Will Domestic Politics in the US and Russia Shape European Gas Markets?

16/10/2012 21:12 BST | Updated 16/12/2012 10:12 GMT

By Dr. Shamil Yenikeyeff

The North American shale gas revolution has led the gas independence of the United States and forced liquefied natural gas (LNG) cargos to move elsewhere. The US success has had a serious impact on commercial drivers and consumer-producer relations in traditional markets and in Europe, in particular. It has forced countries to start exploring new ways of following the American "shale gas" footsteps.

The new abundance has undermined the oil-linked gas price formula used by Gazprom in its long-term contracts. The US could further change the global energy game if it opts to export its gas or use more gas instead of oil. This could lead to an increase in oil exports from North America which could also cause shock-waves in the global oil market.

The next US administration will determine whether to use cheap domestic gas as a vehicle for industrial growth or to ship extra gas volumes via the refurbished LNG terminals to external markets. Some suggest that in their efforts to secure American LNG supplies, premium Asian markets will outbid Europe. If the US decides to use gas domestically, American industries will have a considerable competitive advantage over producers in other countries and regions, including Europe.

Russia is being forced to lower prices for the gas it supplies to its European customers. There is a growing understanding in Moscow that the only way that Russia can retain and even increase its role in the European energy market is by supplying larger gas volumes at the expense of retaining high prices under the current price and commercial regime.

Gazprom is coming under increased pressure not only from outside Russia, but also from powerful gas producers inside the country. Russia's politically connected companies such as Novatek are lobbying Vladimir Putin to reduce Gazprom's export monopoly in favour of independent producers. They also argue that cheaper Russian gas will undermine the commercial attractiveness of LNG and renewables in Europe. As a result, the share of gas in Europe's energy mix and Russia's share in the European gas market will increase.

Lower gas prices could speed up the EU's economic recovery and facilitate the growth of European gas demand. This will also benefit Russian gas producers. Hence, political manoeuvrings in the Kremlin's corridors of power could determine whether Russia will choose gas volumes over prices. In the short term, taking into account the fact that the Russian gas industry contributes only 3-5% to the federal budget, Moscow can afford lower gas prices in its key market - Europe. Vladimir Putin has traditionally backed Gazprom at home and abroad. This, however, could change if the Kremlin decides that the Russian gas monopoly can no longer respond to the challenges in external markets.

So it is that power battles in Vladimir Putin's inner circle and diverse policy views in the United States could bring the global gas game to a new level.

Dr. Shamil Yenikeyeff is a Research Fellow, Oxford Institute for Energy Studies and a Senior Associate Member at St Antony's College, University of Oxford.

Join Yenikeyeff and four other world experts at Intelligence Squared's 'A Natural Gas Revolution: Hot Air or Dose of Sanity. An Evening of Debate', at One Birdcage Walk, London on 18th October. The event is part of the Switched On series of live debates and discussions in partnership with Shell.