World

02.26.14

Why Putin Hates Fracking

Russia's president is really worried about what it will do to the environment. OK, not really.

Vladimir Putin just hates fracking—at least, he hates it when other countries do it. As the Russian president told an economic conference last year, in places where companies are fracking to extract natural gas, they turn on the faucet and “black stuff comes out of the tap.” Consider the environment, he begged his audience.

 While you’re at it, consider the many European countries that depend on Russia for their natural gas or might compete with it as suppliers. Think of Bulgaria, Romania, Poland; and think, especially, of Ukraine.

To be sure, there are environmental issues with fracking, or, more formally “hydraulic fracturing”: huge quantities of water laced with noxious chemicals are blasted deep under the surface of the earth to blow apart rock formations, releasing the gas and oil locked inside them. But, just as surely, the environment is not Putin’s main concern. (P.S. Russia isn’t exactly opposed to do a little fracking of its own.)

If the natural gas reserves in Ukraine are anything like as large as analysts believe—and that is a big “if,” but far from an impossibility—then the geopolitical and economic position of the former Soviet republic could be transformed; its independence from Moscow assured; its value to the West unquestioned.

Even the ousted President Viktor Yanukovych understood that. (He was never so reliable a Putin ally as his opponents painted him.) Last November, Yanukovych’s government signed a $10 billion deal for shale gas exploration and exploitation with the American-based multinational Chevron, following on another massive deal with Royal Dutch Shell.  Together, Yanukovych claimed, those agreements would enable Ukraine “to have full sufficiency in gas by 2020 and, under an optimistic scenario, even enable us to export energy.”

You can imagine how happy Putin was about that.

Just a week later, Yanukovych was supposed to sign a deal with the European Union that would take his country further into the Western orbit when, suddenly, under ferocious pressure from Putin and with the promise of $15 billion in loans and cheap gas, Yanukovych walked away from the European deal. In a response few people expected, huge protests by pro-European crowds filled Kiev’s Independence Square day after day, month after month, until, last week, blood flowed in the streets, the uprising spread, and the government crumbled.

In the delicate efforts to stabilize Ukraine that lie ahead, shale gas will not be very important over the short term. The country is on the verge of bankruptcy. A sovereign default “would be shocking,” says Thomas Blau of the European Council on Foreign Relations. The ripple effects could lead to yet another international financial crisis. “The first issue is to stabilize the transitional government and to address the most urgent problem, which is the default,” says Blau.

If the natural gas reserves in Ukraine are anything as large as analysts believe, then its geopolitical position could be transformed; its independence from Moscow assured.

But over the medium term, uncovering and exploiting Ukraine’s energy resources will be vital if it wants to get back on its feet. Putin has jerked the country around like a yo-yo over the last decade, cutting off its gas supplies in 2006 and 2009 to drive hard bargains. The Ukraine had no choice but to pay up or shut up—or both. The Russian deals corrupted one top official after another. And Moscow’s ruthlessness even served to intimidate the powerhouses of Western Europe, which had come to depend on Russian gas delivered by the pipelines crossing Ukraine.

The strategic implications if the Russian lock on those markets is broken are lost on no one, least of all Putin. His economy is dependent on gas and oil exports, and 76 percent of the gas he pipes out of Russia goes to Germany, Turkey, Italy, France, Britain and other European countries.

Already, the fracking revolution in the United States threatens Russian dominance on several fronts. In the last six years, the Americans have become the world’s biggest producer of natural gas, which costs in the United States a small fraction of what it costs in Europe or Asia. The result has been a massive conversion of electrical power generation from coal to gas in the United States; strong economic incentives for manufacturers to bring their factories back onshore; and newly revived American power in the international energy marketplace. Facilities that, ten years ago, were being built to import liquefied natural gas (LNG) to the United States are now being converted to export it.

Moscow tried hard to downplay the challenge. Just a year ago, Alexei Miller, chairman of the Russian energy behemoth Gazprom, said he thought the American shale gas production was “unprofitable” and the boom in the United States would prove to be a “bubble.” But others in his company admitted that after Gazprom had spent hundreds of billions of dollars to develop fields in the Arctic around the Barents Sea, with the idea the gas there would be sold to North America, that market just dried up: the Americans didn’t need the Russian supply anymore.

As an article on “the geopolitical consequences of the shale revolution” in the current issue of Foreign Affairs points out, of all the governments hit hard by the new American power in energy markets, “Moscow has the most to lose.” Even if American LNG exports don’t completely free the Europeans from dependence on Russian supplies, Gazprom’s customers will gain leverage when they negotiate their deals.  And if they can tap into their own gas fields, all bets are off.

So, beginning around 2011, Putin deployed what The Economist describes as a “holy alliance” of politicians and oligarchs, “trendy environmentalists and Kremlin police-spies” to fight the fracking threat. Since then, the Russians have been moving on several fronts either to block shale gas production, or compete with it. In the eastern Mediterranean, for example, Israel hopes to develop huge potential resources beneath the waters off the Levantine coast. Last Christmas, the Russians signed a deal with the government of Syrian President Bashar Assad staking their claim to the gas that may lie off his shores. (Just one of the many reasons they want to keep him in power.)

But one of the first battlegrounds in this subterranean struggle was Bulgaria, which depends on Gazprom for 90 percent of its natural gas.

In early 2012, as several multinationals got ready to explore potential Bulgarian fields, a few small anti-fracking protests made local headlines. Suddenly various stories rehashed the classic anecdotes about polluted (even flammable) drinking water around American gas fields, and they went further, claiming that Bulgaria would be a testing ground for some new and dangerous technology, creating an environmental “nightmare.” This wasn’t true, but a hodgepodge of political parties in the Bulgarian parliament, as if electrified by these environmental threats they’d never paid much attention to before, suddenly passed a complete moratorium on drilling and exploration.

As one enraged editorialist wrote, the assembly had “banned Bulgaria from learning whether it has shale gas deposits—information which could have released us from the total energy dependence on Russia.” Then, a few months later, came what appears to have been a payoff: Gazprom took a 20 per cent cut in its new 10-year contract with the Bulgarians. Anything to keep them from fracking.

One irony among all these intrigues is that in some cases European hopes for shale gas appear to have been defeated very quickly by geology, not geopolitics. Poland was supposed to have huge gas reserves, and there’s no question the Poles want to be quit of any dependence on the Russians. But that hasn’t worked out. In 2011, Polish reserves were estimated at 44 trillion cubic feet. A year later, that estimate was cut to 9 trillion. Exxon pulled out after its first wells were a disappointment, and Marathon left, too.

Nothing is sure in this business, but in the Ukraine, Shell and Chevron appear to have doubled down. The license Shell bought last May covers “almost 8,000 square kilometers of shale gas acreage,” according to the company’s “Investor’s Handbook.” Chevron’s block covers “1.6 million acres in Western Ukraine,” says Cameron Van Ast, a company spokesman.

Both companies are monitoring the political situation closely. (Chevron won’t start exploring until there’s legislation from the Ukrainian parliament supporting its operations.) But it’s fair to say nobody is watching more closely than Putin to see who’s fracking and who’s not.