Monthly Archives: October 2009

Shale Gas: A Game-Changer with Global Implications

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The following opinion pieces were written by researchers, fellows or scholars. The research and views expressed in these opinion pieces are those of the individual(s), and do not necessarily represent the views of the James A. Baker III Institute for Public Policy.

Tuesday, October 06, 2009
Kenneth B. Medlock III, James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics

Less than a decade ago, companies were planning large scale investments that would allow them to substantially increase shipments of liquefied natural gas (LNG) to the United States from Africa, the Middle East and Australia. This was spurred by the expectation that indigenous supplies would continue to dwindle and demand, particularly for power generation, would continue to grow. However, success in the development of domestic U.S. shale gas has turned this thinking on its head. In fact, growth from the production of shale gas in the United States has contributed to low capacity utilization of the LNG regasification terminals in North America, and modeling at the Baker Institute indicates that this trend is likely to continue into the early 2020s.

The recent and expected future expansion of North America shale gas production has an important implication for the global natural gas market and the geopolitics of natural gas in Europe and, to a lesser extent, Asia. Namely, it will lower the import requirement of the United States relative to what it would have been. A lower LNG import requirement for the United States effectively diversifies the global gas supply portfolio by increasing the available supply to the global market. Thus, supplies otherwise intended for North America can be redirected, even if still in the planning phases of development. To the extent that supplies are redirected, growth in shale in North America benefits European nations in their supply diversification efforts, as well as Asian countries seeking to expand their natural gas imports. In short, expanded supplies in North America, or in any major consuming region for that matter, weaken the leverage that Russia and other major gas-exporting countries, such as those involved in the Gas Exporting Countries Forum, might have on consuming nations moving forward.

Energy security benefits accrue to all natural gas importing countries as a result of new shale developments in the United States and Canada. To the extent that supply growth comes from countries and regions with a history of instability, greater reliance on those sources increases the likelihood of a major disruption in the global gas market. North American shale abates that reliance and reduces the risk of a major global disruption, thereby having significant geopolitical implications. For example, Baker Institute modeling indicates that supply from Iran tends to increase the most when factors inhibit the growth of North American shale supplies. This indicates that Iranian leverage is lessened as a result of expanded shale gas developments in North America. Similarly, as discussed above, expanded North American shale production strengthens the hand of European consumers in dealing with Russia. While shale gas is but one element of the global gas market, it is important to fully understand the broader implications of this new resource.

Timing of future developments is important. Many of the resources in play will have similar costs to the burner-tip, so first-mover advantage is crucial. Recent indications of a change in strategy by Russia with regard to international oil company (IOC) participation in the development of its potentially vast resources in the Yamal peninsula are a strong indicator that Russia understands the potential costs it may incur if it does not move forward quickly. While shale gas developments may reduce the share of the North American market that can be captured by Russian LNG, Gazprom runs the risk of losing significant market share in Europe if it fails to move decisively with plans to develop the Yamal resources. This point is made even more salient by recent interest in shale potential in Eastern Europe. If potential shale resources in countries like Germany, Hungary and Ukraine, as well as other Eastern European countries, prove to be commercially viable, Russia could have a real problem on its hands. On Oct. 1, 2009, Christian Wulff, prime minister of Lower Saxony, Germany, visited the Baker Institute and discussed his interest in developing shale gas in Lower Saxony. ExxonMobil Exploration Company executive Tim Cejka told the audience at the event that ExxonMobil hoped to identify shale gas resources in Germany and other large end-use markets. Moreover, he believed that the shale gas potential outside the United States was substantial. Click here to view a webcast of this event.

Gazprom’s sudden renewal of interest in developing the Yamal in partnership with IOCs probably serves two purposes. First, Gazprom might be hoping that its offer will shift IOC focus (and their capital) back to Russia, in hopes of diverting efforts away from interest in shale resources in Europe. However, the IOCs do not have a great track record with investments in Russia, so this may be wishful thinking. Second, Gazprom must act quickly to defend its strong market position in Europe against an increasing number of competitors. Not only is maintaining a reliable flow important, but expansion is also crucial. Other suppliers are studying new ways to penetrate the European market, such as Qatar’s recent interest in developing an LNG receiving terminal in Poland or the Caspian states’ willingness to entertain discussions about developing pipeline routes to Europe that bypass Russia. Moreover, shale is a potential threat. If Russia can successfully expand Yamal production, it could quiet some of these potential competitors. Gazprom’s visible expansion into the North American market via LNG trade, once tied to gaining access to a growing and premium market, might now be more to keep the option open to redirect LNG cargoes to the United States to prevent it from having to either temporarily shut in production or flood the European market.

As technologies applied to shale formations in the United States are applied to shale formations in Europe and Asia, it is possible that the nature of gas supplies will change substantially. Rather than expanded reliance on Russia and the Middle East, we could very easily see lower reliance on those countries, which dramatically changes the dynamics at the negotiating table and geopolitically. The mere threat of shale gas developments in Europe, if credible, could alter the behavior of Gazprom in supply negotiations. Not only might they be more open to foreign investment, but they could also be more willing to accept a move away from explicit oil-indexation, a move seen by many as inevitable. Time will tell if the shale potential plays out in Europe and even in Asia, where there has also been some recent interest. It has certainly changed the game in the North American natural gas market, so at the very least it should have everyone’s attention.

  • View graphs and slides that illustrate this blog.
  • To view slide presentations used during the Baker Institute’s Oct. 1, 2009, event with Christian Wulff, click here and scroll to the link above each panelist’s name.

Original Article

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The demise of the dollar

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In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading

Tuesday 06 October 2009

By Robert Fisk

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

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