Download Geopolitics of the U.S. Shale Boom

NS4053
Winter Term 2015
New Energy Geopolitics
Overview
• Sarah Ladislaw, New Energy, New Geopolitics: Balancing
Stability and Leverage, CSIS, April 2014
• Carlos Pascual, The New Geopolitics of Energy,
Colombia University, September 2015
• CSIS Volume: Wants to see the implications of increased
gas and oil production from shale in the United States
• Both in the U.S. and
• Other parts of the world
• Colombia Volume wants to see how as new resources are
made available and create new geopolitical tools and
opportunities.
• In this context what are the implications for climate
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issues?
The U.S. Shale Boom I
Recent Developments
• U.S. has radically increased the production of oil and gas
in the past five years
• Entrepreneurial talent, technology, good infrastructure,
private capital and a predictable legal environment have
combined to revolutionize production of hydrocarbons
• In past three years the U.S. has added more than another
Kuwait, UAE, Mexico or Nigeria to global oil supplies
• From 2008 to 2013
• While the U.S. GDP averaged 1.2% per year,
• Output in the oil and gas industry grew four times faster at 4.7%
• Over the same period, total U.S. employment declined by 0.1%
while oil and gas industry employment grew at 4.3% per year
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The U.S. Shale Boom II
• More broadly shale oil and gas has been one of the major
contributors to the U.S. economic recovery
• Adding nearly 1% to the US GDP annually on average over past
six years
• Has accounted for nearly 40% of overall GDP growth in that time
• Since 2008, the U.S. has increased its oil production
• by 4.1 million barrels per day
• An increase of 81%
• In 2014 the U.S. became the largest producer of liquid
fuels in the world
• Further measures to promote vehicle efficiency combined
with economic contraction after the 2008 recession
reduced oil consumption by almost 10 percent from its
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peak in 2006
The U.S. Shale Boom III
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The U.S. Shale Boom IV
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The U.S. Shale Boom V
• As a result, the U.S. reduced its oil imports as a
percentage of consumption from about 60% in 2006 to
27% in 2014
• In natural gas, the U.S. is on track to be a net exporter by
2020 largely due to the shale gas revolution
• Shale gas has increased from 1% of U.S. supply in 1999
to about 40% in 2014
• The EIA estimates that technically recoverable resources
could potentially last another 92 years.
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The U.S. Shale Boom VI
• Good prospects for increased benefits in the future
• New production techniques have meant that resource
deposits around the world previously considered
uneconomic have become “technically recoverable”
• From a geostrategic perspective, assessing the impact of
these new resources more complex.
• They raise questions about who stands to gain, who stands to
lose, and
• what opportunities for advantage might emerge in both the
energy and geopolitical realms
• Some experts see limited significance, while others
predict profound and radical change
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Energy Security I
Energy Security
• Clear that the American energy revolution has made the
U.S. more energy secure based on the fundamentals of
energy security
• Availability (are supplies on the market?)
• Accessibility (can you get to them?),and
• Affordability (can you get them at a competitive price?)
• No question that oil and gas are more available to
American consumers in 2015 than in past decade
• Oil and gas production have grown respectively 81% and
35% over the past 5 years
• Growth in domestic production means energy is largely
accessible despite pipeline transit constraints within the
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U.S.
Energy Security II
• Further Canada is the leading oil exporter to the U.S. and
in 2014 Mexico was third
• Most of the oil the U.S. consumes comes from North America
• America’s energy abundance, supply growth in Canada and
potential for growth under Mexico’s reforms not only point to
potential oil and gas self-reliance in North America by 2035
• The massive increase in energy supplies has
• also profoundly affected the politics of global oil and
• In 2014-2015 caused a massive collapse in international oil
prices
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Energy Security III
• From mid-2011 to mid-2014 the Brent international crude
oil benchmark price hovered in the range of $105-110 per
barrel
• By December 2014-August 2015 the Brent international
benchmark floated between $45 and $65 per barrel
• In part, perceptions of market risk changed
• from a fear of political and security disruptions of international
supplies to
• a fear that disrupted barrels from countries such as Libya, Iraq
and Iran might find their way back t markets when increases in
American production outpaced global demand
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Energy Security IV
• In part Saudi Arabia, Kuwait, and the UAE decided they
could no longer stabilize international prices by adjusting
supply
• On November 27, 2014 declared OPEC would let market
forces determine global oil prices
• This collapse in oil prices will flatten the growth of US oil
supply in 2015-2016, but U.S. production likely to remain
resilient due to
• continued technological change, and
• the capacity to better target capital expenditures to productive
assets
• The 2014-15 oil price collapse may force significant
restructuring in the energy industry as low prices enforce
discipline
• However low prices will not set back American advances12
in making more oil available to U.S. markets.
Energy Security V
Policy lags
• U.S. benefits economically from global stability
• Instability carries with it political risk and potential for
disruptions that increase oil prices and dampen
American economic growth
• Each 10 percent decrease in global price of oil drives a
0.2% increase in global GDP
• Irony for U.S. is that American consumers pay global oil
prices, but as a nation we cannot export crude oil when
there are regional surpluses.
• Due to oversupply of lighter crude types along the Gulf
Coast in in northern Midwest, the U.S. would derive
national value from exporting localized surpluses and
importing heavier crudes that meet specific refining
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needs
Energy Security VI
• Such flexibility to trade oil would
• move trapped surpluses to global markets,
• strengthen the U.S. stance against resource nationalism in other
countries, and
• contribute to a global market environment that promotes
economic growth of the U.S.
• Yergin -- Before shale, you saw more and more mega oil
projects worth 10, 20, 30 billion dollars that would take 15
to 20 years to develop.
• Now, you have shale projects where you can make a
decision and dig a well in 120 days.
• It is no longer $10 billion projects, but $10 million
projects. U.S. production can go up or down so quickly in
response to price, and that makes the U.S. the swing
producer.
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Energy Security VII
• It clearly strengthens the economic position of the U.S.,
and it adds a new dimension to U.S. influence in the
world
• For natural gas, as US pipeline constraints are resolved
the question is
• whether domestic demand can absorb a growth in and more
easily accessible supply
• And if hot how far prices will fall before they erode the incentive
to produce more gas.
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Energy Security VIII
• This assessment of demand, supply and price is
fundamental to the U.S. decision to allow gas exports to
non-Free Trade Agreement countries that could total
about 140 billion cubic meters annually
• DoE concluded that
• Limiting production to U.S. markets would produce U.S. regional
market gluts
• Would create disincentives to US production.
• LNG exports will bring benefits to exporters and their
supply chains
• Beyond that global markets will help sustain incentives
for production which in turn are key to securing
availability and access
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Implications for Climate Policy I
• Natural gas emits fewer green house gases than coal
(half the carbon dioxide of coal when used in power
generation)
• Many in public and private sector are seeking ways to
prioritize role that natural gas plays in the energy
economy
• Proponents of the green agenda have split over:
• Whether to endorse, or
• Resist natural gas as a possible “bridge fuel” that promotes nearterm emissions reduction as cleaner energy solutions are
developed
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Implications for Climate Policy II
• Reordered Options to Deal With Climate Change
• Despite the potential of cheap natural gas to reduce
emissions in the near term some environmentalists note:
• It disadvantages renewable, nuclear, and clean coal energy
sources by making them less competitive
• The emergence of an economic way to produce greater supplies
of oil, the most efficient and energy dense source of energy also
makes diversification of the transportation sector more difficult
• It could also extend the timeframe for implementation or
diminish the economic attractiveness of technologies,
research and investment in alternative transport fuels
and vehicles
• Moreover there remains uncertainty regarding the
amount of methane (a potent GHG) released during
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production
Implications for Climate Policy III
Other Considerations
• Natural gas substitution in some economies is driving
coal usage elsewhere
• Complicates previous positions on how best to navigate
a path to a lower-emission future
• In general less focus on the resource scarcity impetus to
switch away from fossil fuel use has meant attention is
now more squarely on other reasons to address climate
change
• Economic
• National security
• Health and
• Other social impacts
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Geopolitical Impacts I
• Geopolitical Impacts of Global Energy shifts
• While concrete geostrategic impacts have thus far been
limited, there are have been changes in national and
international perceptions that may or may not align with
the new realities.
• Big energy producers like Russia and Saudi Arabia
• Producers aspiring for a greater role in world markets like Iran,
Iraq, and Mexico
• Revenue-dependent countries like Nigeria, Yemen, and Algeria
• Large energy consumers like China, Europe and Japan
• Have all shifted their domestic and foreign policies in
response to perceived changes in the strategic context
resulting (or expected to result) from shale oil and gas
developments
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Geopolitical Impacts II
Big Producer: Russia
• Russia exports almost 70% of its crude oil production and
27% natural gas production
• Second largest oil exporter and the largest gas exporter
• Accounts for about 40 to 50% of budget and
• Over 70% of total export revenue
• While production increasing, sector faces stern challenges
ahead
• Current production levels cannot be maintained without
substantial reinvestment in old areas or the development of
new ones.
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Geopolitical Impacts III
Market shifts fed by shale gas and tight oil revolution have
reinforced the rationale for Russia’s “look East” energy
strategy
• Over last few decades Russia had viewed the West
(especially Europe) as its primary energy market
• In recent years it has pursued a more deliberate strategy
of exporting to the region that will be the fastest growing,
Asia
• A decline in European demand growth (with or without European
shale gas production), and
• A lost potential of a U.S. export market has
• Placed greater imperative for Russia solidifying more oil
and gas export deals with Asia
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Geopolitical Impacts IV
• Many of these trends were underway before shale gas
and oil became an economic reality
• But they have had an effect
• More adequate supplies on the global market may mean that
Asian economies have more options forcing Russia to make its
terms more attractive
• Russia also squeezed on the investment front.
• U.S. assent as a potential competing energy supplier to
Asian markets may significantly alter the commercial
viability of some projects in Eastern Siberia and he far
East
• Russia still has an advantage in Asia because of
geographic proximity.
• In the net, Russia’s reorientation to Asia has been
complicated but not derailed by the shale revolution
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Geopolitical Impacts V
The shale gas and oil revolution adds to existing pressures
on Russia’s energy sector, reinforcing the necessity of
reform
• Russia’s success in both European and Asian markets
relies not only on price, but also whether it is seen as a
stable and reliable supplier
• Significant hurdles to overcome if Russia is to
accomplish this
• Declining production in Russia’s conventional fields raises
questions in the regard.
• Even more importantly
• world leaders view the dominance of Russia’s energy sector in its
overall economy, and
• the challenges of corruption as deeper structural concerns.
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Geopolitical Impacts VI
• Currently, Russia’s energy sector is run according to
domestic political needs
• Averting a significant decline will require new
investments, new technology and rationalization
• In this sense, the shale revolution in U.S. has provided an
impetus for reform.
• Russia’s unclear prospects for domestic reform of its energy
sector,
• And its strategy in response to perceived downward price
pressure loom over the future of its role in the world.
• On other hand, lower oil and gas pieces may force Russia
to address other sectors in its economy that have been
crowed out by oil and gas
• Would lead to more balanced economic growth
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Geopolitical Impacts VII
• The shale gas and tight oil revolution may be lessening
others’ interests in the Arctic to Russia’s advantage
• Opportunities presented by new shale oil and gas have
change the economics not only for Far East gas projects
but the Arctic as well
• Large projects (such as the Shtokman project) have been
postponed.
• International companies deferred Arctic development due to
environmental and reputational risk
• Despite this Russia and Norway continue to devote
significant investment funds towards the development of
the oil and gas resources in the Arctic
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Geopolitical Impacts VIII
• Russia sees Arctic resource development as essential to
its future economic development
• Norway seeks Arctic natural resources to replace
diminishing Noroth Sea oil assets
• Thus far Arctic remains a region of international
cooperation
• However Russia’s broader involvement there may give it
an advantage in shaping that future going forward.
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Geopolitical Impacts IX
• Big Producer: Saudi Arabia
• Though Saudi Arabia’s role in energy markets is different
than Russia’s – as another large producer many of the
implications of shale oil and gas are similar.
• Saudi economy remains heavily dependent on petroleum
and petroleum based fuels and fluids
• For internal consumption, and
• In meeting its revenue needs.
• Petroleum exports account for around 90% of the
kingdom’s export revenues
• Saudi Arabia is also the largest consumer of petroleum in
the Middle East
• Uses include inputs to petrochemical industries, transport, power
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generation and desalinization
Geopolitical Impacts X
• Declining U.S. markets reinforce a reorientation toward
Asia that was already underway
• Although a trend long in the making, the new U.S. energy posture
further shifts markets and thus Saudi Arabia’s focus to the east
• Saudi Arabia has carefully tried to balance its commercial
need to fill market demand in the East with maintaining
strong commercial ties with the west – joint ventures
• With fewer oil exports destined for the U.S. the growth
market for Saudi Arabia is even more focused on China
and other Asian economies
• Have built a series of refineries outside its borders in
China, Japan, South Korea, and Philippines
• Refineries are designed to run Saudi crude as part of
their feedstock stream ensuring the need for exports to
those destinations.
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Geopolitical Impacts XI
• Soft markets fed in part by shale complicate Saudi
Arabia’s role as a market balancer an add an additional
impetus for domestic reform
• Saudi Arabia has built up significant spare capacity over
the last five years to help protect the market from
unmanageable price spikes.
• The combined downturn in growth and rise in supply
means that it could be in a position to hold more spare
capacitity relative to overall market size than it has in a
lon time.
• Does this make economic sense if the U.S. becomes an
oil exporter?
• What domestic reforms are feasible – subsidy reform?
Economic liberalization?
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Geopolitical Impacts XII
• Weakening energy ties help feed a broader concern over
the United States’ continued commitment to stability in
the region
• Syria, Iran, have also caused relations between U.S. and
Saudi Arabia to be tense
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Geopolitical Impacts XIII
Reentrants: Iran, Iraq, and Mexico
• Softer market raise the stakes for reentrants to get back
on the market, putting increased pressure on OPEC
cohesion
• Overall softness of oil markets has presented a serious
challenge to OPEC which aims to regulate production to
manage price levels
• The rush on the part of Iraq and anticipated rush in the
case of Iran to recapture market share represents a direct
challenge existing OPEC producers and their system of
quotas
• Likely to further threaten the group’s cohesion
• OPEC has a spotty record of group coherence and discipline
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Geopolitical Impacts XIV
• OPEC’s power rests in the few key producers (mostly
Saudi Arabia) with the ability to influence price through
the size of its spare capacity.
• One or more of these countries returning to the market or
not is a significant factor for oil price outlook.
• Iraq has officially been out of he OPEC quota system for some
time
• Iran’s production is will below its quota
• Should one or both succeed in producing significantly
more oil it will cause tension between OPEC members.
• U.S. tight oil production has already begun to widen exiting rifts
within OPEC
• Which would be exaggerated further as member countries Iran
and Iraq attempt to recapture market share
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Geopolitical Impacts XV
• The new energy landscape accelerates internal need for
reform
• For formerly significant hydrocarbon producers who are
reemerging
• After isolation (Iraq), or
• Excluded from international energy markets (Iran), or
• Are suffering from steep production declines and
underinvestment (Mexico)
• The shall boom has served as a further impetus for
change.
• All three countries
• have a need to increase production and
• are world-class resource holders with under the right
circumstances to potential to bring on a great deal of
conventional oil and gas supplies over the next 10 to 15 years.
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Geopolitical Impacts XVI
• In order to attract investment over that time-frame each
has to undertake significant economic political and
security reforms
• The act of such reforms of lack of will feed into regional
and global relations, the stability of the countries etc.
• The liberalization of the oil sectors in these countries
could provide the impetus for broader reform and have
geopolitical impacts
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Geopolitical Impacts XVII
Revenue Dependents
• Numerous other contributors to oil and gas markets
whose economies are particularly sensitive to changes in
energy prices
• Most members of the GCC fall into the category as do
Libya, Algeria, Yemen, Venezuela and others
• For most of these countries, hydrocarbon price
fluctuations cut both ways
• On one hand, many countries use oil and gas export revenues to
support high levels of government patronage
• In this sense they benefit from high global prices
• On the other hand many subsidize internal energy consumption
or import fuel, and they benefit from low global prices
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Geopolitical Impacts XVIII
• Potential for modest future price decline raises risks of
instability
• The shale revolution and drop in oil prices is changing
the economics of planned development, production, and
infrastructure projects in multiple countries that are
highly dependent on energy revenues.
• Many countries in this basket – Algeria, Nigeria, Libya,
Yemen and Venezuela are living well beyond their oil
revenue budget and
• As it stands at current prices their ability to maintain the
basic structure of their economies is already under
threat.
• Many of theme are also to varying degrees political
unstable.
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Geopolitical Impacts XIX
• No concrete evidence that a loss of oil-derived revenue
willcause instability
• Howoever as softer energy markets narrow the margin for
finding the proper baance between revenue,production
and stability risks are rising.
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IMF Break-Even Prices I
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IMF Break-Even Prices II
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IMF Break-Even Prices III
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IMF Break-Even Prices IV
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IMF Break-Even Prices V
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Geopolitical Impacts XXI
Consumer: China
• China recently became to largest energy consumer in the
world and
• Is projected to consume more than twice as much energy
as the United States by 2040
• Greater energy supplies enhance China’s energy security
position but do not alleviate its overall vulnerabity
• From a security of supply vantage point the U.S. shale
revolution and the unfolding impact on traditional
producers in the Persian gulf is a main factor prompting
China to take stock of its relationship with MENA
producers
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Geopolitical Impacts XXII
• China ‘s dependence on Middle Eastern energy supplies
is growing and it is increasingly concerned about the
implications of a potential reduction of U.S. presence in
the region
• Chinese leaders are facing questions about what they
can and should do to protect the security of that supply
• China’s broader strategy has been to pursue supply
diversity in order to hedge against regional security
concerns and transportation risks.
• Shale gas potentially gives China a previously
unforeseen domestic option for improving its supply
security.
• China is home to the largest volume of technically
recoverable shale gas
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Geopolitical Impacts XXIII
• However China is at an early stage in unlocking its shale
resource potential and faces challenges stemming from a
lack of
• Adequate technology and technical expertise,
• Necessary infrastructure, water (in some locations), and
• Market conditions
• The shale gas and tight oil revolution has dampened
China’s “United States in decline” narrative stemming
from the recession of 2008
• The prospect of U.S. shale gas exports to the region has
helped to undermine that argument adding a strategic
dimension to the obvious economic benefits for Asian
consumers
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Geopolitical Impacts XXIV
• The shale revolution offers new possibilities to shift the
energy conversation between the United States and
China from one of competition to one of cooperatoion.
• In recent past Chinese international energy policy has
been portrayed as anticompetitive and a possible threat
to U.S. soft power influence
• The changing U.S.energy profile has allowed for new
areas of energy collaboration. In commercial area
Chinese have invested heavily in the U.S. with almost no
U.S. political backlash
• The investment has been a two-way street though more
limited on the Chinese side.
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Geopolitical Impacts XXV
• To U.S. oil and gas companies and oilfield service
companies that wish to capitalize on their shale gas
expertise -- the Chinese shale gas sector presents
significant commercial opportunities
• At the government-to-government level, cooperation
between the two countries to promote greater and
environmentally safe shale gas production has been a
high priority as exemplified by the United-States-China
Shale Gas Resource Initiative launched at the end of 2009
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Geopolitical Impacts XXVI
Consumer: Europe
• If China’s energy demand growth can be characterized as
voracious Europe’s could be seen a anemic
• Both however share a heavy dependence on imports to
meet their oil and natural gas needs
• In 2009 the EU imported 11.2 billion barrels of oil and 14.5
trillion cubic feet of gas – constant or increased slightly
since
• Russia the primary source of these imports supplying 33
percent of all EU crude, 25% of its natural gas and 23
percent of its solid fuels in 2011.
• Norway also supplies a substantial amount of gas to
Europe, providing almost 30% in 2013
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Geopolitical Impacts XXVII
• The shale gas and tight oil revolution that helped the US
to rebound economically in ways that widen the gap with
Europe and exacerbate competitiveness concerns
• At the same time that U.S. industry and consumers are
benefitting from lower natural gas prices, Europe
continues to face higher domestic energy costs that are
already high due to climate change policies.
• These costs are placing pressure on an already weak
European economy that is struggling to recover
• The growing worry over falling competitiveness has
become the dominant pre-occupation in many European
capitals.
• Industrial and end-user electricity prices per kilowatt
hour in Europe are around double those in the U.S.
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Geopolitical Impacts XXVIII
• Coupled with brader energy price challenges, the shale
revolution has increased pressures on Europe’s green
agenda
• As Europe’s economic struggles persist, the conflict
between recovery and environmental policy objectives is
increasingly evident
• Europe recently announced its post-2030 environmental
and energy goals and they are less ambitious than one
would have expected given their position in recent years.
• Shifting energy suppliers from unpredictable Russia to
the Middle East and North Africa do little to alleviate
concerns over vulnerability
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Geopolitical Impacts XXIX
Consumer: Japan
• For Japan, energy scarcity has always been an Achilles’
heel
• The country meets only 15% of its own total primary
energy needs with domestic sources.
• The virtual lack of indigenous fossil fuel resources
propelled nuclear energy to become the centerpiece of
the country’s energy security strategy
• In aftermath of the Fukushima disaster Japan shifted
toward greater use of fossil fuel in power generation,
especially natural gas
• Japan is the world’s largest LNG importer, second largest
importer of coal and third largest net importer of oil.
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Geopolitical Impacts XXX
• Better-supplied markets fed by U.S. shale gas and oil
production helped after Fukushima, but may not offer
long-term price releief.
• Japan was perhaps the most immediate and concrete
benefactor to more global gas supplies. Cargoes that
would otherwise have been destined fro the U.S. were
rerouted to Japan in the wake of Fukushima.
• Helped cushion the price impact but came at a high cost
to Japan’s overall economy.
• Consequently Japanese have been seeking cheaper LNG
sources around the world
• Assessing the potential for LNG and pipe gas projects
from Russia, natural gas in East Africa and LNG projects
in Australia and North America
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Geopolitical Impacts XXXI
• Nevertheless the Japanese view the U.S. shale gas
revolution as a key way to advance tier own supply
security by diversifying both their sources of supply and
associated transportation costs.
• While U.S. LNG represents an attractive opportunity for
Japan in the short term, far from assured that it would
retain its cost advantage over time.
• As a series of export projects come to fruition later this
decade, the gap between the Henry Hub price and
delivered prices of LNG from non-US sources may
narrow to the point where
• Price differential may no longer offsets the costs of
liquefaction and transportation from the U.S.
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