Thursday, April 19, 2007

Has Russian Natural Gas Peaked?

Energy Intelligence Note: April 19, 2007

The US State Department’s Bureau of Intelligence and Research (INR)
reports that Gazprom Chairman (and Russia's Deputy Vice President) Dmitriy Medvedev is demanding Russia’s electric monopoly UES substitute coal-generation for gas generation. This is a reversal of the “gasification” policy of the ‘70s that attempted to reduce the environmental damage and transportation costs of coal-fired power plants. The obvious rationale for reducing domestic consumption is to make more natural gas available for export to Europe and elsewhere. Is this intended to obscure production declines, evidence that Russian natural gas production has peaked?

Gazprom’s existing fields are currently in decline:

The most realistic strategy to offset the sharp decline in production from existing fields is to bring production online from new fields at Yamal, Shtokman, and Sakhalin. These mega-projects, however, have experienced repeated delays and complications. Gazprom is bridging the gap by acquiring producing fields, masking the decline of existing fields. This may preserve the appearance of normalcy, but it doesn’t actually replace declining gas production.

Gazprom’s demands that UES shift to coal-generation can also be explained by simple profit maximization—more gas to sell on the foreign market, where it commands a higher price than under domestic price controls. This explanation, however, fails to explain the timing of Gazprom’s demand. It seems logical that if profit maximization was sufficient rationale to switch back to coal-generation, we would have heard of these demands years ago when this rationale would have been equally valid. Is the more reasonable rationale that Gazprom is scrambling to compensate for plummeting production, under the realization that their mega-projects will not live up to expectations? Europe may have an answer to this question next Winter.


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