the new petro power paradigm - Diplomat Magazine

ENERGY|Di spatches
released its annual energy outlook, the
picture it presented of natural gas markets
was one where net imports were forecast
to meet about 20 percent of U.S. domestic
consumption by 2030 — a sharp increase
in the penetration of the U.S. marketplace
by foreign sources of supply. And this in
spite of the assumed construction and operation
of a pipeline bringing Alaskan production
to the lower 48 states. Canada’s
importance as a source of gas supply for
the United States was portrayed as falling
sharply (even with a fully operational
Mackenzie Valley pipeline), leaving much
higher LNG shipments to account for
about 80 percent of U.S. gas imports (up
from a share of about 5 percent in 2005).
Over the next few years, this picture of
future natural gas supply patterns changed
significantly. In the 2011 edition of its Annual
Energy Outlook, for example, the EIA
projected that the United States would
be almost self-sufficient in natural gas by
2030. Marked increases in domestic production
would replace steadily falling import
volumes from Canada and limit LNG
imports, which would remain a minor
source of North American gas supply, in
sharp contrast to the situation envisaged as
recently as in the 2006 version of the Outlook.
All this was seen as occurring without
the construction of pipelines across Alaska
and down the Mackenzie Valley.
From this perspective, the North American
natural gas “island” would thus
appear to be sustainable for much longer
than had been conceived even a few short
years earlier. For the foreseeable future,
there would be no single, integrated world
market for natural gas and North Americans,
at least, would be spared its complicated
geopolitics.
What brought about this change in perception
about the future of natural gas in
North America? Simply put, the growth
in supply capacity was driven by the assumed
commercially viable extraction of
North America’s huge reserves of shale gas.
The successful marriage of two techniques,
namely horizontal drilling and hydraulic
fracturing (or fracking), that had been increasingly
observed over the last 10 years
or so led the EIA, among others, to revise
its vision of the potential role of shale gas in
the North American supply picture.
Not only was it technologically possible
to tap these resources, but it was now
also economically feasible to do so: actual
production experience using horizontal
drilling and fracking (which typically involves
the high-pressure injection of water
and chemicals to release gas trapped in
formations) showed that shale deposits
could be tapped at much lower cost than
previously believed. Shale gas, it is now
thought, holds a competitive advantage
over production from Arctic regions and
LNG imports and will continue to do so
for decades to come. What had previously
been seen as a possibility only far into the
future now emerged as current-day reality.
And this in less than five years.
There’s been talk of creating an Organization
for Gas Exporting Countries, similar
to OPEC whose headquarters, in Vienna, is
pictured above.
OPEC
Granted that shale gas production presents
its own challenges. For example, there
are concerns that the liquids and chemicals
used in fracking could, under certain
circumstances, contaminate underground
water supplies. However, this technique
has been used for a long time by the North
American oil industry which has an excellent
track record in preventing groundwater
contamination from occurring. While
it is simply not possible to state categorically
that nothing will ever go wrong, it is
also clear that an appropriate regulatory
environment has encouraged and will
continue to encourage industry to operate
responsibly and minimize the likelihood
of water contamination due to fracking.
Heightened activity levels in North
America have generated a lot of information
about the location, extent, and properties
of shale gas deposits. This is not the
case elsewhere in the world, and so the
prospects for shale production to impact
natural gas markets in Asia and Europe remain
much more uncertain. Nonetheless,
a recent report issued by the World Energy
Council suggests that Russia has potentially
larger quantities of shale gas than
the rest of the world (excluding North
America) combined.
If this were to prove correct, then one
could imagine a future that would include
a much closer integration of Asian
and European natural gas markets, with
Russia at the heart of this development.
Europe would become even more reliant
on Russian supplies of natural gas and
potentially huge market opportunities in
Asia, especially in China, could be tapped
by Russian production. The geopolitics of
natural gas outside North America would
thus revolve even more closely around
Russian interests.
What of crude oil? It is, after all, the
single most important commodity in
world trade. What kinds of changes in the
market structure for this energy source are
contemplated by forecasters and analysts?
In comparison to the developments
envisaged for natural gas, the answer
is rather placid: basically, the future is
presented as a rather straightforward extrapolation
of the present and of the recent
past. The U.S. EIA and the International
Energy Agency, among others, foresee
continued dominance of OPEC on the
supply side and demand patterns characterized
by weak (if not negative) growth
in OECD countries, contrasted with robust
increases in oil product consumption in
emerging and developing economies, in
particular China and, to a lesser extent,
India, Brazil, and some Middle Eastern
countries, such as Saudi Arabia.
For some, this is seen as a situation
where the benefits of continued U.S.
investments (military and otherwise) in
efforts to enhance the security of world
crude oil supplies would increasingly accrue
to consumers outside of the United
States, and especially to those in China
and select other emerging economies.
The future would thus be one where U.S.
taxpayers increasingly subsidize oil product
consumers elsewhere in the world.
Continued political resistance within the
United States to military expenditure reductions,
even in the face of deep concerns
over government budget deficits, is certainly
supportive of the kind of world oil
market evolution described above.
It is true, however, that huge amounts
of non-conventional crude oil are known to
exist and that Canada’s oil sands deposits
contain significant reserves on a world
scale. But even the most ambitious forecasts
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