JAMES CLAD

Shale oil and gas gives the U.S. more leverage around the world

Having the U.S. turn from energy importer to energy exporter changes geopolitics

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Since midpoint in the last decade, America’s shale-energy balance sheet has grown ever more positive. The abundance today of shale-enabled oil and natural gas defines many places where investment and economic activity had once been scarce. Just look at Pennsylvania, North Dakota, Texas and many other states.

But there’s another benefit — albeit one which few Americans easily discern: The shale revolution is generating national security and geopolitical assets, real-world consequences moving more sharply into focus in recent weeks.

Just the potential for sizable U.S. energy exports gives pause to petro-dictators and expansionist bullies, forcing Russian President Vladimir Putin, for example, to downscale his ambitions.

Central Europe’s game of power poker these days rests not on tanks and missiles but on Russia’s gas-supply monopoly. Natural gas reaches West European buyers via pipelines crossing Ukraine. In earlier years, Russian behavior had sparked some periodic heartache about this monopoly but, in recent months, the angst has congealed into a determination to weaken Russia’s grip.

This is the security metric through which we should view the push by a bipartisan group of lawmakers for faster federal approval of more than a dozen applications to export liquefied natural gas. Of course, expectant exporters want to profit from America’s newly won primacy as the world’s leading natural gas producer. But the geopolitical impetus also counts for a lot: U.S. LNG exports can weaken Russian and other supply monopolies. In a hydrocarbon “monoculture” like Russia, oil and gas form Mr. Putin’s primary source of leverage.

Critics of the export plan say LNG exports won’t make much short-term difference, considering that there is only one American LNG export terminal, in Alaska. They correctly say the U.S. government cannot direct where LNG will go even with new export terminals. Others point out that American-sourced natural gas may not be able to compete with piped Russian gas, given liquefaction and shipping costs.

While there’s weight in these views, the critics overlook the determination in Europe to find alternatives to Russian gas. They also ignore how profoundly the U.S. shale revolution has already affected the international energy marketplace. In this respect, shale gas production — especially from the Marcellus Shale — has already provided market flexibility to our allies without our having sent a single LNG cargo across the Atlantic.

Some background: In 2005 it seemed inevitable that the United States would displace Japan as the world’s largest LNG importer. Conventional natural gas production couldn’t keep up with growing U.S. domestic demand. So entrenched was this view that American companies invested billions of dollars in building LNG import terminals, and major gas exporters like Qatar made multi-billion-dollar bets on building LNG export infrastructure aimed at the U.S. market.

But the LNG import boom never materialized. Domestic production now outpaces domestic demand and the established suppliers have had to look for new buyers. Qatari LNG now finds its way into Europe and, after the Fukushima reactor disaster, into an energy-starved Japan that has powered down all of its nuclear reactors.

Given that natural gas increasingly has an economic and environmental advantage over coal as an electricity-generating fuel, American coal is finding its way into export markets. As U.S. natural gas production is reducing coal’s share in our electricity marketplace, it is now resurgent in Europe where coal imports hit an all-time high in 2012. Even the Germans, now phasing out commercial nuclear plants in favor of renewable energy, have been buying more coal than ever. Despite the country’s green image, coal plants provided 52 percent of Germany’s electricity last year.

The U.S. geopolitical advantage arises from these trends. Whether from coal or LNG supplied by the United States or other exporters, Europe’s growing range of energy supply options poses a long-term threat to Russia’s monopoly. Over half of Russia’s state budget comes from energy exports. Europe is easily its largest buyer — no matter what the much trumpeted Russia-China deal may portend. The reliance by Europe on Russia for 30 percent of its natural gas points to Russian vulnerability as well.

The geopolitical consequences of the shale revolution transcend periodic, regionally specific crises such as Ukraine or Iran (where U.S. sanctions have been able to bite exactly because of growing North American oil and gas supplies entering world markets).

Aside from physical exports, U.S. shale expertise may well help Europe diversify its energy sources away from Russia, too. There’s talk of exploiting significant shale basins in Britain, France, Germany, Poland and, yes, Ukraine. According to NATO Secretary-General Anders Rasmussen, Russian intelligence has sought ways to co-opt European environmental NGOs that oppose hydraulic fracturing.

Ever since the early 1970s, the dominant motif has posited “energy needs” with “energy vulnerability,” as the United States became the major global oil importer. This vulnerability has rested heavily on our thinking about security, itself a legacy of oil embargoes from that era. Today, the shale revolution is changing that calculus.

New trends, such as the revival of energy-intensive U.S. industries and a distinct improvement in our terms of trade, reflect the still-surprising energy abundance accelerating since 2005. Future natural gas exports and high-value North American shale expertise will play an ever larger part of the geopolitical long game. This new game has only started and, for a change, we seem to have a winning hand.

James Clad, a former deputy assistant secretary of defense for Asia, consults for energy and investment firms and is senior adviser at the Center for Naval Analyses and at Jane’s Defence and Cambridge Energy Research Associates.


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