Shale and Unconventional Gas in Russia

An article by Julian Lee,  FSU Oil & Gas Advisory Service

SHALE GAS



Russia’s Gazprom has dismissed attempts by European countries to emulate the unconventional gas successes of the US, seeking to pour cold water on attempts by several European countries to develop their own shale gas industries. Nevertheless, the company has expressed an interest in acquiring shale gas assets in the US in order to gain expertise that it can apply at home and has already begun to develop its own coal-bed methane business in the Kuzbass region.

While Russia remains the world’s largest holder of conventional gas reserves, much of the remaining gas is located in remote areas and hostile, fragile environments, making it expensive to extract and deliver to customers. In some cases, tapping the country’s unconventional resources is likely to prove a cost-effective alternative.

The unconventional gas developments in North America have already had a huge impact on Russian gas trade with Europe, both in terms of volume and price. The development of unconventional gas in Asia, led by China, could undermine Gazprom’s attempts to develop a large Asian market for Russian gas, while the successful development of shale gas and other unconventional gas resources in Europe would have a major impact on Russia’s core export market and on the political leverage that it is able to bring to bear in Europe through control of its gas exports.

It is not surprising that Gazprom is concerned about unconventional gas, or that it has done as much as it can to try to portray shale gas as uneconomic, environmentally damaging and not a long-term solution for European gas needs.

Alexander Medvedev, Deputy Chairman of Gazprom’s Management Committee and Director General of Gazprom Export, has dismissed the threat of a repeat of the US success in developing shale gas resources in Europe, claiming that it was ‘unimaginable’ that European governments would allow the development of shale gas. Gazprom has done all it can to undermine the development of shale gas, claiming that it is a danger to drinking water, echoing concerns expressed in the US suggesting that the drilling and hydro-fracturing operations associated with shale gas development are contaminating drinking water supplies.

Gazprom has also claimed that the economics of shale gas production were ‘a joke’ and warned that the pursuit of shale gas in North America was turning Russia away from the West and towards customers in the East, particularly China, implying that while the US was pursuing expensive and polluting shale gas, its economic rival in China would be getting the benefit of cheap and safe Russian gas.

However, although Gazprom appears unwilling to admit that the gas market may be changing, Russia’s Natural Resources Minister Yuri Trutnev did finally confirm in April 2010 that shale gas was a ‘problem’ for Gazprom and for Russia. ‘The influence of shale gas raises the prospect of change on gas markets,’ Trutnev told reporters.

For all its assertions that shale gas is dangerous, expensive and of little concern, Gazprom has been linked with the possible purchase of shale gas assets in the US. In October 2009, John Hattenburger, the president of Gazprom’s US trading company, suggested that the purchase of a shale-producing company in the US could make a lot of sense for Gazprom, following the lead of several major oil companies that have sought to buy expertise in the field. ‘Russia has huge shale reserves,’ Hattenberger told Bloomberg. Indeed, a study carried out by Schlumberger in 2007 to identify and rank potential shale gas resources around the world included the West Siberian, Volga-Urals, Timan-Pechora, East Siberia and Pre-Caspian regions of Russia among 688 shale formations in 142 petroleum basins around the world.

COAL BED METHANE

While Gazprom may be seeking to buy expertise in shale gas, the company is much further advanced in the development of Russia’s coal-bed methane (CBM) resources. In February 2010, Gazprom launched Russia’s first coal-bed methane production facility at the Taldynskoye field in the Kuzbass region. Probable CBM resources in Russia are estimated at around 84 tcm (compared with conventional proven gas reserves of 44.4 tcm and probable gas resources of 250 tcm). The Kuzbass CBM resource base is estimated at 13 tcm, securing its position as a large-scale production resource in its own right.

Russia sees two principal benefits from the production of CBM, despite its huge resources of conventional gas. The first is that CBM production is seen as a necessary undertaking to improve safety in Russian coal mines. The second benefit is that much of the country’s CBM resource is located in areas that are not well served with conventional gas supply infrastructure. CBM can therefore offer a local source of energy supply, which is much cleaner than the coal on which these regions have depended in the past. In Kuzbass, CBM production is initially expected to rise to 4 bcm/yr, with a subsequent increase to 18-21 bcm/yr in the long term in order to meet gas demand in the southern regions of West Siberia.

Russia’s Natural Resources and Ecology Ministry has filed proposals to include coal-bed methane in the Russian Classified Index of Natural Resources and Underground Waters. The changes are expected to be registered by the Ministry of Justice, after which it will be possible to obtain subsurface use licences specifically for CBM. Gazprom has also proposed the introduction of a zero tax rate for CBM, since the capital intensive nature of such projects makes them uneconomic under the existing tax system. Further measures, such as zero import duties on CBM production equipment, which is not manufactured in Russia, and subsidised interest rates for loans related to CBM projects have also been suggested.

The assessment of the country’s shale gas resources still lies some way in the future, but may also begin to prove attractive once Gazprom acquires the necessary technology to carry out the work itself. Russia’s untapped conventional gas resources are increasingly located in remote, hostile and environmentally fragile environments, such as the Yamal Peninsula and the offshore areas of the Barents, Kara and Okhotsk Seas. Development of these new provinces will require billions of roubles of investment, not just in the production facilities, but also in long pipelines and expensive liquefaction terminals needed to bring the gas to market. In the meantime, the existing infrastructure will become under-utilised, as gas production from the traditional heartland of the Nadym-Pur-Taz region of West Siberia falls.

The development of Russian shale gas resources close to existing under-utilised transport infrastructure could, in time, become a cost effective alternative to developing expensive conventional resources in remote and hostile locations. Just as is now claimed by some in the US, Russia’s unconventional gas could in the future become the country’s low-cost base-load production. Although that time may still be many years in the future, Gazprom is beginning to position itself for that future.

Source: Centre for Global Energy Studies