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Shale gas is not about to transform the European gas market


The collapse of US gas prices to less than USD 2/mmbtu (USD 71/kcm) and recent newspaper articles touting shale gas production in Europe and large scale export of US gas has increased concern that the pricing and sales volume of Russian gas to Europe are under renewed threat. They are not, in our view. European markets are currently challenging as a result of a lack of demand, not changes in supply driven by shale gas, we believe.

While the rise of LNG has improved the connectivity of global gas markets, they remain highly segmented and are likely to remain so because of the issues around gas transport. Global gas prices continue to vary widely and price movements are often quite independent of each other.

Since last year, shale gas exploration drilling has proved disappointing, Poland has slashed its estimated shale resource base and Bulgaria has banned fracking.

US prices have collapsed, but as dry shale gas drilling needs around USD 5/mmbtu (USD 177/kcm) to generate a full cycle return, gas drilling in the US is starting to fall and we believe it is only a matter of time before prices begin to correct upward. Because of the costs involved in LNG, a USD 5/mmbtu price in the US would translate into a cUSD 400/kcm price delivered to Europe, or around the same as we expect the European oil linked contract price to trend to over time. In the meantime, Europe’s gas import requirement is likely to grow at 10-15bcm/a, we estimate, and in the near term the LNG market is set to tighten. We remain of the view that contract pricing around the USD 400/kcm mark is sustainable and that Europe is likely to need more, not less, Russian gas in the future. 

Colin Smith
VTB Capital analyst

gas, oil, USD, Europe

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