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.

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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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