The United States is moving away from the necessity to import large volumes of natural gas for its domestic requirements. Over the last few years it has become possible to produce vast amounts of shale gas that was previously uneconomic to extract. Between 2007 and 2012, shale gas production in the U.S. rose from 1.3 trillion cubic feet to around 8.5 trillion cubic feet, and it now accounts for almost 35 percent of total U.S. gas production, a figure that is expected to rise to nearly 50 percent by 2030. (1) This contrasts with the situation that existed just a decade ago when natural gas production in the United States was in decline: at that time the Energy Information Administration (EIA) projected that in order to keep up with rising demand the country would need to import 26 percent of its total natural gas consumption in 2020.
The combination of horizontal drilling and hydraulic fracturing, otherwise known as “fracking,” has allowed drillers to release natural gas from shale reserves that had previously been uneconomic to exploit. According to the March 2013 analysis by The American Security Project, “The Geopolitical Implications of U.S. Natural Gas Exports” (2), the enormous production has resulted in a glut of supply and rock-bottom prices, and producers hope to relieve the glut of natural gas in the U.S. by exporting surplus production, taking advantage of higher prices around the world. However, the report points out the fact that under the Natural Gas Act, first passed in 1938 and amended several times since, the export of natural gas is illegal without approval from the Secretary of Energy.
Additionally, the lower gas prices resulting from the new supply situation has lowered American electricity and energy costs and increased the international competitiveness of U.S. manufacturing industry, and so having repercussions on other countries. For example, according to the IP Journal, “German manufacturers (are) fretting about their falling energy competitiveness vis-a-vis the US, where manufacturers are benefiting from the boom in cheap natural gas production.” (3)
The Centre for Strategic and International Studies (CSIS), in “The shifting geopolitics of natural gas” of July 2013, addresses the following question:
“The global political reverberations of U.S. unconventional gas production have recently raised speculation in capitals and board rooms around the globe about the potential for this resource to shift various domestic and geopolitical dynamics”. With regard to this, the CSIS considers four fundamental areas: (4)
- The U.S. will not be a large and growing importer of liquefied natural gas (LNG) as was thought in the early 2000s, and by taking itself out of the global LNG import picture, the United States has freed up supplies of LNG to go elsewhere in the world.
- It has changed how countries with their own shale gas potential look at their energy policy decisions, especially their approach to developing shale gas resources.
- Several countries have had to reevaluate the commercial viability of their natural gas development projects given the likelihood that regional gas markets may be adequately supplied with the rapid increase in projects coming to market.
- The emergence of the shale gas opportunity has created a swell of technological optimism that has fundamentally shifted the psychology around hydrocarbon resource development. Instead of asking if the world will run out of oil and gas, many people are starting to wonder what other frontier energy sources we will be able to access as technology progresses.
In terms of shale oil, rather than shale gas, the Saudi Gazette reports in the article “Shale gas revolution changes geopolitics” (5) that according to the Price Waterhouse Cooper report “Shale oil: the next energy revolution” (6), by the year 2035 shale oil production could boost the world economy by up to $2.7 trillion, with the potential to reach up to 12 percent of the world’s total oil production – near to 14 million barrels a day – “revolutionizing” the global energy markets over the next few decades.
However, this additional supply could push down global oil prices over the next two decades, adds the PWC report, by between US$ 33 to US$ 50 relative to the EIA baseline projection of US$ 133 per barrel in 2035, corresponding to $83-$100 a barrel in real terms.
In addition to this the report makes the observation that: “The potential emergence of shale oil presents major strategic opportunities and challenges for the oil and gas industry and for governments worldwide. It could also influence the dynamics of geopolitics as it increases energy independence for many countries and reduces the influence of OPEC.”
The Gazette emphasized that the major oil exporters at the present time, Russia and the Middle East, could become “significant net losers in the long-term unless they can develop their own shale oil resources on a large scale”. Adding the suggestion that the governments of the OPEC member countries and other major net oil exporters would have to assess the likely impact of shale oil on global oil prices, on their revenues, budgets and economies, and evaluating how to respond to such challenges. (7)
There could be significant geopolitical implications in store. Wu Sike, a member on the Foreign Affairs Committee of the Chinese People’s Political Consultative Conference and member on the Foreign Policy Consulting Committee of the Chinese Ministry of Foreign Affairs, believes that the shale gas revolution initiated by the U.S. will not only change the global landscape of energy distribution but will also change the world’s geopolitical layout, and the United States will take a more dominant position in global energy distribution: (8)
“… as unrest in the Middle East continues and U.S. shale gas technologies become commercialized, the global landscape of energy resources will change and the United States will become less and less reliant on Middle Eastern oil, until this reliance finally ends. The development of this technology will have an insurmountable impact on the Middle East, the global economy and the world’s geopolitical map.”
Some of these effects have already been observed. In the case of Nigeria, as outlined in “OPEC divided over U.S. oil boom”: this important OPEC oil producer has categorized U.S. shale as a “great concern”. (9) Here one should note that Nigeria has light and low-sulfur crudes that compete directly with similar quality domestic U.S. shale oil. The country’s oil minister Diezani Alison-Madueke said: “Shale oil has been identified as one of the most serious threats for African producers”. The countries that export oil to the U.S. could lose 25% of their oil revenue as they are edged out of the U.S. market.
There are concerns about the price also: Iran’s envoy to OPEC, Muhammad Ali Khatibi, pointed out that a combination of rising U.S. shale production and tepid demand is bringing “the price down”, and this will mean problems for some OPEC members, as for example, Iran and Venezuela “who will struggle at $90”, according to Amrita Sen, chief oil analyst at London-based Energy Aspects Ltd. (10)
With reference to potential effects on the liquefied natural gas market, the increase in U.S. natural gas production will most likely mean that proposed new LNG projects in Australia, East Africa, Canada, and Russia would have to focus more on sales to Asia. (11) And as the IP Journal points out, “as the US begins to build facilities for export of liquefied gas (LNG), this capacity could have a significant effect on the price of electricity and gas in Asia. Gas prices there are now about four times those in the US. The region looks to become the main recipient of US LNG, which by lowering energy costs would improve Asian competitiveness versus the European Union (EU).” (12)
There is also the question of maritime transport to consider. According to “U.S. gas via Panama frightens LNG exporters worldwide” (13) once that the expansion work currently in progress makes the Panama Canal large enough for liquefied natural gas (LNG) tankers, the distance to ship U.S. LNG from the Gulf of Mexico to Asia will fall to about 9,000 miles from 16,000 miles: a fact that will allow U.S. exporters to compete for the Asian market. This would transform the United States from an export destination to a supplier for Japan, South Korea and Eastern China. Also to be considered in this equation is the planned joint venture between the government of Nicaragua and China to build a new ship canal through Nicaragua, just north of Panama, which will also link the Caribbean Sea to the Pacific.
In summary, one may appreciate that the consequences of the U.S. “Shale Revolution” will probably be wide-ranging and global, as well as being challenging for all those concerned – a game changer in other words.
By Stuart Wilkinson
oileconomyfocus.com
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Shale Oil: Will the “Shale Revolution” be just in the United States?
- Part I: A general view starting from the U.S.A.
- Part II: Shale in russia, china, europe, australia and latin america
- Part III: Shale in africa and asia
- Part IV: Shale and global oil and gas reserves – revealing figures
- Part V: Shale to be a geopolitical game changer
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References:
1 and 4: “The shifting geopolitics of natural gas”. The Centre for Strategic and International Studies (CSIS). By Sarah O. Ladislaw, David Pumphrey, Molly A. Walton, Michelle Melton. 26 July 2013.
2: “The Geopolitical Implications of U.S. Natural Gas Exports”. The American Security Project. Nick Cunningham. March 2013
3 and 12: “Can German industry compete?” IP Journal, 30 December 2013 by Thomas W. O’Donnell.
5 and 7: “Shale gas revolution changes geopolitics”. Saudi Express. Syed Rashid Husain. 24 February, 2013.
6: “Shale oil: the next energy revolution”. Price Waterhouse Cooper. February 2013.
8: “Shale Gas Will Transform Geopolitics”. American Enterprise Institute. Wu Sike, a member on the Foreign Affairs Committee of CPPCC. 12 February, 2013.
9, 10 and 11: “OPEC divided over US oil boom”. Downstreamtoday.com. Benoit Faucon, Hassan Hafidh, and Sarah Kent. 27 May 2013.
13: “U.S. gas via Panama frightens LNG exporters worldwide”. Reuters. Andew Callus and Oleg Vukmanovic. 6 September 2013.