly higher in Russia than in Germany (i.e. Nord Stream section on the ground in Russia at over 4 million euro/km, vs. Germany's OPAL at over 2 mln euro/km).
According to Korchemkin, the breakeven export price for Gazprom will rise above $420/mcm by 2020.
“Profit margins allow substantial price reduction, but Gazprom expects costs of transportation to rise sharply over the period of ten years.”
Although the government may reduce prices by cutting down taxes, he pointed out that the Russian budget would remain heavily dependent on incomes from oil and gas export.
Should Poland develop its shale gas resources to allow for export, coutries to the east would be likely buyers.
“Poland may bring gas competition to the Former Soviet countries,” pointing to Belarus and Ukraine.
Korchemkin noted the the reversed pipeline connection in Drozdowicze would allow export from Poland to Ukraine, but also through Ukraine, to Slovakia and then further to the West.
“Does exporting to the East make any sense? Going West is not so easy in Europe and Ukraine is paying higher prices than Germany. This is just a scenario we have to look at.”
However, Gazprom will not wait around for shale to squeeze it out from Europe, Korchemkin suggested.
“Russia may inspire the anti-shale movement, including financing heavy-weight politicians in the west to become heads of the clean water movement.”