the shale gas boom: the global implications of the rise of ... · to unconventional gas resources,...

The Shale GaS Boom

antto Vihma FIIa BRIeFING PaPeR 122 • February 2013

U L KO P O L I I T T I N EN INS T I T U U T T I

U T R I K E S P O L I T I S K A INS T I T U T E T

THE F I N N I S H I N S T I T U T E OF I N T E R N AT I O N A L AFFA IR S

122

The GloBal ImPlIcaTIoNS oF The RISe

oF uNcoNVeNTIoNal FoSSIl eNeRGy

• Theshalegasboom,therecentandrapidcommercializationoflarge-scaleshalegasproduction,hasmadetheUSself-sufficientinnaturalgasandhasconsiderableexportpotential.GasissettobecomethebiggestfuelintheUSenergymixandhashelpedtheUStocurbitsgreenhousegasemissions.CheapgasisalsoreinforcingthetrendofrisingindustryinvestmentintheUS.

• TheimpactsoftheUSshalegasboomarealreadybeingfeltinEuropeandAsia,forexampleviacheapercoal.The‘coalrenaissance’inEuropecanstillbeavoidedeitherbyacarbonpriceorotherformsof regulation.Restoring the ability of theEuropeanEmissionsTrading System to guideinvestmentsisthebestsolution,andcanbedonesimplybysettinganadequateemissionscapforthepost-2020period.

• Globally,theriseofunconventionalfossilenergysourcesmeansthattheenergymarketsofthecomingdecadeswillmove towardsamorecompetitiveand fragmentedorder, inwhichmanyenergyimportingcountriesalsoutilizesignificantdomesticresources,andareabletobalancetheirimportswithregionalexportersandthemajorglobalplayers.

• ThesedevelopmentspointtoaweakeningRussiangripontheEuropeangasmarket,andproblemsforRussianexportrevenuesingeneral.OtherstateslagfarbehindtheUSinshalegastechnology,butwilltrytoreplicatetheUSexperiment,whileRussiawillstrivetopreventthisfromhappeninginitsneighbourhood.

The Shale GaS Boom

FIIa Briefing Paper 122

February 2013

The GloBal ImPlIcaTIoNS oF The RISe oF uNcoNVeNTIoNal FoSSIl eNeRGy

Global Security research programme

The Finnish Institute of International affairs

U L KO P O L I I T T I N EN INS T I T U U T T I

U T R I K E S P O L I T I S K A INS T I T U T E T

THE F I N N I S H I N S T I T U T E OF I N T E R N AT I O N A L AFFA IR S

antto Vihma

Researcher


The FINNISh INSTITuTe oF INTeRNaTIoNal aFFaIRS 3

Therecentsuccessstoryofcommercializinglarge-scaleshalegasproductionintheUScanbeconsid-eredamong themost significant events inglobalenergyandclimatepoliticsindecades.WhatdoestheUS shale gas story suggest about global andEuropeanclimatepolitics?IstheUSshalegasboommerelythefirstsignofanewstrategicworldmap,aswasrecentlysuggestedbyaprominentanalystin Foreign Affairs?1Thisbriefingpaperpresentsananalysisofandpreliminaryfindingsonthesemulti-faceteddilemmas.Whilemanyopenquestionsstilllingeraroundtheglobalpotentialofunconventionalgasandoil,itisalreadyrecognizablethattheirtri-umphintheUSisaffectingpatternsoftrade,pro-ductionandclimatepolicieselsewhere.

A grey revolution: Shale gas in the US

Shalegas,namelynaturalgastrappedinshalefor-mations,isthemostsignificantsubcategoryofso-called‘unconventionalgas’resources,whichalsoincludetightgas(naturalgasinsolidrock)andcoal-bedmethane(naturalgasinsolidcoal).Thelarge-scaleexploitationoftheseresourceshasbegunonlyrecently,enabledbythecombinedprogressintwokeytechnologies:horizontaldrillingandfracking.Hydraulic fracturestimulation,or ‘fracking’, isatechniqueinwhichwater,sandandcertainchemi-calsarepumpedintothedrilledholestocreatealargenumberoffracturesintheshalerock,inordertountapthenaturalgastrappedinshales.Similarlyto unconventional gas resources,many differentkindsofunconventionaloilreserves(oilshale,tightoil,oilsandsandothers)havebeentakenintocom-mercialuse,mainlyinNorthAmerica.

There are large potential reserves of shale gas inmany parts of theworld, notably China, theUS,EuropeandAustralia.According to InternationalEnergy Agency (IEA) estimates, unconventionalsourceshaveadded325trillioncubicmetres(tcm)tothecurrentglobalnaturalgasreserves,withcon-ventionalsourcesaccountingfor462tcm(Figure1).Thereisalwaysconsiderableuncertaintyassociatedwiththeassessmentofreservesandresourcesforgasandoil.Mostestimatesareprovidedbygovern-mentsorprivatecompanieswithoutclearanalysisorverification.Therearenoagreedstandards for

1 Tucker,A.‘NewPowerMap’,Foreign Affairs,2012.

concepts such as ‘proved’, ‘probable’, ‘possible’,‘recoverable’ or ‘reasonable certainty’. Uncon-ventionalgas resources in regions thatare richlyendowedwith conventional gas are often poorlyknownandcouldbemuchlarger.Time-seriesstud-iesonspecificregionsshowanotablerisingtrend.TheIEAisalreadytalkingabout‘thegoldenageofgas’.2

NaturalgasiswellonitswaytobecomingthelargestsourceofenergyintheUSduetotheshalegasboom.It currently contributes about 27 per cent of thetotalprimaryenergysupplyandwillovertakeoilinthemid-termtobecomethelargestfuelinthepri-maryenergymix.UnconventionalgasreserveshavealreadymadetheUSself-sufficientinnaturalgasforthe foreseeable future, and provide considerableexportpotential.SeveralanalystssaythattheUS,oratleastNorthAmerica,isalsolikelytobecomeenergyself-sufficientinacoupleofdecadesduetounconventionalgasandoil.EventheOrganizationofthePetroleumExportingCountries(OPEC),theconventional oil exporters’ trade bloc, acknowl-edgedforthefirsttimein2012theimportanceof‘recentsignificantincreasesinNorthAmericanshaleoilandshalegasproductionandtheireffects’.3

Moreover, the rise of shale gas in theUS powersectorhasbeenastonishinglyrapid.In2010,whentheproductionofshalegaswasalreadytakingoff,coal accounted for 42 per cent ofUS electricityproduction.Just18monthslater,coalhaddroppedabouta quarter,contributingone-thirdofthetotal,approximatelyonaparwithnaturalgas.Themainreasonforthisdramaticdropincoalconsumptionwastheincreasedsupplyandcheappriceofnaturalgas.ThespotpricefornaturalgasintheUSAhadfallenfromitspeakof$13/millionBritishthermalunits(mBtu)inmid-2008downtoanincrediblylow$2/mBtu inApril2012.Theserock-bottompricescanbepartlyexplainedbyvaluablesideproducts,liquidcarbons, the inelasticityof gasproductiononcestarted,andtheensuingoversupply.However,mid-termandlong-termpricesintheUSarealsopredictedtostaylow,around$4-6/mBtu(Figure2).

2 InternationalEnergyAgency,‘WorldEnergyOutlook2012’,

OECD/IEA2012.

3 Reuters,‘OPECacknowledgesshaleoilsupplymaybesignifi-

cant’,8November2012.


Figure 1: Remaining ’techically RecoveRable’ natuRal gas ResouRces accoRding to iea’s late 2011 estimate

shale gas

small amounts of shale gas have been

produced for more than 100 years in

the Us, but recently its production

has boomed due to technological

advances.

share oF global conventional and Unconventional natUral gas

global distribUtion oF conventional and Unconventional (shale gas, coalbed methane, tight gas) resoUrces

Unconventional natural gases conventional natural gases 462 tcm328

tcm

oecd americasUnconventional 67tcm

conventional 47tcm

total 114tcm

latin americaUnconventional 48tcm

conventional 32tcm

total 80tcm

oecd europeUnconventional 22tcm

conventional 24tcm

total 46tcm

africaUnconventional 40tcm

conventional 49tcm

total 89tcm

asia-PacificUnconventional 94tcm

conventional 43tcm

total 137tcm

eastern europe / eurasiaUnconventional 44tcm

conventional 144tcm

total 188tcm

middle eastUnconventional 12tcm

conventional 125tcm

total 137tcm

tight gas

some natural gas reservoirs are

locked in extra ordinarily imper meable

hard rock, making the underground

formation extremely “tight.”

coalbed methane

coalbed methane is distinct from a

typical conventional gas reservoir, as

the methane is stored within the coal

by a process called adsorption.

the light circle represents the total amount of recoverable natural gas resources (in trillions of cubic metres) in the specified region.

the dark circle inside represents the amount of unconventional natural gas resources in relation to the total.

data source: iea World energy outlook 2012, p. 134. image: daniel Foster.


While thepriceofgashasrecoveredslightly, thetrendofgasbeingcheaper thancoal seemstobeholdingsteadyintheUS.Inthebroadereconomy,cheapgasisreinforcingthetrendof‘back-sourcing’or‘repatriation’ofindustryintheUS.Intheperiod2006-2011,thefastestgrowingUSsectorbyfarwasthemining,oilandnaturalgas industries,wherejobs expanded by nearly 60 per cent, creating atotalof500,000newandrelativelyhighlypaidjobs.Petrochemical,fuel,fertilizerandsteelcompaniesare also among those that have committed to orare considering large investmentsbasedon theirabilitytosourcecheapenergyandfeedstocks.DowChemicals recently reported thatmanufacturershave already announced90billionworthofnewinvestmentintheUSto‘takeadvantageofitscheapnaturalgas’.AreportbyPricewaterhouseCooperspredictsthatenergy-intensiveindustrieswillcreateamillionnewjobsintheUSby2025.

Climate policies all gassed out?

US emissionshavedecreasedconsiderablydue tothefuelswitchfromcoaltogas.AftertheObamaadministration failed to push through the cap-and-tradelegislationin2009and2010,manywerehighly sceptical of whether theUS would reachitsinternationalpledgeofa17percentreductioningreenhousegasemissionsbelow2005levelsby2020.NowitseemsthattheUSmayactuallymeetthisgoal,althoughadditionalpoliciesandmeasuresareneeded:thetotalgreenhousegasemissionshave

alreadydroppedalmost11percentfromthe2005baseline. In retrospect, theUS would also havereacheditstargetforthefirstcommitmentperiodoftheKyotoProtocolhadthecountryratifiedthetreaty it originally signed in 1997. Shale gas andrenewablesarethemaincontributorstothedeclineinUSemissions.Theenergyproduction-relatedCO2emissionsclimbedalmosteveryyearbetween1990and2007,butsincethe2007peaktheyhavefallenbyanestimated13percentandin2012wereattheirlowestsince1994.TheUScaseshowsthatifuncon-ventionalgasreplacescoal,itcanbeaneffectivetoolforcuttinggreenhousegasemissions.4

Fromaglobalperspective,thepictureisnotsorosy.Forone,theAmericancoalsectorhasadjustedtotheshalegasboomintwoways:byshuttingdownpro-ductionandincreasingexports.Coalproductionfell100milliontonnesin2012,whichisaround10percentofthetotal.Second,UScoalexportsroseabout25percent,upto66milliontonnes.TheinfluxofAmericancoal,coupledwiththesomewhatslowingChinesedemand,decreasedcoalpricesinEuropeby

4 Thelifecycleemissionsofshalegashavebeenthesubjectof

numerousstudiesrecently.Theyareestimatedtobe1-8per

centhigherthanconventionalpipelinegas,andapproxi-

matelyonaparwithconventionalLNGimports.However,

incomparisontocoal,shalegasemissionsaresignificant-

lylower,withestimatesrangingfrom41to49percent.See

‘ClimateimpactofpotentialshalegasproductionintheEU’,

ReportforEuropeanCommissionDGCLIMA,27June2012.

300

100

50

150

200

250

2005 2006 2007 2008 2009 2010 2011 2012 2013

Figure 2: natuRal gas PRice indeXes 2005–2013 Indonesian liquified natural gas in Japan

Russian pipeline gas border price in Germany

commodity price index (includes european, Japanese and uS prices)

Spot price in the uS

data source: imF, World economic outlook, 2012, p. 31.


athirdbetweenAugust2011andAugust2012.LargequantitiesofUScoalarrivedinEurope,wheretheexpansionofcoaluseissupposedtobediscouragedbystrongclimatepolicies,andtriggeredawaveofmediastoriesabouta‘coalrenaissance’inEurope.In2011and2012,coaluseinelectricityproductiongrewsteadilyintheUK,GermanyandSpain,andtherewas even investment activity in new coal-firedplants.Whetherthiswilldevelopintoarealcomebackforcoalremainstobeseen:accordingtoanIEAanalysis,cheapcoalwillbeatemporaryphe-nomenon,withgasrecoveringitspositionby2017.

However,theinfluxofcoalhasalreadyhighlightedtheweaknessoftheEuropeanclimatepolicies,mostimportantlythepoliticalchallengesofregulatingtheEU’sprincipaltool,theEmissionsTradingSys-tem(EU-ETS).Over-allocation,coupledwiththeeffectsofthefinancialcrisis,recession,andalargenumberofcredits (800million) fromdevelopingcountriesviaflexiblemechanisms,hasledtoalargesurplus(2.1-2.4billioncredits)inthemarket,andconsequentlyalowpermitprice(Figure3).

Fromanarrowpointofview,thingsaregoingasplanned:theEUisontracktomeetthetargetsoftheETSdirective,the20percentreductionfrom1990levelsby2020.ButitisequallyclearthatthecurrentpriceofaroundfiveeurospertonneofcarbondoesnotdeliverwhattheETSwassupposedtoachievein a broader sense: it does not drive investmentto sustainableenergy,efficiency, innovationandgloballeadershipinnewclimate-friendlytechnolo-gies.Thecurrentemissionscapisjusttooloosetodothat.TheUSshalegasboommadethisveryconcreteascoalsneakedbacktoexpanditsshareinEurope.

Furthermore,cheapfossilfuelpricesaffectclimatepoliciesinseveralotherways,evenifcoalwerenotmorecompetitivethangasinEurope.Cheapfuelsdiscourageinvestmentinenergyefficiency.Whenconsideringsuchinvestments,companiestypicallyrequireashortbreak-eventimeofjustsomeyears.Asasignificantproportionofthesavingisexpectedto come from reduced fuel costs, cheaper fuelspushprojectsoutoftheinvestmenthorizon.Thisis troubling from the environmentalperspective,aswell as from thebroader social andeconomicpointofview:theIEAhasmadeaconvincingcaseforhowenergy-efficiencyimprovementscanbringmultiplebenefits.These includehealth andwell-beingimpacts,energy-providerandinfrastructure

data source: european commission.

benefits,jobcreation,andreducedenergy-relatedpublicexpenditures.

Inasimilarvein,thecheaperthefossilfuels,themoreexpensivethepoliciespromotingrenewablessuchasfeed-intariffsbecome.Thisinturnaffectsthepoliticalacceptanceofthesesubsidies.Seriousquestionscanbeposedonwhethertheequationofcuttingwelfare-statepoliciesandretaininglargesubsidiesforrenew-ableenergyispoliticallysustainableinthemidandlongterm.Somerenewables–notablybiomassandwindpower–arealreadymaturetechnologiesthatareclosetocompetitivenessinseveralcontexts.Formanyotherclimatetechnologies,theoutlookisbleak.Carboncaptureandstorage(CCS)featuresinvariousrolesinmostscenariosofglobalemissionreductionsupto2050,includingtheIEA’sWorldEnergyOutlook2012.Currently,itseemsthatnotevenpilotprojectsaretakingplaceontheground,whileinthecorridorsmanyactorsstronglyquestionthefutureviabilityofCCS. Itwillcontinue its life in the liturgyof futureenergyscenarios,asaclimatepolicydeus ex machina,butitisbecomingharderandhardertoimaginehowandwhere thecontinuous investments inCCSwillcomeabout.

AstheETSdoesnotcreatemarketsforcleanenergy,renewableshavetobesubsidizedinotherways,andwith feed-in tariffs thepolluter-paysprinciple isturned into familiar taxpayer-pays (i.e. Finland)andratepayer-pays(i.e.Germany)practices.Thisdevelopmentmakesthecurrentandfutureemissionreductionsmore expensive and uncertain. Otherinstrumentssuchasinvestmentsubsidiesareevenless effective policy tools than feed-in tariffs. Aseconomistsareapttosay,‘Youcannotpushwitharope’.

Figure 3: PRice develoPment in the eu emissions tRading system (eu-ets)


ThelackofeffectivenessoftheEU-ETSiswellknowninBrussels,buttheEuropeanCommissionfacesepicbattlesateveryturninordertorestorethecredibil-ityofitsfamedclimatepolicytool.Renegotiationsonaddressingtheoversupplyofpermitsviameanssuchas‘back-loading’or‘setaside’havebeenpain-ful,drawingresistancefromstrongindustriallob-byistsandseveralnewmemberstates,mostnotablyPoland. The financial crisis and the continuouspoliticalbattlesconcerningthefutureoftheUnionarenotconducivetoenablingtheCommissiontoactasaneffectiveregulatorofgreenhousegasemissionstrading.

Second-best regulationmayconsequentlybe theonlywayforwardonbothsidesoftheAtlanticascarbon prices are not coming about.TheUS hasfailedtopassthelegislationonemissionstrading,andtheEUseemstobefailinginregulatingitsETSeffectively. Efficiency standards and controllinglocalpollutantsarenotaseffectiveclimatepolicyinstrumentsasacarbonpricewouldbe,butmaynonethelessdrivethedevelopmentofsustainableenergyforward.Energyefficiencyimprovementsintheindustryarealreadydrivenbystandard-settingfromBrussels.

Allinall,environmentalexpertsandadvocatesinEuropeandelsewheremustrealize that theabso-lutescarcityoffossilenergy–whichaccordingtosomepopularsciencebooksseemstobeforeverjustaroundthecorner–willnotdriveenergyproduc-tiontowardssustainability,at leastnot ina timeperiodrelevantforpreventingdangerousclimatechange.Thereisnoshortageoffossilfuels,buttheremightbeashortageofconventionaloilandgas.

Many researchers and NGOs still promote theneo-Malthusiannarrativeinwhichearlyactiononrenewables,energy-saving,andenergy-efficiencyinvestments will be rewarded by sharply risingprices,theso-called‘peak-oil’,andthusrepresenta true economic win-win opportunity. Severalauthors have claimed that the growing Asiandemandcoupledwiththerisingproductioncostsof new oil and gas fields are finally making the1970’spredictionsofabsolutescarcityandtheendofaffordableenergyareality.However,thisstoryhas lostsomeof itsappeal,as itdoesnot includethemid-termprospectsofrisingnon-conventionalandnon-OPECfuelsupplies.AsGreenpeacenotedrecently,reducingglobalfossilfuelconsumptionfor

reasonsofresourcescarcityaloneisnotmandatory,even though theremay still be substantial pricefluctuationsandregionalshortages.

Morerelativescarcityandhighpricesmaystillbeafeasibleconsiderationforthelongterm,althoughitisbecomingincreasinglydifficulttopredictresourcepricesfor2035.Ifsuccessful,large-scaleandglobalclimatepoliciescanbringconsiderableco-benefitsthroughdecreaseddemandandreducedfuelprices.As the low carbon pathway in the IEA’s WorldEnergyOutlookpointsout,evenwithasignificantdiscountrate,reducedfuelpricesandsupply-sideinvestmentswouldresultinmassivesavings.

The changing geoeconomics of gas and oil

The transformation of theUS into producer andpotentialexporterofliquefiednaturalgas(LNG)hasfreedupconsiderableamountsofsuppliesaimedattheUSmarketfromcountrieslikeQatar.This,com-binedwiththehighoil-linkedpricesofRussiangas,hasmadeLNGanaffordablecompetitortopipelinegasinEurope.Moreeffectsinasimilarveinaresettofollow:increasedLNGproductionintheUSandAustraliawillmakethemarketsmorecompetitiveandintegratedforNorthAmerica,EuropeandAsia,andcheaperpriceswillcontinuetoincreaseLNG’sshareinenergymixesaroundtheworld.TheUSandtheMiddleEastwillaimfortheEuropeanmarket,andAustralia for post-nuclear-power Japan andelsewhere in Asia. Considerable investment willbedirectedtowardsliquefactionandregasificationcapacityinexportingcountriesandmainconsumers.

Furthermore, there is pressure on longstandingarrangementssuchasoil-linkedgascontractsforpipelinenaturalgas,notablythosebetweenRussiaandEurope.Empoweredbytheprospectsofdiver-sifyingtheirgassupply,EuropeancustomershavebeguntorenegotiatetheircontractswithGazprom.TherecentPolishagreementwithGazpromtocutthegaspriceby15percentisthelatestinaseriesofcaseswhereGazpromhasagreedtoamendcontractswithbigEuropeancustomersincludingGermany’sEon and RWE, Italy’s Eni, and France’s Gaz deFrance.The trend is pointing towards spot pur-chases–short-termcontractswithmarketprices–asopposedtolong-termdealsinwhichthepriceisdependentonthatofoil(whichGazpromstronglyfavours). It is expected in the long termthat the


oilandgaspriceswillnolongerbelinked.TheEUCommissionhasalsofeltboldenoughtorebelandhaslaunchedformalinvestigationsintoGazprom’spricingandanti-competitivepractices.

TheKremlindoesnotallowGazpromtousemarketprices domestically, and domestic sales accountfor60percentofGazprom’sproduction.Tokeepon subsidizing Russian households, municipali-ties and industry, the remaining40percenthasto be sold abroadwith awidemargin.The shalegasboomishittingGazprom’sproductiongrowthprospects, pricing power and revenues. Still inmid-2010GazpromCEOAlexeyMillerimpliedthatnon-conventionalfossilfuelswillremainamarginal,luxuriousproduct:‘Ifyoulikefoiegras,thatdoesn’tmeanyounolongerneedaregularsteak’.5HoweverwiththeUSpoisingitselftobecometheenergygiantofthe21stcenturyduetoshalereserves,suchwittymetaphorssoundhollow.

Meanwhile,unofficially,Russiahasbeenactiveinslowingdowntheeffortsofitsneighbourstoutilizetheirshalegasreserves.ThecommonaccusationisthatRussiaimposesconditionsonthecompaniesitcooperateswith–youcannotdobusinessinRus-siaand invest inshalegas inCentralandEasternEurope.Perhapsthemostsignificantexamplewhichhasbeenfloatedwastheexchangeofacooperationagreement onArctic oilwith ExxonMobil for itswithdrawal from the potentially large shale gasdepositsofPoland.InJanuary2013Shellannouncedits$10billioninvestmentinUkrainianshalegas,andacoupleofdayslater,GazpromhandedUkrainea$7billioninvoiceforgasthecountryhadpromisedtobuybutdidnotneed.IfUkraineholdsontoitsplans, itwillbecomeself-sufficientingassupply,andbeforelong,apotentialexportertotheEuro-peanmarket.

TheUS,ontheotherhand,haslaunchedshalegasdiplomacyandcooperateswithChina,India,JordanandPolandunderitsUnconventionalGasTechnicalEngagement Program.6TheUS interest in global

5 ‘Gazprom’sMiller:shalegasis‘foiegras’butcan’treplace

‘steak’’,Russia&CISBusinessandFinancialNewswire,

10June2010.

6 ForanoverviewoftheUnconventionalGasTechnical

EngagementProgram(UGTEP),seehttp://www.state.gov/s/

ciea/ugtep/index.htm[accessed16February2013].

shalegasdevelopment ispartlycommercial,as itpossesses the leading technology andknowledgeon the complexities of shale gas production. ButWashingtonwouldalsoliketoseeincreasingenergyindependenceinthesecountries.

Therecentdramaticallyhighoilpricesof$130abar-relarerelatedtoastringofshort-termsupplydis-ruptionsinIraq,Syria,Yemen,Sudan,theNorthSea,BrazilandtheGulfofMexico,aswellasuncertaintyconcerningIran.WiththeriseofunconventionalproductionfromNorthAmericaandconventionaloilinBrazil,oilpricesmaywelldipbacktobelow$90 or $80 a barrel in themid-term; such num-bers feature inmanyscenarios.ConsultancyfirmPricewaterhouseCoopersrecentlysaidthatglobalunconventional production could push down oilpricesbyasmuchas$50abarrelin2035.ThekeyissuesaretheriseoftheAsiandemandinrelationtothisgrowingsupply,andthepoliticalunrestinmanyproducingcountries.

Several of the fundamental conditions that gaverisetothetightmarketsoverthepasttenyearsstillexist,most notably political tensions and supplydisruptions.However, it is reasonable to assumethatunconventionalsourcesaddtothesupplyandcompetitionanddoreducepricesinthemid-term.Even abundant unconventional energy reserveswill not stop the short-term fluctuations in theoilmarket,but in the long term theymayact asa backstop which pushes prices down, as highenergypricesfurtherstimulatethedevelopmentofunconventionalsources.Inthecaseofoilthishasbeenestimatedtotakeplaceaslongaspricesremainabove$70-$80abarrel.7

The oilmarket is also set to face changes as theunconventional oil production risesby largevol-umesinCanadaandtheUS,andconventionalpro-ductiongetsgoinginBrazil.TheMiddleEastwillbeonepillarofthenewoilmarket,butnolongerthecentreofgravity.ThiswillundoubtedlylessenthestrategicimportanceoftheMiddleEastasaregion,and someanalystshavehighlighted thispoint totheextremeinthecontextofNorthAmerican‘oilindependence’.However,thesupplyfromtheMid-dleEastwillcontinuetohaveeffectsonoilprices

7 IMF,‘WorldEconomicOutlook’,2012,pp.54-55.


globally, so the regionwill remain important formajorconsumers.

Next in the pipeline

From a global perspective, many questions stillremain about how easily unconventional gasresourcescanbedevelopedoutsideNorthAmerica.TheUSshalegasboomisbasedonanefficientgasmarket, flexible pricing and large indigenousunconventional resources. Shale gaswas easy todismisswhenthereweredoubtsoverthesizeoftheresource,andwhentheUSexampledidnotexist.Currently, it sets a powerful example for others.TheUSexperiencealsosuggeststhatinitial‘expertopinion’onthepotentialgeologicalresourcesandfeasibleproductionhasbeenconsistentlypessimis-tic,andinmanycasesdownrightwrong.

Chinaprobablyholdstheworld’slargestreservesofshalegas.AccordingtotheMinistryofLandandResources,China’sgeologicalshalegasreservesandrecoverableshalegasreserveshavereached134tril-lionand25trillioncubicmetresrespectively.How-ever,testdrillinginChinahasonlyjustbegun.Inearly2013,16companies(14state-owned,2private)wonabidtoexplore19shalegasfields.However,government-cappedpricestogetherwithlimitedextractioncapacity,know-how,pipelinesandotherinfrastructurewillmakethedevelopmentofChineseunconventional gas slower than theboom in theUS.AccordingtoBritishPetroleum,above-groundfactorsmeanthat‘NorthAmericawillcontinuetodominateproduction’andthepaceofdevelopmentelsewhereislikelytobenotablyslower,‘giventhelengthychecklistof factors required fordevelop-mentofshalegas’.Inaddition,Chinesegeologicalconditions might not respond well to hydraulicfracturing techniques– although there isno evi-dencethatthiswouldbeaprobablescenario.

Europemight have a shale gas resource approxi-mately on a parwith theUS, but dense popula-tion,highlocalenvironmentalstandardsandlegalframeworks concerning land ownership posechallenges for shale gas production.AsnotedbytheIEA,alevelofenvironmentalperformanceandpublicacceptanceisneededtomaintainorearntheindustrya‘sociallicensetooperate’withinagivenjurisdiction,pavingthewayforthedevelopmentofunconventionalgasresourcesonalargescale.Vocal

publicconcernshavebeenraised inseveralEuro-peancountriesagainstfracking,andFrance,withoneofthelargestestimatedreservesinEurope,hasdeclaredamoratoriumonit. Intheeasternpartsofthecontinent,Russianpoliticalandcommercialinfluencewillcontinuetopostponeinvestments,butisinallprobabilityunabletopreventthem.Poland,Ukraine,LithuaniaandRomaniaarelikelytoroundup thefirst groupof European shale gas produc-ers.ThiswilleasetheEuropeanthirstforsecurityofsupplyandcompetitiveprices,especiallyinthecontextofdiminishingconventionalgasreserves.

Itwill take several years – probably until 2020 –beforeweknowthefullglobalpotentialofuncon-ventional energy sources, including EuropeanandChineseshalegas.Butincaseeitheroneevenpartially succeeds, lower fossil fuel prices are tobeexpected.Increasedcompetitionwill limitthemarketpowerandpoliticalcloutofmega-supplierssuchasRussia,SaudiArabiaandVenezuela.Inthisscenario,theenergymarketsofthecomingdecadewillmove towards amore competitive and frag-mented order, inwhichmany energy importingcountriesalsoutilizesignificantdomesticresources,andareabletobalancetheirimportswithregionalexportersandtheglobalbigplayers.ThespreadofshalegasproductionwillinevitablyreducedemandforRussiangas,particularlyatoil-linkedprices.Thescaleandpaceofthissignificanttransformationarestilluncertain,andmanyoftheseuncertaintieslieaboveground,inthepoliticalrealm.


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