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Ralph Winnie Jr. with the Mongolian President

Ralph Winnie Jr. with the Mongolian President

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Thursday, December 17, 2015

Russia's Shale Gas Revolution-Publication of article by Ralph Winnie, Jr. in Foreign Area Officer Association Journal of International Affairs


RUSSIA’S SHALE GAS REVOLUTION
By Ralph E. Winnie, Jr. 

       Shale oil production in the United States has soared, reversng a decades old decline in America’s crude output. One of the principal reasons is because of fields like North Dakota’s Bakken shale, which could yield 24 billion barrels of oil in the decades to come. The Bakken is a huge boon both to the economic health of the Northern Plains states, but also to the petroleum balance of the USA. From just 60,000 barrels per day five years ago, the Bakken is now producing up to 500,000 barrels per day, with 210,000 barrels per day coming in just the past year. 

However, as great as the Bakken is, there is another oil shale play called the Bazhenov, which is perhaps more significant. The Bazhenov is in western Siberia and while the Bakken is big, the Bazhenov covers 2.3 million square kilometers or 570 million acres, which is the size of Texas and the Gulf of Mexico combined -- 80 times bigger than the Bakken.
Getting access to the Bazhenov is the focus of a new joint venture by both Exxon Mobil and Statoil with the Russian Federation’s Rosneft to jointly develop light oil production techniques in western Siberia. The exploration work to establish if the reserves are commercially viable will take years. According to analysts, it won’t be hard for companies like Exxon and Statoil to export their shale fracking techniques to Siberia and, if Russia is able to deploy 30 drilling rigs to the area, the Bazhenov could be producing one million barrels per day by 2020. The Russian Federation already produces about 10 million barrels of oil per day, putting it about a million barrels a day ahead of Saudi Arabia, the largest producer in the Middle East.
Given the fact that last year Russia’s President Putin announced tax incentives for exploration of shale oil in western Siberia and has forecasted production of two million barrels per day by 2020, the potential for profit from Russia’s shale gas boom is enormous. This is quite evident now that Russian oil companies such as Gazprom Neft, Rosneft, and Lukoil have teamed up with international players like Exxon Mobil, Total, Statoil, and Royal Dutch Shell to share costs and obtain the technology needed to explore for unconventional oil.
Lukoil’s Andrei Kuzyaev estimated that the cost of one horizontal well in Russia is $15 to $20 million compared to around $3.5 million in the United States – a figure which dropped from around $8 million recently due to the highly competitive environment among drilling companies. Consequently, while Alexander Dyukov, CEO of Gazprom Neft, Russia’s fourth largest oil producer, acknowledged that Moscow is five to seven years behind the United States in terms of technology needed to drill for unconventional oil, the gap is narrowing. With the help of their technology partners, Russian oil companies will eventually achieve the requisite knowledge.
The United States Energy Information Administration estimates that Russian recoverable shale oil reserves at 75 billion barrels, more than the 58 billion barrels held by the United States, which is now the leader in shale oil production. Further- more, Dyukov told reporters that Russia might look to domestic suppliers or those in Asia for drilling rigs, which may allow the pumping of another one million barrels per day by 2020 to 2022 from the Bazhenov formation alone. To extract these volumes, Russia needs an additional 250 to 300 heavy drilling rigs, either domestic or Asian -- most notably Chinese -- to facilitate Russia’s shale gas revolution.
However, Russia’s shale gas revolution could be hampered by Western sanctions, already preventing some companies from making new investments in Russia -- which needs advanced technology to explore for unconventional oil. In fact, the United States and the European Union could ban exports of modern technology and application for use in the Russian oil sector, which would affect further oil production. While this measure is only a possible option, according to a recent statement by Alfa Bank, it could affect primarily Artic shelf projects as well as hard to recover oil projects where foreign technology is required the most.
An interesting point to note is that despite the push by Western governments to isolate Moscow because of the situation in Ukraine, energy giants are deepening their relationships with Russian oil and gas companies by investing more money in the country. Exxon Mobil’s Exploration Chief, Neil Duffin, recently signed an agreement with Igor Sechin, head of Rosneft, to expand its joint ventures to drill offshore in the Arctic Ocean, to explore for shale oil in Siberia, and to cooperate on a liquefied natural gas plant in Vladivostok. This deal came just weeks after the United States imposed sanctions on the personal dealings, though not the corporate activities, of Mr. Sechin, who is a longtime aide to President Vladimir Putin. Along with Exxon Mobil, British Petroleum and Total of France also signed contracts at a Russian business forum in St. Petersburg to explore for shale oil. Furthermore, Exxon Mobil plans to drill its first exploratory well offshore in the Russian sector of the Arctic Ocean. Statoil of Norway is in talks for another shale joint venture; Shell’s CEO, Ben van Beurden, met with President Putin and said to him, “Now is the time to expand,” referring to a liquefied natural gas plant project.
Many CEOs of global oil and gas companies acknowledge that they are taking a calculated risk, given the threat of further sanctions, but they also want to protect their long-term interests in Russia, the world’s largest energy exporting nation. According to David Goldwyn, who served as the State Department’s special envoy and coordinator for international energy affairs during President Obama’s firs term, “They are likely to continue to engage until there is a clear policy signal that they should stop. It is not rational to think they would act in any other way. If the government wants them to stop, it needs to say louder that they should stop.”
So far, the United States and the European Union have imposed only limited sanctions aimed at individual Russians and a handful of companies. The existing sanctions don’t explicitly bar the energy giants from operating in Russia. Though President Barack Obama authorized an executive order on March 20th, 2014 that could outlaw such deals, it has not yet been put into effect by the Treasury Department.
The risk for energy companies is that the next stage of sanctions will be broader, cutting off dealings with major sectors of the economy like finance, metals, and energy. The United States and its allies proposed these kinds of sanctions at a Group of Sevens summit, to be carried out if the violence in Ukraine did not subside.
The energy companies are walking a fine geopolitical line and are betting that the Russian oil and gas industry won’t be hit by direct sanctions. The energy industry provides
financing for the Russian government and its
military, making sanctions a threat to action in
Ukraine. Depending on the evolving situation in
Ukraine, the United States and Europe are likely
to tread cautiously, given the industry’s strong role
in affecting world markets. In short, most analysts
and corporate CEOs believe that Russian energy
companies like Rosneft are too big to punish.
With Russian-West tensions high, Moscow has started to look closer to home for partnerships. Russian has already secured a 400 billion contract to supply natural gas to China. Furthermore, Gennady Timchenko, President Vladimir Putin’s key person for developing ties with China, stated publicly that Russia could also import technology from China that would be very beneficial to Russia’s oil and gas industry.
Over the course of 30 years, the $400 million deal will involve piping natural gas from Russia’s Far East to China starting in 2018. There was initial skepticism that the deal would come to fruition because for almost two decades China and Russia slowly moved along the path of energy politics, attempting to carve out their respective roles. Russia wants to sell, the “voracious” Chinese market needs to be satisfied as millions of Chinese are moved out of poverty and into the middle class. Between 2006 and 2013 Chinese gas demand tripled from 56 billion cubic meters to 169 billion cubic meters, China is set
to receive 38 billion cubic meters of gas under the deal over a 30-year arrangement starting in 2018.
According to analysts, the China-Russia $400 billion energy deal has made it imperative for European countries to diversify their gas imports away from Russia. Gazprom has kept an eye on Europe in terms of their desire to find other markets. The Chinese arrangement in that sense works out perfectly, as it provides Russia’s energy industry an outlet to sidestep any kind of dependency and offers options for developing the Russian Far East, which is a much-neglected part of the Russian Federation. A huge investment will be required, but it is a gamble President Putin is willing to take. From the Chinese perspective, natural gas is seen as vital to curbing China’s pollution problem, which has caused many affluent Chinese to leave the country and settle elsewhere. This issue will continue to be on the reform agenda for some time given that Premier Li Keqiang has called for a “war on pollution.”
The other side of the deal is what it will do to other exporters. The United States is pertinent in this regard. The shale gas revolution not only weaned the U.S. from any pending sense of energy dependence, but also allowed the U.S. to turn its eye towards becoming a key supplier of natural gas to the East Asian region and Europe. In fact, in 2012 Barack Obama claimed that the United States was becoming “the Saudi Arabia of natural gas.”
The Russian-Chinese energy pact is Moscow’s statement to Washington that it too has an interest in the Far East and Asian markets. Some analysts search for a Cold War mentality in the

The Russian-Chinese energy pact is Moscow’s statement to Washington that it too has an interest in the Far East and Asian markets. Some analysts search for a Cold War mentality in the deal, pointing to the backgrounds of Gazprom’s managers and the alleged shadow of the KGB.

deal, pointing to the backgrounds of Gazprom’s managers and the alleged shadow of the KGB. Russia is building its clout as an energy supplier while diversifying its customer base.
While the Obama administration has tried to curb Chinese ambitions in the Asia-Pacific region with its statement of a “pivot” to the region, the Russians are exerting a tremendous amount of patience and resourcefulness in an effort to forge alliances and potential new energy markets. It can be inferred that other deals are bound to follow in an effort to exert energy independence and identify new sources of energy markets with countries such as India, Japan, and South Korea, Furthermore, the $400 billion deal between China and Russia to supply 38 bcm of natural gas a year has been widely interpreted as setting a new benchmark for what the Asian market can pay for gas. While the price was not disclosed, sources have put the price around $10 per million British thermal units (BTU), which is close to what Russia receives for supplies sent to Europe. An improving Russian economy will allow its limitless resources to enable the country to emerge as a major gas supplier to the Asia Pacific as well.
Finally, some Russian analysts have criticized the China-Russia deal, believing that the deal was rushed through to neutralize worries of political isolation and to convey the impression that Russia can easily switch sales to the East. Mr. Putin’s arch critic Boris Nemtsov said that the terms, to the extent that they are known, amount to “total loss and robbery” leaving Russia to foot the bill for $55 billion of investment needed to find the gas and build the pipeline infrastructure.
It will be four to six years before any gas is shipped to China. The Kremlin said that China may advance up to $25 billion to help defray the costs, but has conceded that this is not a fixed obligation, a point that has been widely discussed on Russian blogs. The haggling on terms has been contentious because, according to President Putin, “Our Chinese friends are difficult, hard negotiators.”
In the Russian Federation, people have been funneling their money into usable assets like refrigerators, computers, or cars. This effect has kept the country afloat for now and should prevent contradiction of GDP this year. The IMF expects growth in Russia to be 0.2 percent this year, but figures could be worse if major sanctions go into effect. Therefore, Russia’s shale gas revolution presents many opportunities and challenges for the nation as it seeks to expand its role as a global energy superpower and create viable economic and political relation- ships.
New economic data from China shows that Russia has succeeded in capturing a larger share of the massive and growing Chinese oil import market. China’s imports of Russian oil skyrocketed by 36% in 2014. The rapid rise in Russian oil exports to China is displacing other sources such as Saudi Arabia and other OPEC members. The Wall Street Journal reports that China’s oil imports from Saudi Arabia fell 8% in 2014 and imports from Venezuela fell 11%.
The data suggests that Russia and China are finally forging closer trade ties based on energy. They share a lengthy border, but have been unable to capitalize on what has long appeared to be a well-matched economic opportunity -- Russia is a huge energy producer while China is the world’s largest importer
of petroleum products. While the issue over China taking equity stakes in Russian energy projects was of a concern to Russia in the past, this is no longer the case. As of November 2014, a subsidiary of CNPC gained access to a major oil field in Russia. CNPC will take a 10% stake in ZAO Vankorneft, a subsidiary of Rossneft, which is seeking to develop an oil field that could produce one million barrels per day by 2020. More upstream acquisitions by Chinese firms in Russia continue to be in the works as Russia and China are forming a much stronger symbiotic relationship.
Russia’s natural gas giant, Gazprom, says it is ready to begin deliveries to China in a huge pipeline deal just as soon as the so- called Western Route is completed in Siberia. The pipeline has the capacity to ship 30 billion cubic feet of natural gas annually to China. The pipeline is part of a number of Gazprom-China deals worth roughly $400 billion over the next ten years. The bigger pipeline is the Power of Siberia line, which is projected to supply 38 billion cubic meters of gas annually over a 30 year period beginning in 2018. Gazprom CEO Alexei Miller and China Petroleum Corporation Vice President Wang Dongjin signed an agreement on May 8th, 2015 defining the conditions of natural gas supplies from Russia to China via the Western route. China and Russia have been moving aggressively on deals linking the economies together. The national stock exchanges of China and Russia have signed agreements making it easier to transact in renmimbi and rubles instead of dollars on the local exchange. China and Russia have announced a joint investment bank whose first investment is in Chinese agribusiness. Furthermore, according to Xinhua, on May 9th, 2015 China’s biggest hydropower developer, China Three Gorges Corporation, has signed an agreement with Russian hydropower firm RusHydro to jointly build a hydropower plant in Russia. The 320 megawatt plan would be located on Russia’s Bureya River in the east and would help to control floods in the region. Electricity generated from the plant would be transmitted back to China. Details about the value of the investment were not available, but economists and politicians are keeping a close eye on the deal.
The deal was one of a series of 32 contracts totaling roughly $250 billion that were signed between China and Russia on the sidelines of a parade in Moscow that was attended by Vladimir Putin and Xi Jinpeng to mark the end of World War
II. These deals included billions of dollars in infrastructure loans for Russia, including a 300 billion ruble ($6 billion) loan
to build a high-speed railway link. President Putin indicated that Russia would welcome the involvement of Chinese companies in tapping the giant Vankor oil and gas fields in eastern Siberia. Specifics are being worked out. The two leaders also discussed the Silk Road Economic Belt, an ambitious Beijing project intended to encourage infrastructure development in formerly Soviet Central Asia. While conducting the project, China plans to coordinate closely with the Eurasian Economic Union, an economic alliance that includes Armenia, Belarus, Kazakhstan, Kyrgyzstan, and Russia. According to President Putin, “It means reading a new level of partnership that envisions common economic space on the entire Eurasian continent.” He also went on to state, “ Our interstate interests coincide on the majority
of positions and this is exactly what forms the basis of our relationship today. In the sphere of international relations, we coordinate our work at the UN Security Council level and within the framework of the United Nations. And this coordination is a very important part of the creation of a fairer more democratic world order today.” The president gave this interview in a film by Alexei Denisov entitled “Russia and China. The heart of Eurasia.”
Consequently, at a recent Houston conference, a senior Chinese official touted what he described as a “new system of power in China and the world.” This official, Zhiwei Wang, was referring to energy as the ultimate global unifier, describing a future power grid that would straddle the globe linking all nations to the world’s best resources through transcontinental ultra-high-voltage power lines. It has been inferred that he was referring to geopolitics. He may as well have been taking about China’s energy security and the rest of the world’s energy security -- most notably Russia and the United States -- that are increasingly linked to China’s rise.
Russia made a startling proposal to Europe: Dump the United States and join the Eurasian Economic Union. President Putin claims that Europe is now realizing that as a result of the Western economic and financial blockade of Russia, it is Europe itself that is suffering the most. Germany was the first to acknowledge this late in 2014, when its economy began to slow down and is now on the verge of a recession, but now others are speaking out. The former head of the European Commission and Italy’s former Prime Minister Romano Prodi told Messagero newspaper that “The weaker Russian economy is extremely unprofitable for Italy. The lowering of oil and gas prices, in combination with the sanctions pushed by the Ukrainian crisis, will drop the Russian GDP by 5% per annum and thus it cause cutting of Italian exports by about 50%.” According to Prodi, regardless of the ruble rate against the dollar, which is lower by almost half, American exports to Russia are growing while exports from Europe are shrinking. It is not the financial exposure to Russia or the threat of financial contagion should Russia suffer a major recession or worse. Something far simpler, is alleged, that will cause the biggest harm to European economies. The issue is lack of trade, because while central banks can monetize everything, leading to an unprecedented asset bubble which may boost investor and consumer confidence for a limited time, they can’t print trade which is the all important driver of growth in a globalized world.
Therefore, Russia has a not so modest proposal to Europe; “Dump trade with the United States whose calls for Russian “costs” has cost you another year of declining economic growth and instead join the Eurasian Economic Union.” Russia feels the European Union should renounce the free trade agreement with the United States (TTIP) and enter into a partnership with the Eurasian Economic Union instead under the belief that a free trade zone with its European neighbors would make more sense than a deal with the United States. Russia further made a dig at health standards in the U.S. food industry when Vladimir Chizhov declared, “We don’t even chlorinate our chickens.”
China and India have now recently signed 26 business deals worth more than $22 billion in such areas as renewable energy, ports, financing, and industrial parks. According to Indian embassy officials in Beijing, since China is keenly interested in opportunities in India’s two trillion dollar economy. On May 16th, 2015 Namgya Khompa of the Indian Embassy in Beijing highlighted
the importance of the China-India business deals after a three day visit by Indian Prime Minister Narendra Modi during which he sought to boost economic ties and quell anxiety over a border dispute between China and India.
At the same event, Prime Minister Modi encouraged Chinese companies to embrace opportunities in India in manufacturing, processing and infrastructure announcing, “Now India is ready for business” with an improved regulatory environment. “You are the factory of the world whereas we are the back office of the world, Modi stated. “You give thrust on production of hardware while India focuses on software and services.” These 26 deals were in addition to 24 agreements signed on May 15th, 2015 between China and India.
This represents Chinese President Xi Jinping’s vision of creating greater economic ties between China and India. When President Xi first went to India last year he announced $20 billion in investment over five years, including construction of two industrial parks. Progress has been slow in part because of difficulties Modi has had in getting political approval for easier land acquisition laws which have now been resolved.


ABOUT THE AUTHOR Ralph E. Winnie, Jr. is Director of the China Program at the Eurasian Business Coalition, where he is also the Business Development Representative for North America as appointed by the Guangxi Province Investment Promotion Agency, where he has been responsible for the promotion of business development, tax and trade between Guangxi province in the People’s Republic of China and the United States. Mr. Winnie Jr. graduated magna cum laude from Touro College’s Jacob D. Fuchsberg Law Center in 1999. He studied international law at Oxford University (Magdalen College), United Kingdom and Moscow State University, Russia.