What Ukraine Needs Is An American-Style Shale Gas Revolution

Mar 3 2014, 5:10pm CST | by

What Ukraine Needs Is An American-Style Shale Gas Revolution
Photo Credit: Forbes Business

Natural gas was the origin of the crisis in Ukraine. The country serves as a transit point for about 6 billion cubic feet per day of Russia’s natgas exports into Europe. That’s about 2.2 trillion cubic feet per year, or 14% of Europe’s total supply.

More than just serving as a middleman for Russian gas, Ukraine is like the dealer who got hooked on his own supply. Under the terms of its last supply deal, Gazprom agreed to sell gas to Ukraine at $7.70 per thousand cubic feet, a 33% discount to what European customers pay (but a big premium to U.S. gas prices of roughly $4.50 per mcf). Moscow even agreed to gradually buy $15 billion of new Ukrainian bonds, to keep the country from defaulting on other debts.

Yet even at that discounted price, Ukraine has had a tough time paying Gazprom’s invoices. Earlier today Russia suggested that if Ukraine didn’t pay its $1.5 billion gas bill Gazprom might just shut off the valves and renege on those price discounts. Since 2006, Putin has twice cut off the gas to Ukraine, most recently in 2009.

Edward Chow at the Center for Strategic and International Studies, wrote in this essay last December that Ukraine’s being “addicted to cheap gas … has blocked the modernization of its industry, economy and politics.”

Ukraine has been a junky for Russian gas. Putin clearly had no problem with that; it is in Russia’s interest to keep Ukraine and Europe hooked on Russian gas at prices just low enough to quash incentives to drill and frack for shale gas. Russia’s state-run news and propaganda outlets have for years disseminated articles critical of fracking and supported opponents of the technique, despite its 50-year track record of proven efficacy and scant mishaps.

Even Ukraine’s ousted President Yanukovich, despite his dealmaking with Russia, had clearly acquiesced to pressure to explore Ukraine’s other energy options.

Last year Ukraine signed natural gas exploration deals with Royal Dutch Shell as well as Chevron, which pledged to invest as much as $10 billion if adequate supplies of shale gas were found. The government said it hoped the two companies’ projects would add more than 50% to Ukraine’s current domestic natgas supply. Ukraine could hold more than 40 trillion cubic feet of recoverable shale gas, enough to satisfy decades of demand.

Now with Yanukovich gone it’s as if Putin has taken the Crimea as a kind of hostage — collateral to hold against what Ukraine owes Russia for gas.

A few billion dollars in IOUs is, of course, a less than flimsy pretext for thuggery. Which is why the Kremlin’s propaganda machine has been spreading lies about how his soldiers are there to save Ukraine’s ethnic Russians from right-wing crazies.

But Putin’s actions underscore the threat that shale gas development really does pose to Russia’s gas-fueled diplomacy.

Even if Gazprom were to cut off gas supplies to Ukraine, there is no real fear of a gas shortage in Europe, according to Bernstein Research. This winter has been a warm one in the region (as witnessed by the balmy temps for the Sochi Olympics), so demand for heating has not been as great. Thus, natural gas volumes in storage are higher than average, at about 50% of capacity.

What’s more, even if Russia did halt shipments through Ukraine, there’s enough extra space in the Nord Stream pipeline running from Russia into Germany to pick up about half of the slack.

The rest of any shortfall could likely be met with greater imports of superchilled LNG. Europe has been building more gas storage in recent years precisely to balance out Russia’s influence and to position itself to receive LNG not just from established gas giants like Qatar, but also from giant new projects in Australia, a host of planned export terminals in the U.S. and even new developments in the works offshore Israel.

Analyst Oswald Clint, of Bernstein, said in a note today that several big oil and gas companies are positioned well to benefit from higher gas prices on the continent. BG Group ships a lot of LNG and has a higher percentage of its supply free to be sold on the spot market. While Shell is also a big LNG player. Statoil, meanwhile, is the company with the highest leverage to European gas, with Bernstein figuring that 47% of its net income last year came from European gas production and marketing.

As for oil, Ukraine uses about 300,000 barrels per day, with roughly 80,000 bpd sourced domestically. There the country is also beholden to Russia; Rosneft already owns Ukraine’s second-biggest oil refinery, and is in process of acquiring the biggest.

That’s too bad, because now would have been the perfect time for the Obama administration to lift the ban on American oil exports so that we could send a few million barrels of  American “freedom oil”  to Ukraine.

In Monday trading, shares of Statoil advanced 2.5%; Shell was down 1.4%; while Total (which has a gas venture with Russia’s Novatek) declined 2%. BP, which owns about 20% of Kremlin-controlled Rosneft, was down 3%. Gazprom’s ADRs plunged 11%./>/>

Vladimir Putin

Source: Forbes Business

 
 

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