NS4053 Winter Term 2015 New Energy Geopolitics

1. NS4053 Winter Term 2015New Energy Geopolitics

2. 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 issues?

3. 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

4. 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 peak in 2006

5. The U.S. Shale Boom III

6. The U.S. Shale Boom IV

7. 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.

8. 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

9. 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 U.S.

10. 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

11. 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

12. 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 advances in making more oil available to U.S. markets.

13. 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 needs

14. 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.

15. 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.

16. 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

17. 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 near-term emissions reduction as cleaner energy solutions are developed

18. 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 production

19. 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

20. 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

21. 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.

22. 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

23. 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

24. 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.

25. 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

26. 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

27. 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.

28. 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 generation and desalinization

29. 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.

30. 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?

31. 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

32. 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

33. 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

34. 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.

35. 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

36. 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

37. 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.

38. 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.

39. IMF Break-Even Prices I

40. IMF Break-Even Prices II

41. IMF Break-Even Prices III

42. IMF Break-Even Prices IV

43. IMF Break-Even Prices V

44. 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

45. 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

46. 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

47. 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.

48. 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

49. 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

50. 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.