Rising shale gas production in the United States and Canada as well as potential natural gas supplies from Iraq could be pivotal in curbing Russia's ability to organize an "energy weapon" against European consumers, according to a new study released today by Rice University's Baker Institute for Public Policy. 

The study, "Russia and the Caspian Basin in the World Energy Balance," examines Russia's evolving energy relations with its Caspian neighbors, the Organization of Petroleum Exporting Countries and the West and considers potential scenarios for Russian and Caspian oil and natural gas strategies.

"Maintaining favorable tax conditions to support investment in onshore shale gas resources in the United States can play an important role of containing Russia's leverage over an increasingly global natural gas market," said Kenneth Medlock, a Baker Institute researcher and lead author of the study. "In addition to North American resources, our scenario analysis shows that there are several supply sources that can serve as viable alternatives to heavy future global reliance on Russian natural gas." 

The level of investment made by small U.S. independent oil and gas companies could be negatively impacted by proposed new tax changes such as the abolition of IDC (intangible drilling costs) credits and adjustments in the depreciation allowance because in many cases, smaller drilling companies do not have the scale to absorb additional costs. 

Medlock said that Russian efforts to organize a "gas troika" among three of the largest natural gas producers – Iran, Russia and Qatar – would result in all members of the troika losing significant market share over time with only minor, short-lived gains from higher prices. The development of alternative supplies from a variety of other sources, including North America, North Africa, Australia and Iraq, would serve as counterweights to attempts by the troika to exercise any market power. "Ironically, Russia could be one of the biggest losers in this scenario," Medlock said.

Nonetheless, the Baker Institute recommends that the United States and Europe work together to promote the development of additional natural gas storage capacity (perhaps a strategic stockpile), particularly in Europe, to enhance energy security in the emerging global natural gas market. "Storage is vital to overcoming short-term market disruptions, but it is likely that market reform will be a precursor to substantially enhancing Europe's storage capability," Medlock said.

The study also notes that concerns about the vulnerability of Eastern European countries such as Ukraine and Poland could be best addressed by helping to finance projects to diversify the natural gas supplies of those countries. 

The Baker Institute researchers recommend that the Obama administration consider new approaches to counter Russian interference in the energy sector of the Central Asian energy states and transit states in the Caucasus. The Baker Institute said U.S. diplomats should focus more on resolving territorial and ethnic conflicts in the region and on promoting overall energy market transparency and liberalization than on reviving stalled pipeline diplomacy.

"For all the United States' good intentions, U.S. pipeline diplomacy has not managed to significantly reduce the dependence of Central Asian states on Russia to transport their energy supplies," the study's authors wrote.

Although there was little damage to the U.S.-backed Baku-Tbilisi-Ceyhan pipeline and the Baku-Tbilisi-Erzurum pipelines that extended through Georgia during the Russo-Georgia war of 2008, the operation of Georgian ports was seriously disrupted, making apparent the risks that either accidental or deliberate damage could take place at Russian hands.

To access the executive summary of the study, visit http://www.rice.edu/nationalmedia/multimedia/2009-05-07-RussEnergyExecSu...