The emergence of shale plays as a global factor in energy production has put a crimp in the energy leverage the Kremlin has exerted over much of energy-dependent Europe dating back to the era of the Soviet Union. Western technology that has utilized horizontal drilling and hydraulic fracturing to develop previously uneconomic shale gas and oil reserves has lessened the influence that Russia has over many of its neighbors, particularly those in Eastern Europe that traditionally have been heavily dependent on natural gas, and to a lesser extent oil, from Russian pipelines.
Former Soviet satellite nations in Eastern Europe and even Central European nations like Germany have been at the mercy of Russian strongman Valdimir Putin and the Russian oligarchs who set pricing for Russian gas. Today, however, these countries are gaining access to oil and gas from other sources and there is some development of shale gas in Europe itself, most notably in Poland.
In recent years, the United States has surged ahead of Russia as the world leader in natural gas production. This self-sufficiency in natural gas is mainly due to increased development of shale gas reserves. It has also resulted in dramatically lower prices for gas in the US, where gas prices are about one-fourth of gas prices in Eastern Europe.
As a result, US and Canadian gas producers are preparing to produce liquefied natural gas (LNG) for export to Asia and, possibly, Europe. In addition, since the US has dried up as a market for natural gas from other countries due to its own self-sufficiency, large volumes of LNG are being diverted to Europe, where spot prices has fallen to half of that of Gazprom, the Russian gas giant. In Germany, for instance, Gazprom has been forced to accept large price cuts because of the competition, although to date Russia has kept prices high in Eastern Europe.
For years, Gazprom’s profits have formed a sort of “slush fund” for the Kremlin. Now that this is being dramatically reduced, Russia may be forced to abandon some of its mega-projects, including its plans for the Shtokman field, north of the Arctic Circle. Other massive pipeline projects may be abandoned as well, as Russia starts to look east toward China for future market potential.
Because of the impending loss of its monopoly as a gas supplier to European markets, Gazprom’s demise looks increasingly likely to some observers. And with the demise of Gazprom, Russia’s influence in energy will surely wane, they say. This is good news to the US and the West, which would like to see more economic and political reforms in Russia. Give credit to free markets for any change that occurs.