We can help Russia by stopping, or substantially curtailing, fracking.
Do we want to help Russia, or is this only an unintended consequence of efforts to stop fracking?
Russia, a major supplier of natural gas to Europe, has sold its natural gas to Europe using long-term contracts with the price tied to an oil index.
Now, fracking has upended the market with substantial pressure on Russia to tie its contracts to the lower spot price for natural gas.
The shale gas revolution in the United States has freed huge quantities of Liquefied Natural Gas (LNG) for use in Europe and elsewhere. This has driven the spot price for natural gas down, to where it is substantially below the oil index.
Russian natural gas is now expensive, and this is potentially bad news for Russia. Russia needs the higher price in order to help rebuild and maintain its natural gas infrastructure, and to build new upstream supplies and capabilities.
Russia has used its economic clout as a major supplier of natural gas to Europe, to put political pressure on Europe, as well as the Ukraine. European governments have talked about building the Nabucco pipeline that would access natural gas from Azerbaijan and Kazakhstan in an effort to free itself from Russian political pressure. To discourage Europe from building Nabucco, the Russians countered by threatening to build a rival South Stream pipeline and by actually building the Nord Stream pipeline under the Baltic. The first half of the Nord Stream pipeline started delivering natural gas to Europe in November of last year.
The UK’s National Balancing Point (NBP), a large European gas hub, has attracted large quantities of unconventional natural gas, as well as LNG from Qatar, which has created liquidity in the market and driven down the spot price for natural gas.
Some existing large distributors and users of natural gas in Europe are tied to long-term contracts with Gazprom. They are coming under pressure from their competitors, who obtain lower cost natural gas from the NBP hub, to get out from under their Gazprom contracts. This would hurt Russia.
It should be noted that Russia has decided not to develop shale gas while encouraging Europe to also not develop shale gas, as this would only add to gas supplies and drive down prices for Russian gas.
The other factor to consider relates to Qatar, which has been pricing its natural gas sales to the NBP using spot prices. Qatar is the largest, or second largest, producer of traditional natural gas in the world. Russia recognizes the importance of Qatari gas, as it is a large supplier of the NBP hub. If Russia can convince Qatar to price its natural gas using an oil index, it would help remove the supply of natural gas that is available at the spot price.
The Gas Exporting Countries Forum, also known as the Gas OPEC, recently met in Qatar. At the meeting, Russia encouraged Qatar to sell primarily to Asian countries, using long-term contracts based on an oil index.
If the United States stops or substantially curtails fracking, it will once again mean that the United States will import LNG. The natural gas that is now available to Europe as LNG, will be diverted to the United States, eliminating the low spot price in Europe, and, thereby help Russia maintain high prices for natural gas sales to Europe.
Importing LNG into the United States will result in higher natural gas prices for homeowners and industry.
Higher prices will hurt homeowners who heat with natural gas and also hurt industry. Chemical companies will again move offshore to produce chemicals, and, once again, American jobs will be lost.
Russia is hoping for two events. First, that the United States substantially curtails or stops fracking. Second, that Qatar can be convinced to price gas sales to the UK’s NBP hub using an oil index.
Note: A source for this article is the European Energy Review.
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