Post on 14-Feb-2017
The impact of the shale gas "revolution"
By Eli Wærum Rognerud, Office of the Auditor General of Norway,
August 2015
Note: This paper was submitted as part of an assig nment of the Norwegian BI Executive MBA Programme
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Table of content
Introduction ............................................................................................................................................. 2
Executive summary ................................................................................................................................. 2
What is the shale gas "revolution" .......................................................................................................... 4
1. Energy markets and prices .............................................................................................................. 5
2. Developments in existing petroleum producing regions and nations ............................................ 9
3. Energy policy in consuming countries ........................................................................................... 12
4. The geopolitics of energy .............................................................................................................. 13
5. Energy companies' strategies ........................................................................................................ 16
6. Renewable energy production ...................................................................................................... 16
7. The environment ........................................................................................................................... 17
Conclusion ............................................................................................................................................. 19
References ............................................................................................................................................. 20
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Introduction
Shale gas has been described as a "revolution", our "bridge to a low carbon future" and indeed "the
biggest thing that happened to America" (shale pioneer Harold Hamm, quoted in The Guardian
2015), yet others have branded it an "environmental disaster". There is little dispute however that
the commercial exploitation of shale gas has been, and continues to be, a major game changer in the
global energy sector. Following this introduction and an executive summary, the opening chapter of
this paper briefly describes what is meant by the shale gas revolution and what technological
developments brought it about. The following seven chapters discuss the impact of the shale gas
revolution on various aspects of the energy sector.
Executive summary
Chapter one examines the immediate and potential longer term impact of shale gas on global
petroleum markets and prices, illustrating how the North American supply boom has brought a
dramatic reduction in gas prices in the US. It has also broken the traditional link between energy
prices in the global energy market, resulting in a geographically divided, three-tier gas pricing
structure in the global gas markets. The chapter further explains how changes in supply and prices
have influenced energy demand, especially in the US, and shifted the global trading patterns of gas.
Notwithstanding these major changes, the chapter points to the uncertainty still associated with
volume forecasts in the shale industry, and the multitude of additional factors at play in global
energy markets.
Chapter two goes on to discuss in some more detail the way shale gas has influenced developments
in existing petroleum producing regions and nations. The chapter focuses on developments in the
USA, as the home of the "revolution", and Qatar, as the world's leading LNG exporter and a key
player in global gas markets. Apart from levelling the American energy trade balance, it is argued that
the availability of higher quantity gas at lower prices has helped boost American economy; increasing
employment, stimulating activity in gas-demanding industries especially and improving the
competitiveness of many American exports goods. For Qatar, the emergence of American shale gas
has weakened its global pricing power and may, at least in the medium term, challenge its position as
a global "swing supplier". Finally, this chapter makes reference to how the shale boom is sought
replicated by other reserve holders; in Europe in particular.
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Chapter three takes a closer look at the impact of the shale gas revolution on energy policy of
consuming countries. This issue is closely related to the previous chapter, as main producers are also
consumers. Energy policy is further a matter of geopolitics, which is treated in chapter four. This
chapter thus gives a few examples only of policy considerations and changes that are likely motivated
by developments in gas price- and supply structures, in Europe and Asia in particular: efforts to
reduce energy dependency, increase self-sufficiency and diversify energy sources.
Chapter four discusses how the shale gas revolution is changing the geopolitics of energy; including
US' outlook on energy security and thereby the Middle East as a major "sphere of interest"; OPEC's
response to the supply shock and Russia's concern over weakening negotiating power in Europe. It is
also briefly described how energy-exporting countries may face domestic instability as a result of
falling revenues, especially in autocracies.
Chapter five examines how a few, selected energy companies have approached the new
opportunities presented by shale gas. In the US, the shale gas revolution has given rise to a number
of small companies venturing in production. A few larger players are positioning themselves to
convert US LNG import facilities to export terminals. To yet others, shale represent a strategic area of
long-term investment.
Chapter six briefly reviews the possible impact of shale gas developments on renewable energy
production. Though it is virtually impossible to demonstrate any direct and linear relationship
between supply and price of one energy source vs another, abundant, cheap gas undoubtedly
threatens to slow investment in renewable projects and reduces the competitiveness of eg wind and
solar vis-à-vis fossil fuelss for electricity generation.
Finally, chapter seven discusses various aspects of environmental impact of the shale gas revolution,
focusing on the actual extraction and production itself, possible results of changes in energy
consumption patterns, and the general issue of public environmental concern. Arguably, shale gas
remains a controversial energy source, and by no means the answer to a low-carbon future.
The conclusion summarizes the key arguments above, and reiterates how the seven key issues
discussed are mutually interdependent.
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What is the shale gas "revolution"
Shale gas, along with tight sands and coalbed methane constitutes so-called unconventional gas
resources. These are natural gas resources trapped in deep, underground rocks such as shale rock or
coal beds (Carbonbrief 2015). The resources are harder and more expensive to access than for
example conventional gas, but can be extracted using hydraulic fracturing, or "fracking", a method
whereby a mixture of water, sand and chemicals are injected into the rock formation under high
pressure, fracturing the low-permeability shale to release natural gas. The method has been used in
the industry since the nineteenth century and in the US since the mid twentieth century, but has
recently become much easier and much cheaper as a result of improved techniques and
technologies. Most significant has been the development of horizontal drilling: Having drilled a
vertical well of several hundred meters, the drill can turn 90 degrees and pierce the rock horizontally
for another several hundred meters. This gives producers access to a large sub-surface area from a
single "mother" drill hole and greatly increases the reach of the drilling rig. (Marey and Koopman
2013, 2; Carbonbrief 2015)
Shale rock is common in many parts of the world, and makes up an estimated 35% of the world's
surface rocks. As illustrated in Figure 1, technically recoverable shale gas resources exist in a number
of countries, however it is the USA that has piloted the "revolution" and today by far dominates the
industry. US shale gas production in 2012 stood at some 460 billion cubic meters (bcm) gas, followed
by Canada (80 bcm), Poland (0,66 bcm) and China (13,4 bcm) (IEA 2015b).
Figure 1. Source US EIA 2013, cited in OPEC 2014
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The development has been rapid. Between 2007 and 2014, US shale gas production grew more than
50 percent, with a five-fold increase in proven national reserves in the same period. Though not the
main focus of this paper, it should also be noted that oil production from shale deposits, so-called
"tight oil" is growing even faster than shale gas, bringing US oil production to a level not experienced
since 1970. Of total marketed gas production in the US, 60% are now unconventional gas resources.
(IEA 2014; Nyquist and Lund 2014; Statoil 2015). Though there is considerable uncertainty still
surrounding production forecasts, the IAE estimates that global natural gas reserves, including shale
gas, will last 250 years with current consumption levels, compared with 120 years when only
including conventional recoverable resources (IEA 2011, 7).
This vast increase in global gas supply has significant impact on the energy sector at large, as will be
discussed in subsequent chapters.
1. Energy markets and prices
When launching the IEA Energy Outlook Report in 2012, Executive Director Maria van der Hoeven
left little doubt about the significance of the shale gas revolution: “North America is at the forefront
of a sweeping transformation in oil and gas production that will affect all regions of the world”, she
stated to the press (IEA 2012 a). The key to this transformation is first and foremost the sheer
volume of gas production, but also the -at least longer term - possible flexibility with which US gas
can be traded.
Natural gas made up 21% of the world's energy supply in 2011 (IEA 2014), and demand is rising.
According to the IEA, gas is especially attractive to developing regions in Asia, most notably China
and India, and the Middle East, which face rapid urbanization and growing energy demand. In its
special report on gas in 2011, "The golden age of gas?" IEA outlines a scenario where the share of
natural gas in the global energy mix rises to 25% by 2035. This assumes a gas demand of 5,1 trillion
cubic meters (tcm), 1,8 tcm more than current levels.
Unconventional natural gas resources are now estimated to be as large as conventional ones (IEA
2011), and the portion of shale gas of total production is expected to grow significantly, as illustrated
in figure two.
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Figure 2 : Projections for increased shale gas production. Source: IEA 2013; Marey & Koopmann 2013
Despite vast increase in demand, EIA's 2035 scenario further assumes that average prices will remain
relatively stable, mainly due to the emergence of unconventional sources. In this perspective, the
shale gas revolution indeed has an impact on global energy markets and prices. So far however, the
most important effects are observed in the US, where a positive supply shock has fuelled demand
and at the same time a significant downward pressure on natural gas prices 2010-2014 (Fatouh,
Rogers and Stewart, 2015, 24; IEA 2015, EAI 2015a).
US gas prices are quoted by the Henry Hub1 index, reflecting the pricing point of natural gas futures
contracts traded on the NY Mercantile Exchange, NYMEX. Spot prices are given in USD/MMBtu, or
million British thermal units. From peaks well above 10USD/MMBtu in 2006-08, prices on the Henry
Hub for a period dropped below USD2/MMbtu "when suppliers rushed to drill the easiest reachable
shale plays" (Maroy and Koopman 2013, 3). Prices have now stabilized between USD3 and
USD4/Mmbtu. The developments on the Henry Hub are illustrated in figure 3.
Figure 3: Henry Hub Natural Spot Price. Source: EIA 2015
1 Henry Hub is a distribution point on the gas pipeline in Louisiana and lends its name to the index
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The US domestic effects of the supply shock will be described in more detail in chapter two, but in
terms of market position, it has moved the US from a major gas importer to a position of energy self-
sufficiency and potential net export within few years (IEA, 2012a).
The US supply boom has further broken the historically stable relationship between the price of oil
and Henry Hub Natural gas. Most importantly, it has increased price differential or spread of gas
prices between the US on the one hand and Europe and Asia and Japan on the other, resulting in
geographically divided, three-tier gas pricing structure. This means Henry Hub is selling at a fourth of
European prices and a fifth of Japanese, as illustrated in Figure 4 (Maroy and Koopman 2013, 2).
Figure 4: Broken link between energy sources. Source: WB, EIA, presented in Maroy and Koopman 2013, 2
These developments have in turn has affected the global trading pattern of gas, and to some extent
the energy mix in different regions.
As indicated above, virtually all US gas is currently traded in the domestic market as there are no
natural gas export facilities in operation yet, though several are underway. Overseas export is
expensive, requiring either a gas pipeline or LNG production facilities. As a result, LNG imports that
had been expected to reach 70 Bcm in 2010, were in fact reduced from 18 Bcm in 2005 to 4,2 Bcm in
2012. This has meant that volumes from other gas producers originally intended for the US market
has had to find new buyers. Qatar, as the world's largest LNG exporter, whose record-size LNG
compressors (megatrains) launched in 2009 expanded capacity in a low-demand period, were able to
divert volumes to both Europe and Asia. Declining demand in Europe and readily available Qatari
LNG led to a drop in pipeline imports in Europe, mainly from Russia. Russia in the period proved itself
as a "shock absorber" of an increasingly integrated market, reducing its pipeline exports (Fattouh,
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Rogers and Stewart 2015, 22). Asian demand had suffered from the financial crisis of 2008, but
rapidly recovered and soared in the 2010-11, partly due to the Fukushima disaster, after which Japan
used gas to replace its nuclear power (BP, 2014; OPEC 2014a). The Asian demand was then in part
met by the Gulf surplus created in the wake of increasing US self-sufficiency.
Notwithstanding these important supply shifts, the perhaps most important impact is possibly still to
be seen, if and when the US position itself as an exporter. Whilst the US prohibits exports of crude oil
and condensate, there are much fewer restrictions on natural gas. Export are already approved to
countries with which US has a free trade agreement (Irwin 2013), and in May this year, US president
Obama gave green light for another milestone LGN export project. Cheniere Energy's proposed
liquefaction terminal in Corpus Christie bay, Texas, became the sixth LNG to win approval for global
gas export. Over the next 20 years, Cheniere will be allowed to export up to 2.1 billion cubic feet of
LNG per day to countries with which the United States does not have free trade agreements (Dlouhy,
2015). With more than half a dozen such terminals planned, Cheniere is positioned to become one
of the world's most important gas exporters in the global energy market. "The impact we’re having
on the rest of the world sometimes surprises us," the company CEO Charif Souki told Bloomberg
(2015) earlier this year. “We’re going to represent 25 percent of the gas sold to Spain. We’re going
to feed enough gas to England to heat 1.8 million homes,” he said. Many more investors have sought
approval for similar export projects as federal policy on the issue is expected to relax further. License
to export unrestrictive of destination and a strategic geographic position means that not only export
volume, but flexibility, may pave the way for the US as the new global "swing supplier" in gas.
However, uncertainty surrounding the technical as well as financial viability of many of these
projects, political resistance and industry lobby fighting to keep the "cheap gas at home" leaves
forecasts uncertain (Blackwill and O'Sullivan 2014).
Since oil, gas and coal are to some extent substitutes, shale supply also has also had an impact on the
market of other energy sources. In the US, low gas prices has made it competitive to coal and helped
reduce consumption, though the US also has the world's largest reserves of coal. US Coal output
dropped from some 160 million MWh in 2002 to nearly 120 million MWh in 2012. Coal exports
soared in the same period, from a quarterly figure of just over 20 million MWh on 2002, to a peak
over 160 million MWh in 2012 (IAE, 2013). The US shift from coal to gas is further helped by
government policy to reduce coal, and increasing shares of renewable source in electricity generation
(OPEC 2014b). Consequently, according to OPEC (2014a, 8) "US coal has found its way into European
markets, where its relative low price coupled with low carbon prices has made it more competitive in
power generation than gas." In fact, 50% of US coal exports was absorbed by Europe in 2012 (Maroy
and Koopman 2013, 3). Also in Asia, coal is still far cheaper than natural gas, and demand outlook
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depends as much on Co2 prices and government policies as the volume of shale gas on the global
market. Analysts at Rabobank also found a strong negative price relationship between oil and gas
prices when relative supply of gas over oil increased 2000-2013 (IEA 2014; Maroy and Koopman
2013).
Finally, it must be noted that both shale gas production forecasts and assumptions about the impacts
on market flows comes with much uncertainty. "Despite the fact that shale gas holds huge global
potential, there are still uncertainties surrounding the shale gas development in other regions, such
as Asia, Oceania and Latin-America, which can impact the global gas market outlook" OPEC (2014a)
announced. Last autumn, a joint IEA-IEF-OPEC symposium discussed the prospect of natural gas and
shale gas in particular as compared with other energy sources. It concluded that "natural gas will
remain competitive only if the gas price is maintained below USD 4/MBtu", and pointed to growth
outlooks in Asia as the main point of attention in coming years (OPEC 2014a).
2. Developments in existing petroleum producing regions and
nations
It is beyond the scope of this paper to review the potential effects of the shale gas revolution on all
actors in the energy market, and the multitude of factors at interplay with increased gas supply. This
chapter therefore focuses mainly on developments in the USA, as the home of the "revolution", and
Qatar, as the world's leading LNG exporter and a key player in global gas markets.
For a country that imported 40-50% of its energy only few years ago (Ridder and de Yong, 2013), the
abundance of cheap natural gas has most obviously levelled the US American energy trade balance.
More importantly, the availability of cheap gas has significantly helped boost American economy. It is
estimated that the shale boom has already helped generate an additional 135,000 high-wage jobs in
the energy sector from 2007-2012. The development of infrastructure, drilling and rig facilities,
pipelines and rail networks could generate a total 1,7 million jobs, according to analysts at the
McKinsey Global Institute (Nyquist and Lund, 2014). For gas-intensive industries such as
petrochemicals, transportation, metals (especially iron and steel), and fertilizer, the boom has been a
"game changer", bringing about what an IHS report (Fullenbaum and Larsen 2013) termed "A
manufacturing renaissance". US has now become the world lowest-cost chemical producers outside
the Middle East (Barteau and Kota 2014, 8), and production cost on a number of goods from the gas-
fed industry is nearing that of China, improving the competitiveness of many American exports
goods. Construction, infrastructure and services are also benefitting. Looking at tax revenues, IHS
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suggests that government revenue from the unconventional sector will exceed $1.6 trillion from
2012 through 2025 (Fullenbaum and Larsen 2013). All in all, it is estimated that by 2020,
unconventional oil and gas production could boost the United States’ annual GDP by between two
and four percent (Nyquist and Lund, 2014). Marey and Koopman (2013) at Rabobank liken the
development to the ICT revolution some 20 year ago, and the boost provided for the services sector.
Tough plunging oil prices have taken a toll on profits also in the shale industry, the downturn is to
some extent spent improving production techniques and cost saving measure. This has already
brought higher production efficiency on several rigs, which can reinforce outfit and profits later
(Loveless 2015 and Harlan 2015). Shale gas also takes a prominent place on the US political and
policy agenda, as will be discussed more in chapter 4; spurring debate about which economic,
political and security priorities should inform energy strategy.
Quatar's proven oil and gas reserves comprise more than 13% of global reserves, making it the
world's third largest holder after Iran and Russia. As illustrated in Figure 6, US is now the world's top
natural gas supply holder, with Qatar in fourth place. Qatar's rate of production has been remarkable
however, rising from some 24 Bcm in 2000 to 159 Bcm in 2013, the equivalent of 5% of global
production. Effective compressors and a flexible shipping system make it a dominant player in LNG
trade, accounting for almost a third of global LNG exports in 2013 (BP, 2014). At present 65,8% of
Qatar's production goes to export (Fattouh, Rogers and Stewart 2015, 18).
Figure 5: Natural gas supply, 2013. Top 10 Countries. Source: OPEC 2014a
Fattouh, Rogers and Stewart (2015, 18) explain how until recently, "Qatar has been able to balance
the LNG market between the Atlantic and Pacific Basins, selling volumes to Europe when Asian prices
are low and directing them eastwards at times of market tightness, but continuing to place LNG
cargoes in Europe to support Asian prices" (ref the three-tier price structure described earlier). This
has given Qatar the status that Allsopp and Stern (Stern 2012) calls "the discriminating monopolist".
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There is little doubt however that the emergence of American shale gas has weakened Qatar's
global pricing power and may, at least in the medium term, challenge Qatar's position as a global
"swing supplier" . Provided that US LNG export projects on the Gulf and East coast actually come to
fruition, it is very possible that the US may take over this position globally - US produced LNG can be
shipped with cargoes both to Asia through the panama Canal, and east or south to customers in the
Europe and the Atlantic basin (Fattouh, Rogers and Stewart 2015, 37). Assuming that significant US
gas volumes reaches global market, this is further likely to enforce more flexible price indexation;
confirming the breaking between oil and gas prices but also possibly bringing greater integration to
the three-tier structure described earlier. Buyers are certainly eager to re-negotiate previous long
term gas contracts in the face of the new market realities.
For Qatar, changes to the outlook for its LNG export and limited domestic absorption capacity is also
likely to prolong the moratorium barring further developments of the North Field, the largest non-
associated gas field in the world. Uncertainty about Qatar's ability to maintain revenue from LNG gas
exports may also, longer term, bring into question the "social contract" whereby the authoritarian
regime maintains relative stability though public services and allowances financed by gas revenue (de
Ridder and de Jong, 2013); an issue also revisited in the geopolitics chapter.
Finally, some consideration must be given to those countries expecting or hoping to exploit new
shale technology of their own. As described above, shale is available many places in the world, and a
few years ago, a number of European producers and international agencies alike expressed much
expectation that the US revolution could be replicated. In 2011, EIA estimated the potential for
European shale gas at 17,000 BcM, an equivalent of 9% of global reserves in 2011, with Poland and
Great Britain as main holders (IEA, 2011). The optimism concerned not just the possibility of boosting
national revenue, but also to loosen dependence on Russia and Gazprom's gas delivery. Expectations
have since been significantly reduced; the reserves are much smaller than first assumed, and both
geological conditions and population density makes it much harder to retrieve than in the US
(Jacobsen 2014). In addition, environmentally conscientious Europeans have mobilized strong public
resistance to shale developments. Still, Poland has not given up, and remains the world's second
largest producer as before mentioned. UK prime minister David Cameron also insists that the US
shale gas revolution can be replicated in Britain (Carrington, 2015).
Beyond Europe, China, Algeria as well as Argentina hold vast unconventional resources, but lack the
regulatory framework and technical expertise to utilize this potential as of yet. South Africa, Brazil
and Australia also consider exploring their reserves. Canada's production is sharply rising, but is also
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mainly supplying domestic markets, with little integration with the US. Russian considerations and
responses are briefly treated in the following chapters. (Babali 2014, Bellelli 2013, IAE 2014)
Though there is little doubt that the North American shale gas revolution effects developments in
existing energy producing regions and countries, a number of other factors may also influence future
scenarios, as exemplified above. This includes Russia's future response to a possible European
oversupply, and a potential price war. Economic developments in Asia and particularly Chinese and
Indian gas demand will certainly also matter, so will the LNG and gas volumes provided by Australia,
Canada, Russia and East Africa. As will be discussed in subsequent chapters, politics and energy policy
are also likely to be deciding factors.
3. Energy policy in consuming countries
All countries are energy consumers, and large producers also tend to be large consumers. Energy
policy is further a matter of geopolitics, which is treated in chapter four. This chapter thus gives a few
selected examples only of policy considerations and changes influenced by developments in gas
price- and supply structures.
In the US, the shale boom has been helped along by favorable business policies and tax regimes.
President Obama in his 2013 State of the Union address explicitly backed shale gas drilling, referring
to shale and gas as "cleaner, cheaper and full of jobs". The shale boom has also influenced recent
environmental policy, such as Obama's Clean Power Plan, which treats shale gas as a "bridge" to a
low carbon future, easing the task of achieving emissions control (White House 2015). More
stringent emissions targets and regulatory measures are made easier by the gas boom, as shale gas
replaces more polluting coal. At the same time, it has negatively impacted the national effort and
effectively undermined the short-term market for developing low-emission technology, such as
carbon capturing technology for coal and gas. (Jacoby, O'Sullivan and Paltsev 2012).
In the EU, energy security has been a key goal for some time. The main tools are policy and
regulation that stimulate diversification of energy sources, reduces external (especially Russian)
energy dependence, and fosters development of national projects of self-sufficiency. Though not
directly linked to the shale gas boom, increased global gas supply and more integrated markets
positively factor into these policy considerations. The European Commission's ‘Energy Roadmap
2050’ for example highlights gas as critical for the transformation of the energy system, whilst
maintaining ambitions for a 27% renewables share by 2030. The European Parliament has
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specifically called for members states to ensure that "administrative and monitoring resources are
adequate to sustainably develop shale gas" (Bellelli 2013, 15). Noticeably, the new EU climate goals
launched at the World Economic Forum in Davos in 2013 does not contain any supra-national
limitations on neither exploration not drilling for shale gas; a results in large credited to British and
Polish lobbying efforts (Jacobsen 2013). A policy brief by the EU Directorate- General for External
Policy nonetheless concludes that "all things considered, a replication of the US is not probable, given
the low level of public support" (Bellelli 2013, 17).
China has a fast growing economy and a rapidly expanding, urbanizing population, creating a strong
need for new energy sources. Though not yet a shale gas producer, national companies are exploring
options for developing domestic reserves whilst also investing in US shale. Disastrous air pollution
has accelerated the urgency to reduce the share of coal as the country's prime energy source. Shale
advancements in China are backed by a national energy plan stating that 6% of the country's energy
will come from shale gas by 2020 (Yang, 2012). Asia being the fastest growing natural gas market,
China is also driving the longer-term prospect of an Asian hub for trading of natural gas. Currently
Asian prices are still largely determined by long term contracts indexed to oil, which in part explains
the large spread in global gas price described in chapter 1. This of course has impact on the
competitiveness of Asian goods from gas-dependent industries. The IEA in 2013 suggested the lack of
infrastructure and strong national regulation rendered the prospects bleak for an Asian gas hub.
Since then however, the shut-down of nuclear reactors in Japan, a growing price spread and
increasing Chinese appetite for gas are raising the stakes for strong regional and eventually global
market convergence. Professor Jonathan Stern, chairman of natural gas research program and senior
research fellow of the Oxford Institute of Energy Studies in fact predicts "we will be trading at
Shanghai prices by 2020" (Granger 2015). One way or another, the region's large consumers are
attentively watching the shale gas revolution, looking for ways to increase energy self-sufficiency and
industry competitiveness.
4. The geopolitics of energy
Geopolitics is concerned with the relationship between geographical space (and to some extent
historical and social factors) and the power of nation states, specifically how the control over
territories and resources influences political power and political and economic outcomes. Power is in
turn defined as the ability to influence or control others' behavior (wikipedia.com; reference.com
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and lecture notes 15 June 2015). Many of the issues discussed under the previous headings of prices,
markets and policy could thus also be framed as issues of geopolitics. This chapter therefore focuses
on a few selected developments observed in the wake of the shale gas revolution; including US'
outlook on energy security and thereby the Middle East as a major "sphere of interest"; Russia's
concern over weakening negotiating power in Europe and OPEC's and especially Saudi Arabia's
strategic response to the supply shock. The Asian desire for creating a regional pricing hub has
already been mentioned. With reference to the Qatari example above, it is also briefly described how
energy-exporting countries may face domestic instability as a result of falling revenues, especially in
autocracies or so-called "anocracies".
Energy independence has been the "the holy grail of American leaders over the past four decades,
from Richard Nixon to Barack Obama" (Anderson, 2015). Thanks to shale, that dream is closer than
ever. According to IEA projections, the US will in fact be energy independent by 2035 (IEA 2013). In
geopolitical terms, it would mean first and foremost a welcome end to the troublesome dependence
on countries such as Saudia Arabia, Iraq and Venezuela. The dependence on politically unstable and
authoritarian regimes is of course uncomfortable for US politicians, but also an issue of security.
George W Bush termed it "an urgent national security concern" and certainly had this in mind when
intervening in the Iraq-Kuwait conflict in 1990-91. Though the issue is complex, security concern is at
least in part explanation for the US' strong military and political presence in the Middle East: The
protection of infrastructure and transport routes along the Strait of Hormutz and the strategic
partnerships maintained with key producers such as Kuwait and Qatar and the Gulf Cooperation
Council (de Jong 2013). Energy independence may therefore motivate a partial disengagement of the
US from the Middle East. At the same time, the global "war on terror", Islamic radicalization, historic
ties with Israel and the recent nuclear agreement with Iran will certainly remain priority issues in
American foreign policy.
A number of countries are closely watching energy development in the US as a matter of political
concern. Last year, the US surpassed Russia as the world’s leading energy producer, and by next year,
according to projections by the International Energy Agency, it will shortly overtake Saudi Arabia as
the top producer of crude oil. (Blackwill and O'Sullivan 2014). This is of major concern to both
countries.
Russia is the world's largest natural gas producer, and the rise of the US as a potential swing supplier
on the global gas market would represent both an economic and political nightmare. 70% of Russian
is sold to Europe, transported by pipelines running through Ukraine. A threat to its position as a
dominant energy supplier is of course also a political threat. Though the motivation for Russia's
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meddling in the Ukrainian-EU negotiations, the annexation of Crime and the meddling in the East-
Ukrainian conflict is complex, there is little doubt gas plays a part in it. In 2014, when Royal Dutch
Shell concluded a USD 10 billion production sharing agreement with the Ukrainian state company
Nadra Yuzivska, the biggest deal on European shale gas till now, it was considered a major blow for
Russian President Vladimir Putin. Due to the conflict in the eastern part of the country however, Shell
in June this year issued a withdrawal notice on the project, quoting Force-Majeure (ie circumstances
beyond Shell's control). This implicitly announced "game over" for one of Europe's most promising
shale gas projects. The withdrawal came just months after American company Chevron notified it as
also pulling out of a major gas exploration project in the west of Ukraine and illustrates what
Financial Times called "heightened geopolitical risk".
OPEC holds 40% of all explored petroleum resources in the world, and 80% of known resources, of
which 85% are of in the Middle East. Saudi Arabia, Iran, Iraq and Qatar are, along with Russia, the
world's biggest producers and exporters of oil and gas today (IEA, 2014b). OPEC has traditionally
been able to control global oil prices through concerted efforts to adjust member's production, with
Saudi Arabia the "sultan of swings". Though the specific role of shale gas in the recent oil price drop
is uncertain, it is sure that this time around, "Saudi Arabia and other key members are showing no
sign of wavering in their focus on defending market share instead of prices" Reuters reported. The
lack of a plan by OPEC to accommodate the return of more Iranian oil following the signing of the
nuclear deal2, has further confirmed OPEC's weakening position as the global price setter on oil. Iran
expects to raise output "by 500,000 barrels per day (bpd) as soon as sanctions are lifted and by a
million bpd within months, its Oil Minister Bijan Zanganeh has said." (Economic Times, 2015).
Finally, it should also be noted that many of OPEC's principle actors actively use their energy politics
to uphold autocratic regimes though highly subsidized energy to own populations and generous
welfare regimes funded by petroleum revenue. The same revenues have bought influence in the
region: Qatar's support for Sisi's regime in Egypt and Iran's support for Hezbollah in Lebanon and the
Assad regime in Syria are some examples. (Gause, 2015). It can be argued that for these countries, as
is the case for Russia, falling revenues represent a potential domestic destabilizing effect, and a treat
also to regional influence.
In sum, countries relying on petroleum revenues for domestic services and/or using energy for
foreign policy purposes, especially when counter to American interest, are likely to see their
influence shrink. Consumers can welcome the revolution.
2 Officially known as the Join Comprehensive Plan of Action signed between the permanent members of the UN
Security Council plus Germany, Iran and the EU.
16
5. Energy companies' strategies
The shale gas "revolution" has also, if not revolutionized strategy in energy companies, driven
significant adjustments in companies across the entire energy sector. How companies have adjusted,
of course depend on current production base, technical experience and comparative advantage, and
geographical location, but few remain indifferent.
In the US, the shale gas revolution has given rise to a number of new, small companies venturing in
production. A Forbes analysis of the world's largest oil companies notes how the shale boom is led by
dozens of smaller, independent operators generating just 200 boe per day (Helman, 2015). Many are
relying on bonds and equity sales to raise capital. Some larger players have entered the field. Exxon
aquired XTO Energy for $40 billion. Chevron and Shell have secured land in the Marcellus play, the
largest producing shale basin in the US, and BP and Total partnered with Chesapeake Energy, an
industry-leading actor in the unconventional pays in the US (Helman, 2015). A few companies, such
as Cheniere Energy, Qatar Petroleum and Exxon Mobile are positioning themselves to convert US
LNG import facilities to export terminals, as already discussed (Fattouh, Rogers an Steward 2015, 24).
As a capital intensive industry, still with large overheads and a very strong price pressure as
previously discussed, few of these large players have actually been able to capitalize on their
investments, however. Shell has been losing on their investments in the US two years in a row
(Helman, 2015), but has made unconventional resources as a strategic, longer term priority (Shell,
2015). Similarly, Statoil (2015) describes share gas reserves and other unconventional sources as an
important area of growth for the company, as it significantly increases the long-term reserve base.
The company highlights its "history as a pioneering company and its technological commence" as an
important conditions for its "strategic ambitions" in shale gas. By and large, hesitation or long term
investment seems to be the going approach of leading sector companies, a strategy that reflects well
the industry outlook.
6. Renewable energy production Governments and leading energy agencies alike predict that the future is renewable. According to
IEA (2014a), renewables are the world's fastest-growing power source measured in % growth.
Renewable energy sources are expected to rise to 25% of gross power generation in 2018, up from
20% in 2011. Bloomberg (2015) bravely announced that "Fossil fuels just lost the race against
renewables".
17
In real numbers however, fossils still remain the major sources in the global energy mix. Moreover,
since energy sources are to some extent substitutes, a dramatic supply increase or price drop in for
example natural gas will therefore, at least longer term, affect investments in and demand for
renewable energy. Solar and wind -the fastest growing renewable sources, are different from fossils
as they are used almost exclusively for power generation (Radof et. al. 2014, 44), but could still in
theory replace a large portion of the demand for oil, gas and coal (IEA 2013). The attractiveness of
renewables however depends in large part on their availability and price. Today, the price of solar
energy vs. gas/coal is estimated at $1: $0,30- 0,90. At the same time, wind and solar sectors tend to
be net recipients of government support; i.e. are highly subsidised3 (Radof et. al. 2014, 10).
The shale boom poses a particular challenge to the "green energy shift". The EIA’s Annual Energy
Outlook 2014 predicted renewables would supply just 16% of US electricity demand by 2040. Shearer
et al (2014) demonstrated how abundant natural gas "will delay the availability and price
competitiveness of lower-carbon renewable sources" and concludes that natural gas may in fact have
a net negative effect on greenhouse gas emissions. At the IAE, the link is made specifically between
shale gas and slowing developments for renewables. According to the agency's chief economist, Fatih
Birol, "renewable energy may be the victim of cheap gas prices if governments do not stick to their
renewable support schemes." (IEA 2012). Launching the IAE's special report on gas, she warned that
"A golden age for gas is not necessarily a golden age for the climate". Indeed, if the world is to
remain within the 1C safety limit of global warming, policy measures in favors of renewables would
still have to play a major part, the agency stated.
Though it is virtually impossible to demonstrate any direct and linear relationship between supply
and price in one energy source vs another, abundant, cheap gas pushes a number of existing and
potential renewable projects further beneath break-even, and almost certainly skews demand.
7. The environment
Though shale gas undoubtedly has had major impact on energy markets, the forecasts for
exploration, especially outside the US, have been drastically moderated over the past five years. One
of the main reasons for this is environmental concern and public resistance to the extraction process.
3 A study recently conducted of energy taxation and subsidy regimes in the EU and Norway in the period 2011-2014
estimates Net transfers received from (provided to) each energy source. "The report found that EU28+Norway governments receive far greater revenues from oil, gas and coal than these energy sources receive in the form of direct subsidies or other transfers. Oil is by far the largest contributor to government revenues. In contrast, wind and solar power are net recipients of support."
18
Within the EU, Government attitudes vary, but public opinion is generally hostile, and skepticism
growing. In Sweden, Germany and Holland, as well as the UK, public resistance has forced
governments to backtrack more positive positions on shale gas exploration (Bellelli 2013; Carrington
2015; Wright 2015). Both the environmental impact of the production process and the broader
consequences for energy consumption and emission therefor merits some consideration.
Fracking in itself is a controversial process. France and Bulgaria have banned the use of the
technology altogether. The chemicals used in fracking have in some cases been proven to
contaminate ground water, such as in Colorado. The process further requires large amounts of water,
which is a considerable problem in water-scarce regions such as California. Here, 70 million gallons
were used in the industry last year, destabilizing general consumer's water supply around drilling
areas. There is also strong scientific evidence that fracking causes earthquakes, though the impact of
those quakes is usually moderate. A USGS Federal report documented a 5 times increase in quakes in
Oklahoma, listing Texas, Ohio and Arkansas as high risk areas as a result of shale activity. (IEA 2015;
Nunez 2015)
When replacing more polluting energy sources such as coal, shale gas may have positive net effect on
for example emissions volumes, since natural gas produces only half as much Co2 as coal. For this
reason, analysts and policy makers have often termed natural gas the "bridge" to a lower carbon
future, but the gains depend entirely on the production method.
Shearer et al (2014) review the effect of natural gas supply on US renewables and Co2 emissions.
Though gas produces less Co2 than coal, methane escape from fracking operation is a big problem.
The greenhouse gas is more than 20 times more potent than carbon dioxide in terms of global
warming. Leaks are rarely captured by the gas companies because of the costs involved and the
practical impunity for the -often small, entrepreneurial perpetrators. The scale of the problem is
clear to the government administration, and President Obama recently announced a target of
reducing methane emissions by 45 % under the Clean Air Act (CBC News, 2015). The US
Environmental Protection Agency (2015) estimates that without regulation however, the US can
expect to see emissions increase by 25% by 2025. In its special report on Energy and Climate Change,
the IEA (2015, 13) this year listed methane escapes as one of its key concerns.
The 11% reduction in Co2 emissions in the US in the period 2007-2013 has often been attributed to
the shale revolution. However, as Bjørnstad (2015) describes, the economic crisis and a reduction in
consumption is the most likely main effect. More importantly, as previously discussed, coal surplus
the US has simply been exported elsewhere at low price, mainly to Europe, which saw a significant
19
risk in coal consumption the last years. According to the IEA, the EU's trading scheme for emissions
has too low a price on carbon emissions to compensate for the attractiveness of cheap coal. This
example shows that gas can simply displace emissions rather than cut them altogether, according to
the IEA's chief economist, Ms Birol (IEA 2012).
As important as the environmental impact of shale production and use therefore, is the fundamental
question about the continued reliance on fossil energy sources, and what high supply at low prices
does to demand and usage patterns, including incentives for resource efficiency and green growth.
Arguably, shale gas remains a controversial energy source, and barely a revolution from an
environmental perspective. "Gas cannot solve climate change – we need renewable energy" (EIAE
Chief Economist Ms Birol to the Guardian.)
Conclusion
The previous chapter have discussed some of the main consequences of the shale gas revolution. A
rapid and dramatic increase in natural gas from US shale field in particular has driven down process
and changed market supply structures. It has also impacted policy in consuming countries and
regions, and in energy companies, notwithstanding the geopolitical and environmental impact.
Perhaps most importantly though, the paper has illustrated how the issues discussed are mutually
interdependent. Changes in one area, be it market supply, national policy or geopolitics may
mitigate, exacerbate or skew developments in another. For the same reason, the shale gas revolution
itself should not serve as a single starting point of analysis, if one wishes to understand the energy
sector. Though shale clearly has been a game changer in the industry, a broader understanding of
markets, prices, policy and geopolitics for that matter is as important in determining the outlook of
shale gas as vice versa. Finally, a number of factors not covered in any detail here, such as the current
economic crises, economic development and growth in Asia, conflicts and wars, and not least future
technological innovation could also dramatically change the sector in years to come.
20
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