By Stefano Cingolani
In any revolution there is a pioneer, a visionary, a hero, the first one who launches the stone. In the shale revolution, the forerunner is George Mitchell a relatively small independent producer based in Houston, Texas. In the early 90′s he received the terrible news that his company was running out of gas. So he started the “mission impossible”: a project to extract gas from a dense sedimentary rock. The geological formation where he began his experiment was called Barnett Shale, between Dallas and Fort Worth. George used a technique called hydraulic fracturing (now known as fracking) and for many years seemed that he was only wasting time and money. By the end the decade, the gas came out from its rocky trap. In 2002 Mitchell sold his company to Devon Energy that has developed another technology, the horizontal drilling. In that year, the production of shale gas was less than one per cent of the American supply, today is 25 and it will become 50% in two decades. The real estate devoloper, philantropist and visionary, born to Greek immigrants parents in 1919, died last July the 26th. The Economist wrote: “Few business people have done as much to change the world as George Mitchell”.
Not only gas. The same technique of drilling can be applied to rocks hiding oil, producing a chain reaction in the entire energy industry; so, the shale revolution is going to reshape the economic as well as the political balance of powers. America is going to reduce dependence from foreign sources of hydrocarbons, but even from coal, nuclear power, sun and wind (the renewable sources strongly subsidized by taxpayer money). The USA will become energetically independent by 2040. By that time, the process will have changed the geopolitical landscape in the world.
In May14th the International Energy Agency, presented its Medium-Term Oil Market Report. With a little bit of emphasis immediately gave the magnitude of the change: “The supply shock created by a surge in North American oil production will be as transformative to the market over the next five years as was the rise of Chinese demand over the last 15. The shift will not only cause oil companies to overhaul their global investment strategies, but also reshape the way oil is transported, stored and refined”.
According to the MTOMR, “the effects of continued growth in North American supply – led by US light, tight oil (LTO) and Canadian oil sands – will cascade through the global oil market. Although shale oil development outside North America may not be a large-scale reality during the report’s five-year timeframe, the technologies responsible for the boom will increase production from mature, conventional fields – causing companies to reconsider investments in higher-risk areas”. Maria van der Hoeveun, IEA executive director underlines “the good news”: this is helping to ease a market that was relatively tight for several years. “The technology that unlocked the bonanza in places like North Dakota can and will be applied elsewhere, potentially leading to a broad reassessment of reserves. But as companies rethink their strategies, and as emerging economies become the leading players in the refining and demand sectors, not everyone will be a winner.”
Technology, economy and geopolitics, everything is involved in this new oil&gas revolution that will determine the decision of investment in the next future, out-crowding other efforts to re-allocate the capital to non oil sources: nuclear, sun, wind. North America is going to become the new center of gravity according to many experts, overcoming the Persian Gulf, the Caspian plateau and Siberia. In terms of geography, the real center where the new supply and the new demand are going to meet is the Pacific Ocean. In term of balance of powers, USA, Canada and Australia will form a new strong block, China will take advantage from the reducing prices of energy, Russia will be forced to change not be marginalized and is going to loose its grip on Europe, Saudi Arabia and the Gulf states are going to reduce their wealth. Not only. Middle East will become less crucial for the American security and for the rest of the world.
Everybody has to deal with this new reality. Above of all, China always hungry for energy. Wu Sike, a member on the Consulting Committee of the Ministry of Foreign Affairs gives a glimpse of the new mood at the top of the Chinese regime: “As a diplomat who has over 40 years of experience in the Middle East, I believe that the US-initiated shale gas revolution will not only change the global landscape of energy distribution but will also change the world’s geopolitical layout – he wrote in China-US Focus on Febraury 12, 2013 – The United States will take a more dominant position in the global energy distribution. With that in mind, observers will certainly watch how the US will adjust its global strategy, especially its Middle East policy, and ponder what kind of a situation other energy-consuming nations will face in terms of energy safety”. Outside the US, potential reserves of shale gas have been identified in countries from Mexico and Argentina to Algeria. Chinese interest is rising swiftly, both for shale gas and for another form of unconventional natural gas, coal-bed methane. Europe is a big question mark, even if it is thought that Europe’s unconventional-gas potential, particularly in the east, may be as great as North America’s.
The Belfer Center of the Harvard Kennedy School on July 2012 publishes a report together with Rice University’s Baker Institute (The Geopolitics of Natural Gas) with four scenarios about the future of unconventional gas, based on different combinations of success and liberalization. In any case, concluded the report, “The relative fortunes of United States, Russia, and China – and their ability to exert influence in the world – are tied in no small measure to global gas developments and vice versa. Geopolitics are affected by the trajectory of gas markets as much it shapes that trajectory. Geopolitics play a significant role in whether a number of gas projects are realized and come online and where pipelines are built”. The collapse of political regimes in major energy-producing and consuming countries could significantly alter the landscape of gas and oil markets, according to the report. The scenarios explicitly consider a regime crisis in producer countries such as Russia, Saudi Arabia, and Venezuela. On the consumer side, only an economic and political collapse of China would seriously reduce global demand for gas. The power and transportation sectors are critical determinants of total natural gas demand. “While the gasification of the power sector is well underway, it remains unclear whether natural gas will be adopted widely in the transportation sector. Geopolitical or environmental drivers are likely to play a critical role in the pace of gas substitution in power and transportation if a transformation is to occur”.
THE AMERICAN RENAISSANCE
The major change is in North America, from Canada to the Gulf of Mexico. According to Daniel Yergin, one of the most celebrated experts of energy and geopolitics, author of bestsellers (The Prize and The Quest) and co-founder of Cambridge Eneargy Research Associates, “It was not until the fall of 2009 that leaders in the nation’s capital woke up to the fact that something was changing in the U.S. energy mix. In the energy industry, use of the new technology quickly gathered speed. The know-how was applied across North America, in such shale formations as Haynesville, mostly in Louisiana; Eagle Ford in South Texas; Woodford in Oklahoma; Horn River and Montney in British Columbia; Duvernay in Alberta; and the “mighty Marcellus,” the huge formation that spreads from Pennsylvania and New York down into West Virginia. Gas output rose dramatically, and the anticipated shortfall turned into a large surplus”. Environmentalists are very critical and maintain that operations have spread into regions that are largely unfamiliar with modern oil and gas drilling. Some worry about the amount of water used in the process. “But last year, the 3,500 shale-gas wells drilled in the U.S. used only about 0.02% of total water used in the U.S.”, Yergin writes. Concerns also have been raised about the possibility that hydraulic fracturing could contaminate the aquifers that supply drinking water. But fracking occurs below drinking-water aquifers, separated by a mile or more of impenetrable rock. The new energetic sourcers and the reduction in prices has helped the manufacturing industry to recover and is feeding a new wave of re-localisation: car industry and others are calling back part of the productions.
Robert Kaplan (The Geopolitics of Shale, Sratfor, December 19, 2012) believes that “America, regardless of many of the political choices it makes, is poised to be an energy giant of the 21st century”. In particular, the Gulf Coast, centered on Texas and Louisiana, has embarked upon a shale gas and tight oil boom. That development will make the Caribbean an economic focal point of the Western Hemisphere, encouraged further by the 2014 widening of the Panama Canal. At the same time, cooperation between Texas and adjacent Mexico will intensify, as Mexico increasingly becomes a market for shale gas, with its own exploited shale basins near its northern border. The geopolitical emergence of Canada could amplify this trend. Canada has immense natural gas deposits in Alberta, which could possibly be transported by future pipelines to British Columbia, where, with liquefaction facilities, it could then be exported to East Asia. Meanwhile, eastern Canada could be the beneficiary of new shale gas deposits that reach across the border into the northeastern United States. Thus, new energy discoveries would bind the two North American countries closer, even as North America and Australia become more powerful on the world scene.
THE PACIFIC GAME
Australia has large new natural gas deposits that, with liquefaction facilities, could turn the country into a principal energy exporter to East Asia, if it will be able to significantly lower its cost of production (not very easy to do). Australia is already starting to emerge as the most dependable military ally of the United States in the Anglosphere. The alliance of these two great energy producers of the future could further cement Western influence in Asia, according to Kaplan.
China also has significant deposits of shale gas in its interior provinces. Beijing is burdened by relatively few regulations, the regime could acquire the land and build the infrastructure necessary for its exploitation. This could compensate for the decline of its coastal-oriented economic model by spurring development inland. China has even greater incentives to develop its shale gas resources. According to US intelligence, the country’s recoverable resources are larger than those of the United States at 36 trillion cubic meters. The main geostrategic reason for Beijing to develop shale gas for transportation is that the US Navy controls the Pacific and most Chinese oil arrives by tanker. Large-scale use of natural gas for transportation would protect China from much of the effect of an American blockade.
The country that might suffer on account of a shale gas revolution is Japan, paticularly now that the nuclear power has been affected by the aftermaths of the Fukushyma accident. Japan is rushing to sign agreements with African oil rich countries in ope competition with China. The struggle for energy between the two big Far Eastern countries, is going to influence the balance in the Pacific arena, let’s hope peacefully.
A DECLINING GULF?
What is going to happen to the Emirates and Saudi Arabia? Oil is still there and it will stay for long, cheaper and easier to exploit. But the power of the Arab oil will be reduced and, consequently the dominant role of Opec on price and production. The United States, somewhat liberated from Middle East oil because of its own energy sources, could act with major room of manoeuvre in the entire exchequer. Obviously, the immense deposits of oil and natural gas in the Arabian Peninsula, Iraq and Iran will keep the Middle East a major energy exporter for decades. But the shale gas revolution will complicate the world’s hydrocarbon supply and allocation, so that the Persian Gulf may lose some of its primacy.
Wu Sike is convinced that, “as unrest in the Middle East continues and US shale gas technologies become commercialized, the global landscape of energy resources will change and the United States will become less and less reliant on Middle Eastern oil, until this reliance finally ends. Even from this point of view, this technology will have an insurmountable impact on the Middle East, the global economy and the world’s geopolitical map”. Not only, as in a domino’s effect, Russia and Europe will follow.
RUSSIA IN THE GRIP
Russia is currently the energy giant of Europe, exporting natural gas westward in great quantities, providing Moscow with political leverage all over Central and particularly Eastern Europe. Russia’s reserves are often in parts of Siberia that are hard and expensive to exploit, though Russia’s extraction technology has been considerably modernized. And Russia for the moment may face relatively little competition in Europe. But what if in the future the United States were able to export shale gas to Europe at a competitive price? A direct consequence will be a stronger competition between ships and pipes, sea and land, oceanic routes and transcontinental crossing. The geography of the world energy will be reshaped and, as a consequence, the importance of strategic areas like the Black Sea, Baku and the Caucasean countries, Siberia and Kazakhstan, in brief the entire ex soviet empire. No more huge investments for pipelines connecting Europe and Russia, replaced by degasification facilities along the coasts.
This is a long run scenario, because for the next ten-fifteen years America will not have enough gas and oil to feed Europe. So, the dependence on Russia will be reduced but not canceled. In any case, thinking for the future, we are going to have a dramatic reduction in the blackmailing power of Russia. With deep consequences even on the economic and political arena. A more vulnerable Gazprom is making weaker the Putin’s base of power; the authocracy fed by gas will be forced to change. A country still totally dependent on export of energy, will be forced to invest in new sources and in different industries. A more decentralised system, more articulated with different centers of power and wealth is going to produce a major reshuffle of the Russian system. Natural gas might become less of a political tool for Russia and more of a purely economic one.
THE STILL VULNERABLE EUROPE
Imagine a future in which the United States exports liquefied shale gas to Europe, reducing the dependence that European countries have on Russian energy. The geopolitics of Europe could shift. Less dependence on Russia would allow the vision of a truly independent, culturally vibrant Central and Eastern Europe to fully prosper “an ideal of the region’s intellectuals for centuries, even as ideas in this case would have little to do with it”, writes Robert Kaplan. This might especially be relevant to Poland which may have significant deposits of shale gas: “Were Polish shale deposits to prove the largest in Europe (a very big “if”), Poland could become more of an energy producer in its own right, turning this flat country with no natural defenses to the east and west — annihilated by both Germany and the Soviet Union in the 20th century — into a pivot state or midlevel power in the 21st”.
Not all the consequences of the shale revolution are going to be positive for the European Union, according to Alan Riley, professor at City University of London. In a comment on The New York Times, he wrote: “The danger is that the United States will no longer have any direct interest in ensuring supply flows out of the Gulf. At the very least this will mean that Washington is likely to demand greater European investment in its own energy security. One option for the European Union is to develop natural gas transportation as an energy security hedge. This would also increase pricing pressure on oil producers”.
The lack of energy makes Western Europe weak and strategically dependent. New explorations are finding shale gas and even oil in several countries (Poland, Ukraine, North Germany, France and in the Po basin in North of Italy). “But shale gas in Europe is expected to be at least twice as expensive to extract as in the US, because, compared to the US, Europe’s shale layers are deeper, its regulations are likely to be tougher and its oil and gas service sector is less competitive and more oligopolistic”, according to David Buchan is a senior research fellow at the Oxford Institute for Energy Studies Meanwhile, the oil and gas wells in the North Sea are drying up, the nuclear power is opposed by public opinion, the renewable sources are more and more expensive even for the state finances. Definitely, the Old Continent is still on the weak side of the new balance of powers and it needs to rethink its place in the world. Once again, and again; it is its destiny.
Pubblicato su Longitude, agosto 2013
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Stefano Cingolani, giornalista e scrittore, specializzato in politica estera ed economia, editorialista del quotidiano “Il Foglio” e del settimanale “Panorama”. Ha lavorato all’“Unità”, al “Mondo”, al “Corriere della Sera” (in particolare da New York e da Parigi), all’agenzia ApBiscom e al “Riformista”. Ha condotto Radio3Mondo su Radio Rai. Il suo ultimo libro è “Bolle, balle, sfere di cristallo, l’economia dell’inganno”, Bompiani 2011.