Streetwise Professor

February 11, 2010


Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 9:40 pm

Developments here in Texas are having consequences around the world, in places that couldn’t be more different–like Russia.  Specifically, Gazprom has announced that the massive Shtokman gas project in Russia’s frozen north has been postponed.  It may not be unpostponed any time soon.  Part of the reason for postponement is the lingering effect of the financial crisis on the demand for gas in Europe.  But another big part of the reason is that the economics of the project were predicated on exporting liquified natural gas (LNG) to the US.  With the massive production of shale gas in Texas, Louisiana, and Arkansas, the US will not be needing LNG imports any time soon; as a result, the US has supplanted Russia as the world’s largest gas producer.  Indeed, the US may become an LNG exporter.  The technology for accessing shale gas may also open up previously unreachable supplies outside the United States, some of which should be able to reach consumption markets by pipelines, and some in the form of LNG.

Given the centrality of gas to Putin’s (“Gasputin’s”) geopolitical schemes, these developments are to be welcomed.  They should be welcomed by Russians too (though not those feeding at the rent trough); anything that undermines the rents that support the natural state is a boon for those who suffer from its stultifying effects.  These developments may save the Europeans from themselves and their inability to devise a coherent, unified strategy to combat the gas weapon, and reduce the intensity of the Great Game in the Caspian region and Central Asia.   The development of new unconventional gas supplies should also but a serious crimp in any plans for a gas OPEC.  All good.

In other words, drill horizontally baby, drill horizontally.

The development of a more active spot market for gas in Europe, driven by LNG, should also permit a change in contracting for Russian pipeline gas.  Currently, contract prices for Russian gas are tied to oil prices.  Although oil and gas are substitutes, and exhibit some correlation in values, the connection is quite loose.  The development of a spot gas market would permit indexing contract prices for pipeline gas delivered to Europe to European spot prices.  This would reduce, and arguably eliminate, the divergences between gas values and contract prices that create incentives for opportunistic behavior that necessitate rigid contractual terms such as take or pay provisions that are currently the source of friction between Gazprom and European consumers.

The huge ramifications of the technology of drilling for natural gas bring to mind the 1970s James Burke show “Connections.”  What happens in the hot, humid Piney Woods country can shape destinies on the dusty plains of Central Asia or the frozen wastes of Russia.  Truly amazing.

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  1. Shale gas tends to have very high decline rates (around 50-60% in the first year). Furthermore, the majority of plays are uneconomical. I think we’ll get a gas plateau for the next decade, not a glut, so this won’t be the silver bullet that kills Gazprom or GasOPEC (at best they’ll postpone them for a bit).

    Comment by Sublime Oblivion — February 12, 2010 @ 12:34 am

  2. But note, SO, how SWP pines for the Russian people to be impoverished so that they will rise against Eeeevuuul Putin and all his works. I guess there are now too many Russian babies being born, too well-nourished, for his taste. This is what he means by “stultifying effects”, that they are now insufficiently desperate to submit once more to his ideological preferences.

    Comment by rkka — February 12, 2010 @ 7:35 am

  3. rkka–you’re more full of crap than usual, which is saying something. In fact, what you say is the inversion of the truth. Russians will remain in purgatory as long as they remain in the thrall of a natural state sustained by resource rents. As for your comments re the number of babies being born, that is a figment of your twisted imagination. Dream your sick dreams, boy. (Or is it girl?)

    The ProfessorComment by The Professor — February 12, 2010 @ 8:12 am

  4. Having rescued a baby from Yeltsin’s comprador Russia at the peak of western influence there. That baby is now a teenager, growing tall and strong, unlike many of those I left behind. The evident desire to once again have a Russian subject for economic experimentation strikes me as utterly brutal.

    Comment by rkka — February 12, 2010 @ 6:35 pm

  5. @ rkka – The prospect of robbery and dismemberment of Russia, however distant or improbable, is always welcome in circles that are not friendly to Russia. 😉

    Comment by Leos Tomicek — February 12, 2010 @ 7:08 pm

  6. “Connections” – what a great show that was! Good call, SWP – “global economy,” anyone?

    And – oh, sheesh – rooshans, with the twisted mentality, once again playing the victim about how everyone, just everyone, wants to see Russia “on its knees” and “dismembered.”


    Comment by elmer — February 13, 2010 @ 10:18 am

  7. Lol, Elmer, the whole problem from the SWP perspective is that Russia has gotten off her knees.

    Comment by rkka — February 13, 2010 @ 2:17 pm

  8. Dear elmer

    Paul Goble does not write articles on anything else than potential dismemberment of Russia. If tomorrow few crazy Tatars in Ryazan’ oblast decided to revive the Qasim khanate we would hear about it on his blog. Amsterdam tries to turn one of the biggest robber barons history has ever known into some type of victim and Prof cheers on any news that might economically damage Russia.

    But when Russians and Russophiles point that out they are just paranoid.

    Comment by Leos Tomicek — February 13, 2010 @ 6:41 pm

  9. Exactly correct, Leos. However, you do occasionally run into an open Russophobe who makes explicit the improvement in Russian demographics and his feeling of a rising Russian threat to the West.

    Of course, the fact that the West’s military spending is well over an order of magnitude greater than Russia’s, or that the West has a greater material conventional superiority than the one the Soviet one the West whined vociferously about 30 years ago does not figure into his analysis.

    So he’s an open Russia-hater who wishes Russia ill, but hardly honest. At least he does not conceal his ill-will behind a bunch of unctuous economic verbiage.

    Comment by rkka — February 14, 2010 @ 3:56 pm

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