How the U.S. Blew Up the Global Energy Market
Business + Economy

How the U.S. Blew Up the Global Energy Market


Late last month, Alexey Miller, CEO of the Russian energy giant Gazprom, dismissed the energy boom occurring in the U.S. right now as a “soap bubble [that] will burst soon” – and said the United States was “not a competitor” to Gazprom.

“Currently, there aren’t any projects that we know of where shale gas production would be profitable,” Miller said. He added that “absolutely all the boreholes” in the U.S. are empty.

In the same article, published by Russia’s state-sponsored outlet Russia Today, Vagit Alekperov, president of Lukoil, another huge Russian energy firm, also dismissed the advancements the United States has made in shale drilling.

“Of course, it is a great achievement on the part of U.S. engineers that America is now producing oil and gas from shale. In order to do it, they had to drill very tricky wells and do hydraulic fracturing,” he said – then added, “Undoubtedly, this is an achievement, but I wouldn’t call it a revolution.”

Coming from a typical business executive, these kinds of comments toward competitors could be dismissed as corporate bluster. It’s the same kind of talk that was heard during the Bush administration, when Russia seemed to celebrate each one of the U.S.’s multiple missteps in European and Iraq relations

Coming from Miller and Alekperov, the comments have weight and deserve attention. But they also show that the tables have turned: Russia had the United States on its heels during the Bush administration. Now, Russia is concerned about how much the U.S. shale gas explosion will hit Russia’s energy industry, the single source of the country’s economic strength.

In 2000, shale gas provided only one percent of U.S. natural gas production. By 2010 that number grew to 20 percent, and some analysts predict it will swell to 46 percent by 2035, according to Paul Stevens, an oil and energy expert, in his book The Shale Gas Revolution

Both Miller and Alekperov are in their current positions in Russian business because they have close ties to Vladimir Putin,  
the Kremlin, and the Federal Security Service (FSB), the successor to the KGB. The energy business and politics are intertwined in Russia, more so than in any other country in the world. Since Putin took office as president, Russia has used its energy industry not just to build its wealth, but to exert its political will.

So when two Russian energy executives tell the world not to worry about American industry, they’re sending a political message. As the U.S. shale industry grows, it makes Russia less and less important to vulnerable countries like Poland, who are at Russia’s mercy. It also takes away potential customers, as the United States looks to explore markets that were targets of companies like Gazprom.

For proof that the Russians are concerned about the emergence of shale energy, consider this: Despite dismissing shale publicly, on Thursday Gazprom announced its own shale-drilling project.  

“Russia has their own vested interest to downplay the affect of shale gas,” said Rons Dixon, founder of Shale Experts, a firm that consults on the industry. “They’re hypocrites – they’re announcing their own shale projects – because they know there are billions of dollars at stake.”

After the collapse of the Soviet Union, Russia was in tatters: Its economy was broken, its military pilfered, its government feeble. Boris Yeltsin’s ineffectiveness left a power void that was eventually filled by Putin.

Putin used Russia’s vast energy resources, along with a lot of dirty politics, to get the county back on its feet. In the first decade of the 21st century, Russian energy companies like Gazprom and Lukoil made hundreds of billions of dollars with energy contracts in Europe. (Putin’s opponents were jailed or left the country before being shipped to Siberia. British authorities are currently investigating whether Putin had one such exile killed.)

Russia then used those energy contracts to establish political power and exert political will in its old sphere of influence. Multiple times, it shut down energy supplies to countries like Ukraine, Poland and the Czech Republic over pricing disputes, all of which conveniently happened in the middle of bitter Eastern European winters.   

At the same time, it began building a pipeline that would bypass former Warsaw Pact countries completely. That’s when the Bush administration urged Europe to diversify supplies, but those calls were ignored.

U.S. companies have found a way to make the expensive process of drilling for shale gas much cheaper, according to Dixon of Shale Experts. These companies are now exporting this technology to countries like Poland and Sweden, who right now are slaves to Russian energy. Soon, Poland and Sweden will be able to produce their own energy, eliminating the need for a relationship with Russia, Dixon said.

“This starts to shift the political balance away from the need to rely on Russia,” he said. “Companies are bringing that technology over to Poland right now, where the environment is perfect for shale gas exploration.”

The booming U.S. shale industry, as well as the consumption of less foreign energy, is now allowing the United States to begin to enter the energy production market. Dixon says U.S. companies are making inroads into the British energy market, taking away opportunities from Russian firms.

According to Daniel Twining, a senior fellow for Asia at the German Marshall Fund, American energy surpluses also allow American firms to challenge Russia in Asia, especially in critical ally countries like Japan.

Twining adds that the U.S. firms also have a shot at breaking into the Chinese market, one that’s been long sought by Russian firms, with little success.  It would be a coup for the American energy industry if it could establish ties with China.

“We all keep waiting for this Russia–China relationship,” said Twining. “The Russians do seem to have a strategy of tying up China through energy supply agreements, but it hasn’t happened.”

That’s not to say that companies like Gazprom are to be taken lightly. It still has deep ties to the FSB. And most of Russia’s money is tainted, as there are a number of gangsters who have their fortunes tied up in these energy giants. They play by a different set of rules than their American and European competitors.

The best approach to Gazprom was outlined by former CIA chief James Woolsey in 2008, when he described a typical Gazprom employee this way:  “If you meet a really smart, articulate 45-year-old guy at the Noga Hilton bar in Geneva, and he says he's with Gazprom and he'd like to talk to you about a joint venture in some part of the world, he might be what he says he is. He might be a Russian intelligence officer under commercial cover. He might be a senior member of some Russian organized-crime family. And the really interesting thing is that there's a pretty good chance that he's all three – and that none of those institutions have any problem with that at all.”