Less than a decade ago the international gas market was largely shaped by US imports. Today the United States is about to become a gas-exporting nation. This change is profoundly affecting global geopolitics: Shale gas exploitation is theoretically viable in many parts of the world, especially Europe and China, so major new market players may emerge. Other countries and regions, especially Russia and the Middle East, could find their positions weakened despite the financial, technical and environmental doubts surrounding the future of shale gas as a non-conventional energy source. In the energy sector, bluffing about future potential is part of the game.
From 1945 until 2010, the conventional natural gas market was structured around the import-export flow between producing regions -- the former USSR and the Middle East -- and major consumers: the US, Europe and China. This set-up, manifest in a network of gas pipelines and diplomatic and financial agreements, required huge investment and long-term planning, and a certain predictability. Constructing and securing global supply routes created relations of mutual dependence between nations and fed the desire to interfere, encouraged by alliances.
But now energy supply is being radically reoriented in unforeseen ways. As recently as 2007, the Russian giant Gazprom selected Total and Statoil as its foreign partners to exploit the Shtokman field in the Barents Sea, which accounts for 2% of global natural gas supplies and would have required $30bn in investment. Three years later, Russia put the project on ice as the United States no longer needed Shtokman gas. Meanwhile, as well as a world energy slump caused by recession, non-conventional fossil fuels arrived on the market, a phenomenon which is “driving America’s energy revival,” according to BP’s Energy Outlook 2030.
Shale gas exploitation originated in the United States, where the combined discoveries of a Texan engineer George Mitchell, who succeeded in the 1990s in applying the technique of hydraulic fracturing to marl rock, and the US company Devon Energy, which in 2005 perfected horizontal drilling, made possible the extraction of shale gas, which had long been known to exist. This breakthrough has also made possible the exploitation of “tight gas” and shale oil. New players have appeared: Brazil, Canada and Australia.
As a result, forecasters predict that the United States will be 99% self-sufficient in energy by 2030 (compared to 70% in 2005). The importance of energy in US foreign policy in recent decades gives some indication of the upheaval ahead. The United States has already overtaken Russia as the world’s biggest gas producer. According to the World Energy Outlook from the International Energy Agency in 2012, within two or three years the United States will also have surpassed Saudi Arabia in oil production. The United States, once a major importer, could be a hydrocarbon exporter within 15 years.
Thierry Bros, author of a book on the US shale gas revolution, writes that a strong domino effect has been started by the United States’ energy revival. In the United States, shale gas is produced for a low price: At the end of 2012 it was $4 per BTU [British Thermal Unit, the standard unit of measurement] on the domestic market, compared to $18 in Asia and $10 in Europe. Bros says it becomes more profitable for the United States to produce electricity from gas rather than coal, and consequently the US is exporting coal to Europe.
To take full advantage of this new opportunity, GDF Suez has mothballed three of its four gas-fired power stations in France. The financial daily Les Echos said: “The French group is suffering from competition from cheap American coal and reduced electricity demand in Europe. Its gas-fired power stations are no longer profitable because they are not operating at capacity. On average their capacity utilisation has fallen from 42% in 2011 to 33% last year.”
If these changes in the composition of the energy market turn out to be lasting, there will be knock-on effects. Europe’s relations with Russia are one example. At the instigation of some member states, such as Germany, the EU has handled Russia carefully over many major political, security and strategic issues: Until recently, Gazprom supplied 40% of Europe’s imported natural gas. US progress towards energy autonomy indirectly changes the picture, through its knock-on effect on Qatar. Qatar is the world’s number one exporter of liquefied natural gas (LNG). LNG is shipped rather than piped, and converted back to a gas at its destination. But as US import needs have shrunk, significant quantities of LNG once destined for US terminals 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.
Is Russia a big loser in the shale gas revolution? “Yes, in a sense,” says Tatiana Mitrova of the Energy Research Institute in Moscow. “Gazprom must bid farewell to lucrative long-term contracts and abide by the logic of the market: spot prices, which will no longer be indexed to oil prices.” As a result of the recession, the formerly attractive European market is less appealing for Gazprom. In 2008 it represented 30% of Gazprom’s sales by volume but generated more than 60% of its revenue.
Since then, Russia has been eying up the Asian market: China, South Korea and Japan -- which has been seeking non-nuclear sources of energy since the March 2011 tsunami and the Fukushima accident. This shift is encouraging Russia to move from a pipelines policy -- with all that entails in terms of significant geopolitical consequences and long-term dependency -- to the more flexible LNG.
A study led by Tatiana Mitrova, which looks ahead to 2040, seems relatively optimistic about Russia’s longer-term prospects: “The ‘shale breakthrough’ has postponed for two or three decades the [global] threat of running out of economically viable oil and gas reserves ... and has secured the predominantly hydrocarbon character of the world’s energy sector. The share of oil and gas in world primary energy consumption will remain practically unchanged (53.6% in 2010 and 51.4% in 2040).” The world will enter an “era of gas,” the report claims, which means less atmospheric pollution. The International Energy Agency (IEA) forecasts 50% growth in gas consumption by 2035. Gas’ share of world energy is set to rise from 21% to over 25% in the years ahead.
As to the Middle East and the members of OPEC, should we expect a US geopolitical retreat? “I don’t think so,” says Daniel Yergin, head of Cambridge Energy Research Associates (CERA). “First, bear in mind that currently less than 10% of the Persian Gulf’s energy production is exported to the US. In volume terms, the US isn’t highly dependent on the Gulf. In spite of that, we haven’t seen the US disengage from the region. Because what matters to America is that oil should serve the global economy, its growth and the strategic importance of the Middle East.”
More and more of the Gulf’s energy output flows to Asia. “That could force China to take on political and security responsibilities, in the Middle East for example, so as not to compromise its energy security,” says Michel Meidan, an expert in Chinese energy at the Eurasia Group, a US consultancy. “China is very reluctant to do that, but it is possible that the new realities of the oil market and geopolitics will force its hand.” For the moment, China benefits from the fact that the US is willing to play the role of global policeman, since it has an interest in ensuring the Chinese economy does not collapse.
In this ever-changing landscape, China is also betting on shale gas. The potential is there, according to the US government’s Energy Information Administration, whose most recent report rates China’s resources as “technically recoverable,” at the top of the list of 42 countries surveyed. But China’s geology, which is very different from that of the United States, may make extraction more difficult and less profitable. “Energy security is an absolute priority for Beijing. In the context of revolts in the Arab world, given that more than half of China’s oil imports come from the Middle East, it is demonstrating ambition to produce shale gas. That is also why Chinese businesses are investing abroad in this sector -- to acquire the technology,” says Meidan.
Given these new Chinese resources and competition from Central Asian countries and Australia (both keen to supply China with gas), Russia is unlikely to exert energy domination over China as it did over Europe in 2000-2010.
The game has several levels. Even short-term forecasts invariably provoke counterclaims. If one energy source becomes too costly to produce and transport, the industry switches to another and tries to reduce consumption, improve efficiency and change the price-setting mechanisms. Scarcely has one change reached the consumer market when another comes along. “The shale gas revolution has already happened. What matters now in the United States is shale oil. As a result, according to the US Department of Energy, oil production will increase by 23% by 2015,” Bros claims.
The great unknown is the size of world shale gas reserves. “They are very hard to estimate. It’s not like gas in a conventional reserve. In Europe, most hydrocarbon production has happened offshore. So we don’t know a lot about what’s underground. To find out, you have to drill wells and do a production test. In Poland, our American partners in Exxon have decided not to pursue the project, after admittedly disappointing results. But only around 30 wells were drilled. We still believe that potential exists, so we’re staying,” said Bruno Courme, Total’s head of shale gas in Europe. Poland is banking on shale gas, hoping to reduce its dependence on Gazprom, and Russia, with which it has a difficult history.
Willingly or not, all the major players on the world energy market -- the United States, China, Europe and Russia -- have taken adaptive measures in the face of the “shale gas revolution,” though there is as yet no sign that any of them can foresee its long-term consequences.
Régis Genté is a journalist. Translated by George Miller.
Copyright © 2013 Le Monde diplomatique – distributed by Agence Global