The shale revolution’s global footprint

By Javier Solana

Former EU High Representative for Foreign and Security Policy, Secretary-General of NATO, and Foreign Minister of Spain. President of the ESADE Center for Global Economy and Geopolitics and Distinguished Fellow at the Brookings Institution

Thousands of negotiators are currently gathered at the United Nations climate-change talks in Warsaw, creating a blueprint for a comprehensive global agreement to be delivered by 2015. But, as the negotiators work, the world's energy landscape is in enormous flux. Given that most of the world's CO2 emissions stem from energy production and transport, it is critical to monitor these changes closely.

In particular, the shockwaves triggered by the shale-energy revolution unleashed in the United States are reverberating globally. With the advent of hydraulic fracturing, or "fracking," US oil production has risen by 30%, and gas production by 25%, in just five years. Shale gas contributed almost nothing to US natural-gas supplies at the start of the century; by last year, its share had soared to 34%, with the US Energy Information Administration predicting a further rise to one-half by 2040. As a result of this bonanza, US domestic energy prices have plummeted.

The US, with all its geographical blessings, is on the road to energy self-sufficiency and is reaping clear economic benefits. Development of unconventional oil and gas supported 2.1 million jobs and contributed $74 billion in tax revenues and royalty payments to government coffers in 2012. Industrial competitiveness has soared, owing to much higher gas prices in Europe and Asia. Refiners and petrochemical companies are flocking to the US.

But this does not mean that the US can withdraw into splendid energy isolation. After all, energy is a global commodity. The effect is direct when it comes to oil prices. Although oil accounts for a smaller part of the energy mix nowadays and spare capacity is currently well ensured, chiefly by Saudi Arabia, a price shock would still have global effects - as such shocks have had in the past.

Gas prices, by contrast, vary widely across regions: from under $4/MMBtu in the US to around $10 in Europe and $15 in Asia. Until the gas market becomes more liquid and more global, this spread will remain. Nonetheless, global economic interdependence means that every country has a stake in others' energy bills. If one region's economy falters, all countries feel the effects.

In Europe, shale-energy resources have largely remained in the ground. Even so, the shale revolution across the Atlantic has been felt in diverse ways. For example, decreased US demand for liquefied natural gas (LNG) has allowed gas prices to come down in Europe. European utilities' bargaining power vis-à-vis Russian gas giant Gazprom has risen considerably - despite long-term oil-indexed supply contracts.

Yet European competitiveness is in danger. European companies are still buying gas at around triple the price paid by US firms. This is unlikely to change in the near future, as liquefaction and transport costs will keep LNG prices high even if the US issues more export permits.

Finally, Europe's energy mix is gradually shifting from the one that it needs to reach its climate-change goals. As inexpensive natural gas has eroded coal's traditional share of electricity generation in the US, importing cheap coal from the US has become more attractive to Europe. Especially in Germany, the Energiewende (the shift away from nuclear energy following the Fukushima catastrophe in 2011) has led to an increase in coal consumption. Indeed, coal is on track to provide more than half of Germany's electricity supply.

The EU's position as a climate-change champion is in danger. Greenhouse-gas emissions may have dropped as a consequence of reduced production amid the economic recession, but the coal resurgence does not bode well for future targets.

Coal is king in China too, providing two-thirds of its power supply. But China's rulers know that this situation is unsustainable. Not only is air pollution a growing source of concern, but diversification of energy sources is a crucial national-security interest.

The scale of China's unconventional energy endowments is still relatively uncertain. But population density and water scarcity will certainly be inhibiting factors in their exploitation. China maintains robust relationships with energy producers in the Middle East, Russia, and elsewhere (including booming Myanmar) - to secure and diversify its conventional sources. Just last month, Dmitri Medvedev's first visit to China as Russia's prime minister resulted in a ten-year, $85 billion oil-supply deal for the state-owned energy giant Rosneft.

Natural gas, however, is the weak link. Asia's pipeline network is far too thin, and gas prices are among the highest in the world.

That implies a potential boon to Russia's main gas producers, especially as Europe's energy-diversification campaign weakens export demand. Indeed, given that oil and gas revenues account for half of Russia's federal budget, adapting to new realities is virtually an existential imperative for the Russian state. There is opportunity in Siberia's frozen taiga, particularly the Bazhenov field, which may hold some of the largest unconventional reserves in the world. But the investment needed to develop these resources may remain in short supply in the absence of tax reforms.

The shale-energy revolution that started in the US is thus causing sweeping changes worldwide. And incorporating shale gas into the world's energy mix could help to combat climate change by creating a bridge to a low-carbon future. So long as methane leakage is contained, CO2 emissions from natural-gas combustion can be significantly lower than those caused by reliance on oil.

Cheap energy sources, however, can eventually come at a high price, albeit with a politically tricky time lag. Simply put, the current cost of pollution is too low, while the level of urgency is high. In Warsaw and beyond, it is vitally important that the international community reaches a sufficiently high common denominator in limiting greenhouse-gas emissions. If not, we will not be able to limit the global temperature increase to a sustainable level.

Copyright: Project Syndicate


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