Posted in Finance Articles, Total Reads: 2073
, Published on 17 July 2013
With global reserves upward of 188 trillion cubic meters and expected potential market size of $26.66 billion, shale gas is being touted to inspire the next biggest geopolitical shift of the century. The dynamics of the global oil market are poised to change forever with the conventional importers of fossil fuels becoming potential exporters. Consider the fact that US, a major importer of fossil fuel, has increased its shale gas production 12-fold in the last decade. China, another major importer, holds the largest reserves of shale gas in the world. These developments will have serious repercussions, especially for the major oil exporters like Russia and Saudi Arabia.
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Industrial production of shale gas began in the 1970s. However, the costs were prohibitively high for the technology to be of any commercial value. Over the years, however, the development of hydraulic fracturing and horizontal drilling technologies has reduced the costs for extraction of shale gas. Coupled with rising oil prices, the production of shale gas has become viable and more profitable.
USA is the first country in the world to have begun commercial production of the gas. It is poised to produce a whopping six million tonnes/day by 2020, overtaking Saudi Arabia to become the world’s largest oil producer. Coupled with its oil demand reaching a peak, USA would become a net exporter of natural gas. This would not only give it independence in energy supply and protection from continuous variation in global oil prices, but also shield it from the instability in the Middle-East from where it currently sources most of its oil. Further, the shale gas industry is expected to provide employment to over 1.7million people and lead to cheap supply of gas that would promote energy intensive manufacturing activities like specialty chemicals, thus helping US come out of the current economic downturn. Canada is also sitting on huge reserves of natural gas that it plans to supply to north-eastern United States. All these events will lead to a tectonic shift of power back towards the United States. In South America, Argentina and Brazil could become self-sufficient, reducing dependence on Venezuelan oil that would help them to grow faster and increase employment opportunities.
Even the European Union will reap benefits of shale gas, as it finds a substitute to Russia’s Gazprom and the Middle-East for sourcing its oil and natural gas requirements. Further, Poland and France possess sizable reserves as well. This is crucial since Europe’s dependency on imported fossil fuels is expected to increase with the production falling to very low levels in the North Sea oil fields. However, US as an exporter would mean the transformation of the political clout that Russia has over eastern and central Europe due to its oil reserves to a purely economic one. The eastern and central regions of Europe would thus prosper. But the US would lose interest in ensuring safe supply of oil out of the Gulf, and the European Union would have to increase investment to ensure energy security and safe passage of tankers through the Gulf.
China has an even greater incentive to increase its shale gas production as it tries to reduce its reliance and investment in high risk African oil fields that offer low returns and require extensive investment. It is the second largest consumer of fossil fuels in the world and self-production would help it save on foreign exchange as well. Further, the US Navy controls the Pacific Ocean and most of Chinese oil arrives through tankers. Thus, China would be safeguarded against energy shortages in the event of a US blockade.
Moving to the Asia-Pacific region that is expected to have an increased energy deficiency in the future, shale gas would provide a cheap source of natural gas to developing countries like India, especially from Australia, with its large natural gas deposits. Thus, USA and Australia are expected to control the market for natural gas exports in the decades to come.
On the other hand, the outlook for Saudi Arabia and Russia looks pretty bleak. Even though the immense deposits in the Middle-East will keep it a major exporter for decades to come, it will lose control over oil prices and its prime position of being the world’s largest exporter. However, the major impact in the Middle-East will be primarily geopolitical. The sanctions on Iran have worked due to the US emerging as an alternate source of gas. Further, once US loses interest in and stops supporting monarchies in the Middle-Eastto get access to their oil, revolutions like the Arab spring could change the political dimensions of Asia. Russia, on the other hand, stands to lose in the face of obsolete technology and increasing costs, falling oil prices and declining political clout over Eastern Europe. Other major losers would be politically unstable landlocked African nations like Chad, South Sudan and Sudan, whose hydrocarbons would become less valuable.
However, Petroleum Geologist Arthur E. Berman is of the opinion that “Resources are not reserves and reserves are not supply”, implying that the actual recoverable shale gas reserves may be much less than anticipated. For instance, there are theories that point to oil companies overstating shale gas reserves and production. Further, the production from shale gas wells falls sharply over time and the cost of the technology required to maintain even a flat level of production in the long run has decreased but is still prohibitive. A UK study has shown that the price of shale gas is still more than $200 as compared to an equivalent barrel of oil at $120. Finally, there are contradicting views on the environmental impact of shale gas with some studies pointing to a greater carbon footprint from using shale gas over a twenty year period than oil or coal.
Thus, there are various factors like government policy and rate of development of drilling technology that would determine the full-scale impact of shale gas on world oil production. However, USA and China will nevertheless forge ahead as we see a shift in the world oil production balance, exaggerated by the production of cars in US and UK that run on natural gas. Rapid economic growth will be hinged on shale gas reserves in the decades to come and the countries that have poor reserves are sure to lose out.
This article has been authored by Ayush Kanwar from IIM Ahmedabad
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