Shale Gas and U.S. National Security

This post was written by Kenneth B. Medlock III, the James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics at the Baker Institute Energy Forum.

Just a decade ago, companies were planning large scale investments that would allow them to import substantial volumes of liquefied natural gas (LNG) to all coasts of the US from Africa, Russia, the Middle East and Australia.  This was spurred by the expectation that domestic supplies would continue to dwindle and demand, particularly for power generation, would continue to grow.  However, success in the development of shale gas spurred by upstream innovations involving the use of horizontal drilling and hydraulic fracturing has turned this thinking on its head.  U.S. shale gas production has risen from virtually nothing in 2000 to over 20 percent of domestic production today, which, in turn, has rendered the LNG regasification terminals in North America largely idle.  Moreover, modeling at the Baker Institute indicates this is not likely to change for two to three decades.

A Department of Energy sponsored study just released by the Baker Institute examines the geopolitical consequences of rising supplies of natural gas from shale and the implications for U.S. security and foreign policy. The study was performed utilizing the Rice World Gas Trade Model to compare scenarios in which global shale gas resources can be developed to different extents.  Three scenarios in particular were the focus of the study.  The first posits that all known global shale gas resources can be developed, given prevailing commercial technologies and open tendering practices. This so-called Reference Case includes economic and geologic assessments of global shale resources North America as well as in Europe and Asia, so it presents a picture of the current expectations for changing geopolitical and market implications of a full-scale development of known shale gas resources.

The other two scenarios place restrictions on shale gas development so that the outcomes can be compared to the Reference Case.  The second scenario is constructed as a counterfactual aimed to demonstrate what the world would look like if shale gas developments did not progress to the levels currently under way.  It assumes shale developments in North America are limited to the Barnett, Woodford, and Fayetteville shale plays, and that no shale gas outside of North America is open for development.  The third scenario posits that the full development of shales in the Northeast US is disallowed indefinitely, perhaps due to environmental or other preventive policies. Comparison of these cases illuminates the importance of shale gas to US national interests.

Much of what is concluded in the study follows from the outcome depicted in Figure 1.  In particular, Figure 1 highlights the role that shale plays in limiting the need for LNG imports to the US. In the counterfactual case where shale development is not allowed, the US becomes a major importer, much as was expected to occur in the early 2000s. The two primary beneficiaries of the expanded demand for LNG are Iran and Venezuela, while Russia benefits indirectly through higher LNG prices that allow it to maintain market share in Europe.  Thus, shale gas effectively reduces the projected influence of these countries in global gas markets by providing the US with a domestic alternative source of supply.

In sum, the Baker Institute study finds that full development of commercial shale gas resources in the United States will have multiple beneficial effects for U.S. energy security and national interests. The full and timely development of U.S. shale gas resources will limit the need for expensive imports of LNG. Shale gas will also lower the cost to average Americans of reducing greenhouse gases as the country switches to cleaner fuels. Moreover, as greater shale gas production creates greater competition among suppliers in global markets, U.S. and international prices for natural gas will not rise substantially and current pricing paradigms – such as oil-indexation – will be challenged. Increased competition also reduces the threat that a Gas-OPEC can be formed, and it will trim the petro-power of energy producing countries such as Russia, Iran, and Venezuela to assert themselves using an “energy” weapon or “energy diplomacy” to counter U.S. interests abroad.

The study finds, for example, that shale gas’ role in global markets will greatly reduce Russia’s leverage over Europe, eventually limiting Moscow’s share of the Western European market to less than 13 percent, down from its recent peak of 27 percent. The dramatic lessening of Europe’s dependence on Russian gas will likely reduce Russia’s ability to unduly influence political outcomes. A more diverse energy supply for Europe enhances U.S. interests by buttressing Europe’s abilities to resist Russian interference in European affairs and help border states in the Balkans and Eastern Europe assert greater foreign policy independence from Moscow. In general, a more energy independent Europe will be better positioned to join with the United States in global matters that might not have the full support of Russia.

Rising U.S. shale gas supplies will also assist the United States in its policies toward Iran. The study finds that shale gas developments effectively close the commercial window for Iran to export large amounts of natural gas for an additional 20 years, making it easier for the United States to achieve buy-in for continued economic sanctions against Iran. By delaying the need for Iranian gas, the United States buys time to find a better solution to the Iranian nuclear problem and leaves open the possibility that political change will take place in Iran before its influence as a major global natural gas supplier grows. In addition, the long delay in the commerciality of Iranian gas means that Tehran will have trouble moving forward with the development of pipelines to India or Pakistan until at least the mid-2020s, thus reducing a potential source of tension between the United States and India.

Finally, the rise of shale gas production will lower the global requirements for natural gas from volatile Middle East and North Africa over the next few years, giving the region time to sort out its current political and social turmoil before its importance as an energy supplier grows from currently high levels.

The study also highlights that shale gas production…

  • … reduces the future share of world gas supply from Russia, Iran, and Venezuela; without shale discoveries, these nations would have accounted for about 33 percent of global gas supply in 2040, but with shale, this is reduced to 26 percent.
  • … reduces U.S. and Chinese dependence on Middle East natural gas supplies, lowering the incentives for geopolitical and commercial competition between the two largest consuming countries and providing both countries with new opportunities to diversify their energy supply.
  • … reduces the opportunity for Venezuela to become a major LNG exporter and thereby lowers long-term dependence in the Western Hemisphere and in Europe on Venezuelan LNG.

Natural gas stands to play a positive role in the global energy mix, making it easier to shift away from more polluting, higher carbon-intensity fuels and increasing the near-term options to improve energy security and handle the challenge of climate change. The ample geologic endowment of shale gas in North America and potentially elsewhere around the globe means that natural gas prices will likely remain affordable and that the high level of supply insecurity currently facing world oil supplies could be eased by a shift to greater use of natural gas without fear of increasing the power of large natural gas resource holders such as Russia, Iran, and Venezuela.

To tap this benefit, it will be essential for the United States to promote a stable investment climate with regulatory certainty. In particular, the United States will need adopt policies that ensure shale gas exploitation can proceed steadily and predictably with sound environmental oversight. The United States should focus squarely on setting the policies needed to ensure that shale gas can play a significant role in the U.S. and global energy mix, thereby contributing to greater diversification of global energy supplies and to the long-term national interests of the United States.

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