The Shale Gas Revolution and the Global Commons

1 Feb 2013

Shale gas and other unconventional hydrocarbons have long held the promise of freeing global energy supplies from unstable parts of the world. Today, the CSS’ Jonas Grätz considers how the current shale gas revolution might impact the security dynamics of the global commons.

In recent years, reserves of unconventional oil and gas resources have been discovered that may allow countries like the United States and China to meet a larger portion of their energy demands. Do you expect these countries to turn inwards and care less about the security of global energy supply routes?

No, the United States has interests in regions like the Middle East that extend far beyond energy supply routes. For instance, a number of allies in both Asia and Europe remain dependent upon Middle East supplies and, therefore, secure shipping lanes. Some of those allies, like Japan or South Korea, have also become more important in light of Barack Obama’s “pivot” to Asia. Maintaining a military presence in the region also brings economic dividends. The Gulf Cooperation Council states trade their oil in Dollars and have pegged their currency accordingly. It is like an insurance policy for the Dollar’s status as a reserve currency. Indeed, this issue grows in importance given that the Federal Reserve is expanding money supply. Moreover, the US federal debt that countries like Saudi Arabia and Japan are buying can also be seen as a payment for security provision. Such help is crucial for the US economy in times of economic strain and high indebtedness.

Of course, Washington is currently revising its defense and security strategies in view of budgetary shortages. But American reluctance to directly intervene in the Libyan and Syrian civil wars needs to be distinguished from safeguarding maritime security and regional stability in the Middle East. I do not expect much of an “inward turn” in this regard. That would be a sign that American hegemony is coming to an end. If that happens, it will not necessarily be by choice.

For China, unconventional oil and gas supplies have yet to make a massive impact on the country’s military posture. Beijing cannot hope to cover its rising energy demand with help of unconventional sources any time soon. In any case, China is focused on backing up its territorial claims in the South and East China Seas with rapid expansion of military power. And despite talk in Beijing about the need to secure shipping lanes, the capabilities of the People’s Liberation Army-Navy in this regard remain underdeveloped. Thus, the United States’ withdrawal from the region would be as worrying for Beijing as it would be for Washington’s allies.

In Strategic Trends 2012 youwrite that super tankers backed by naval power now trump pipelines supported by land power. Does that mean that traditional oil producers such as Russia or Iran may become less geopolitically significant?

This is relevant mostly for natural gas and not for oil. The oil market was dominated by supertankers even before the advent of shale gas. However, supplies of liquefied natural gas (LNG) by tanker have become more common, due in part to unconventional gas supplies in the United States and reduced demand as a result of the global financial crisis. This supply glut is reducing the value of pipeline supplies.

The surge in shipments of LNG supplies is revolutionizing the gas market. Previously, the market was regionalized, and its boundaries were fixed by pipeline supplies. Hence, both supplier and consumer could not escape the relationship. A big supplier like Russia that supplied gas to many smaller markets by pipeline was, therefore, quite powerful. Moscow could set prices and discriminate among consumers. In lieu of competition, prices were often determined by an oil-price link. Now, consumers can escape this rigid relationship by sourcing LNG from global markets. This also holds the possibility of breaking out of the oil-price link, which is quite difficult to justify as there are significantly more resources of natural gas than oil in the world.

Russia’s power as a gas supplier stems first and foremost from its pipeline-based supplies priced against oil, as well Moscow’s status as a leading or monopoly supplier to some markets. As consumers had no alternative, Russia could, in turn extract economic and political concessions from countries dependent upon its supplies.

A good example is Ukraine, which is dependent upon Russia for about 70% of its gas supplies. After Moscow interrupted these in 2009, Kiev signed a very unfavorable gas supply contract. One year later, Russia granted a rebate of 30% in exchange for an extension of basing rights for the Black Sea Fleet in Sevastopol. Still, the gas price at the Ukrainian border is higher than at the border with Germany, despite significantly shorter transportation routes. Ukraine is attempting to decrease its reliance on Russian gas supplies by exploring for shale gas and even importing small amounts of gas from Germany. However, Russia’s gas contract with the country continues to reinforce Moscow’s influence over Kiev.

Conversely, shale gas coupled with LNG has become an increasingly important source of alternative energy for the European Union. These supplies not only reduce the pricing power of Russia, but also provide a supply alternative to monopolized markets. Consequently, Russia’s market share of gas supplies is falling as alternative resources become available. As a result of changing market dynamics, Moscow had to agree to the EU’s demands for price reductions and continues to haggle with China over gas prices. In this respect, access to LNG supplies and possible reserves of shale gas may provide Beijing with greater leeway at the negotiating table. However, Russia’s vast territory and significant reserves of hydrocarbon resources nevertheless ensure that it remains an important energy supplier.

Iran’s influence over the Strait of Hormuz also means that it is still an integral feature of global energy supplies. The strait remains a major shipping route for oil and LNG supplies particularly from Qatar, the world’s most important LNG supplier. However, the Gulf States are starting to divert supplies from the strait by renovating old oil pipelines or building new ones.

As new oil and gas producers emerge, the market power of traditional suppliers tends to decrease, thereby increasing the prospect of a genuine global energy market to emerge. Which states stand to benefit most from this development?

States that are both energy producers and leading consumers will benefit most from these changes, as their economies can grow while simultaneously reducing dependence upon imports. These are first and foremost the United States and possibly China, if it can replicate some of the American success story. In addition, some traditional energy producers may benefit, such as Venezuela, which possesses large heavy oil deposits. But they have not been produced in a significant scale so far, as the political context is challenging. Also, small energy importers will benefit as will those states that cannot do the heavy geopolitical lifting required to ensure good supply terms when a market is absent or deficient.

How does the oil sands and shale gas revolution impact upon efforts to protect one of our most important global common goods, namely the climate?

In terms of market prices, the outcomes might actually be positive, for example, by lowering the cost of natural gas versus coal. In the United States, this helped to reduce carbon dioxide (CO2) emissions, as coal was substituted with more efficient natural gas. Indeed, the availability of larger quantities of natural gas might also lead to a quicker phase-out of coal in China. But offsetting effects are also possible. In the EU, for example, an abundance of cheap coal pushed up CO2 emissions. At the same time, natural gas in the EU trades at much higher prices than in the United States, which suggests that the EU Emissions Trading System (EU ETS) is dysfunctional.

However, it is doubtful whether the advent of unconventional oil and gas supplies has had a huge impact on global governance. Even before the emergence of unconventional resources there was plenty of scientific evidence to support climate change theories (and prices were sufficiently high), but not much policy action was happening. Now, governments are concentrating on finding a way out of economic crisis. Keeping the economy growing and societies from falling apart is the task of the day. This agenda is far more important for hindering progress on climate change mitigation than the emergence of unconventional resources. Hence, the discussion needs to move on to adaptation as a complement to mitigation.

If you take all these aspects together – maritime security, geopolitics, market efficiency, climate change – how will the exploitation of unconventional hydrocarbons affect the governance of global commons in the coming years?

At start of the 21st century it was suggested that increasingly scarce oil and gas supplies may eventually be the cause of inter- and intra-state conflict. I think these concerns have been taken off the agenda by the growing importance of unconventional resources. Indeed, while there will still be competition for resources, this will instead take place on market-based terms.

I do not expect shale gas or oil sands to have a profound impact upon securing the maritime commons any time soon. As argued above, the maritime posture of the US and China develops independently from the unconventional revolution. The US has many reasons to stay involved in the Middle East, whereas China is focusing on claims in its vicinity for now. Beijing may, in time, have more of a vested interest in guaranteeing maritime security, especially as it develops its raw materials interests in Africa. But depending on how political relations evolve, an agreement with the US might also be in the cards. However, this seems a long way off from today’s situation.

Concerning geopolitics, the importance of some countries’ energy supplies to the global market has reduced, most notably Russia. While this has had an impact on Moscow's geopolitical muscle, it did not result in reduced global ambitions. As for climate change policy, other dramatic events occurring on the commons are likely to have a more profound effect on climate mitigation than unconventional hydrocarbons. I expect the debate to move towards adaptation, rather than mitigation of climate change.

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