The Shifting Geopolitics of Natural Gas

The extraordinary pace and scale of U.S. natural gas production has managed to surprise even seasoned energy observers. As recently as 2005, U.S. natural gas production was declining—the U.S. Energy Information Administration (EIA) projected that the United States would need to import 7.89 trillion cubic feet (tcf) of gas in 2020 (or 26 percent of total consumption in 2020) just to keep up with rising demand. Instead, the situation has changed as a result of the unconventional natural gas revolution, which unlocked vast amounts of natural gas previously uneconomic to extract. Between 2007 and 2012, U.S. shale gas production surged from 1.3 tcf to about 8.5 tcf. Shale gas now accounts for almost 35 percent of total U.S. gas production and that share is expected to rise to nearly 50 percent by 2030. As a consequence of the newfound resource abundance, natural gas prices in the United States have plummeted from $13 per million British thermal units (Mmbtu) in 2008 to around $3.80/Mmbtu today (up from only $2 a year ago). U.S. natural gas resource estimates have climbed from 1,091 tcf in 2000 to over 2,300 tcf, according to a recent report, with reserve levels of 300 tcf.

The new technological applications perfected by the shale gas revolution in the United States have the potential to spread beyond North America and increase gas supplies globally. A recent world hydrocarbon resource study by the EIA and Advanced Resources International estimates global shale gas resources at 7,299 tcf—an astronomical number, especially compared with estimates just a few years ago. The study notes that shale gas resources contribute an impressive 30 percent to overall known natural gas resources.

To date, the production of shale gas has been limited mostly to the United States, though other countries are starting to explore their own resource base and evaluate commercial, policy, and logistical options for commercial production.

The dramatic reversal of fortunes in the United States triggered by the “shale gale” has implications far beyond economics. 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.

As noted in a publication released earlier this year, these are still early days for the unconventional gas development process and the technological, economic, and regulatory landscape is still emerging. As these dynamics unfold, progress will likely yield substantial changes in the ultimate production potential, environmental impact, and economic profile of many of these resource plays. Given this uncertainty and the rapid evolution of the sector, assessing the long-term geopolitical impacts of this revolution is a challenging and uncertain task.
Still, amidst the uncertainty, one fact is indisputable: the unconventional gas revolution is already influencing geostrategic energy dynamics in important ways. These changes can be summarized in four broad categories: perceptions of leverage, energy policy reconsideration, commercial competitiveness, and resource optimism.

First, contrary to the prevailing wisdom of the early 2000s, the United States is not going to be a large and growing importer of liquefied natural gas (LNG). By taking itself out of the global LNG import picture, the United States has freed up supplies of LNG to go elsewhere. The new shale gas production is also backing out traditional Canadian pipeline imports which have spurred plans for several LNG export projects from Western Canada. This is a win for global gas consumers because the existence of these extra supplies and the potential for U.S. LNG exports has given previously captive natural gas buyers additional leverage in negotiations for long-term gas supply contracts. This leverage may be limited depending on circumstance and ultimately dependent on other market forces, but it is already apparent. For example, Gazprom’s willingness to lower gas contract prices and loosen the oil-linked structure is often linked with the threat of additional LNG supplies to Europe from other countries but was also influenced by Statoil’s decision to change their contract structure for selling gas into European markets, weak European demand and European efforts to reform their internal energy policy related to gas and electricity markets through the EU’s third energy reform package. Another example to keep an eye on is Asian buyers’ desire to gain access to Henry Hub linked prices to bring about lower priced gas in the near term and greater contract flexibility than the traditional oil-linked contract price in Asia. Given Asia’s stronger demand picture and less competitive energy markets, the use of this leverage has so far not been as evident but may develop in the future as more contracts come up for renegotiation.

Second, 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. More broadly, it allows these countries to rethink the role that natural gas can play in their overall energy mix and how a domestic source of gas might alter the need for gas imports. China and Europe are both prominent examples of this. For China, the potential for additional domestic resource development could help alleviate (though not eliminate) some of the pressure to seek resources abroad and develop import options (long-haul pipeline or LNG import facilities) as vigorously as they have over the last decade. However, developing this resource domestically will require Chinese policymakers to resolve major infrastructure, water, commercial, and pricing questions that could impact regional energy balances in the long-run. For some European decision makers, the combination of a serious financial crisis and economic downturn, coupled with their goals to achieve greater energy self-sufficiency, energy efficiency, and a low carbon economy, makes shale gas development very attractive. European countries like the UK and Poland are some of the first to move forward with development. However, not all countries see the development of shale gas as the right path to pursue. Some countries, like France and Germany, are citing environmental concerns as the reason that they are not more aggressively pursuing their own shale gas potential.

Outside of Europe, large energy exporters, such as Saudi Arabia and Russia, are looking to cultivate their unconventional resource development capabilities and potential. The former is pursuing unconventional gas drilling in the Red Sea, while the latter may perceive onshore tight oil resources, along with marginal field development, to be an important strategic option for maintaining production levels without the higher geologic risks of frontier areas such as the Arctic offshore.

Third, 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. Companies have also had to evaluate their own portfolio of prospects and capital outlays in light of burgeoning unconventional resource development. Some projects currently under development are being scrutinized to be sure they remain viable and more expensive gas finds in the Arctic, deepwater Brazil, Australia, Turkmenistan, or offshore East Africa may have longer commercial timeframes for realization than would otherwise be the case if the development of shale gas in the United States were not so robust. The end result is that these countries may not be bringing in as much revenue along the same timeframe as previously thought. For regions of the world whose development depends on investment and government income generated by natural resource production, this reevaluation of project competitiveness may have significant consequences for domestic policy and economic reform.

Fourth, 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. The announcement of a methane hydrate breakthrough by a Japanese company and the ensuing press coverage is an example of this widespread technology optimism (though not without its critics). The flip side of this optimism among consumers is the potential for a psychology shift among producers, who may see their markets, influence, and power undercut.

The direct impact of this optimism on geopolitics is often difficult to discern. However, it is clear that many countries are now looking for ways to incorporate natural gas into their economies, such as the recent emphasis on natural gas vehicles in China and the United States. Natural gas is now a more pivotal part of global climate change negotiations and, within that context, countries are looking for ways to incorporate gas into a low carbon outlook. While much of the international energy dynamic was previously based on the notion of driving technology advancement in the face of resource scarcity, the shift is now towards making the most of newfound abundance and scrutinizing more carefully technological horizons where new surprises may occur.

Few doubt that the potential of unconventional gas resources will continue to shape energy markets in new and important ways beyond what has already occurred. Several key questions are still playing out and the consequences are not fully understood. However, central to those questions is whether and how countries will seek to utilize perceptions of leverage, energy policy reconsideration, commercial competitiveness, and resource optimism to their strategic advantage.

Sarah O. Ladislaw is co-director of the Energy and National Security Program and senior fellow at the Center for Strategic and International Studies in Washington, D.C. David L. Pumphrey is co-director and senior fellow of the Energy and National Security Program. Molly A. Walton is a research associate with the Energy and National Security Program. Michelle Melton is a former intern with the Energy and National Security Program.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2013 by the Center for Strategic and International Studies. All rights reserved.

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Sarah Ladislaw

Sarah Ladislaw

Former Senior Associate (Non-resident), Energy Security and Climate Change Program
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David Pumphrey
Senior Associate (Non-resident), Energy Security and Climate Change Program

Molly Walton and Michelle Melton