USA Shifting To Unconventional Gas.

The US will import less LNG over the next two decades than earlier expected, as domestic unconventional gas becomes a major contributor to supplies, the federal Energy Information Administration (EIA) said in an outlook released on Dec. 12. Gas consumption in the US is estimated to total 27.0 TCF in 2025, the EIA, the US Department of Energy's statistical wing, said in its annual energy outlook.

This is 3.7 TCF less than the EIA had predicted in last year's outlook. The EIA attributes the drop to higher natural gas prices. The past working week ended on Dec. 23 with the price of natural gas futures at NYMEX settled at $12.28/m BTU, down from $14.00/m BTU a few weeks earlier. The Henry Hub spot price of natural gas on Dec. 23 was $11.14/m BTU. The New York City Gate price was $11.75/m BTU. WTI at NYMEX on Dec. 23 closed at $58.43/barrel, down from a record of $70.85/b at the end of August. IPE Brent closed at $56.69/b. NYMEX heating oil closed at $1.7053/gallon, down more than 34 cents on Dec. 22. NYMEX gasoline closed at $1.5505/g.

The EIA said: "After peaking, natural gas consumption is projected to fall slightly by 2030, as higher natural gas prices result in a larger market share for coal in the electric power sector in the later years of the projection". US gas output is seen slightly lower than originally forecast due to lower levels of offshore production. Offshore output is lower in the updated outlook "at least in part to the impacts of Hurricanes Katrina and Rita, which are expected to delay offshore drilling projects because of a lack of rigs".

US output growth will be slowed in the longer term because existing operations damaged by the storms are recovering slowly. US gas production is projected to be 21.2 TCF in 2025 compared with the 21.8 TCF in 2025 projected last year, the EIA said.

Unconventional gas production in the contiguous 48 states is expected to be a "major contributor to growth in US natural gas supplies", the EIA said. Unconventional gas is now expected to account for 45% of domestic output in 2030 versus last year's projection of 39% of output by 2025. The EIA said: "Starting in 2021, the projected levels of unconventional natural gas production in the [2006] reference case are higher than those in [the 2005 case], reaching 9.5 TCF in 2030".

US imports of LNG will still grow to meet rising demand, but the increase is less than had been earlier expected. The growth has been moderated by reduced consumption and higher foreign demand for gas-to-liquids production, which uses natural gas as a feedstock, limiting the gas available to supply the LNG trade, according to the outlook.

LNG import volumes in 2025 are now projected to be only two-thirds of that estimated last year. Total net imports are estimated to increase from 0.6 TCF in 2004 to 4.1 TCF in 2025, according to the 2006 outlook.

Europe Gas Imports May Drop If Kiev-Moscow Dispute Is Not Resolved: Ukrainian Prime Minister Yury Yekhanurov on Dec. 23 ordered the state-owned Naftogaz oil and gas firm to "prepare all necessary materials...for forwarding to the Stockholm court". The appeal would be formally filed with the Stockholm International Arbitration Court in the event of "further irresponsible statements", Interfax quoted Yekhanurov as saying, in an apparent reference to Gazprom.

Earlier in the day in Moscow, Gazprom repeated its threat to cut its gas supplies to Ukraine on Jan. 1 if a new agreement on prices were not reached before then. Speaking to reporters in Moscow, Alexander Medvedev, the chief of Gazprom's export arm, on Dec. 19 said: "If there isn't a [new] contract, there won't be [natural gas] deliveries".

Ukraine and Russia have been at loggerheads for months over Moscow's intention to increase the price of gas for Ukraine to bring it in line with world market rates. Currently Ukraine and Russia settle their gas bill by barter, with Moscow providing Kiev with gas as payment for the transit of Russian gas exports through Ukraine to European countries to the west, with a base price of $50 (42) per 1,000 cubic meters (35,316 cubic feet).

Moscow wants to switch to cash payments and more than quadruple the price of supplies to the Ukrainian market, to $220-230 per 1,000 cubic meters. Ukraine wants a price increase to be gradually phased in over several years.

Gazprom, How Reliable? The result of a Moscow-Kiev conflict could be winter energy shortages in some European countries. Yet on the same day, Jan. 1, Russia assumes the rotating presidency of the Group of Eight nations, of which it has made "energy security" a central theme.

Moscow is widely expected to use its G8 presidency to promote itself as a reliable energy supplier to the world's biggest economies. These two positions may seem contradictory, but in fact point to the same conclusion. While it does so in a variety of ways, Russia is ever more confidently wielding its mammoth reserves of oil and natural gas as a political tool.

High prices, tight supplies, and the West's desire to reduce reliance on Middle East oil producers are increasing Moscow's leverage. Cliff Kupchan, an analyst with the Eurasia Group consultancy and former US State Department official in the Clinton administration, was on Dec. 23 quoted as saying: "It is not that energy is the new atomic weapon. But Russia knows petro-power, aggressively and cleverly applied, can yield diplomatic influence".

After spending the past year bringing key oil and gas assets back under state control, a string of events have shown how Russia is using its petro-power. Gazprom, the state-controlled gas giant, is demanding that former Soviet states, which since the USSR collapsed in 1991 have enjoyed subsidised prices for Russian gas, move to market rates. But it is doing so in a highly differentiated way.

Ukraine, having shifted out of Moscow's orbit since last year's Orange Revolution, has been slapped with the biggest demand for a price increase. Prices charged to Georgia and Moldova, which have also turned their gaze westwards, have nearly doubled. Yet Belarus, loyal to Moscow, is still getting gas at the old price.

Russia is also using its dominant position in oil to favour Russian commercial interests. It plans to cut oil supplies to Lithuania from Jan. 1 in an attempt to press the Baltic republic to favour a Russian buyer over rival Polish and Kazakh bidders for the strategic Mazeikiu oil refinery. The refinery is being sold by the Lithuanian authorities to pay off a huge back tax bill owed to Moscow by Yukos, the Russian oil company whose main production asset has, in effect, already been renationalised as part of the legal assault on Mikhail Khodorkovsky, its former owner.

Russia is squeezing potential competitors in the former Soviet Union - notably Kazakhstan - which are trying to develop their own energy industries independently of Moscow. It is attaching tough conditions to allowing Kazakhstan to expand a crude oil pipeline from the vast Tengiz field in the Caspian to Russia's Black Sea port of Novorossiysk. This is crucial to plans by the field's operator, Chevron, to ramp up production.

This month Russia started construction, with some fanfare, of the $5 billion North European Gas Pipeline, an export route under the Baltic Sea to Germany which will bypass the Baltic states, Ukraine and Poland. It attracted even more attention by naming Gerhard Schroder, the former German chancellor, project chairman.

Within days, word leaked that Russian President Vladimir Putin had asked Donald Evans, the former US commerce secretary and close friend of President George W. Bush, to chair Rosneft, the Russian state-owned oil company preparing for an initial public offering (IPO). But Evans has politely declined, citing other commitments.

Russia has always used energy as a lever with its former Soviet neighbours - and kept natural gas prices low partly to have them within its fold - though it is being increasingly hard-nosed. Political and economic interests are intertwined.

With gas prices rising, increasing the effective revenue loss to Gazprom and Russia from providing cut-price gas, there seems little point continuing to subsidise states which have already shunned Moscow.

Russian Finance Minister Alexei Kudrin recently stated: "The time when we built relations by quasi-subsidising neighbouring economies is gradually passing. We must think about our own interests".

The Financial Times last week said: "Most analysts expect Russia and Ukraine to pull back from the brink before west European gas supplies are threatened; neither would want to be blamed for shortages".

Russia has far too much at stake. It is preparing to project its energy influence to a much wider audience. Its approaches to Schroder and Evans may be an important part of that.

Moscow has hinted to US officials and international energy executives that it intends to use its coming G8 presidency to assure the world it can be a pivotal energy supplier to Europe, the US and Asia. Kupchan, of Eurasia Group, believes Russia has studied Saudi Arabia, which has used its energy clout to build a close geo-political relationship with the US - and mute US criticism of its domestic policies. But he suggests Russia is aiming for a "Saudi-plus" model.

Kupchan said: "Saudi Arabia has achieved this only with the US. The Russians are looking for something broader". Moscow wants to build a wider network of influence and, unlike some petro-states, turn its oil and gas companies into international players.

Kupchan forecasts more moves to grant minority stakes to foreign oil majors in Russian companies, both state- and privately-controlled, and oil and gas projects, though with Russia always retaining control. He also foresees more invitations to prominent Western executives to take jobs with Russian energy companies. Both could help confer a sense of legitimacy and transparency on its industry, especially after the state's asset-grab, and increase Russian companies' sway in foreign capitals.

The FT said with some, particularly US, politicians "challenging Russia's G8 role amid questions over its democratic record - heightened by the Yukos affair - western officials say Russia will be under intense scrutiny". The FT quoted "one person close to the White House" as saying: "The G8 is going to be a great opportunity for them to appear adult, responsible and be taken seriously by the world".

Even through the break-up of the Soviet Union and crises that followed, Russia's gas exports to Europe, 80% of which transit Ukraine, have always been reliable. But unless Ukraine agrees to pay much more for the gas it takes from the pipeline for its own use, Russia has said it will cut out Ukraine's portion from the gas going into the pipe.

If Ukraine keeps taking gas, which Moscow says would be stealing, supplies to Europe could be cut by about 20%. Both sides have huge incentives to make a deal, however. Russia has no other way to get its gas to Europe, while Ukraine, which currently receives 30% of its gas from Russia in a barter deal in lieu of transit fees, has no alternative source.

Yet both sides claim the other is refusing to negotiate seriously. Viktor Yushchenko, Ukraine's president, last week called Russia's position "irresponsible, unprofessional and naive". He accused Moscow of trying to punish Kiev for its turn towards democracy in last year's Orange Revolution.