Russia and the Shale Gas Revolution

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Russia and the Shale Gas Revolution

An Analysis on the Potential Impact of the Shale Gas Revolution

Confidential

Thesis Supervisor:

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Declaration by Candidate

I hereby declare that this thesis, “Russia and the Shale Gas Revolution, An Analysis on the Potential Impact of the Shale Gas Revolution”, is my own work and my own effort and that it has not been accepted anywhere else for the award of any other degree or diploma. Where sources of information have been used, they have been acknowledged.

Name: Joris Cornelis Wilhelmus Govers

Signature:

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Table of Figures

Figure 1 McKelvey diagram modified by MIT. ... 20

Figure 2 Worldwide confirmed reserves of natural gas (Trillion cubic feet, Tcf) 2011. ... 21

Figure 3 Worldwide production of natural gas (Billion cubic feet, Bcf) 2011. ... 22

Figure 4 Degree of economic dependence (%) on natural gas imports (2011). ... 25

Figure 5 Russian GDP growth (US$) and Brent oil prices (US$). ... 64

Figure 6 US shale gas production and natural gas imports (Billion cubic feet, Bcf). ... 42

Figure 7 Natural gas price development (US$ per million British Thermal Unit, MMBtu). ... 57

Figure 8 Global primary energy consumption by fuel (2011). ... 84

Figure 9 Different types of gas resources. ... 84

Figure 10 Shale gas resources and areas with water constraints. ... 85

Table 1 The Effects of the Shale Gas Revolution on Russia, Four Scenarios. ... 17

Table 2 Shale Gas (Technically Recoverable Resources [TRR]) in North America (Tcf). ... 41

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1. Foreword

This Master thesis was written in order to obtain the degree of M.Sc. International Relations and International Organization at the University of Groningen. It presents four scenarios that outline the potential impact of the shale gas revolution, if it were to successfully expand to Europe and Asia, on Russia’s domestic stability and the capability of the Russian government to exert political influence, both regionally and globally.

This thesis has been written under the supervision of Prof. Dr. L.E. Lobo de Guerrero, who I would like to thank for his valuable advice and input. Furthermore, I would like to thank my parents for their seemingly never-ending support and patience. I would also like to thank my grandparents, who have shown a keen interest in this project from start to finish. Lastly, I would like to thank Wendelien Veldkamp. I could not have finished this project without your loving support.

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2. Introduction

“We [Gazprom] are skeptical about shale gas”, and because there “aren’t any projects [that are known to be] profitable”, the current production of shale gas in the United States (US) is to be considered “[a] soap bubble that will soon burst”.1 Aleksey Miller, CEO of Gazprom, made these comments two days after Centrica, an energy company based in the United Kingdom (UK), announced it had successfully concluded a deal with Cheniere, a US based Liquid Natural Gas (LNG) provider, concerning the import of shale gas from the US.2 The Centrica-Cheniere deal will undoubtedly add new vigor to the debate surrounding the so-called ‘shale gas revolution’. This debate came to the forefront in the mid 2000s, when US based energy companies started to successfully produce large volumes of natural gas trapped in shale rock formations. Previously, these resources had been considered technologically inaccessible and/or economically unviable. New technological innovations, such as hydraulic fracturing, have overcome these challenges and the production of shale gas in the US has since then grown continuously. In 2012, shale gas already accounted for 40% of the overall natural gas production in the US.3_{The increased availability of natural gas in the US has led}

to a significant decrease of domestic natural gas prices.4 Furthermore, it is thought that the additional shale gas production could transform the US from an importer of (liquid) natural gas to an exporter around 2016.5 The prospect of the US as an exporter of natural gas is what has caused experts and commentators to dub these developments as revolutionary.

The current public debate on shale gas is focused mostly on the economic and environmental effects of its production. However, the advent of shale gas in the US and the potential ‘spread’ of the shale gas revolution can also have serious (geo-) political implications. First, existing natural gas trade patterns are likely to be affected by current, and potential future, shale gas developments.6 Countries with significant known shale gas resources will have the ability to either achieve a higher level of natural gas self-sufficiency or, in some cases, to

1_{Russia Today, “American Shale Gas Project Is a Bubble about to Burst – Gazprom CEO,” Russia Today,}

March 30, 2013, http://rt.com/business/shale-gas-gazprom-us-088/.

2_{Marc Hall, “Big Shale Gas Deal May Not Spark EU Energy Revolution,” EurActiv, March 28, 2013,}

http://www.euractiv.com/energy/shale-gas-faces-uncertain-future-news-518765.

3_{Vello A. Kuuskraa, Scott H. Stevens, and Keith Moodhe, Technically Recoverable Shale Oil and Shale Gas} Resources: An Assessment of 137 Shale Formations in 41 Countries Outside the United States (Washington, DC:

U.S. Energy Information Administration, June 13, 2013), 11.

4_{British Petroleum, BP Statistical Review of World Energy 2013 (London: British Petroleum, June 2013), 27.} 5_{Linda E. Doman et al., International Energy Outlook 2013 (Washington, DC: U.S. Energy Information}

Administration, July 25, 2013), 57.

6_{John Deutch, “The Good News about Gas: The Natural Gas Revolution and Its Consequences,” Foreign Affairs}

90, no. 1 (February 2011): 85–86; Iana Dreyer and Gerald Stang, The Shale Gas “revolution”: Challenges and

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7 transform themselves from an importer of (liquid) natural gas to an exporter. Second, a higher level of natural gas self-sufficiency, coupled with a potential diversification of the suppliers of natural gas, will allow governments to conduct their foreign policy with a higher degree of ‘freedom’ vis-à-vis energy exporting states.7 Furthermore, a reduced risk of energy supply interruptions on a global scale could also persuade governments to act in a more unified manner towards addressing international political disputes, such as Iran’s nuclear program.8 Third, natural gas exporting countries could lose their political leverage over countries with a high dependency on natural gas imports and thus their ability to engage in so-called “energy diplomacy”.9 This holds true particularly regarding the energy relations between the Russian Federation (Russia) and the European Union (EU), and Russia and the former Soviet states. Lastly, the majority the world’s leading natural gas producing and exporting countries have a poor ranking on the Democracy Index of the Economist Intelligence Unit.10 Rising oil prices, which in turn raised the price of natural gas, allowed these regimes to either buy off domestic dissent or to fund an extensive security apparatus to oppress it. The shale gas revolution has the potential to challenge this situation. Encouraged by the developments in the US, additional shale gas resources have been sought and identified in Asia, Africa, Europe, and South America.11 Countries that have traditionally supplied said regions with natural gas, and whose governments are dependent on the export revenues, will have to readjust some of their current domestic policies should the extraction of these resources prove to be a viable option. The Harvard Kennedy School has, in a project called the geopolitics of natural gas, described the influence of natural gas on international relations as follows: “the relative fortunes of the United States, Russia, and China – and their ability to exert influence in the world – are tied in no small measure to global gas developments and vise versa”.12_{The ‘arrival’ of shale gas}

adds to this list the fortunes of current natural gas producers, countries with newly identified shale gas resources, and countries that are dependent on natural gas imports.

7_{Kenneth B. Medlock, Amy Myers Jaffe, and Peter R. Hartley, Shale Gas and US National Security (Houston:}

James A. Baker III Institute for Public Policy, Rice University, July 2011), 54–55.

8_{Ernest J. Moniz, Henry D. Jacoby, and Anthony J.M. Meggs, The Future of Natural Gas (Cambridge,}

Massachusetts: Massachusetts Institute of Technology, June 6, 2011), 155.

9_{Medlock, Myers Jaffe, and Hartley, Shale Gas and US National Security, 54.}

10_{Of the seventeen major natural gas producing countries (see Figure 3), two are classified as a ‘flawed}

democracy’ (Indonesia, Malaysia), one as a ‘hybrid regime’ (Egypt), and ten as an ‘authoritarian regime’ (Russia, Iran, Qatar, China, Saudi Arabia, Algeria, Turkmenistan, Uzbekistan, United Arab Emirates (UAE)); Economist Intelligence Unit, Democracy Index 2011, Democracy under Stress (London: Economist Intelligence Unit, 2012), 3–8.

11_{Kuuskraa, Stevens, and Moodhe, Technically Recoverable Shale Oil and Shale Gas Resources, 6–7.} 12_{Amy Myers Jaffe and Meghan L. O’Sullivan, The Geopolitics of Natural Gas (Cambridge, Massachusetts:}

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8 2.1 Research Questions

Russia represents a particularly interesting case study for the potential (geo-) political effects of the shale gas revolution. Not only does the Russian government seek to guard the country from domestic instability, it also pursues an extensive foreign policy. This policy, guided by the belief that Russia remains a global power, aims at preserving Russian dominance within a self-declared regional sphere of influence.13 Furthermore, it seeks to balance the current dominant position of US within the international system through an explicit emphasis on ‘Multipolarity’.14 However, the Russian government’s ability to preserve domestic stability and to pursue these foreign policy goals is heavily dependent on Russia’s position on both the international oil and natural gas market.15 This raises the following question:

How can the ‘shale gas revolution’ influence the future stability of the Russian Federation and the ability of its government to act as a regional and global power?

The research question stated above requires an analysis of several aspects. These aspects are structured in a total of four chapters. Each chapter will contain a separate analysis on each of the following six sub-questions, either individually or combined:

1. What is the current position of the Russian Federation on the (international) natural gas market?

2. What influence has the export of natural gas had on the stability of the Russian Federation since the presidency of Vladimir Putin in 2000?

3. How have successive governments of the Russian Federation utilized the export of natural gas as a foreign policy tool?

4. How has the ‘shale gas revolution’ developed itself since the mid 2000s?

5. What effects can the ‘shale gas revolution’ have on the position of the Russian Federation on the (international) gas market?

6. What options does the government of the Russian Federation have to ‘tackle’ the effects of the ‘Shale Gas Revolution’?

The first two chapters will start with an elaboration on the presupposed link between Russia’s position on the international oil and natural gas market and the domestic and international

13_{Andrew C. Kuchins and Igor A. Zevelev, “Russian Foreign Policy: Continuity in Change,” The Washington} Quarterly 35, no. 1 (Winter 2012): 147–151.

14_{Ingmar Oldberg, “Russia’s Great Power Ambitions and Policy under Putin,” in Russia Re-Emerging Great} Power (New York: Palgrave Macmillan, 2007), 17.

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9 capabilities of the Russian government. Since this thesis analyzes the effects of the shale gas revolution it will focus solely on Russia’s position on the international natural gas market. The first chapter will analyze the first sub-question and will explain the workings of the international natural gas market. Furthermore, it will analyze the Russian position on said market and the relations between Russia and its two main export markets, Europe and Asia. The second chapter will combine the second and third sub-question and analyze how the position described in chapter two has influenced both the domestic stability of Russia and the foreign policy capabilities of its government. The third and forth chapter will analyze the shale gas revolution and its effects on the Russian position described in the previous two chapters. The third chapter will focus on the fourth sub-question; the ‘origin’ of the shale gas revolution and the current developments in North America, Europe, and Asia. The forth chapter will combine the fifth and sixth sub-question. First, it will analyze the potential effects of the shale gas revolution on the Russian position described in chapter one. Second, it will analyze several policy measures that could help the Russian government cope with the anticipated effects of the shale gas revolution. The fifth chapter will provide an answer to the main research question by combining all of the analyses and trends into three different scenarios. Each of these scenarios will have two dominant ‘forces’ that determine the outline of the scenario and thus the effects of the shale gas revolution on Russia. The last chapter will conclude with some final remarks on the scenarios presented in chapter six, the used theoretical framework, and on the shale gas revolution general.

2.2 Theoretical Framework

2.2.1 Energy Resources and the Realist Paradigm

The main research question of this thesis, the potential effects of the shale gas revolution on the future stability of Russia and the ability of the Russian government to act as a regional and global power, will be analyzed from a realist perspective, specifically neoclassical realism. Realism, also known as the realist paradigm, is best understood as a family of theories within the study of International Relations (IR).16 The “distinctive and recognizable flavor” of these theories stems from the shared understanding that realist theorists have of the international system and its workings.17 The most important realist assumption is the notion that, due to the human nature and the absence of an international government, the realm of international

16_{Scott Burchill et al., Theories of International Relations, 4th ed. (Basingstoke: Palgrave Macmillan, 2009), 31;}

Jeffrey W. Legro and Andrew Moravcsik, “Is Anybody Still a Realist,” International Security 24, no. 2 (Fall 1999): 9.

17_{J. Donnelly presents a thorough overview of all the major realist theorists and their respective take on realism;}

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10 relations is characterized by anarchy and governed by (state) power and interest.18_Realist

theorists also emphasize that people tend to organize themselves in groups in order to provide for their security. In most realist theories, this group-centric approach has resulted in a strong tendency to focus on the state.19 Lastly, states are expected to act in a rational manner in order to achieve their preferences. Most realists assume that these preferences can range from “at minimum, [guaranteeing] their own preservation and, at a maximum, [a] drive for universal domination”.20

The importance of energy resources in modern-day international politics, Russia’s foreign policy since the presidency of Putin in 2000, and the foreign policy of energy importing and exporting states in general, are all best understood and analyzed through the realist insights described above. First, realists recognize that the access to and control of natural resources has significant influence “upon the power of a nation with respect to other nations”.21 Furthermore, realist theorists acknowledge that throughout history, certain commodities have had a strategic value that goes beyond their mere market price.22 Commodities such as energy resources, minerals, and water and food, have been repeatedly used as a foreign policy tool and have served as a “prime catalyst of armed conflict”.23_{The Russian government has also}

recognized the important role of energy resources within the current international system and president Putin has stated that he considers Russia’s energy resources to be an “important geopolitical tool”.24 Second, state-owned energy companies currently control around 85% of the worldwide oil reserves and between 70-80% of the worldwide natural gas reserves.25 This is part of a broader process in which countries that export energy resources “are nationalizing their energy industries, leaving less and less room for the private market”.26 Russia is no exception; its government has taken control over the Russian energy sector and has acquired an active role in the international natural gas market via the energy company Gazprom. In 2005, the Russian government acquired a controlling share in Gazprom (50,002%) and a year

18_{Hans J. Morgenthau and Kenneth W. Thompson, Politics amongst Nations: The Struggle for Power and} Peace, 6th ed., Brief Edition (New York: McGraw-Hill, 1993), 5; Edward H. Carr, The Twenty Years’ Crisis 1919-1939, 2nd ed. (London: Macmillan Press, 1981), 64–65; Kenneth N. Waltz, Theory of International Politics (Reading: Addison-Wesley Publishing Company, 1979), 117.

19_{Waltz, Theory of International Politics, 117; Legro and Moravcsik, “Is Anybody Still a Realist,” 13.} 20_{Legro and Moravcsik, “Is Anybody Still a Realist,” 14; Waltz, Theory of International Politics, 118.} 21_{Brenda Shaffer, Energy Politics (Philadelphia: University of Pennsylvania Press, 2009), 3; Morgenthau and}

Thompson, Politics amongst Nations: The Struggle for Power and Peace, 127.

22_{Gal Luft and Anne Korin, Energy Security Challenges in the 21st Century (Santa Barbara: ABC-CLIO, 2009),}

340; Morgenthau and Thompson, Politics amongst Nations: The Struggle for Power and Peace, 130–133.

23_{Luft and Korin, Energy Security Challenges in the 21st Century, 340.} 24_{Shaffer, Energy Politics, 119.}

25_{Ibid., 3.}

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11 later the company was granted a monopoly on the export of natural gas from Russia.27_It

could thus be said that states, as stressed within the Realist paradigm, remain the most important actors in the international energy market. Third, when analyzed from an economic perspective, energy exporting countries might at times seem to act irrational. However, when this ‘irrational’ behavior is approached and analyzed from a realist perspective, it becomes apparent that short-term economic advantages are sometimes “sacrificed in order to increase the state’s political and geopolitical power”.28 The Russian government has implemented such policies in the past when it subsidized energy exports to neighboring states in order to gain control over their energy infrastructure.29 Lastly, in order to improve their energy security, countries have sought to avoid an excessive dependence on one particular supplier. This is in line with realist thoughts that recommend a diversification of the supply base in order to create some leverage over individual suppliers, or in the words Winston Churchill: “safety and certainty in oil […] lay in variety and variety alone”.30

IR’s two remaining dominant paradigms, the liberal and Marxist/radical paradigm, both have significant shortcomings when analyzing the importance of energy resources in modern-day international politics, and specifically the Russian government’s use of these resources. The liberal paradigm downplays the influence of power politics and the notion that energy exports could be used as a foreign policy tool.31 Instead, liberal theorists place their faith in the global energy market and the concept of ‘interdependence’. Liberal theorists assume that energy market players are motivated by profit maximization and therefor tend to act rationally.32 Furthermore, both producers and consumers desire stable market conditions, which creates a situation of mutual dependency (interdependence).33 If a conflict of interests does occur, regional and/or international institutions can help resolve the conflict through mediation.34

However, these liberal assumptions are challenged by both the foreign policy of the Russian government and the current conditions on the global energy market. On several occasions, the Russian government has proven its willingness to employ the country’s energy exports as a

27_{Shaffer, Energy Politics, 119; U.S. Energy Information Administration, Russia, Country Report (Washington,}

DC: U.S. Energy Information Administration, September 18, 2012), 12.

28_{Giedrius Česnakas, “Energy Resources in Foreign Policy: A Theoretical Approach,” Baltic Journal of Law &} Politics 3, no. 1 (2010): 35.

29_{Shaffer, Energy Politics, 124.}

30_{Daniel Yergin, “Ensuring Energy Security,” Foreign Affairs 85, no. 2 (April 2006): 70.} 31_{Luft and Korin, Energy Security Challenges in the 21st Century, 341.}

32_{Ibid., 340.} 33_{Ibid., 341.}

34_{Roland Dannreuther, International Relations Theories: Energy, Minerals, and Conflicts, Polinares Working}

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12 foreign policy tool. Furthermore, with a majority of the world’s energy resources controlled by government-owned companies, the global energy market is unable to function according to liberal principals.35 The Marxist/radical paradigm is focused primarily on the structural injustices of the world’s economic and political system. Events within the international system are explained as attempts to either challenge or maintain these structures, depending on the country’s position within said system. However, Russia’s foreign policy is driven by a desire to remain a regional and global power and the actions of the Russian government therefor cannot be viewed as part of an economic/political struggle between the North and the South, as is done by dependency theorists.36 Furthermore, although the Russian economy is heavily dependent on its energy resources sector, it also has the capabilities to produce high-value goods, again contradicting the dependency theory.37 Lastly, the Russian government has refused to enter into cartels such as the OPEC, which illustrates that it does not identify with the efforts of Southern countries to strengthen their position vis-à-vis the North. The anti-Western critique of the Marxist/radical paradigm can help explain the Russian government’s efforts to renationalize the country’s energy resource industry and to curb the influence of Western multinational.38 However, the subsequent use of the country’s energy exports as a foreign policy tool can only be explained with the help of realist paradigm.

2.2.2 Neoclassical Realism

While the realist paradigm is well suited to analyze this thesis’ main research question, not all individual realist theories are. Classical realism, with its Hobbesian worldview, assumes that states will always strive to further expand their power.39 Classical realists therefore cannot explain the behavior of states, such as the Netherlands and Norway, which do not employ their energy resources as a tool for power expansion. Neorealism, also known as structural realism, cannot be applied because it aims primarily at explaining how units (states) interact within a given international system (structure).40 It does not seek to offer any tools that can explain the behavior (foreign policy) of individual states within the international system. Furthermore, neorealist theorists focus primarily on the distribution of military capabilities and believe that it is “productive” to ignore the economic domain and thus the influence of

35_{Luft and Korin, Energy Security Challenges in the 21st Century, 342.}

36_{Dannreuther, International Relations Theories: Energy, Minerals, and Conflicts, 10.} 37_Ibid.

38_{Ibid., 10,11.}

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13 energy resources.41_{Offensive realism shares neorealism’s focus on military capacities but}

recognizes that states, at times, might also pursue so-called “non-security goals”, such as generating economic wealth. However, states are expected to pursue these policies only “as long as the requisite behavior does not conflict with balance-of-power logic”.42 Russia, faced with repeated expansions of both the EU and NATO, seems to have relied exclusively on expanding its economic influence. According to the logic of offensive realism, the financial resources that were invested in acquiring and maintaining this economic influence should have been used to strengthen Russia’s ailing armed forces in order to balance the before mentioned expansion. Defensive realism assumes that security is “often plentiful rather than scarce” and that states do not structurally seek more power but only react to clear external threats.43 When confronted by such external threats states will preferably adopt a policy of balancing. However, Russia began to expand its economic influence long before any clear external threat required balancing.44 This would seem at odds with defensive realist thoughts and touches on the main weakness of this theory; “in denying the states strive for power [it] loses the ability to correctly assess the phenomenon”.45 Lastly, neorealism, offensive realism, and defensive realism all share a common weakness. By not taking into account the internal dynamics of a state, such as its governmental structure, these theories find it difficult to explain the varying behavior amongst energy exporting states faced with similar external constraints and/or the changing behavior of one individual state even when external constraints remain unchanged.

Neoclassical realism, while retaining all of the previously mentioned advantages of the realist paradigm, addresses many of the weaknesses identified among the different realist theories described above. Gideon Rose first coined the term neoclassical realism in a review article in 1998.46 In this article, Rose reviewed several recently published works that he believed constituted a new and distinct take on realism. Since then, the body of neoclassical works has continued to expand and further attempts have been made to specify neoclassical realism and

41_{Anita Orban, Power, Energy, and the New Russian Imperialism, 1st ed. (Westport: Praeger Security}

International, 2008), 13.

42_{John J. Mearsheimer, The Tragedy of Great Power Politics (New York: Norton, 2001), 46.}

43_{Gideon Rose, “Neoclassical Realism and Theories of Foreign Policy,” World Politics 51, no. 1 (October}

1998): 149.

44_{A. Orban points out that when Russian corporations started to expand their influence in Central and Eastern}

Europe, “EU and NATO expansions were not foregone conclusions but mere possibilities [and] in case of the EU quite distant ones”; Orban, Power, Energy, and the New Russian Imperialism, 20.

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14 its research agenda.47_{The most distinguishing feature of neoclassical realism is that the}

theory incorporates both external and internal variables in order to explain a state’s behavior (foreign policy).48 It could thus be said that neoclassical realism occupies the middle ground between pure structural theories and constructivist theories.49 Like most realist theorists, neoclassical realists assume that a state’s actions are governed primarily by systemic forces/pressures and a state’s position within the international system, or “its relative material power capabilities”.50 However, neoclassical realists also recognize the distinct influence of internal factors on foreign policy, such as the political leaders and internal structure of a state. First, it are the political leaders of a state that, based on their personal understanding of their country’s position within the international system, form the eventual foreign policy of said state.51 However, assessing a country’s position within the international system can prove difficult due to the nature of systemic feedback and shifts in relative power, which are often subject to multiple interpretations.52 Second, a state’s political leaders do not always have the “complete freedom to extract and direct national resources as they wish”.53_{The proportion of}

national resources that political leaders can commit to foreign policy depends on the strength and structure of a state.54 This is also known as the difference between national power and state power, the former being the portion of national power that governments can employ to pursue their foreign policy goals.55 According to neoclassical realists, these foreign policy goals are not aimed solely at achieving security. Instead, states seek to control and shape their external environment. The relation between a state’s ambitions and its capabilities can be described as follows; “as their relative power rises states will seek more influence abroad, and as it falls their actions and ambitions well be scaled back accordingly”.56 Lastly, it is important to recognize that neoclassical realism regards certain developments as tendencies and not as inexorable laws.57

47_{Steven E. Lobell, Norrin M. Ripsman, and Jeffrey W. Taliaferro, eds., Neoclassical Realism, the State, and} Foreign Policy (Cambridge: Cambridge University Press, 2009).

48_{Rose, “Neoclassical Realism and Theories of Foreign Policy,” 146.}

49_{Ibid., 152; Lobell, Ripsman, and Taliaferro, Neoclassical Realism, the State, and Foreign Policy, 3.} 50_{Rose, “Neoclassical Realism and Theories of Foreign Policy,” 146; Lobell, Ripsman, and Taliaferro,} Neoclassical Realism, the State, and Foreign Policy, 4.

51_{Rose, “Neoclassical Realism and Theories of Foreign Policy,” 157–158.}

52_{Lobell, Ripsman, and Taliaferro, Neoclassical Realism, the State, and Foreign Policy, 30.} 53_{Rose, “Neoclassical Realism and Theories of Foreign Policy,” 147.}

54_Ibid.

55_{Fareed Zakaria, From Wealth to Power: The Unusual Origins of America’s World Role (Princeton: Princeton}

University Press, 1998), 9.

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15 Neoclassical realism offers several advantages when analyzing the influence of shale gas on Russia’s domestic and international capabilities. First, neoclassical realists focus explicitly on material power, such as energy resources, and the degree to which the state can utilize that power, the difference between national and state power.58 Second, neoclassical realism recognizes that a state’s behavior can be influenced by internal factors, such as the internal structure of a state and the understanding that its political leaders have of the international system. These factors allow neoclassical realists to explain the variable behavior of energy exporting states faced with similar circumstances and/or the changing behavior of individual energy exporting states.59 Furthermore it explains why nondemocratic states are often more successful in using their energy resources as a tool for power expansion. Fewer governmental checks and balances allow nondemocratic states to transform energy power into state power more easily.60 Lastly, because of the importance attributed to a state’s internal factors and their effects on foreign policy, neoclassical realism also allows for an analysis of the foreign policy of energy importing countries.

2.3 Methodology 2.3.1 Scenario Analysis

Scenario building is considered a common method within futurology, “the scientific study of possible, probable and desirable future developments, the options for shaping them, and their roots in past and present”.61 A scenario can best be defined as a description of a conceptual future that includes the “paths of development”, or dynamics, that will lead to such a future.62 Scenarios were first developed during the 1950s and were used for the purpose of strategic military planning. Towards the end to the 1960s, companies such as Royal Dutch Shell, also started to develop scenarios for commercial purposes. It is important to emphasize that the purpose of a scenario is not to offer a comprehensive image of the future. Rather, a scenario is supposed to draw attention to, and put focus on, certain aspects through the presentation of a hypothetical future based on certain assumptions.63

The scenarios presented in this thesis will provide a narrative account of the potential impact of the shale gas revolution on Russia. The reason for this narrative approach is the current

58_{Česnakas, “Energy Resources in Foreign Policy: A Theoretical Approach,” 47.} 59_Ibid.

60_{Ibid., 48.}

61_{Hannah Kosow and Robert Gaßner, Methods of Future and Scenario Analysis (Bonn: Deutsches Institus für}

Entwicklungspolitik, 2008), 5.

62_{Ibid., 6.}

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16 lack of quantitative data concerning the worldwide production of shale gas. Presently, data on shale gas production is only available for the US and only for the period between 2007-2010. Additionally, the large-scale production of shale gas is yet to commence in either Europe or Asia. This lack of data makes it impossible to use quantitative scenario methods, such as trend extrapolation or trend impact analysis.

2.3.2 Neoclassical Realism and Scenario Analysis

Constructing a narrative scenario that analyzes the potential effects of the shale gas revolution on Russia from a neoclassical perspective has one major challenge; the common methodology of neoclassical realism is detailed historical analysis.64 However, this preference for detailed historical analysis does not imply that neoclassical realism holds no predictive value. First, neoclassical realists predict that an increase of a state’s relative material power will lead to a corresponding expansion in the ambition and scope of its foreign policy. A decrease in power will subsequently lead to a corresponding contraction.65 Second, neoclassical realists predict that the before mentioned process will not necessarily be gradual. Adjustments to a state’s foreign policy are not solely dependent on objective material trends but also on how state leaders perceive them. Lastly, neoclassical realism predicts that countries with a weak state will take longer to transform an increase in material power into state power and thus an expansion of their foreign policy activity.66

Neoclassical realists, when seeking to explain a state’s behavior, take into account the role of both independent (systemic pressures/incentives) and intervening variables (internal factors such as the view of the international system held by a state’s leaders).67 A scenario that seeks to analyze the potential influence of the shale gas revolution on Russia from a neoclassical perspective will have to take both these variables into account. First, there is the independent variable, or systemic pressure, that can potentially influence the relative material power capabilities of the Russian government; in this case the shale gas revolution. Second, there are the intervening variables, such as the view of the international system held by Russia’s state leaders, which determine how the Russian government will respond to this systemic pressure. In the following scenarios all of these internal factors will be represented by the willingness and capability of the Russian government to implement reforms. The willingness to do so will indicate how the Russian government perceives it position within the international system and

64_{Lobell, Ripsman, and Taliaferro, Neoclassical Realism, the State, and Foreign Policy, 7.} 65_{Rose, “Neoclassical Realism and Theories of Foreign Policy,” 152.}

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17 the potential influence of the shale gas revolution thereon, the capability to do so relates to Russia’s internal structure and state power. These two main driving forces, the shale gas revolution and the willingness and capability of the Russian government to implement reforms, make for a two-dimensional scenario space that results in four separate scenarios. These four scenarios are illustrated below in Table 1.

Independent variable/systemic pressure Spread of the Shale Gas

Revolution

Shale Gas Revolution remains a North American affair In te rv en in g var iab

le _{Domestic reforms} _{Managing the Shale Gas}Scenario 1;

Revolution

Scenario 2; Modernizing the Russian

Natural Gas Industry

No domestic reforms

Scenario 3; The Perfect Storm

Scenario 4; Status Quo

Table 1 The Effects of the Shale Gas Revolution on Russia, Four Scenarios.

The four scenarios illustrated above will encompass a sufficiently wide range of challenges to properly assess the potential effects of the shale gas revolution for Russia. This is consistent with the view that “a larger number [than four or six] of alternative worlds is often neither necessary nor desirable”.68

2.4 Research Sources

An analysis on Russia’s current position on the international natural gas market, and the potential effects of shale gas thereon, will inevitably entail numerous figures and statistics. All the data presented in this thesis, unless indicated otherwise, comes from either the US Energy Information Administration (US EIA), the International Energy Agency (IEA), or the British Petroleum’s (BP) Statistical Review of World Energy. At the moment of writing, data on the reserves, production, consumption, etc., of conventional and unconventional natural gas was only limitedly available for the year 2012. The ‘base year’ for all the figures, statistics, and comparisons presented in this thesis is therefore set on 2011. Whenever more recent data is presented it is done so to illustrate either the continuance or discontinuance of certain trends.

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18 2.5 Research Relevance

A scenario can “serve to focus attention on [the] possible paths of [a certain] development”; in this case the potential effects of the shale gas revolution on Russia.69 It can also help policy makers to prepare for these effects.70 Russia’s sheer size and influence in both Eastern Europe and Central Asia means that, if the effects of the shale gas revolution prove to be significant, the shale gas revolution will also indirectly affect the before mentioned regions. Furthermore, as outlined in the introduction, the spread of the shale gas revolution will not only affect Russia, but also other ‘traditional’ natural gas exporting countries. Some of these countries, such as Algeria and Azerbaijan, are currently members of the EU’s European Neighborhood Policy (ENP). This program was established in 2004 and seeks to create a ring of stable and friendly states. ENP members are encouraged to implement democratic and economic reforms, and in return, are offered a certain degree of economic and political integration with the EU.71 However, without the prospect of an eventual full EU membership, ENP members have proven reluctant to implement necessary reforms. Furthermore, the EU has struggled between upholding its own values and securing and diversifying its energy supply.72 This is dangerous situation since the shale gas revolution has the potential to destabilize these countries, especially when reforms remain unimplemented. This means that policy makers in Europe, such as the EU, will have to take into account, and prepare for, the potential negative effects of the spread of the shale gas revolution. This thesis can help identify some of those potential negative effects.

69_{Kosow and Gaßner, Methods of Future and Scenario Analysis, 18.} 70_{Glenn and The Futures Group International, “Scenarios,” 17.}

71_{Nicu Popescu and Andrew Wilson, The Limits of Enlargement-Lite: European and Russian Power in the} Troubled Neighbourhood (London: European Council on Foreign Relations, June 2009), 2.

72_{Stephan Keukeleire and Jennifer MacNaughtan, The Foreign Policy of the European Union (Basingstoke:}

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19

3. The Russian Position on the International Natural Gas Market

In 2011, natural gas made up 23.3% of the global primary energy consumption (see Figure 8 in the Appendix a full overview of global primary energy consumption).73 The global demand for natural gas in that same year increased by 2.2%, below the historic average of 2.7%.74 The popularity of natural gas is caused by several factors. First, there are an increasing amount of possibilities for the application of natural gas. Second, natural gas is more environmental friendly when compared to other fossil fuels, such as oil and coal. Lastly, natural gas allows countries to diversify their energy mix.75 The price of natural gas has fluctuated up and down but the general trend this decade, with the notable exception of the US since 2008, has been upward.76 This chapter will analyze the Russian position on this expanding and lucrative market. The first paragraph will analyze the functioning of the international natural gas market and Russia’s position thereon. The second and third paragraph will focus on Russia’s main export markets, Europe and Asia.

3.1 Current International Natural Gas Market 3.1.1 Definitions concerning Natural Gas Resources

The global demand for natural gas is projected to grow an annual 1.7% until 2040.77_{In order}

to meet this growth in demand, natural gas producing and exporting countries will have to increase their output. Their ability to do so will depend on the availability and accessibility of additional natural gas resources. Analyzing these resources can be contentious since multiple (national) classification schemes are currently in use worldwide. In an effort to create a single global standard, the United Nations (UN) has established the System of Environmental-Economic Accounting (SEEA).78 The SEEA includes a sub system, based on the McKelvey diagram, which is focused on the classification of energy resources (SEEA-Energy). A modified version of this diagram, made by the Massachusetts Institute of Technology (MIT) and aimed exclusively at the appraisal of natural gas resources, will be used to classify natural gas resources throughout this thesis.79 An illustration of the diagram can be seen in Figure 1.

73_{British Petroleum, BP Statistical Review of World Energy 2012 (London: British Petroleum, June 2012), 4.} 74_{Ibid.; British Petroleum, BP Statistical Review of World Energy 2013, 4.}

75_{Task force 3, International Gas Union, Geopolitics and Natural Gas (Oslo: International Gas Union, June}

2012), 62.

76_{British Petroleum, BP Statistical Review of World Energy 2013, 27.} 77_{Doman et al., International Energy Outlook 2013, July 25, 2013, 11.}

78_{United Nations, “System of Environmental-Economic Accounting (SEEA),” United Nations Statistics} Division, accessed June 24, 2013, http://unstats.un.org/unsd/envaccounting/seea.asp.

79_{The McKelvey diagram is a classification scheme that can be applied to different types of mineral resources.}

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20

Figure 1 McKelvey diagram modified by MIT.80

The total area of the diagram illustrated above represents the Gas Initially In Place (GIIP), which includes all the natural gas that is thought to exist within the earths subsurface before any production has occurred.81 The further classification of the GIIP into several categories is established via three factors: geological knowledge, technological capabilities, and economic viability. Geological knowledge revolves around the identification and assessment of a natural gas basin. Higher levels of geological knowledge result in lower levels of uncertainty regarding the natural gas estimates of a particular basin. The second factor revolves around the technological requirements needed to extract the natural gas from the basin. Resources that can be extracted by using currently available technology, including the cumulative production to-date, are classified as Technically Recoverable Resources (TRR). Subtracting the cumulative production to-date from the TRR leaves the Remaining Recoverable Resources (RRR). The RRR corresponds with the area in Figure 1 that is outlined in red.82

The decision to develop these RRR depends on the third factor, the economic viability of the natural gas resources. Aspects that determine this viability are, amongst other, the cost of development and the current market price for natural gas.83 Confirmed reserves, as indicated in the McKelvey diagram above, are thus natural gas resources that have been discovered, are

80_{Ernest J. Moniz, Henry D. Jacoby, and Anthony J.M. Meggs, The Future of Natural Gas (Cambridge,}

Massachusetts: Massachusetts Institute of Technology, June 6, 2011), 20.

81_{Qudsia Ejaz, Background Material on Natural Gas Resource Assessments, Supplementary Paper, The Future}

of Natural Gas (Cambridge, Massachusets: Massachusetts Institute of Technology, June 6, 2011), 1.

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21 technologically recoverable, and which are considered economically viable.84_{However, it is}

important to recognize that the last two factors are not rigid; technological innovations can make the development of previously inaccessible resources a possibility while fluctuating natural gas prices can cause a change in the economic viability of certain TRR.

3.1.2 Proven Reserves and Production

In its last complete survey in 2011, the US EIA estimated the worldwide-confirmed reserves of natural gas to be 6,707.31 Trillion cubic feet (Tcf).85 Furthermore, the survey confirmed the presence of natural gas resources in a total of ninety-eight countries. The twenty most significant countries, in terms of their confirmed natural gas reserves, are ranked in Figure 2. Together these countries account for 90.9% of the worldwide-confirmed reserves of natural gas.86 Russia possesses the world’s largest confirmed reserves of natural gas. Estimated at 1,680 Tcf they account for 25% of the global confirmed reserves of natural gas.

Figure 2 Worldwide confirmed reserves of natural gas (Trillion cubic feet, Tcf) 2011.87

The worldwide production of natural gas has shown a continuous increase in order to cope with the growth in global demand. In 2011, the US EIA registered a worldwide production of 117.47 Tcf.88_{Russia and the US, representing 20.2% (23.7 Tcf) and 19.5% (22.9 Tcf) of the}

total worldwide natural gas production respectively, are the world’s two dominant producers.

84_{Ibid., 3.}

85_{U.S. Energy Information Administration, “International Energy Statistics, Natural Gas, Reserves,” EIA,}

accessed April 4, 2013, http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=3&pid=3&aid=6.

86_Ibid. 87_Ibid.

88_{U.S. Energy Information Administration, “International Energy Statistics,” Natural Gas, Production, accessed}

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22 Figure 3 ranks the eighteen foremost producers of natural gas in the world. Combined, these countries account for 81.1% of the worldwide production of natural gas.

Figure 3 Worldwide production of natural gas (Billion cubic feet, Bcf) 2011.89

Russia’s natural gas production takes place primarily in Western Siberia, the location of the Urengoy, Yamburg, and Zapolyarnoye natural gas fields. Classified as so-called supergiant gas fields, these fields account for 53% of the total natural gas production in Russia.90 However, this situation is likely to change in the coming future. The Urengoy and Yamburg fields, having been in production since 1976 and 1983, have registered an annual decline in output of -4.5% between 2001-2008.91 The Zapolyarnoye gas field, in operation since 1999, has been able to partly compensate this decline due to an annual output growth of 5%.92 Ultimately, however, the Zapolyarnoye field alone cannot compensate the above-described decline in production and additional natural gas fields will have to be developed. Explorations activities have already started in the Yamal Peninsula, Eastern Siberia, and Sakhalin Island in order to bring the natural gas resources in these regions into production.93

The majority of Russia’s natural gas production is consumed domestically. With a domestic consumption rate of around 70% in 2011, Russia was the world’s second largest consumer of natural gas.94_{The remaining surplus production is exported, primarily via pipelines to Europe.}

89_Ibid.

90_{Ejaz, Background Material on Natural Gas Resource Assessments, 39.} 91_Ibid.

92_{U.S. Energy Information Administration, Russia, September 18, 2012, 11.} 93_Ibid.

94_{Calculating the domestic consumption percentage presented here was done by subtracting the natural gas}

imports (1.494 Bcf) from the domestic consumption (17.975 Bcf) and dividing the outcome by the total production (23.686 Bcf); Ejaz, Background Material on Natural Gas Resource Assessments, 36.

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23 These exports, estimated at 7.8 Tcf in 2011, make the Russia the world’s largest exporter of natural gas.95

3.1.3 Regional Markets and Long-Term Contracts

The functioning of the international natural gas market is heavily determined by the physical characteristics of natural gas. In comparison to oil, which can be transported by a variety of means and at relative moderate cost, the transportation of natural gas is costly and requires a network of pipelines and distribution points. Combined, this infrastructure forms a long-term “physical tie” between producer and consumer.96 The inflexible nature of this infrastructure has prevented the formation of a truly global market. Instead, the ‘international’ natural gas market consists out of four relatively independent regions, each with its own corresponding market. These are the Asian-Pacific, European (including Russia and North Africa), North American, and the much smaller South American market.97

The relative autonomy of the regional markets mentioned above has resulted in the creation of distinct pricing mechanisms. In the Asian-Pacific and European markets, natural gas has traditionally been traded under long-term contracts.98 In these long-term contracts, the price of natural gas is linked either to global crude oil prices (Asia-Pacific market) and/or the price of several oil products, such as diesel and heavy fuel oil (European market).99_{Furthermore, these}

contracts specify the minimum volume of natural gas the client is expected to take off on an annual basis; the so-called take or pay clause. The first provision is intended to promote market stability; the second is intended to minimize investment risks and to ensure a market for the supplier. In contrast to the Asian-Pacific and European market, the North American market has been largely deregulated and revolves around so-called trading points or hubs.100 At these hubs, the trade and price of natural gas is determined by the competition between various suppliers and consumers in what are known as spot transactions.

The advent of Liquid Natural Gas (LNG) has come some way to change the prevailing market conditions described above. Natural gas, when cooled to a temperate of -162°C, will liquefy and contract to a volume 1/600th that of its normal gaseous state.101 Once liquefied, the natural

95_{U.S. Energy Information Administration, “International Energy Statistics,” Natural Gas, Exports, 2013,}

http://www.eia.gov/cfapps/ipdbproject/IEDIndex3.cfm?tid=3&pid=26&aid=4.

97_{Moniz, Jacoby, and Meggs, The Future of Natural Gas, June 6, 2011, 147.} 98_Ibid.

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24 gas can be transported around the world by specialized ocean-going tankers. As a mode of transportation, LNG offers two main advantages. First, LNG can diversify the supply base of natural gas importers and can thereby enhance a country’s energy security.102 Second, without the need to pass through transit countries, contract negotiations and transport routes become far less complicated.103 These advantages have been capitalized on and in 2011 LNG made up 32.3% of the global natural gas trade.104 The trade volume of LNG is projected to grow further and double by 2040, after having already doubled between 2005 and 2010, increasing from 10 Tcf to 20 Tcf.105

Despite LNG’s growing prominence within the global natural gas trade, its potential to create a global natural gas market with characteristics similar to that of the global oil market remains questionable.106 The main reason for this is that LNG requires an expensive infrastructure of installations in order to liquefy the natural gas and to return it to its gaseous state. Currently, the number of LNG installations is limited and the high investments involved with expanding this infrastructure means that LNG is preferably traded under long-term contracts.107 Thus while the advent of LNG has provided a contribution to the gradual formation of one global natural gas market, this market still lacks the flexibility of the global oil market. However, as companies are increasingly selling their surplus LNG production via spot transactions and the number of LNG installations continues to grow, this might change in the future.108

3.2 Energy Relations between Russia and Europe 3.2.1 Europe’s Dependence on Natural Gas Imports

Europe, with an annual growth in consumption of 0.7-1.4% and a decline in domestic natural gas reserves, is expected to become increasingly dependent on natural gas imports.109 In 2011, European countries already had to import an estimated 16.8 Tcf of natural gas; 38.7% (6.5 Tcf) of these imports concerned intraregional trade while 61.3% (10.3 Tcf) was imported from countries outside Europe. Three countries dominate Europe’s intraregional natural gas trade; these are Norway (3.3 Tcf), the Netherlands (1.8 Tcf), and the UK (0.6 Tcf). The

102_{Moniz, Jacoby, and Meggs, The Future of Natural Gas, June 6, 2011, 148.}

103_{Luft and Korin, Energy Security Challenges in the 21st Century, 273; Task force 3, International Gas Union,} Geopolitics and Natural Gas, 7.

104_{British Petroleum, BP Statistical Review of World Energy 2012, 4.} 105_{Doman et al., International Energy Outlook 2013, July 25, 2013, 4.} 106_Ibid.

107_{Moniz, Jacoby, and Meggs, The Future of Natural Gas, June 6, 2011, 148.} 108_{Shaffer, Energy Politics, 13.}

109_{The US EIA predicts a annual growth in consumption of 0.7% for European OECD countries and 1.4% for}

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25 majority of the natural gas imported from outside Europe originated from Russia (6.2 Tcf).110

The degree to which European countries rely on imports to satisfy their demand for natural gas is illustrated in Figure 4. The graphs in this figure represent the natural gas dependency of France, Germany, the UK, Italy and Spain; the five largest EU member states in terms of their Gross Domestic Product (GDP). Also included in the figure are two graphs representing Poland, the country with the biggest GDP of the new EU member states, and the cumulative natural gas dependency of the entire EU.111

Figure 4 Degree of economic dependence (%) on natural gas imports (2011).112

In 2011, Europe’s ailing economic situation, high natural gas prices, and growth in renewable energy sources, caused the EU’s consumption of natural gas to decline by -9.9%.113 However, as can be seen in the figure above, the EU’s dependency on natural gas imports continued to grow. Additionally, countries that used to be self-sufficient in natural gas have also become increasingly dependent on imports. The UK, which ten years ago was still a net exporter of natural gas, is the starkest example of this trend. As Europe’s domestic natural gas reserves continue to decline, dependency on natural gas imports is expected to increase in the future.114 However, it must be noted that not every country is as vulnerable as the graphs in Figure 4

110_{Turkey and the Caucasus (Other Former Soviet Union) have not been included in this thesis and have therefor}

been subtracted from the trade movement figures presented in BP’s Statistical Review of World Energy. Belarus and Ukraine are classified as European countries whereas Russia has been classified as a non-European country; British Petroleum, BP Statistical Review of World Energy 2012, 28.

111_{The data of Eurostat has not yet been updated after the EU’s latest enlargement on July 1}st_{2013. The EU}

graph therefor does not include Croatia.

112_{Eurostat, “Energy Dependence,” European Commission, Eurostat, December 12, 2013,}

http://epp.eurostat.ec.europa.eu/portal/page/portal/product_details/dataset?p_product_code=TSDCC310.

113_{British Petroleum, BP Statistical Review of World Energy 2012, 4; British Petroleum, BP Statistical Review} of World Energy 2013, 4.

114_{Doman et al., International Energy Outlook 2013, July 25, 2013, 58.}

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26 suggest. While the economy of France is indeed heavily dependent on imports to satisfy its demand for natural gas, natural gas consumption only accounts for a small portion of France’s total primary energy consumption. In 2011, nuclear energy made up the majority (41%) of France’s primary energy consumption, whereas natural gas constituted a mere 15%.115

3.2.2 Current Natural Gas Infrastructure and Future Projects

There are five pipelines that connect Russia to the European natural gas market; these are the Yamal-Europe, Northern Lights, Soyuz, Brotherhood, and Nord stream pipeline.116 The Europe and Nord Stream pipeline are the two most recently constructed. The Yamal-Europe pipeline was completed in 2005 and runs from Russia, through Belarus and Poland, to Germany.117 The Nord stream pipeline consists out of two parallel lines that were completed in 2011 and 2012. With a combined flow capacity of 1.9 Tcf per year, this offshore pipeline connects Russia directly to Germany via the seabed of the Baltic Sea.118 Both pipelines were constructed in order to reduce Russia’s transit vulnerability. Prior to the building of these two pipelines, nearly 80% of Russia’s natural gas exports to Europe went through Ukraine via the previously mentioned Soyuz and Brotherhood pipeline.119

Two pipelines are currently planned to further reduce Russia’s transit vulnerability, the South stream and Yamal-Europe II pipeline. The South stream project is another offshore pipeline, which will run over the seabed of the Black Sea between Russia and Bulgaria. The pipeline will be constructed in the territorial waters of Turkey in order to avoid Ukrainian territory altogether and expectations are that it will be completed in 2015.120_{The Yamal-Europe II}

pipeline is a second strand of the existing Yamal-Europe pipeline and aims to increase its capacity by 30%.121 Gazprom announced its commitment to the project in April 2013 and expects to complete it between 2018-2019, after work on the South Stream project is finished. However, the Polish government’s reaction to the project has been skeptical and whether this date will prove realistic remains questionable.122

115_{Shaffer, Energy Politics, 131; British Petroleum, BP Statistical Review of World Energy 2012, 41.} 116_{U.S. Energy Information Administration, Russia, September 18, 2012, 14.}

117_{Shaffer, Energy Politics, 124–125.}

118_{U.S. Energy Information Administration, Russia, September 18, 2012, 14; Doman et al., International Energy} Outlook 2013, July 25, 2013, 59.

120_{U.S. Energy Information Administration, Russia, Country Report (Washington, DC: U.S. Energy Information}

Administration, September 18, 2012), 15.

121_{Vladimir Soldatkin, “Gazprom Wields Pipeline Plan in Spat with Ukraine,” Reuters, April 3, 2013,}

http://www.reuters.com/article/2013/04/03/russia-europe-gas-idUSL5N0CQ2Y020130403.

122_{Russia Today, “Russia Revives $5bn Yamal-Europe Pipeline Project,” Russia Today, April 4, 2013,}

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27 3.3 Energy Relations between Russia and Asia

3.3.1 Asia’s Growing Demand for Natural Gas

The consumption of natural gas in Asia is expected to grow an annual 1.3-3.3% until 2040, with China and Japan being the two main driving forces behind this growth.123 In 2011, the consumption of natural gas in these countries increased by 21.5% and 11.6%.124 China’s rapid increase in natural gas consumption is the result of the country’s 12th Five-Year Plan. In this plan, the Chinese government stated its intention to encourage the use of natural gas and to increase its share in the primary energy consumption to 8.3% by 2015.125 Japan’s natural gas consumption has grown significantly due to the shutdown of a large portion of the country’s nuclear energy sector, which was done in the wake of the 2011 Fukushima disaster.126 The Russian government has repeatedly expressed its desire to supply the expanding Asian-Pacific natural gas market. Not only would an additional market strengthen Russia’s energy security; it would also put Russia in a position to play the European and Asian market against each other, which could result in a higher price for its natural gas.127

3.3.2 Current and Future Russian (LNG) Exports

As there are no pipelines that connect Russia directly to the Asian-Pacific natural gas market, exports take place primarily from the Sakhalin-2 plant; Russia’s only LNG facility.128_The

majority of Russia’s LNG is sold under long-term contracts to Japan and South Korea. Both countries lack significant domestic natural gas reserves and, due to geographic and political constraints, are unable to import natural gas via pipelines.129 Smaller volumes of LNG are also exported to China, and occasionally, to Taiwan and Thailand. The idea of constructing a pipeline that will enable Russia to export its natural gas directly to China has surfaced on several occasions. However, this idea is unlikely to materialize due to two reasons. First, uncertainty remains regarding the volume of Russia’s natural gas resources in the east Siberia. This makes it difficult to determine whether the costs of constructing such a pipeline are justifiable.130 Second, the majority of China’s energy consumption takes place on the east

123_{The US EIA predicts an annual growth in consumption of 1.3% for Asian OECD countries and 3.3% for}

Non-OECD until 2040; Doman et al., International Energy Outlook 2013, July 25, 2013, 46,47.

124_{British Petroleum, BP Statistical Review of World Energy 2012, 4.}

125_{Fatih Birol and John Corben, Are We Entering a Golden Age of Gas, Special Report, World Energy Outlook}

2011 (Paris: International Energy Agency, 2011), 15.

126_{Doman et al., International Energy Outlook 2013, July 25, 2013, 46.} 127_{Shaffer, Energy Politics, 117.}

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28 coast of the country. Constructing a pipeline from known gas resources in western Siberia all across China’s territory to the east is economically less attractive than exporting LNG.131

Several projects and policy measures are currently being planned and/or implemented in order to strengthen Russia’s position on the growing Asian-Pacific natural gas market. First, plans have been made to expand the production capacity of the existing Sakhalin-2 plant. However, with Gazprom struggling to secure the necessary natural gas resource base, progress has been slow.132 Second, there are plans to construct two additional LNG facilities in Vladivostok and the Yamal Peninsula.133 The Vladivostok project is a $13.5 billion investment by Gazprom that will include a LNG plant, port, and a pipeline to the Chayanda natural gas field. The plant is expected to become operational in 2018 and will have a production capacity of 480-720 Bcf.134 The Yamal project is a $20 billion investment by a consortium of companies that is led by Novatek, Russia’s second largest natural gas producer, and includes French energy company Total and the Chinese energy company CNPC. Recently, two groups of Japanese and Indian companies have also indicated their interest in acquiring a combined stake of 10% in the project.135 The project is planned to come online in 2018 and will have a capacity of 792 Bcf.136_{Lastly, the Russian government has attempted to give Russia’s LNG sector an}

additional boost by implement two policy measures. First, new laws have recently been approved that will liberalize the export of LNG from Russia, thereby ending Gazprom’s LNG export monopoly.137 Second, the tax breaks for LNG operations on the Yamal peninsula will be expanded to include similar operations elsewhere.138

131_Ibid.

132_{Vladimir Soldatkin, “Shell Warns Gazprom of Price Risks as LNG Expansion Delayed,” Reuters, September}

30, 2013, http://www.reuters.com/article/2013/09/30/us-russia-shell-lng-idUSBRE98T0HE20130930.

133_{U.S. Energy Information Administration, Russia, September 18, 2012, 15.}

134_{Vladimir Soldatkin, “Gazprom’s Investment in Vladivostok LNG Plant Seen at $13.5 Bln,” Reuters,}

November 21, 2013, http://www.reuters.com/article/2013/11/21/gazprom-lng-investment-idUSL5N0J60UD20131121.

135_{Reuters, “Japan and Indian Groups May Split 10 Pct in Yamal LNG Plant,” Reuters, November 28, 2013,}

http://www.reuters.com/article/2013/11/28/russia-japan-lng-idUSL5N0JD1Z520131128.

136_{U.S. Energy Information Administration, Russia, September 18, 2012, 15.}

137_{Reuters, “Russia’s Putin Approves LNG Exports for Gazprom’s Rivals,” Reuters, December 2, 2013,}

http://www.reuters.com/article/2013/12/02/russia-lng-idUSL5N0JH0W420131202.

138_{EurActiv, “Russia Invests in LNG Project to ‘Diversify’ From Europe,” EurActiv, October 22, 2013,}

Russia and the Shale Gas Revolution