PITTSBURGH (AP) — The Kremlin is watching, European nations are rebelling, and some suspect Moscow is secretly bankrolling a campaign to derail the West's strategic plans.
It’s not some Cold War movie. It’s about the U.S. boom in natural gas drilling, and the political implications are enormous.
Like
falling dominoes, the drilling process called hydraulic fracturing, or
fracking, is shaking up world energy markets from Washington to Moscow
to Beijing. Some predict what was once unthinkable: that the U.S. won’t
need to import natural gas in the near future, and that Russia could be
the big loser.
“This is where everything is being turned on its
head,” said Fiona Hill, an expert on Russia at the Brookings
Institution, a think tank in Washington. “Their days of dominating the
European gas markets are gone.”
Any nations that trade in energy could potentially gain or lose.
“The
relative fortunes of the United States, Russia, and China — and their
ability to exert influence in the world — are tied in no small measure
to global gas developments,” Harvard University’s Kennedy School of
Government concluded in a report this summer.
The story began to
unfold a few years ago, as advances in drilling opened up vast reserves
of gas buried in deep shale rock, such as the Marcellus formation in
Pennsylvania and the Barnett, in Texas.
Experts had been
predicting that the U.S. was running out of natural gas, but then shale
gas began to flood the market, and prices plunged.
Russia had been
exporting vast quantities to Europe and other countries for about $10
per unit, but the current price in the U.S. is now about $3 for the same
quantity. That kind of math got the attention of energy companies, and
politicians, around the world.
Some European governments began to
envision a future with less Russian natural gas. In 2009, Russia had cut
off gas shipments via Ukraine for nearly two
weeks amid a price and payment dispute, and more than 15 European
countries were sent scrambling to find alternative sources of energy.
The
financial stakes are huge. Russia’s Gazprom energy corporation, which
is state-controlled, had $44 billion in profits last year. Gazprom,
based in Moscow, is the world’s largest producer of natural gas and
exports much of it to other countries.
But last month Gazprom
halted plans to develop a new arctic gas field, saying it couldn’t
justify the investment now, and its most recent financial report showed
profits had dropped by almost 25 percent.
The U.S. presidential campaigns have already addressed the strategic potential.
A
campaign position paper for Republican Mitt Romney said he “will pursue
policies that work to decrease the reliance of European nations on
Russian sources of energy.”
In early September, President Barack
Obama said the U.S. could “develop a hundred-year supply of natural gas
that’s right beneath our feet,” which would “cut our oil imports in half
by 2020 and support more than 600,000 new jobs in natural gas alone.”
Poland’s
Ministry of the Environment wrote in a statement to The Associated
Press that “an increased production of natural gas from shale formations
in Europe will limit the import via pipelines from Algeria and Russia.”
The issue has reached the highest levels of the Kremlin, too.
Hill,
of the Brookings think tank, heard President Vladimir Putin speak in
late 2011 at a Moscow gathering of academics and media. She said in a
blog post that “the only time I thought that he became truly engaged was
when he wanted to explain to us how dangerous fracking was.”
But
one top Gazprom executive said shale gas will actually help the country
in the long run. Sergei Komlev, the head of export contracts and
pricing, acknowledged the recent disruptions but predicted that the U.S.
fuels wouldn’t make their way to Europe on any important scale.
“Although
we heard that the motive of these activities was to decrease dependence
of certain countries on Gazprom gas, the end results of these efforts
will be utterly favorable to us,” Komlev wrote in an email to the AP.
“The reason for remaining tranquil is that we do not expect the
currently abnormally low prices in the USA to last for long.”
In
other words, if the marketplace for natural gas expands, Russia will
have even more potential customers because it has tremendous reserves.
Komlev
even thanked the U.S. for taking the role of “shale gas global
lobbyist” and said Gazprom believes natural gas is more environmentally
friendly than other fossil fuels.
“Gazprom group generally views
shale gas as a great gift to the industry,” he wrote. When natural gas
prices rise, “it will make the U.S. plans to become a major gas exporter
questionable.”
Whether exports happen involves a dizzying mix of
math, politics and marketplaces, along with the fact that U.S. natural
gas companies — and their shareholders — want prices to rise, too.
James
Diemer, an executive vice president for Pace Global, an international
consulting company based in Virginia, believes that shale gas costs more
to extract than the current market price. Pace, which recently released
a report called “Shale Gas: The Numbers vs. The Hype,” has been
studying shale gas for Gazprom and other clients.
“The capital
will stop flowing” to U.S. shale gas, and the price will go up, Diemer
predicted. He would not divulge the kind of work Pace is doing for
Gazprom. Pace is owned by Siemens, a German company.
Pace’s work
for Gazprom has raised some eyebrows in Washington, and Hill noted that
industry watchers in Europe already believe Russia is bankrolling
environmental groups that are loudly opposing plans for fracking in
Europe, which could cut down on Russia’s natural gas market.
“I’ve
heard a lot of rumors that the Russians were funding this. I have no
proof whatsoever,” she said, noting that many critics give the rumors
credence because Gazprom owns media companies throughout Russia and
Europe that have run stories examining the environmental risks of
fracking.
Gazprom dismissed such conspiracy theories, saying that
“nothing could be more out of touch with Gazprom’s inherent interests,”
because the shale boom promotes gas as an abundant, affordable energy
source.
Many U.S. media outlets, including the AP, have run
stories about shale gas and the environment. Regulators contend that
overall, water and air pollution problems are rare, but environmental
groups and some scientists say there hasn’t been enough research.
U.S.
energy companies are eager to export natural gas products. The issue is
sensitive enough that the Obama administration has delayed a decision
on export permits until after the election. In April, the Sierra Club
sued to block one plan for exports, saying it would drive up the cost of
domestic natural gas and lead to environmental damage.
But just
the potential for exports could allow others to seek lower prices from
Russia, said Kenneth Medlock III of the James Baker Institute for Public
Policy at Rice University in Houston.
“It changes the position at
the bargaining table for everybody,” Medlock said. “You stack all that
up, and you start to realize, ‘Wow.'”
There’s one enormous unknown
with the shale gas bounty in the U.S., Hill said. Unlike in Russia and
some other countries, neither the government nor any one private company
can really control or direct it.
“The question is, can the U.S. do what the Russians do, which is use this as a political tool?” she said.
