U.S. Shale Boom Reduces Russian Influence Over European Gas Market

U.S. Shale Boom Reduces Russian Influence Over European Gas Market

The U.S. shale gas boom has not only virtually eliminated the need for U.S. liquefied natural gas (LNG) imports for at least two decades, but significantly reduced Russia’s influence over the European natural gas market and "diminished the petro-power" of major gas producers in the Middle East and Venezuela.

According to a study by Rice University’s Baker Institute, "Shale Gas and U.S. National Security", U.S. shale gas has substantially reduced Russia’s market share in Europe from 27 percent in 2009 to 13 percent by 2040, reducing the chances that Moscow can use energy as a tool for political gain.

European customers now have an alternative supply to Russian gas in the form of LNG displaced from the U.S. market. The shale boom also has exerted pressure on the status quo by indexing gas sales to a premium marker determined by the price of petroleum products.

Russia already has had to accept lower prices for its gas and is now allowing a portion of its sales in Europe to be indexed to spot gas markets, or regional market hubs, rather than oil prices.

"This change in pricing terms signals a major paradigm shift," noted study authors Kenneth B. Medlock III, Amy Myers Jaffe, and Peter R. Hartley.

Investment in LNG export facilities in the Middle East and Africa during the 1990s also have been rendered obsolete as the North American shale boom reversed forecasts saying the U.S. would need to import growing amounts of LNG to meet domestic demand.

Shale gas will also help limit global dependence on gas supplies from the same unstable regions that are currently uncertain sources of global oil supply.

"In this way, shale gas can play a critical role in averting a reinforcement of the political risk we currently face in the global oil market," the study authors noted.

Shale Boom Reduces Share of Russian, Iranian, Venezuelan Gas Supply

The U.S. shale gas boom reduces the future share of world gas supply from Russia, Iran and Venezuela. Without shale discoveries, these nations would have accounted for about 33 percent of global gas supply in 2040, but with shale, this is reduced to 26 percent, said Medlock III, a James A. Baker III and Susan G. Baker Fellow in Energy and Resources Economics, at the Rice Energy Finance Summit in Houston last month.

The abundance of U.S. shale gas reduces the opportunity for Venezuela to become a major LNG exporter, and thereby lowers long-term dependence in the Western Hemisphere and in Europe on Venezuelan LNG.

"It also reduces competition for LNG supplies from the Middle East, thereby moderating prices and spurring greater use of natural gas, an outcome with significant implications for environmental objectives," said Medlock.

The study, released in July and funded by the U.S. Department of Energy, found that expanded U.S. shale production reduces U.S. and Chinese dependence on Middle East natural gas supplies, lowering the incentives for geopolitical and commercial competition between the two largest consuming countries and providing both countries with new opportunities to further diversify their energy supply.

Other geopolitical repercussions of the expanding U.S. shale production is the limit it places on Iran’s ability to tap energy diplomacy as a means to strengthen its regional power or to buttress its nuclear aspirations," said Medlock.

Additionally, U.S. shale gas will lower the likelihood of a long-term potential monopoly power of a "gas OPEC: or a single producer such as Russia that exercises dominance over large gas consumers in Europe or elsewhere.

Shale Boom Reverses Demand Forecast

The North America shale gas boom reversed the 2000 forecast that North America would be short on gas supply, and would need significant amounts of LNG imports to meet demand. Instead, growth opportunities for LNG developers are seen primarily in Asia.

In the aggregate, average annual capacity utilization of U.S. LNG regasification terminals may not approach 15 percent until the late 2030s, Medlock told attendees at the Rice Energy Finance Summit.

Not only has North American shale gas effect rippled across the globe, displacing supplies in global trade, but creating interest in developing shale gas resources worldwide. Advanced Resources International this year estimated that global shale resources in place are large than previously estimated, with total technically recoverable resources pegged at 6,600 Tcf.

However, sustained, rapid development of shale gas is not a certainty. The unique market structure of the U.S. also enabled the U.S. shale boom to happen. Ownership of transportation capacity rights is unbundled from pipeline ownership in the U.S., which made it possible for a producer to access markets through a competitive bid for pipeline throughput capacity.

"Absent this, many of the small producers that first ventured into shale might not have been willing to do so, specifically because access to markets could have been limited," said the study authors. "This is inherently a problem in most other markets globally, where pipeline capacity is not unbundled from facility ownership and large incumbent monopolies control much of the transportation infrastructure."

The U.S.'s well-developed, competitive regulatory framework governing gas infrastructure development, transportation services, marketing and mineral rights ownership and acreage acquisition also helped promote rapid development of shale resources.

This development pace "may not be fully or quickly replicable in other markets around the globe where state involvement in resource development and transportation is more prevalent," including ownership of mineral rights.

European policies favoring resources that compete with natural gas, or new U.S. or Chinese laws that would reduce gas demand also could hamper future shale resource investment.

Changes to U.S. tax policy for upstream oil and gas, including proposed changes to expensing rules, investment credits, and/or royalty rates, could also make shale exploration and production unprofitable at current prices.


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