It is fair to say that the development of shale gas in the United States, which is rooted in the Barnett Shale in North Texas, has become the most controversial energy development in modern history, perhaps closely rivaled by nuclear power in the 1970s. This is in part due to the fact that the large supplies of natural gas that have been thrust upon the market just in the last 10 years have pushed natural gas prices so low that renewable sources of energy are not longer economically viable. The result is a coalition of disparate interests with the goal of stopping the development of natural gas.
The overall importance of shale gas and shale oil for that matter, the production of which is skyrocketing due to the technologies of horizontal drilling and hydraulic fracturing that made shale gas possible, cannot be understated. However, the importance of shales to the U. S. extends beyond economics and the environment to our national security.
A landmark study by scholars at Rice University’s James A. Baker III Institute for Public Policy, released in mid-2011, highlights the pivotal importance for national and global security of developing our abundant domestic natural gas resources. Supported by the U.S. Department of Energy, the report uses computer modeling and economic and political analyses to demonstrate the importance of shale gas development, not only to the U.S. but also to the world as a whole.
“This study assesses the impact of U.S. domestic shale gas development on energy security and U.S. national security, with emphasis on the geopolitical consequences of rising supplies of U.S. natural gas from shale and the implications for U.S. foreign policy,” according to the authors.
One of the important conclusions is that “shale gas delays for well over a decade the world’s reliance on regions that have historically been volatile and greatly reduces the chance of any individual or group of producers exercising decisive monopoly powers. In the United States, in particular, growth in LNG imports is put off by at least two decades.” (page 29)
The authors note that natural gas—if not disadvantaged by government policies that protect competing fuels, such as coal—stands to play a very important role in the U.S. energy mix for decades to come. Rising shale gas production has already delivered large beneficial impacts to the United States. Shale gas resources are generally located in close proximity to end-use markets where natural gas is utilized to fuel industry, generate electricity and heat homes. This offers both security of supply and economic benefits.
Rising shale gas supplies have eliminated U.S. requirements for imported liquefied natural gas (LNG), which has already had geopolitical implications. For example, it has played a key role in weakening Russia’s ability to wield an “energy weapon” over its European customers by increasing alternative supplies to Europe in the form of LNG displaced from the U.S. market (page 9).
The sharp increase in domestic natural gas supply has also led to significantly lower domestic natural gas prices, which lowers the costs of initiatives to diversify the American automobile fleet to run on non-oil based fuels such as CNG (compressed natural gas) for passenger cars and light trucks and LNG (liquefied natural gas) for over-the-road trucks. In both the U.S. and abroad, the promise of growing shale gas production has raised the prospects for greater use of natural gas, an outcome with significant implications for global environmental objectives since lower-cost natural gas can displace fuels associated with higher air pollution and greater carbon intensity, such as coal and oil.
Without doubt, the natural gas supply picture in North America has changed substantially, and it has had a ripple effect around the globe not only through displacement of supplies in global trade but also by fostering a growing interest in shale resource potential in other parts of the world. Thus, North American shale gas developments are having effects far beyond the North American market, and these impacts are likely to expand over time. Prior to the innovations leading to the recent increases in shale gas production, huge declines were expected in domestic production in the United States, Canada, and the North Sea. This meant an increasing reliance on foreign supplies at a time when natural gas was becoming more important as a source of energy.
Rising shale gas production in the United States is already impacting markets abroad. In particular, LNG supplies whose development was anchored to the belief that the United States would be a premium market are now being diverted to European and Asian buyers. Not only has this immediately presented consumers in Europe with an alternative to Russian pipeline supplies, it is also exerting pressure on the status quo of indexing gas sales to a premium marker determined by the price of petroleum products. In fact, Russia has already had to accept lower prices for its natural gas and is now allowing a portion of its sales in Europe to be indexed to spot natural gas markets, or regional market hubs, rather than oil prices. This change in pricing terms signals a major paradigm shift.
Utilizing scenario analysis based on peer-reviewed, scientific assessments of the properties of shales (which the Baker Institute then uses to develop its own technically recoverable estimates and associated finding and development cost curves), this Baker Institute study, sponsored by the U.S. Department of Energy, is able to demonstrate that U.S. shale gas can help abate the enhancement of geopolitical power wielded by key petroleum-states as global primary energy use shifts increasingly to natural gas. Specifically, shale gas will play a critical role in diminishing the petroleum-power of major natural gas producers in the Middle East, Russia, and Venezuela and will be a major factor limiting global dependence on natural gas supplies from the same unstable regions that are currently uncertain sources of the global supply of oil.
In summary, shale gas is not only the key to the America’s energy future but it will also play a critical role in reducing the political risk we currently face in the global oil market.