Gazprom and the US shale gas 'myth'

By Claire-Louise Isted

July 21 - The US is now importing much less gas as companies use new extraction technology to fracture rocks, and Gazprom is reportedly deeply worried about the emergence of shale gas. Claire-Louise Isted assesses the claims and counter-claims of the Russian gas giant's fears.

In its statements on the US shale gas phenomenon, Gazprom appears to be presenting itself as the little boy in the tale by Hans Christian Andersen who, unlike the crowd of admirers around him -- because they are afraid to be seen as incompetent or stupid -- declares that the Emperor is not wearing a costume of immeasurable splendour at all but is in fact just in his underwear.

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"Shale gas will play a very important and useful role of balancing gas markets at the regional level, but there are no reasons to crown it and elevate it to the throne," Gazprom chief Alexey Miller said June 11.

Speaking at the European Business Congress in Cannes, Miller said that shale gas was a "valuable asset to domestic markets" but its growth was "overstated" because of high-yield production and slumping demand from the global financial crisis.

Mikhail Korchemkin at think tank East European Gas Analysis told Platts July 12 that he disagreed with this statement.

"I think the real growth of shale gas is still ahead. Technological progress goes on and the production costs of shale gas are decreasing rapidly," Korchemkin said.

"Gazprom's own experience shows that shale gas production growth in the US affects gas markets in Europe and Asia. Shale gas is the same methane -- CH4 -- and I wouldn't consider it separately from conventional gas or LNG. Shale gas does increase gas-to-gas competition, which is a normal thing in the free market," he said.

Miller argued in his speech that production of gas from tight reservoirs had been "going on for decades" and that it was "only for the general public that this topic had lately become an eye-opener".

He highlighted the problems: relatively low output at wellheads and their sharp depletion after the first years of production; large numbers of drilling operations; the constant need to move to new areas of development; high investment requirements.

As a result, shale gas can serve as a "local source" of energy, compensating for a reduction in production volumes or the absence of traditional gas in regional markets. Thus, the useful role for shale gas is to balance gas markets, Miller said.

Traditional natural gas on the other hand uses time-tested production technologies and reliable methods for determining extractable reserves, and allows the operational management of fields while maintaining stable levels of production for decades.

The increased attention to shale gas in recent years is due to the coincidence of three factors, Miller said. These are: the growth of shale's share in the gas balance of the US (owing to the effect of accumulated investments in the sector and a decrease in 'conventional' production); the commissioning of high yield-facilities for the extraction and liquefaction of gas in the world; and the simultaneous decline in overall demand for gas because of the global financial and economic crisis.

This combination of factors is temporary, Miller said.

"In the first quarter of 2010, gas production volumes in the US remained unchanged, but LNG imports were ramped up by 60%. Commissioning of facilities for gas liquefaction around the world in 2008 amounted to 11.4 million tons, in 2009 -- 15.6 million tons. Yet, in the current year, it is planned to put on stream no more than 1.4 million tons of LNG new production capacity. At the same time, demand for gas in the world is picking up. Therefore, the conditions under which shale gas by year-end could hit new record highs no longer exist," he said.

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