Economics · Management · Politics · Strategy

Shale Gas Geopolitics

Abstract

Shale gas is the natural gas that is trapped within the shale formations. Shales are fine-grained sedimentary rocks that are considered to be rich sources of petroleum and natural gas. Over the past few years, the combination of horizontal drilling and hydraulic fracturing has given access to large volumes of shale gas that were previously uneconomical to produce. Prominent among them is the growth of shale gas development in US. This has led to the energy independence of US. Today US is in a position to export the natural gas. This event has a cascading effect on the global economic, political and security setup. In addition to this, discovery of shale gas reserves in Europe and China has further ruffled the economic and political fabric of the world. This article discusses the effects of  shale gas development on the geopolitics in various parts of the world.

Background

The origins of shale gas development in US dates back to the 1970s when there was severe shortage of natural gas in US. In response to this issue, the US government decided to fund the R & D programs and incentivize the development of unconventional natural gas.  It was private entrepreneurship Mitchell Energy, which succeeded in applying the technique of hydraulic fracturing to marl rock in the 1990s, followed by the US company Devon Energy, which perfected horizontal drilling, that led to the commercial scale extraction of shale gas, which had long been known to exist. It was this development that brought about a boom in the shale gas development. Less than decade ago, the international gas market was shaped by US imports. Today US is about to become a gas exporting nation, setting up a new trend in the international gas market and hence in the political power play. Adding to it, the discovery of technically recoverable shale gas reserves in Europe and China has further added to the number of participants in the gas market

The US Story

To understand the Shale gas Geopolitics, it is necessary to know the change in the energy sourcing of US, the second largest energy consumer of the world. The energy consumption of US in 2012 stands at 2152 Million tons of oil equivalent (Mtoe)  [as per the statistics provided by Enerdata].

The factors that led to the gas revolution in the US are the increased demand for gas from 1970s to 1990s.This was accompanied by the declining reserves of gas and increase in the price of gas. As a result, US had to import gas from Canada and build LNG import capacity. So US had to look into alternative exploration methods, leading to  growth in shale gas development that started in 1990s and continued in 2000s.Technological advances in horizontal drilling and fracturing techniques led to reduced drilling and completion times and also reduced the  cost of production. This also led to increased production of gas. As shown in the below figure, US has a potential shale gas reserve of around 1000 tcf.

sg1

Source: Business Insider

Many independent exploration and production companies, working with service providers, exploited the lower cost structures and technology to yield profitable results. Also these companies have decentralized corporate structure that enabled quick decision making in crucial areas such as asset/land acquisition and key operational decisions during the drilling and completion processes.

Huge capital available in US is another contributing factor for the growth of shale gas development. Shale gas operators have found an additional way of raising capital through Joint Ventures (JVs) with International Oil companies (IOC) and National Oil Companies (NOC).

US has become a natural gas exporter from the earlier status as an importer. Earlier, to accommodate the potential increase in imports, five new LNG import terminals were built in the latter half of the2000s and some existing facilities were re-commissioned and expanded. Current LNG import facility stands at 14 billion cubic feet per day (bcf/d).These imports have become unnecessary due to the growth in the shale gas development. Now the industry is showing keen interest in building LNG export facilities and 31 applications have been received for this, as of September 2013.The total export capacity that is proposed is 33.8 bcf/d.

U.S. Natural Gas Production, Consumption, and Trade

Historical and Projected Data

sg2

Source: EIA Natural Gas Databases and EIA’s Annual Energy Outlook 2013 Early Release, Natural Gas Section

Outcomes

1) Reduction in prices of oil and gas in the international market:

There would be a downward effect on the prices of oil and gas in the international market as the oil and gas destined to US will be freed. Also the US gas is priced far below the international gas prices.

This is another reason why the export of natural gas  is viewed as a great opportunity for the US. The figure below shows the same.

Select Global Natural Gas Prices

sg3

Source: BP Statistical Review of World Energy, 2013, June 2013

2) US Energy Independence:

The major outcome of the US energy independence will be the reduced US dependence on the oil from OPEC countries like Saudi Arabia, Venezuela, and United Arab Emirates.

As per the data available with the US Energy Information Administration for the year 2012, US imported about 10.6 Million barrels per day of petroleum from about 80 countries and exported about 3.2 MMbd of crude oil and petroleum products. This resulted in a net import of 7.4 MMbd.

2012:  Top sources of imported petroleum to the United States million barrels per day and percent share of gross and net imports
Import  sources Gross imports Exports to import source Net imports
Total, all countries 10.596 3.184 7.412
OPEC countries 4.256 (40%) 177 4.078 (55%)
Persian Gulf countries 2.151 (20%) 0.088 2.144 (29%)
Top five countries
Canada 2.955 (28%) 0.403 2.551 (34%)
Saudi Arabia 1.359 (13%) 0.001 1.358 (18%)
Mexico 1.031  (10%) 0.526 0.469 (6%)
Venezuela 0.952  (9%) 0.085 0.867 (12%)
Russia 0.477 (5%) 0 0.477 (10%)

Source: US Energy Information Administration

3) Reduction in revenue of oil producing nations:

The revenue of the oil producing nations in the Middle East and North Africa will decrease. Also the prominence of this region in the world scene will reduce. As a result, many of these countries that are suffering from deep maladies – extremist ideologies, conspiracy theories, tyranny, cruelty, etc – will see a healthy change. The rulers of these countries, who depended on revenue from oil to hold on to power, will have to move on to the path of social inclusion.

4) Reduction of military presence in the Persian Gulf:

The presence of the US Military in the area around the Persian Gulf can be reduced. Currently the fifth fleet of the US Navy operates from Bahrain and a lot of money is spent on the maintenance of the fleet and its support activities. Till now US needed huge military presence in this region so as to prevent any untoward incident from escalating to a point where it sent the oil prices sky-rocketing. Also America remains concerned about any problem that might disrupt the flow of oil and gas through the narrow Strait of Hormuz – the bottleneck that could in an instant cut off the energy supply from Saudi, Iraq, Qatar, Kuwait, and other major oil and gas producers of the region.

5) US won’t need to engage in wars like the Gulf War and the Iraq War. These wars were centered on the need to secure the sources of energy.

6)  New market destination for the gas:

With the expanding export facilities for gas in US, US allies like Japan and other European countries could become the destination markets for gas.

After the Fukushima nuclear disaster, Japan is planning to phase out nuclear energy as its energy source. US can increase its export to Japan to fill the void that would be created by the absence of nuclear energy.

Similarly, Germany is phasing out nuclear energy and turning towards other sources for energy. This opens up another opportunity for US to sell its gas.

7) US as power center to neutralize the dominance of Gas Exporting Countries Forum (GECF)

The huge availability of natural gas with US will lead to the weakening of the GECF which is seen as a cartel in the natural gas market like the OPEC in the oil market. Consequently these countries will be forced to use the gas-on-gas basis for pricing the gas instead of the oil indexed price they had been using till now. The former pricing method will reduce the price of gas in the international gas market.

The European Story

The fall of the Russian dominance:

  • In Europe, Russia is the major supplier of gas. Most of the gas is supplied to Europe through the gas pipelines. Russia continues to maintain its influence on the countries that were initially the part of the erstwhile USSR. It emphasizes this influence by managing the pipelines that draw the oil and gas from these countries into Russia before supplying it to Western Europe. Thus by occupying the key nodal points Russia continues to hold on to its influence over these countries.

EU Natural Gas Imports

sg4

Source: BP Statistical Review of World Energy 2013.

  1. Most of the Russian pipelines to Europe run through Ukraine and Belarus. Due to hostile conditions between Ukraine, Belarus and Russia, there have been disruptions in the gas supply to Europe in 2006 and 2009.Consequently the European nations will be looking out for diversification of their energy source to evade the impact of such disruptions.
  2. Germany, which relies on Russia for energy, has got it connected to Russia through the Nord Pipeline which bypasses nations like Poland and Lithuania who are critical of the Russian dominance.
  3. However, another pipeline project which takes into consideration the concerns due to the Russian dominance has been underway in the south. Those are the Trans Anatolian Natural Gas Pipeline (TANAP) and the Trans Adriatic Pipeline (TAP).These projects will be useful in transporting the gas from the Caspian region and Central Asia.
  4. Poland has got the Europe’s most favorable infrastructure and public support for Shale gas. Estimated technically recoverable shale gas reserve of Poland is 148 Tcf. Other Eastern European countries like Ukraine and Romania have started the shale gas exploration.
  5. All these efforts to find out the new sources and transport mechanisms for natural gas can reduce the Russian dominance over the region.
  6. But as US gas import needs have reduced, significant quantities of liquefied natural gas once destined for US terminals from Qatar, world’s number one LNG exporter, will have to seek markets in Asia and Europe, enabling the EU to reduce its dependence on Russian gas. Several terminals have been opened or are planned in Greece, Italy, and Poland, which has ambitions to act as central Europe’s point of entry for gas from Qatar and elsewhere.
  7. Adding to it, most of the gas export facilities in US are on its eastern coast. It means that transportation of US natural gas to Europe is a viable option. Also the US gas is priced on gas-on-gas basis and hence it is priced lower. On the other hand, Russian gas is priced on oil indexed pricing basis and hence it is priced higher. So if Russia has to stay in the competition, it will have to soon price its natural gas on gas-on-gas basis.
  8. Return of the Cold War Era:
  9.  In an interview in the ‘Natural Gas Europe’ ,Dr. Aviezer Tucker, Assistant Director of the Energy Institute at the University of Texas at Austin, mentions about  the situation in Europe being similar to what it was during the cold war era. Russia will be trying to discourage the nations from exploring shale gas as energy option, mostly on grounds of environmental hazards involved in fracking , because if that were to happen then Russia would lose its influence over these nations. Also Russia will find it difficult to sell its gas which is priced higher since it sells the gas  at oil indexed prices. At the same time, US will be encouraging the nations to explore shale gas as a means for energy source diversification. This is evident from the fact that US has been a strong supporter of the TANAP and TAP projects which secures gas supply to the Southern Europe bypassing Russia. This has led to formation of two camps of nations, one that supports shale gas exploration and the other one that opposes it.
  10. As Russia’s energy dominance is vulnerable under these circumstances and given the possibility of dwindling revenue from oil and gas sector, Russia would probably need to bring in more economic and political reforms to foster growth.

The Asian Story

China’s shale reserve:

China has huge reserves of shale gas, possibly double that of US. According to the Bloomberg business week magazine, China has 1275 Tcf of technically recoverable shale gas while US has about 637 Tcf. However China’s dependence on natural gas is minimal as of now. The energy consumption pattern of China is as follows:

Oil 70%
Coal 19%
Hydroelectric 6%
Natural Gas 4%
Others 1%

Source: Bloomberg business Week Magazine

Also, there are many other factors which impede the shale gas exploration in China.

Few among them are the challenging geography and the monopolistic nature of the oil and gas sector in China. The topography of the region of shale gas reserves is mountainous making it not easily accessible. Also the formations are folded and faulted which makes it difficult to drill horizontal wells. Also the inflexible structure of the oil and gas industry makes it difficult to seek the capital needed for the growth of the shale gas development.

Hence it will take few years before the shale gas is produced on a commercial basis in China.

Outcomes

  1. With a possible withdrawal of the US presence from the Persian Gulf, China will have to step up its naval presence in this region as China sources most of its oil from here.
  2. China will have to keep an eye on the happenings in this region to ensure that the supply of oil is not disrupted, a key role that US had been playing for years.
  3. This also mandates huge Chinese naval presence in the Indian Ocean to safeguard the sea lanes against the Somali and the Indonesian pirates.
  4. As a prelude to this fact, China has started developing the “string of pearls” strategy of securing access to bases and harbors where Chinese ships can resupply and refit. It includes Chinese partnership in building the port facility at Gwadar in Pakistan, Hambantota in Sri Lanka, Chittagong in Bangladesh and Sittwe in Myanmar.
  5. This would give China the means to project power over the routes that many other nations rely upon for their energy supply. To overcome this dominance, India and Japan have stepped up their naval activities in the Indian Ocean by conducting multi-nation joint naval exercises.
  6. Asian countries like South Korea, Japan and Taiwan, which have no natural gas resources, will benefit from greater diversity in their LNG suppliers.
  7. countries like India, who are dependent on the Gulf countries like Qatar for natural gas can demand the gas to be priced on gas-on-gas basis (Henry Hub price) instead of the oil indexed pricing basis.

Conclusion

Thus the growth of shale gas development has led to dynamic shift in the energy equilibrium among the nations. As these nations try to align themselves according to the new setup, the relations among the nations are set to get a makeover. Countries like US have gained immensely out of it. On the other hand the energy dominance of the Russia and the OPEC countries has reduced. Also the centre of power in various parts of the world will be undergoing a dramatic shift like the rise of Chinese dominance in the Indian Ocean. Many countries which depended on imports to satisfy their energy demand will be finding out ways to harness the natural gas obtained from their shale reserves to reduce their energy dependence.

By: Anup Joseph

References

  1. How shale tilts the scale, April 16, 2012, Bain Brief
  2. Natural Gas-Revolution or evolution?, Delloite
  3. EIA/ARI World Shale Gas and Shale Oil Resource Assessment
  4. The Promise and Peril Of China’s Shale Gas, April 22-April 28,2013, Bloomberg Business Week
  5. Geopolitical Threats to World Energy Markets, The Journal of Social, Political, and Economic Studies
  6. Shale Gas Changes Geopolitics by Régis Genté, Le Monde diplomatique
  7. Office of Enforcement’s 2012 State of the Markets Report – Federal Energy Regulatory Commission
  8. U.S. Energy Information Administration

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