For a fresh perspective on geopolitical trends, look at the world through the lens of the natural gas trade. One of the reasons for Israeli unease with the Arab Spring is that the democratic uprising that took down Hosni Mubarak also brought interruptions in Israel’s supply of natural gas, much of which since 2008 has come from Egypt. Wondering about China’s new interest in Australia and Qatar? It’s about their abundant gas supplies and China’s tremendous energy needs. Desperate for signs of cooperation from North Korea? Check out reports that Kim Jong-il may agree to the construction of a natural gas pipeline that would link Russia, Pyongyang, and Seoul. From Asia to the Middle East to North America, a boom in natural gas usage is rearranging international connections, with major repercussions for global politics.
Energy consumers see that natural gas is relatively inexpensive, provided it can be transported efficiently, and abundant, especially if it can be harvested from shale rock and other unconventional deposits. The International Energy Agency (IEA) predicts that over the next twenty-five years gas will be the fastest-growing energy source, overtaking coal as soon as 2030. Around the world, natural gas is fast becoming the fuel of choice for electric power generation, especially with nuclear losing its appeal in the aftermath of the Fukushima disaster. Energy experts predict gas could even displace oil in the transportation sector, as car and truck engines are redesigned. The trend has so impressed IEA analysts that the agency in 2011 boldly predicted that the world is entering “a golden age of gas.”
The implications are significant. Because gas is somewhat cleaner than other fossil fuels, its rise as a fuel source should have environmental benefits. Because it is cheaper than oil, its increased use would lower energy costs and bring energy to millions of people who lack access to it now. But among the most striking consequences of a dramatic growth in natural gas consumption would be its effect on international relations. The energy trade is an important determinant of the global balance of power, and the shift to natural gas will introduce a new set of winners and losers, bringing greater independence to many countries and reducing the energy leverage that oil producers have traditionally enjoyed. After chairing an advisory panel on the subject for the Department of Energy, former CIA director John Deutch concluded that the prospective geopolitical shifts amount to no less than “a natural gas revolution” in global affairs.
A big difference between gas and oil is the trading infrastructure. While oil can be shipped in tankers, gas has moved mainly through pipelines, thus confining it largely to regional markets. Liquefied natural gas (LNG) is facilitating the development of a global market in gas, but it is still traded largely on a country-to-country basis, with negotiated prices that are specified in contracts. As gas usage has grown, these gas deals have grown more important.
In Bolivia, for instance, a determination to use natural gas wealth for political ends has affected relations with its neighbors for most of the past decade. Privately financed exploration in the late 1990s revealed that the country’s proven gas reserves were six times greater than what was previously believed, but Bolivian leaders could not agree on how to exploit them. A public outcry forced President Gonzalo Sánchez de Lozada to resign and leave the country in 2003 after he proposed to export natural gas to Mexico and the United States through a terminal in Chile, where it was to have been liquefied. (Anti-Chilean sentiment has run deep in Bolivia ever since a war with Chile in 1879 cost the country its Pacific access.) Bolivian gas is now sold instead to Brazil and Argentina, but disputes with Brazil over the terms of the gas contract have cast a shadow over that relationship in recent years, and management of the country’s gas exports is probably Bolivia’s top foreign-policy challenge.
The Bolivian case shows how the natural gas trade is more likely to be complicated by resource nationalism than the oil business would be. In a pique, Venezuelan President Hugo Chávez can say he is prepared to cut off oil sales to the United States, but because oil is a globally traded commodity managed by middlemen, the threat is largely meaningless. For every buyer, there will always be a seller. State-to-state gas deals, by contrast, are more likely to carry geopolitical overtones. In 2005, for example, Egypt took the bold step of agreeing to sell natural gas to Israel. The gas began flowing in 2008 through a pipeline that runs across the Sinai peninsula and continues undersea to the Israeli port of Ashkelon. Israel depends on natural gas for much of its power generation, and the deal with Egypt has provided the country with more than forty percent of its gas needs.
The notion of exporting gas to Israel has been highly unpopular in Egypt, however, and in the months following the collapse of the Mubarak regime, the Sinai pipeline has been repeatedly blown up, forcing Israel to fire up unused coal plants and convert several gas-fueled generating stations to run on fuel oil or diesel instead, at a cost of several million dollars. But the country had a possible solution: In December 2010, a Houston-based energy exploration company announced “a significant natural gas discovery” about eighty miles off Israel’s coast. Preliminary measurements suggested it could be the world’s biggest deepwater gas discovery in ten years and could provide Israel with enough gas to become a net exporter, providing it with more clout in its regional energy relationships.
South Korea also relies on imported energy sources and is keen on natural gas, which explains its interest in a Russian proposal to build a pipeline that would carry Russian gas from Siberia across the Korean peninsula. The idea has been floated for years, but North Korean leader Kim Jong-il apparently gave the proposal his firm support during a meeting in August 2011 with Russian President Dmitri Medvedev. South Korean President Lee Myung-bak subsequently agreed to work closely with the Russians to make the project a reality. The South Koreans have offered to build a natural gas power generating plant in the north as compensation for Pyongyang’s support for the pipeline. The key to the project’s success would be a design that would reassure Seoul that the North Korean authorities had no incentive to steal the gas or cut off the supply before it reaches the south.
The textbook illustration of a link between geopolitics and the natural gas trade is Russia. As of 2010, the country was the world’s top gas producer (after briefly being surpassed by the United States), with one state-controlled company, Gazprom, accounting for about eighty percent of the country’s production. Originally part of the Soviet Union’s Ministry of Gas Industry, Gazprom is in effect a state monopoly, and its power and reach are without comparison in the energy world. The company has its own armed forces, with as many as twenty thousand armed security guards and a private fleet of unmanned drones, used mainly to monitor pipelines and production facilities. The company effectively operates as an arm of the Russian state, and the company’s gas deals in Europe and Asia can legitimately be seen as an extension of Russian foreign policy, exemplifying the growing importance of “gas diplomacy.”
Though its relative importance as a gas provider to Europe has diminished over the past ten years, Russia still meets about a quarter of Europe’s needs, more than any other supplier, and European governments have long been uneasy about their dependence on Russian gas. About eighty percent of the Russian gas shipment to Europe goes through Ukraine, and the flow has been cut on two major occasions at least in part because of geopolitical wrangling. In January 2006, after Kiev resisted price increase demands, Gazprom reduced the flow of gas to Ukraine, causing shortages in other European countries that received gas through Ukraine. Politics seems to have played a role in the Russian move. Ukraine at the time was moving closer to the West, and Ukrainian leaders charged that Moscow, with its price increase demands, was trying to “blackmail” Ukraine into changing its political course.
The gas flow was cut once again in January 2009, causing a severe midwinter gas shortage across Europe. The two episodes convinced many European leaders that Russia was ready and willing to use Gazprom’s clout in what it considered its “privileged sphere of influence,” with the goal of bringing the former Soviet republics back under Moscow’s control. Joschka Fischer, the German foreign minister and vice chancellor from 1998 to 2005, spoke for many European observers when he wrote in 2010, “The primary goal of Russian gas policy isn’t economic but political, namely to further the aim of revising the post-Soviet order in Europe.”
The eagerness of European countries to reduce their dependence on Russian gas has prompted ongoing efforts to find alternative supply routes. Iraq and the former Soviet republics of Azerbaijan and Turkmenistan are promising sources, and for about a decade European authorities have been scheming to develop a gas pipeline that would bypass Russia. The Nabucco pipeline project, launched in 2002, would bring gas from the Caspian basin across Turkey to a hub in Austria. In addition, BP and two Italian companies have been promoting pipeline projects of their own along that southern corridor. The European Commission and the United States have both given strong backing to the Nabucco project, but the pipeline planners have had a difficult time lining up the supply commitments needed to make the project economically worthwhile. Moscow has put pressure on the Central Asian states to send their gas to Russia rather than Europe, and China is pursuing supply deals of its own in the region.
Among the major new developments has been the construction of new facilities to liquefy natural gas. Petroleum engineers have long known how to convert gas into liquid form through extreme cooling, but only in recent years has the LNG industry expanded to the point that it has altered gas trading patterns. The construction of dozens of new liquefaction and regasification plants around the world, along with the introduction of LNG tanker ships, has made it possible for island nations like Australia to become major gas exporters, and it has given gas-consuming countries new supply sources. The United States, Japan, China, and European countries were all quick to embrace the industry. (In the US alone, twelve new terminals have been built to receive LNG, with plants to regasify the LNG for shipment through pipelines around the country.)
The development has been rapid. The International Energy Agency predicts that between 2008 and 2020 total liquefaction capacity will double. Qatar, which opened its first LNG plant in 1997, by 2006 had become the world’s top LNG producer and was investing in LNG terminals around the world. For European countries with terminals, importing LNG from Qatar or Algeria or Nigeria is another way to reduce dependence on Russian supplies. By 2035, for example, LNG is expected to supply about half of the United Kingdom’s natural gas needs, with imports from Qatar leading the way. British Prime Minister David Cameron’s February 2011 visit to Qatar, culminating in a new gas deal, put Moscow on notice that Europe had alternatives to Russian gas.
Qatar and other LNG exporters have an even more inviting market in Asia. The IEA foresees China’s gas consumption growing by nearly six percent annually up to 2035. Japan, having lost much of its nuclear generating capacity as a result of the March 2011 earthquake and tsunami, is now a huge gas market as well, and LNG imports from Australia, Qatar, and the other gas exporting countries will be essential to its energy mix. Such developments were not foreseen twenty years ago. The LNG industry has diversified the gas trade, introducing new producers into the picture and giving gas importers more supply choices just as their demand for gas is growing.
Without a doubt, the most revolutionary recent development in the natural gas world has been an improvement in the ability to extract gas from shale rock and other unconventional sources. Geologists have known for two hundred years that shale contains combustible gas, but the tightness of the shale formation meant that the gas was generally considered unrecoverable. In the last decade, however, energy companies in the United States have found that it is economically possible to harvest shale gas through the use of hydraulic fracturing (“fracking”), by which large amounts of water mixed with sand and chemicals are injected at high pressure into the rock formations in order to free the gas trapped inside. In addition, gas producers are now employing horizontal drilling techniques, turning their drill bits in a horizontal direction after reaching a deep shale reservoir and thus reaching more deposits from a single well.
These developments have proven so promising that analysts are dramatically increasing their estimates of how much shale gas can be recovered around the world. In the United States, shale accounted for almost no gas production as recently as 2000. It now provides about twenty percent of the total production, and within twenty years it could be half. The US government’s Energy Information Administration has estimated that if recoverable shale gas reserves are included, the United States may have enough natural gas to meet US needs for the next hundred years, at current consumption rates.
Such estimates are imprecise and may well be adjusted downward, but the production of shale gas has already dramatically altered the US energy picture. Just a few years ago, it was assumed that the United States would be a net importer of natural gas, with much of it arriving as LNG. But the terminals and regasification facilities that were built to facilitate LNG imports are now going largely unused. The successful production of shale gas could even mean the United States will soon be a net gas exporter. Some of the existing regasification facilities, built for LNG imports, could actually be converted to liquefaction plants, so that excess domestic gas production can be exported as LNG.
If the United States became self-sufficient in natural gas, there would be significant geopolitical implications. When Arab states in 1973 imposed an embargo on oil shipments to the United States as punishment for US support of Israel, American consumers learned how vulnerable their country was to the “oil weapon” when used by potentially hostile states. As the United States moves toward energy independence, if only in gas, that vulnerability disappears. There would also be geopolitical effects overseas. With the United States no longer importing LNG, that gas could go to European consumers instead, and Europe’s dependence on Russia for its gas supply would diminish. In 2000, Russia was supplying about forty percent of Europe’s gas; some estimates have the Russian share sliding to ten percent by 2040.
Whether the United States can maintain a sharply upward trend in shale gas production depends on whether the reserves are as promising as they now appear to be, whether the gas price is sufficient to cover production costs, and especially whether environmental concerns associated with shale drilling are addressed. Hydraulic fracturing requires enormous amounts of water, and recycling or disposal of the waste water can be problematic. There have been cases where shale well casings have proved defective, and contamination of the surrounding soil or water has occurred. Authorities in New York, New Jersey, and Maryland have imposed temporary moratoria on fracking in order to assess the practice and determine whether it imposes any risks to drinking water or human health.
France and South Africa have both banned fracking, and the European Union is considering its own moratorium. The United Kingdom, Germany, Ukraine, and other countries have not yet banned fracking altogether but are moving cautiously in their adoption of the practice. To date, only the United States and Canada are producing shale gas in significant quantities.
Shale advocates insist that careful monitoring of fracking practices and rigorous regulation should address the environmental concerns, and they argue that shale gas reserves are so abundant that it would be foolish for countries not to exploit them. The International Energy Agency predicts that the gas industry will succeed in dealing with the environmental challenges associated with shale and other unconventional gas sources, and that by 2035 unconventional gas will account for twenty percent of global production. China, Australia, Africa, Europe, and South America all have vast shale gas reserves.
Poland, which has depended on Russia for half its energy needs, is the one European state to embrace shale gas with enthusiasm. Energy analysts believe Poland has enough technically recoverable shale gas to meet its consumption needs for more than three hundred years. More than one hundred exploration concessions have already been granted in the country, and about thirty companies have begun drilling there. “Shale gas can redefine Poland’s energy relation with other countries,” says Beata Stelmach, the undersecretary of state in the Ministry of Foreign Affairs. “It will reduce our dependence on unstable and unpredictable suppliers.”
Next after Poland are China, Australia, and India, all of which are eager to pursue shale opportunities. China has set a goal of satisfying ten percent of its gas demand with shale by 2020, in part because of its exploding energy demand and its concern about overreliance on coal, which is fast polluting the Chinese air. Some shale drilling has begun in Australia, although higher costs and a less developed infrastructure mean it will be several years before shale production can take off there.
If shale gas does catch on, the energy world will not be the same. Unlike oil, shale reserves are found all over the world. “It’s an equalizer,” says Amy Jaffe, director of the Energy Forum at Rice University, which has a Department of Energy grant to study the changing geopolitics of natural gas. If countries can satisfy their energy needs with production close to home, Jaffe points out, it will be far easier for them to maintain political independence. According to the IEA’s 2011 World Energy Outlook, all major regions of the world have recoverable gas resources equal to at least seventy-five years of supply at current gas consumption rates. By contrast, the trend in oil production, according to the IEA, is toward “greater reliance on a small number of producers, with oil delivered to markets along a limited number of potentially vulnerable supply routes.”
The more countries produce their own gas from local shale reserves or other unconventional gas sources, the less clout large gas exporters will have on their own. A few years ago, with natural gas demand rising, some energy analysts were predicting the organization of a gas exporters cartel, led by Russia, Iran, Venezuela, and Qatar, that could attempt to control the global gas market. Those fears now seem overblown. An initial meeting of a “Gas Exporting Countries Forum” in Qatar in November 2011 ended without any agreement on how the group could maximize the income of its member states.
It is worth remembering that the use of natural gas as an energy source is a relatively new phenomenon. For many years, gas was treated as more of a nuisance than a resource. Natural gas found in oil fields was often burned off as a waste product. The transport difficulties were too great and the demand too low. With the introduction of LNG, however, the natural gas trade got a big boost, and the low cost and relative cleanliness of gas—compared to coal and oil—broadened its appeal. It is still too soon to know whether the production of gas from shale and other unconventional sources will prove as promising as shale advocates predict. Many obstacles remain in the way of a “natural gas revolution.” But the story no longer rests on speculation and prediction alone. Gas has already changed the energy world.
Tom Gjelten is a correspondent for NPR.
Photo Credit: www.kremlin.ru