At the beginning of the last decade, many energy market forecasters and analysts foresaw a transformation of natural gas markets into something akin to the world crude oil market. Basically, the world’s three main regional natural gas markets (Asia, Europe and North America) which, to date, had evolved mostly independently, would become much more integrated as North American and Western European production declined steadily over time.
In the future, supply patterns would be characterized by rapidly rising shipments of liquefied natural gas (LNG) — the glue, if you will, that would increasingly bind together the three regional markets into one, a market structure much like that prevailing for crude oil. There was even talk of the possible creation of an OGEC — Organization of Gas Exporting Countries — a cartel that would operate much along the lines of OPEC.
After all, at the end of year 2000, approximately 55 percent of the world’s known reserves of natural gas were located in three countries: Russia, Iran and Qatar. The geopolitics of natural gas were about to become much more complicated and would evolve to parallel that of crude oil, with North America (aka, the United States) becoming increasingly reliant on Middle East countries to meet domestic natural gas consumption requirements.
We had seen this movie before and hadn’t liked it much then, but it seemed that we were, however reluctantly, resigned to a second screening.
By the middle of the first decade of the 2000s, not much had happened to challenge this view of the future of natural gas markets. In 2006, for example, when the Energy Information Administration (EIA), part of the U.S. Department of Energy, released its annual energy outlook, the picture it presented of natural gas markets was one where net imports were forecast to meet about 20 percent of U.S. domestic consumption by 2030 — a sharp increase in the penetration of the U.S. marketplace by foreign sources of supply. And this in spite of the assumed construction and operation of a pipeline bringing Alaskan production to the lower 48 states. Canada’s importance as a source of gas supply for the United States was portrayed as falling sharply (even with a fully operational Mackenzie Valley pipeline), leaving much higher LNG shipments to account for about 80 percent of U.S. gas imports (up from a share of about 5 percent in 2005).
Over the next few years, this picture of future natural gas supply patterns changed significantly. In the 2011 edition of its Annual Energy Outlook, for example, the EIA projected that the United States would be almost self-sufficient in natural gas by 2030. Marked increases in domestic production would replace steadily falling import volumes from Canada and limit LNG imports, which would remain a minor source of North American gas supply, in sharp contrast to the situation envisaged as recently as in the 2006 version of the Outlook. All this was seen as occurring without the construction of pipelines across Alaska and down the Mackenzie Valley.
From this perspective, the North American natural gas “island” would thus appear to be sustainable for much longer than had been conceived even a few short years earlier. For the foreseeable future, there would be no single, integrated world market for natural gas and North Americans, at least, would be spared its complicated geopolitics.
What brought about this change in perception about the future of natural gas in North America? Simply put, the growth in supply capacity was driven by the assumed commercially viable extraction of North America’s huge reserves of shale gas. The successful marriage of two techniques, namely horizontal drilling and hydraulic fracturing (or fracking), that had been increasingly observed over the last 10 years or so led the EIA, among others, to revise its vision of the potential role of shale gas in the North American supply picture.
Not only was it technologically possible to tap these resources, but it was now also economically feasible to do so: actual production experience using horizontal drilling and fracking (which typically involves the high-pressure injection of water and chemicals to release gas trapped in formations) showed that shale deposits could be tapped at much lower cost than previously believed. Shale gas, it is now thought, holds a competitive advantage over production from Arctic regions and LNG imports and will continue to do so for decades to come. What had previously been seen as a possibility only far into the future now emerged as current-day reality. And this in less than five years.
Granted that shale gas production presents its own challenges. For example, there are concerns that the liquids and chemicals used in fracking could, under certain circumstances, contaminate underground water supplies. However, this technique has been used for a long time by the North American oil industry which has an excellent track record in preventing groundwater contamination from occurring. While it is simply not possible to state categorically that nothing will ever go wrong, it is also clear that an appropriate regulatory environment has encouraged and will continue to encourage industry to operate responsibly and minimize the likelihood of water contamination due to fracking.
Heightened activity levels in North America have generated a lot of information about the location, extent, and properties of shale gas deposits. This is not the case elsewhere in the world, and so the prospects for shale production to impact natural gas markets in Asia and Europe remain much more uncertain. Nonetheless, a recent report issued by the World Energy Council suggests that Russia has potentially larger quantities of shale gas than the rest of the world (excluding North America) combined.
If this were to prove correct, then one could imagine a future that would include a much closer integration of Asian and European natural gas markets, with Russia at the heart of this development. Europe would become even more reliant on Russian supplies of natural gas and potentially huge market opportunities in Asia, especially in China, could be tapped by Russian production. The geopolitics of natural gas outside North America would thus revolve even more closely around Russian interests.
What of crude oil? It is, after all, the single most important commodity in world trade. What kinds of changes in the market structure for this energy source are contemplated by forecasters and analysts?
In comparison to the developments envisaged for natural gas, the answer is rather placid: basically, the future is presented as a rather straightforward extrapolation of the present and of the recent past. The U.S. EIA and the International Energy Agency, among others, foresee continued dominance of OPEC on the supply side and demand patterns characterized by weak (if not negative) growth in OECD countries, contrasted with robust increases in oil product consumption in emerging and developing economies, in particular China and, to a lesser extent, India, Brazil, and some Middle Eastern countries, such as Saudi Arabia.
For some, this is seen as a situation where the benefits of continued U.S. investments (military and otherwise) in efforts to enhance the security of world crude oil supplies would increasingly accrue to consumers outside of the United States, and especially to those in China and select other emerging economies. The future would thus be one where U.S. taxpayers increasingly subsidize oil product consumers elsewhere in the world. Continued political resistance within the United States to military expenditure reductions, even in the face of deep concerns over government budget deficits, is certainly supportive of the kind of world oil market evolution described above.
It is true, however, that huge amounts of non-conventional crude oil are known to exist and that Canada’s oil sands deposits contain significant reserves on a world scale. But even the most ambitious forecasts of which I am aware have Canadian production reaching no more than 50 percent of current Saudi Arabian output by 2030.
Yes, an important source of supply for the world crude oil market, but one highly unlikely to account for much more than 5 percent or so of total world production in the foreseeable future. To complicate matters even more, recent estimates (including that reported in BP’s Statistical Review of World Energy 2011) of extra heavy crude oil reserves in Venezuela (a founding member of OPEC) exceed those of Canada’s oil sands. The preeminence of crude oil reserves held by OPEC members appears to be a factor that will be with us for quite some time.
Nonetheless, sustained high crude oil prices are certainly having an impact on exploration and development activity patterns. In the United States, for example, where much of world oil and gas drilling occurs, for every drilling rig involved in oil-related operations in 2005, there were on average six such rigs working natural gas prospects.
By April of 2011, however, the EIA reported that there were more active oil drilling rigs than gas rigs in operation in the United States. Some of this increased oil-related activity was directed at U.S. shale oil deposits, which are estimated to be 50 percent larger than Canada’s oil sands and, according to a World Energy Council report, thought to be by far the largest in the world.
Development and production of these deposits along with Canada’s oil sands production could go a long way in reducing U.S. dependence on sources of crude oil outside North America, thus making it even more evident that U.S. investments in enhancing the security of world oil supplies primarily benefit consumers in other parts of the world. However, currently available technology is such that the costs of producing shale oil are high (even relative to other non-conventional sources). Furthermore, the chemical composition of the oil extracted from shale formations differs from that of conventional and other non-conventional crudes, and poses significant challenges at the refining stage.
If only someone were to find a commercially viable way of extracting and processing shale oil, future prospects for the world crude oil market might look quite different than these do today and could signal a new era in the geopolitics of oil.
André Plourde is an economics professor and dean of Carleton University’s Faculty of Public Affairs.
