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12 Jan, 2010 09:58

Unconventional gas poses market dilemma

Russia has the world’s largest gas reserves - but may still need up to $200 billion in investment over the next decade.

Analysts say rising unconventional gas development and slowing demand may threaten Russia’s long term market position. Unconventional today – it could become conventional tomorrow. Currently the gas which could be extracted from sand, coal, turf and shale, is called unconventional. However, the US already gets half its production from new sources. Within the EU, the UK, Poland and Hungary are still at pilot project stage.

Russia is the leader in traditional gas extraction but Dmitry Lutyagin, Senior Analyst at Veles Capital warns demand could fall.

“Europe is looking at the U.S. which has started unconventional gas extraction. Earlier technologies to extract that gas were very expensive, but new developments in technology make it cheaper. By 2025 Europe wants to extract around 100 billion cubic meters of gas from shale deposits.”

Experts say the EU gas market could be "revolutionised" if it makes the transition from traditional gas to unconventional fuel. And Gazprom should get ready for the switch, according to Aleksandr Nazarov, Senior Analyst at IFC Metropol.

“Russia could hedge those risks through long term contracts with China – Asian countries will be the main driver of consumption in the future.”

Experts say, the resource potential of unconventional natural gas is enormous, but say it’s still only potential. Russia’s Yamal peninsula has trillions of cubic meters of ready-to-go traditional gas.

But experts say Russia should hurry up while oil prices are more or less stable. Exploration in the permafrost becomes commercially unviable if oil prices drop below $50/bbl.