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Energy Policy

America’s Bright Energy Future

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The New Energy Map

Two strategically important documents were released this June. The first was the Energy Information Administration’s (EIA) report[1] on World Shale Oil and Shale Gas reserves. This report was published in 2011 and 2012, but for the first time, the 2013 report looked beyond U.S. borders and assessed the technically recoverable[2] world reserves by studying 137 shale formations in 41 countries. The second document is President Obama’s new energy policy[3], focused ostensibly on combating climate change.

Both documents are geo-strategically significant: the United States remains the world’s foremost energy consumer, with China close behind; and it is also one of the global leaders in energy production and technologies. American companies are leaders in development of fourth generation nuclear reactors, as well as in hydraulic fracturing; the U.S. is also competitive in renewable energy technologies. The U.S. also sits atop the world’s largest coal reserves, with 27% of global proven reserves. Finally, the U.S. is the second largest emitter of greenhouse gases, having recently been overtaken by China, and still the largest emitter per capita.

It is evident that whatever energy policies the United States finally adopts will have a major impact on the rest of the world; through energy prices, through R&D investment and through moral suasion as well (or lack thereof). Yet of the two documents, the most significant is the EIA’s report, not the President’s proposed initiatives. This is due both to the remote likelihood of the President’s energy policy being translated into legislation with any degree of success or resemblance to Mr. Obama’s original intent; but also to a regrettable lack of ambition evident in the plan. The far more technical EIA report, while only showing what is rather than what maybe, paints a far brighter picture for U.S. energy policy.

This article deals with the EIA report. My next article will discuss Mr. Obama’s climate proposals.

Endowed by Nature and Nature’s God

The United States has always enjoyed a particular abundance of natural resources of every description. A temperate climate, fertile soil and abundance of waterways have not only made America’s farmers some of the most productive in the world, but have granted cheap and easy access to the world’s markets through New York and New Orleans. Energy resources are no different. The most recent report of the EIA reaffirms the abundance of recoverable shale resources within America’s borders. The United States leads the world in shale gas reserves and is second only to Russia in shale oil reserves.

Of strategic interest is the fact that the top 6 nations in each category control approximately 66% of shale gas and shale oil reserves in the world. Such a concentration of resources has major implications for global supply and market price of these commodities, as well as raising the potential for cartelization of shale energy products: just think of OPEC and the dominant role played by a very small number of well-endowed oil states led by Saudi Arabia. The following two maps not only make this point vividly, but demonstrate why the energy future looks so bright:

shalegas

shaleoil

1. Almost 30% of the world’s shale gas reserves are in North America. Not only does the United States have access to the world’s largest shale gas reserves (15%), another 15% of world reserves reside in Canada (7.5%) and Mexico (7.5%). All sitting within the North American Free Trade Agreement area; enjoying easy and cheap access to American markets and American LNG plants for export. All three nations have recognized the need and opportunity for further integration of energy markets, as well as legislation facilitating investment and technology transfers between them[4]. The eventual goals include the full development of the Mexican economy into advanced industrialized status, as well as the continuation of the “industrial renaissance” in the United States;

table

2.    China is #2 in gas and #3 in oil. The fact that the world’s largest polluter and second largest energy importer is sitting atop vast, yet unexploited shale energy reserves should make environmentalists very, very happy (yet it does not). China’s only realistic alternative to satisfying their insatiable demand for energy is to import more and more coal: which is precisely what they are doing. A cursory look at China’s primary energy generation ought to demonstrate why fracking will be so important for China’s and the world’s future:

chinaenergy

A major driver of Chinese military spending, especially in naval power, is the need to secure the sea-lanes through which China’s energy imports flow. China’s long strategic relationship with Burma served that purpose: the development of a port on the Andaman Sea with rail and pipeline connections into southern China. This served to avoid the dangerous choke points in the Java Sea where U.S. naval power could easily block oil tankers from the Persian Gulf.

 slocs

If China were able to develop a greater degree of energy self-sufficiency and to additional supplies from Russia and Kazakhstan, her vulnerability to a U.S. naval blockade would be substantially reduced. That is bad for the U.S. in case of a conflict with China: but more importantly, it might eliminate the tensions that could lead to a conflict in the first place. It is far easier to negotiate and be conciliatory when you don’t feel threatened or backed into a corner; addressing China’s long-term energy needs could be the most potent tool that American diplomacy has to play.

Assuming, of course, that the Chinese are serious about a “peaceful rise”.

3.    Russia has plentiful by inaccessible resources. Russia is #1 in shale oil reserves, but only #9 in shale gas reserves. The authors of the study were unable to evaluate some of Russia’s potential resources due to a lack of available information: it is very likely that Russian reserves will go up in the future as more information becomes available on shale areas like the Timon-Pechora and Eastern Siberian basins.

russianbasins

Two observations stand out: the first is that the largest shale areas are in remote areas of Russia’s far north and east. They are not close to any major markets; it is safe to say that they are not close to anything. Yet the Eastern Siberian basin is close enough to northern China to make a pipeline a realistic proposal. The Western Siberian basin is further off, but Russia could potentially leverage infrastructure in Kazakhstan. Additionally, if global warming continues, it is entirely possible that Russia could develop ports and infrastructure near Naryan-Mar and Salakhard to export oil and LNG via the now ice-free Arctic Ocean. That leads to the second observation: Russia will need very large scale capital investment in order to make use of her shale resources and the folks with the most capital to invest and the greatest interest in doing so are the Chinese.

4.    Large reserves exist across North Africa, especially Algeria and Libya. North Africa has long been a major energy supplier for Europe, and will become even more important as shale resources are exploited. Security concerns will slow investment and development, but the income from these resources will allow governments to beef up security forces as well as pursuing more generous social programs to ease popular discontent (assuming elites do not simply siphon off all the excess rents). At least as important, these resources will allow Europe to avoid committing economic suicide with their pursuit of “green economies”, especially in Germany[5], and their repugnance to permitting fracking within their own borders.[6]

5.    Large shale deposits in Argentina, Paraguay and Brazil promise to boost regional GDP.  Both Argentina and Brazil have large, recoverable shale gas deposits, while Argentina also has the fourth largest recoverable shale oil deposits in the world. Is it any wonder that Buenos Aires nationalized YPF and that Mexico’s PEMEX is threatening to sell its stake in Spain’s Repsol if the latter company doesn’t negotiate with the Kirchner government to arrive at an amicable settlement? PEMEX wants to invest in the Vaca Muerta gas field and they don’t want legal hassle from Repsol when they do. These finds ensure Brazil’s energy security, with large, reliable and cheap sources in her borders or on her doorstep, which should increase regional GDP and provide for continued growth of Brazilian industrial competitiveness.

Future So Bright (I Gotta Wear Shades)

It should be very encouraging that the world’s major economies are all sitting atop of or bordering on large shale gas deposits, as the production and consumption of natural gas is far cleaner than the far more ubiquitous coal. A proliferation of American technical know-how in hydraulic fracturing could help developing economies in China, India and Brazil meet their growing energy needs without massive, costly investments in expensive renewables or yet unproven technologies. Just replacing a significant fraction of current coal consumption with natural gas would have a dramatic impact on greenhouse gas emissions.

Europe, which is mostly against fracking with some exceptions, will nevertheless benefit from the shale deposits in North Africa. So long as the security situation in these countries does not deteriorate, these nations will be able to provide a critical alternative to Russian gas supplies.

For North America, sitting atop a bonanza of shale gas and oil, the mid-term benefits stand to be enormous: a reindustrialization of the US driven by cheap domestic gas; consumers benefiting from reduced heating costs; flexibility to replace coal-fired electricity plants with gas-fired plants; the possibility to invest in gas-fueled heavy vehicles, reducing even further the need for imported petroleum. An improved trade balance, job growth in manufacturing and the energy sector, lower consumer inflation, increased investment and integration within NAFTA. All of these factors will drive enhanced economic growth over the next two decades.

rustbelt  

Perhaps most importantly, the exploitation of shale deposits buys time. Time for advanced industrial economies to make further investments in renewable energy sources; and time for developing economies to realize that climate change impacts them as much or more than the rich nations. This is anathema to many environmentalists, but the simple stark truth is that the majority of hydroelectric sources are already being exploited, and that other renewables are simply too small a percentage of global energy supply and too expensive to replace fossil fuels in the short run[7]. Without important investments in shale and nuclear power, it is sheer fantasy to expect carbon emissions to fall or even to remain where they are. Shale gas, while not a panacea, is a vital bridge energy to a greener future.

Whether governments will make good use of that time is another story. But at least the EIA report paints a brighter picture of the future than many dared hope even 5 years ago.


 

Sources and Notes

 [1] Advanced Resources International, Inc., “EIA/ARI World Shale Gas and Shale Oil Resource Assessment,” prepared for the U.S. Department of Energy , June 2013
[2] “Technically recoverable” is a moving target: it means recoverable at an economic profit with current technology and with an assumed range of market prices. As technology advances or as commodity prices vary, the amount of technically recoverable oil and gas will likely increase
[3] “The President’s Climate Action Plan,” Executive Office of the President, June 2013
[4] Montes, Juan, “Mexico in Talks to Open Energy Sector to Private Investors,” Wall Street Journal, 18 June 2013
Nemec, Richard, “North America: An Energy Rocket Ship if Mexico Gets Aboard,” Pipeline and Gas Journal, May 2013
Carroll, Carlton, “API Welcomes House Passage of U.S./Mexico Oil and Natural Gas Agreement,” American Petroleum Institute, 27 June 2013
[5] Germans are very rightly concerned that the end of nuclear energy generation is having serious, unintended consequences: it is leading to an increase in dirty coal consumption, increased dependence on Russian energy imports, and higher domestic energy prices which are hurting the competitiveness of German companies in key industrial sectors like chemicals and steel.
[6] Europeans have no problem with consuming other people’s fracked energy, only with permitting it in their own territories.
[7] Non-hydroelectric renewable sources’ percentage of primary energy consumption was 1.6% in 2011, up from 1.4% in 2010. From the BP Statistical Review of World Energy June 2012.

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