Thursday, March 18, 2010

Sour Borscht?

I was amused to read that Russian gas giant Gazprom's CEO Alexander Medvedev expressed deep, heart-felt concerns about the environmental impact of shale gas development.  The only thing he has heart-felt concerns about is the future of his company now that abundant natural gas has created a viable spot market for gas in Europe that has undermined the oil-indexed pricing scheme for his long-term natural gas customer contracts.  It has also taken the U.S. off the table as an LNG customer. 

European shale gas may never catch on in a big way, but not having the U.S. as an LNG customer while at the same time seeing the opening of several huge LNG export facilities in the Middle East, southern Asia and Australia in the next several years means that Europe will have a viable, reasonably priced backup source of natural gas for a long time.  All of a sudden, Russia's captive market doesn't look so captive. 

Recently, Gazprom has had to postpone a large scale natural gas development and many analysts are suggesting that its two new major European gas pipelines might be unnecessary.  While the Medvedev-Putin-Medvedev contingent might be able to control things in Russia, the free market has given them a wake-up call that will require huge structural changes at Gazprom if the company is to be successful given the new gas supply paradigm going forward. 

The question of natural gas drilling's impact on the environment isn't going away any time soon.  Today the EPA announced that it will embark upon a two year project to study the impact of fracking on human health and water quality. (Check out the article if you are in the anti-Arthur Berman camp - he sounds quite rational in his defense of the practice.)  I think hydraulic fracturing is an easy hook, but there isn't much proof of environmental damage there.  Natural gas-related incidents that have occurred were surface spills or were caused by faulty casing underground.  Fracking is not a new technique and the safety of its implementation has only improved over time.  Even if the EPA blesses fracking in 2012, the naysayers will still be out there, possibly led by Alexander Medvedev, if he is still in control of Gazprom.

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