Monthly Mind July 2013 - The Geopolitics of the US Shale Revolution
There is little that is better suited to highlighting the significance of the shale revolution in North America than Qatar's decision, as the world's leading exporter of liquefied natural gas (LNG), to move into north American gas production in April 2013. Together with their British partner Centrica, the Qataris were happy to invest one billion US dollars to join in the brave new (gas) world.
In Europe, by contrast, public debate is focused less on the opportunities than on the risks of shale gas and oil extraction, also known as "fracking". However, in these parts the strategic significance of unconventional oil and gas production and the resulting shift in geopolitical power has simply not yet been sufficiently understood:
- Thanks to lower gas prices, the US has gained a competitive advantage over Europe and Asia, with more energy-intensive, in particular, reaping the benefits. Thus, BASF has announced its intention to build three new factories in the US. In view of this development, what will become of Germany as an industrial location for these sectors?
- In 2009 the US overtook Russia as the world's leading producer of gas and is likely to move into the export business as early as 2016, with 25 LNG export plans - for instance to South Korea, Israel, Singapore and Jordan - having already been approved.
- In addition new deep sea discoveries and shale gas will render the US practically independent of oil imports by 2025 or thereabouts.
- This could significantly reduce the US trade deficit, 58 percent of which is currently attributable to fossil fuel imports. Moreover, lower energy prices will mean that consumers have more money to spend, thus increasing consumption and boosting growth.
Following the OPEC oil embargo of 1973, the US announced its intention to become independent of oil and gas imports by developing its own resources. Half a century later the US might now actually reach this goal. In any case, these days there is little talk of the much-evoked "end of the American era".
The fact that the US is turning into a gas exporter will reinforce the existing trend towards a global gas market, independent of oil price indexing which currently still dominates.
This, in turn, will put pressure on Gazprom's existing business model of generating major, steady export revenue from long-term pipeline contracts in Europe. Against the background of the increasing diversification of European gas imports - besides three new LNG terminals, from 2018 gas will be transported to Europe from Azerbaijan via the Transadriatic Pipeline (TAP) for the first time - Gazprom will have to significantly adjust its pricing to hold onto its market share, much to the detriment of the Russian budget.
Middle Eastern oil and gas producing countries such as Saudi Arabia, Kuwait or Qatar will also have to face an entirely new situation: they, too, will only be able to defend their market share by lowering prices. And they, too, will have to face shrinking public budgets - as well as all the resulting problems that could ensue for the political stability of the region.
And what about China? Although the Middle Kingdom has even greater shale gas reserves at its disposal than the US, it is still a long way off becoming a gas world power, due to its lack of production capacity and trained personnel. In China, in the last two years roughly the same amount of shale gas was extracted as in North Dakota in the last two weeks. Since fracking, which is necessary for this type of production, requires a substantial amount of water, a shale revolution in China is proving difficult, not least because of the water shortages there.
The shale revolution demonstrates just how quickly energy policy prognoses can change. At a meeting of the core group of the Munich Security Conference in Doha in May, motivated by the growing energy independence of the US, representatives of the Gulf states were already talking of their fears of a US withdrawal from the Middle East and the resulting power vacuum in the Gulf. Such perceptions are of strategic significance. Indeed, any reduction in US presence would affect the power balance in the Near and Middle East - resulting in potentially significant consequences for Europe's interests as well.
After all our dependence on fossil fuel imports will continue to grow over the next two decades, irrespective of the German move to alternative energies. At the same time, Europe will no longer be able to rely on the US securing our energy lifelines from the Gulf in the long term. In this respect European energy security policy will inevitably have to face a new strategic task and the question remains as to whether we will be up to it.
Ambassador Wolfgang Ischinger is Chairman of the Munich Security Conference and co-organizer of the FAZ conference "Energy Security – How to Feed and Secure the Global Demand?“ on July 10 in Frankfurt/Main.
Friedbert Pflüger, former Parliamentary State Secretary, is the Director of the European Center for Energy and Resource Security (EUCERS) at King‘s College London and Senior Fellow of the US Atlantic Council.