Shale gas market monitoring to be continued

October 29, 2013

Gazprom to continue monitoring the shale gas market

The Board of Directors of Gazprom has taken note of the results obtained from the monitoring of the development of the shale gas industry in various regions of the world.

It was noted that the operating units of Gazprom Group continued monitoring the situation with shale gas production.

However, participants at the meeting agreed that shale gas production in Russia at present is inexpedient due to the abundance of conventional gas reserves, with production cost significantly lower than the estimated costs of shale gas production. It was also noted that shale gas production carries substantial environmental risks.

Meanwhile, active coverage of this issue in the media has led to popularization of natural gas in the world, which is a favorable factor for Gazprom as a reliable natural gas supplier.

The Management was directed to continue monitoring developments in the shale gas industry in various regions of the world and to report to the Board of Directors on its findings in the IV quarter of 2014.

Background

In 2012 and 2013, commercial shale gas production, like before, was witnessed only in the U.S. and Canada. In 2012 shale gas production in the U.S. was about 270 billion cubic meters. The share of shale gas in the country's cumulated production continued to increase.

At the same time, more than a half of the cumulated production of shale gas on North American fields for the last period remained unprofitable. This is confirmed by considerable reduction in the number of drilling rigs, carrying out construction of gas production wells in the US, and also sale of shale assets by a number of major companies in this industry.

According to experts, the growth in shale gas production may help turn the United States into an exporter of liquefied natural gas. However, implementation of export LNG projects is impossible without appropriate permits by U.S. federal agencies who are interested in the country's energy security and in maintaining low prices in the domestic market. Under these circumstances, implementation of all the North American LNG export projects announced seems unrealistic.

A number of factors continue to constrain organization of commercial shale gas production in Europe. Particular among them are the region's limited resource potential, high population density and lack of wide access to drilling and maintenance services. The results obtained during test operation of a number of exploration wells in Europe, especially in Poland, have been unsatisfactory, despite government support and preferential tax treatment.

In Asia, China is considered as the most prospective country in terms of development of shale gas production. However, development of this industry in China has been slower than planned due to the more complex geological structure of local shale deposits, poor infrastructure, lack of energy and water, as well as a very high population density in the most prospective areas for shale gas production in the country.

Development of the shale gas industry comes with a number of environmental risks as commercial production of shale gas requires drilling a lot of wells and pumping large amounts of water mixed with sand and chemicals into the reservoir. Moreover, there is a risk of contaminating the land surface and groundwater. Currently, there is a moratorium on hydraulic fracturing in European countries (France, Bulgaria, Germany, the Netherlands, Spain, etc.) and in some states in Australia. Besides, a moratorium has remained in New York State, where Marcellus - one of the largest shale basins in the U.S. - is located.

Information Directorate, OAO Gazprom

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