U.S. Shale Gas: What does it mean for Europe and Russia?

The United States shale gas revolution is breaking the hegemony of older natural gas producers. Four years after the U.S. first surpassed Russia in natural gas production, Gazprom is still struggling to grasp the implications. Earlier this year, Gazprom CEO Alexei Miller called the gas boom in the United States a “soap bubble [that] will burst soon.”[i] The only bubble set to rupture is Russia’s.

In the last decade, the U.S. switched from expecting to import large quantities of natural gas to becoming the world’s top natural gas producer. Shale gas is at the heart of the transformation. The combination of two extraction techniques, horizontal fracturing (“fracking”) and horizontal drilling, have suddenly made vast reserves of natural gas commercially viable.

According to BP, in 2012 the U.S. “once again recorded the largest volumetric increase.... while Russia ... had the world’s largest decline.”[ii] The absolute terms are striking. The U.S. produced around 15% more gas than Russia in 2012, continuing a trend it started in 2009 (see Figure 1 below). 

U.S. shale gas is rapidly transforming global energy markets, since its pricing is not tied to oil. U.S. natural gas prices are determined on a spot market, and increased natural gas production has sent prices have plummeted. In 2012, the price of natural gas in the U.S. was one quarter that of Germany’s (see Figure 2).[iii]

Source: BP Statistical Review of World Energy June 2013

The shale gas boom has had significant implications in Europe. First, liquefied natural gas (LNG) from Qatar that was slated for an American import market has instead landed on European shores, expanding sources for natural gas in the E.U.

Second, the U.S. spot market has shown the world that natural gas does not have to be tied to oil prices and has allowed European natural gas importers to renegotiate the terms of their long-term contracts with existing suppliers. In 2012, Italy’s Eni, Poland’s PGNiG, and Germany’s E.ON obtained more favorable terms with Gazprom. Though a blessing for Europe, the renegotiations cost the Russian company $4.2 billion in pretax earnings. [iv]

Third, the U.S. may export its cheap natural gas to European markets by 2018. The U.S. Department of Energy has already approved two LNG export projects to ship its new gas bounty abroad, and more approvals are possible in the coming year. Although much of the gas is expected to go to more profitable Asian markets, European buyers have already signed up for American supplies. In March, Centrica, a leading U.K. utility, contracted with Cheniere Energy for 1.75 million metric tons of gas annually for 20 years from the Sabine Pass LNG terminal in Louisiana.[v]  

Furthermore, American policymakers argue that there is a geopolitical imperative for the U.S. to share its natural gas exports with European allies. This month, Senator John Barrasso (Republican-Wyoming) wrote that if President Obama “is serious about strengthening U.S. foreign policy and helping our allies, he will act to undermine Russian dominance in global energy markets” by permitting quicker exports.[vi]

In spite of these developments, Gazprom has not acknowledged the U.S. natural gas boom as a threat to its business model. On the contrary, Mr. Miller stated, “America is not our competitor. We are skeptical with regards to shale gas; we don't see any risks. The U.S. remains a gas-scarce country. America is the largest gas market and consumes more gas than anyone else.”[vii]

How much of this is bluster? Russia does have the world’s largest proven reserves of natural gas, nearly four times more natural gas the U.S., according to BP estimates.[viii] Even when it comes to shale gas, Russia has the ninth largest technically recoverable reserves in the world.[ix] But the size of its reserves may not be enough.

Russia is ill-equipped to adapt to the changing global energy markets. Aging infrastructure and difficult drilling conditions mean that Russian oil and gas companies will need to make large investments to access their resources.[x] This need to invest in infrastructure comes at a time of stagnated economic growth. The New York Times reports that “Russia’s economy ... slowed to a near standstill in the first months of this year, and the Kremlin is now preparing to dip into its $171 billion rainy day fund in a bid to spur growth.”[xi] It remains to be seen whether the money will be spent on high-cost projects such as the Nord Stream pipeline, which will do little to promote increased gas production, or if it will be invested in accessing new resources. 

In the meantime, Europe has begun to withdraw from Russia’s grip. European states are now better able to set their own terms when buying Russian gas, and in the coming years they will have more natural gas suppliers to choose from.

Still, the extent of the influence of the U.S. shale gas boom on Europe will depend on Europe’s ability to internally integrate its energy market. American LNG will likely continue to put downward pressure on global energy prices, which will impact European markets writ large. But the countries with LNG import terminals could see the largest impact on their natural gas prices. Other EU member states, including the Baltics, should strive meet European goals to unbundle natural gas networks and open themselves up to new suppliers. Only then will they fully benefit from changes in global energy markets.

Kristīne Bērziņa is an Associate Fellow at LIIA. She is the author of the new strategic primer “European Views on American Natural Gas Exports” for the American Clean Skies Foundation. She also recently published an op-ed on U.S. LNG exports in Washington’s Roll Call newspaper: “Will Europe Benefit From Shale Boom?”