2015 Abdullah S. Kamel International Symposium “Evolving Hotspots and the Geopolitics of the Energy Revolution”
Dr. George Shambaugh Associate Professor Edmund A. Walsh School of Foreign Service and Department of Government Georgetown University 681 ICC th 37 & O Street, NW Washington, DC 20057
[email protected] & Aaron Tayler Ph.D. Candidate Department of Politics Princeton University 130 Corwin Hall Princeton, NJ 08544
[email protected] June 5, 2015
Massive deposits of shale gas are now potentially accessible thanks to the development of innovative extraction technologies like hydraulic fracturing and horizontal drilling.1 Despite some clear negatives – namely water and air pollution near production sites, the risks of deep water drilling, and political opposition to “fracking” at the local level in the United States and throughout Europe – the promise of plentiful and inexpensive energy combined with the environmental benefits of burning natural gas rather than coal or oil create powerful incentives to develop natural gas production and transit capacity around the globe. What are the geopolitical consequences of these activities?
In the economic realm, the dispersion of shale gas reserves, lower local gas prices, the need for infrastructure construction, and the time lag between increased local production and its impact on regional and global markets increase the likelihood that a country with newfound supplies of natural gas is more likely to experience a financial boon than the “resource curse” that has haunted many oil exporters in the past.2 While the global price of oil is likely to decline, hurting traditional oil exporters, the impact of fracking on gas prices will be network-specific and will vary depending on available pipeline, LNG, and storage capacity.
In the political realm, the denial of natural gas offers a sharper tool of economic statecraft than the “oil weapon.” The global price of oil makes it difficult for oil exporters to target specific countries with higher prices without hurting others; it also makes it difficult for oil exporters to protect themselves form a decline in global demand or global price. The ease of transporting oil globally also makes embargos difficult to sustain. In contrast, the transportation constraints associated with natural gas limit the availability of alternate suppliers and alternate markets,
For a brief summary of the initial ideas developed in this article, see our blog post: George Shambaugh and Aaron Zlotnick, “Cave Hic Dragones: Transit Countries and the Geopolitical Consequences of Energy,” Markets in Motion, Georgetown Journal of International Affairs (November 3, 2014). On line: http://journal.georgetown.edu/cave-hic-dragones-transit-countries-and-the-geopolitical-consequences-ofenergy/. 2 George Shambaugh and Aaron Tayler, “The Energy Revolution: A Resource Blessing or Resource Curse?” Georgetown Journal of International Affairs, 16(2) (Forthcoming, Fall 2015). 1
making both suppliers and downstream consumers of natural gas vulnerable to network-specific price and volume manipulation.
In the security realm, newfound energy supplies throughout the Americas, in China and elsewhere may decrease energy security concerns in these countries. In contrast, the need to protect pipelines and/or LNG shipping makes transit states and energy importing countries without ready access to these reserves prone to security dilemma dynamics. The potential loss of export income will also make traditional energy exporters more prone to take actions that protect energy distribution networks and maintain market share in remaining energy export markets.
Each of these dynamics has differing consequences for energy exporters, importers with newfound supplies, importers without domestic supplies, and transit states. The limited ability to transport natural gas – via pipelines or on ships in liquid form – amplifies the resource blessings associated with its development and allows for the targeted exploitation of countries on particular pipeline-networks. It also reduces energy-related security dilemma dynamics in countries with newfound gas deposits while increasing the vulnerability of transit countries, traditional exporters, and energy dependent countries without ready access to domestic or international alternatives. I.
The Unique Qualities of Natural Gas Natural gas can be distinguished from other fossil fuels, especially oil, by two
characteristics: infrastructure specificity and time lags between local production and its regional and global impacts.3 Price constraints associated with the cost of liquefying natural gas effectively limit transportation options to gas pipelines and liquid national gas These features are discussed at length in our earlier article, George Shambaugh and Aaron Tayler, “The Energy Revolution: A Resource Blessing or Resource Curse?” Georgetown Journal of International Affairs, 16(2) (Forthcoming, Fall 2015). 3
(LNG) tankers. On average, 69 percent of global natural gas consumption comes from domestic sources, 21 percent is imported through pipelines, and 10 percent is from LNG.4 LNG has more than doubled since 1990 and continues to grow quickly but is limited by the high cost of liquefaction and the size of the LNG tanker fleet and availability of LNG terminal ports. 5 The number of LNG importing countries and those with regasification capability has doubled from about 15 in 2004 to about 30 in 2013, but the number of exporting countries (17) and total volume of LNG exports (237 million metric tons) have stabilized since 2011.6 Qatar remains the largest exporter (33%) followed by Malaysia and Australia. Japan is the largest importer (37%), followed by South Korea and China. Furthermore, as of May 2015, Lloyds lists only 404 specialized tankers in the global LNG fleet, with an additional 143 ships on order.7 In short, despite a surge in LNG capacity, the vast majority of natural gas will likely continue to be produced and consumed domestically and distributed internationally through pipeline networks, some of which are connected to LNG shipping terminals. Although oil also faces transportation constraints, these constraints are not as limiting. Oil companies must link producing wells to refineries capable of refining oil with the appropriate sulfur content, density, and other chemical characteristics.8 Unlike with natural gas, however, when pipeline capacity is insufficient or unavailable, oil can be transported by trains, trucks, barges or ships if production facilities exist beyond the reach of oil pipelines.9 The second distinguishing characteristic of natural gas is the relatively long time lag between its local development and its effect on regional and global supplies. Local prices International Gas Union, World LNG Report – 2014 edition. Sponsored by Total. On line: www.igu.org. Even when transported in volume, the liquefaction and regasification processes account for a combined 4570 percent of all costs, from exploration and production to delivery. For a more detailed account of the production process and market for LNG, see: Office of Fossil Energy, U.S. Department of Energy (2005). Liquefied Natural Gas: Understanding the Basic Facts. Retrieved from http://energy.gov/sites/prod/files/2013/04/f0/LNG_primerupd.pdf 6 International Gas Union, World LNG Report – 2014 edition. Sponsored by Total. On line: www.igu.org. 7Lloyd’s List Intelligence. On line: http://www.lloydslistintelligence.com/llint/gas/index.htm 8 For a more detailed discussion of varying constraints on gas and oil, see: George Shambaugh and Aaron Tayler, “The Energy Revolution: A Resource Blessing or Resource Curse?” Georgetown Journal of International Affairs, 16(2) (Forthcoming, Fall 2015). 9 James Conca, “Pick Your Poison For Crude Pipeline, Rail, Truck Or Boat,” Forbes (April 26, 2014). Online: http://www.forbes.com/sites/jamesconca/2014/04/26/pick-your-poison-for-crude-pipeline-rail-truck-orboat/ 4 5
for oil quickly converge with a single global price because the ease of transportation means that price differentials will quickly be counteracted by a shift in the supply or consumption. In contrast, transportation limitations for natural gas enable wide price differentials on global and even regional levels. Reflecting this phenomenon, the prices of British Brent, West Texas Intermediate, and Dubai crude oil remain highly correlated despite a surge in oil production due to fracking, while natural gas prices have diverged widely since 2008 when the U.S. price of natural gas plummeted due to a surge in domestic production. There is a wide variation in the landed price of LNG gas, both within North America ($2.47/MMBtu (one million British Thermal Units) in Lake Charles, USA, and $3.35 in Canaport, Canada) and globally ($7.15/MMBtu in Spain, $7.18 in Rio de Janeiro, and $7.85 in Korea and Japan in April of 2015).10 Price differentials also persist in smaller geographic areas. For example, although they all averaged about $4/MMBtu in February of 2014, severe winter weather and corresponding increases in the demand for heating in January 2015 significantly drove up the price of Algonquin City gas that serves Boston and the price of Transco Zone 6 gas that serves New York to $23.51/MMBtu and $37.04MMBtu, respectively, while the price of Henry Hub gas that serves the southern United States remained substantially lower at $2.50 /MMBtu.11 As pipeline and LNG networks and capacities expand, the prices for gas will converge as they do for oil. Where these capacities are limited, the buffer between local gas production and its impact on regional and global markets will continue to have significant economic, political and strategic implications.
Source: Waterborne Energy, Inc. On line: http://www.ferc.gov/market-oversight/mktgas/overview/ngas-ovr-lng-wld-pr-est.pdf. 11 U.S. Energy Information Administration, Natural Gas Weekly Update, February 19, 2015. On line: http://www.eia.gov/naturalgas/weekly/. 10
Figure 1: The Global Price of Oil12
World Bank Commodity Price Data (The Pink Sheet) 120.00
$/bbl
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80.00
Crude oil, average
60.00
Crude oil, Brent Crude oil, Dubai
40.00
Crude oil, WTI
20.00 0.00 199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013
Figure 2: The Divergent Global Prices of Natural Gas13
18.00 16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00
Natural gas, US Natural gas, Europe Liquefied natural gas, Japan
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
$/mmbtu
World Bank Commodity Price Data (The Pink Sheet)
12Data
for the chart are from the World Bank Commodity Price Data (Pink Sheet), see: http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21574907~ menuPK:7859231~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html 13Data for the chart are from the World Bank Commodity Price Data (Pink Sheet), see: http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21574907~ menuPK:7859231~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html
II.
Geopolitical Implications of Natural Gas
A.
From Resource Curse to Resource Blessing14 The need to create transportation infrastructure and the resulting time lag between
local production and regional and global market dynamics mean that access to shale deposits is more likely to generate a “resource blessing” rather than the “resource curse” that has haunted so many oil exporters in the past.15 The “resource curse” reflects a tendency of countries with an abundance of oil or other non-renewable resources to become over-dependent on commodity exports that tend to become controlled by the government or monopolistic firms. High global demand for oil (or other privileged commodities) tends to drive up local prices for oil while simultaneously increasing demand for the country’s currency from oil importers. Consequently, other sectors become less competitive as the local currency appreciates and local energy costs rise.16 While recognizing the importance of domestic institutions, we argue that several basic characteristics of natural gas decrease the likelihood that its development will generate the curse that troubles exporters of oil and other high value primary commodities.
For further elaboration, see: George Shambaugh and Aaron Tayler, “The Energy Revolution: A Resource Blessing or Resource Curse?” Georgetown Journal of International Affairs, 16(2) (Forthcoming, Fall 2015). 15 For more elaboration, see: George Shambaugh and Aaron Zlotnick, “Cave Hic Dragones: Transit Countries and the Geopolitical Consequences of Energy,” Markets in Motion, Georgetown Journal of International Affairs (November 3, 2014). On line: http://journal.georgetown.edu/cave-hic-dragones-transit-countries-and-thegeopolitical-consequences-of-energy/ and George Shambaugh and Aaron Tayler, “The Energy Revolution: A Resource Blessing or Resource Curse?” Georgetown Journal of International Affairs, 16(2) (Forthcoming, Fall 2015). 16 Recent research on the resource curse suggests that the presence of strong and representative local institutions can help counterbalance these economic policy biases and reduce the likelihood of corruption. See: Khalid Alkhater, “The Rentier Predatory State: An Empirical Investigation of the ‘Resource Curse’,” SSRN Working Paper Series, Rochester, (October 2009), Christa Brunnschweiler and Erwin Bulte, “The Resource Curse Revisited and Revised: A Tale of Paradoxes and Red Herrings,” Journal of Environmental Economics and Management, Volume 55, Issue 3 (2008), 248-264, Jonathan Di John, “Is There Really a Resource Curse? A Critical Survey of Theory and Evidence,” Global Governance, Volume 17, Issue 2 (2011), 167-184, John Hammond, “The Resource Curse and Oil Revenues in Angola and Venezuela,” Science and Society, Volume 75, Issue 3 (2011), 348-378, Dominik Kopinski et al., “Resource Curse or Resource Disease? Oil in Ghana,” African Affairs, Volume 112 (2013), 583-601. James Robinson et al., “Political Foundations of the Resource Curse,” Journal of Development Economics, Volume 79, Issue 2 (2006), 447-468. 14
The diversified and robust impact of natural gas production and transport on the overall economy will likely reduce the dynamics of the resource curse.17 First, the increasing development of natural gas from shale and traditional sources tends to drive down local energy prices. The impact on global supplies, and thus international demand for local currency, are conditional on cross-national pipeline or LNG capacity. When that capacity is limited, price divergence is likely, resulting in lower domestic energy costs, lower energy imports and a potentially significant competitive advantage in energy intensive industries. Second, the need to build pipelines and LNG facilities provides an added local stimulus and employment. Third, before these facilities come on line, demand for rail and other forms of transportation (for oil if not gas) will also increase significantly. Fourth, transit countries are able to further benefit by extracting transport rents once the pipelines are operational. Considering these effects, the Congressional Budget Office estimates that “real (inflation-adjusted) GDP [for the United States] will be about twothirds of 1 percent higher in 2020 and about 1 percent higher in 2040 than it would have been without the development of shale resources.”18 B.
Political Bargaining Leverage Infrastructure specificity and time lags also affect the type of bargaining leverage
that states can derive from manipulating energy supplies. Oil supplies can be reduced or restricted as a threat. This “oil weapon” is often feared and can be shocking – as it was when used against the United States in early 1973 – but its use as a tool of statecraft is limited because the relative ease of transporting oil globally makes it likely that alternate suppliers will be found to circumvent an oil embargo. Consequently, oil embargoes tend to leak within a relatively short period of time. Second, since regional oil prices converge fairly quickly around the global price, the desire to raise the cost of oil for an adversary requires the ability to raise the price of oil globally. Such capacity is limited to a few very large oil exporters – like Saudi Arabia – or the coordinated actions of multiple large oil Dominik Kopinski et al., “Resource Curse or Resource Disease? Oil in Ghana,” African Affairs, Volume 112 (2013), 583-601. 18Congressional Budget Office, “The Economic and Budgetary Effects of Producing Oil and Natural Gas From Shale,” December 9, 2014. On line: https://www.cbo.gov/publication/49815. 17
exporters. Third, strategies that shift the global price of oil up are difficult to target against specific actors. Though the Arab oil embargo in 1973 was intended to punish the United States for its support of Israel in the Yom Kippur war and was thought of by some to be a potential tool to compel advanced industrialized countries to create a New International Economic Order, higher oil prices imposed a double hit on developing countries by increasing their energy costs and decreasing demand for their exports from advanced industrialized countries. Fourth, oil can be offered to specific countries at a reduced rate – Venezuela offered both Argentina and the U.S. state of Maine oil at reduced rates to curry favor. Yet, global declines in demand – as happened when U.S. oil imports decreased following its fracking boom – drive down the global price of oil with global consequences. As a result, it is very difficult for traditional energy exporters like Venezuela, Russia or Qatar to protect themselves from a decline in demand and the resulting decline in revenue resulting from expanded energy production within large energy consuming countries. In short, the “oil weapon” is hard to use and difficult to target. In contrast to the diffuse nature of the “oil weapon,” threats or promises involving natural gas leverage are easily targeted and difficult to mitigate. Transportation constraints associated with natural gas limit the availability of alternate suppliers and alternate markets, making downstream consumers and suppliers vulnerable to networkspecific price and volume manipulation. The direct effect of terminating supplies of natural gas is felt principally by those who are part of the associated pipeline. While downstream consumers are vulnerable to upstream threats, consumers outside of the given pipeline network are not. Furthermore, the ability of third parties to act as alternate suppliers is limited by their connectivity to a given pipeline network below the choke point. The limited capacity of third parties to act as alternate suppliers also means that consumers in the pipeline network are vulnerable to price manipulation within in the pipeline system. At the same time, dependence on pipelines creates a type of obsolescence bargaining power for consumers against upstream suppliers who lack access to alternative markets. For example, the Chinese and Russian governments recently concluded an agreement to construct a long natural gas pipeline network to connect their two countries. Though hailed as a success by Russia as way of reducing its reliance on European gas markets, the Chinese will likely be able to exploit the lack of other consumers on the
pipeline to hold Russia hostage to lower prices once the pipeline is constructed.19 In sum, access to and prices paid for natural gas are functions of network-specific bargaining. European-Russian energy relations provide an example of the network-specific bargaining associated with natural gas pipelines. Russia cut off gas supplies through Ukraine in 2006, 2009 and 2014 due to economic and political disputes, with negative consequences for downstream European consumers. These actions inspired many European countries to reduce dependence on Russian gas, construct additional pipelines and LNG facilities, expand energy storage facilitates, and shift to other energy sources (including coal). Meanwhile, Russia is pursuing the development of the North Stream and South Stream pipelines to gain access to the European market without going through Ukraine. Roughly 40% of European gas comes from Russia, but the level of dependence of different European countries on Russia varies widely. Germany imports about one third of its gas and oil from Russia, twelve European Union member states import more than half of their gas from Russia and four – Lithuania, Estonia, Latvia, and Finland – depending on Gazprom as their sole supplier.20 Interestingly, the price paid for natural gas follows the “Opera seating model” in which countries closer to “the stage” (Russia) who happen to have fewer alternate energy options pay more for their natural gas, while those who are father away and happen to have more alternatives pay less.21 Individual efforts to mitigate the risk of energy dependence are important because it is difficult for countries outside of a given pipeline network to act as alternate suppliers. Even with its boom in shale gas production, the United States is currently unable to transport enough gas to Europe to significantly reduce its vulnerability to the potential denial of Russian gas. Poland and Lithuania are investing in LNG facilities. Russia responded to these investments by lowering the price it charged for gas, even though the facilities are not online. In the event of a conflict, however, Russia could likely interdict shipping in the Baltic Sea, thus closing off access to LNG imports. Other European countries can import some of their gas from Norway, Algeria, or West Africa. Still others are stockpiling natural gas – Latvia and Germany have large reserves while others have none. 19Meghan
O'Sullivan, “New China-Russia Gas Pact Is No Big Deal,” Bloomberg (November 14, 2014). Online: http://www.bloombergview.com/articles/2014-11-14/new-chinarussia-gas-pact-is-no-big-deal. 20 BP Statistical Review of World Energy 2014 21 Thanks to Grzegorz Kozlowsky, Polish Ministry of Foreign Affairs, for suggesting this analogy.
Such network redundancy may potentially decrease political leverage held by transit states, suppliers and consumers alike, but it is expensive and time consuming. C.
Security Energy-derived security issues can be separated into vulnerability concerns and
security dilemma dynamics. Vulnerability is a product of a state’s susceptibility to the disruption of energy supplies or significant shifts in energy prices. As noted earlier, while many states are vulnerable to shifts in the global price of oil, most will likely be able to find alternate sources of oil relatively quickly. In contrast, natural gas producers and consumers are generally less sensitive to global shifts in supply and demand, but far more sensitive to fluctuations in supply, demand, and price within their pipeline or LNG shipping networks. Traditional energy importers with newfound natural gas supplies may be able to decrease their vulnerability to others by developing their domestic supplies. Importers without domestic reserves and transit countries will remain vulnerable to network-specific manipulation of natural gas supplies and prices. A second type of energy security issue is created by security dilemma dynamics. A security dilemma develops when efforts to increase one’s security at home are perceived by others as potentially threatening.22 That fear may trigger a defensive reaction by others that could, in turn, be perceived as threatening by the first country. The first country redoubles its defensive efforts. This confirms the others’ fears and they reply in kind. Consequently, hostilities escalate where none were intended – it is simply the product of mutual suspicion and fear about each other’s intentions. Security dilemma dynamics are often used to explain arms races like those between the United States and Soviet Union during the Cold War. They also suggest the potential for a contemporary arms race in the Pacific as China modernizes its military and expands its efforts to defend newly built islands with sea and air capability. Japan is responding to these actions with more assertive and nationalist actions of its own, including expanding its long-limited Japanese Defense Force. Robert Jervis, “Cooperation Under the Security Dilemma,” World Politics, Volume 30, Issue 2 (January 1978), 167-214. 22
The exploitation of domestic shale reserves and the increasing diversification of oil and gas suppliers can reduce a country’s vulnerability without immediately threatening others. This is because the transportation difficulties prevent these countries from readily exporting their natural gas and, thus, deny both the market consequences of such exports and the possibility that they could be manipulated as tools of economic statecraft. For example, while Russia could threaten to cut off the flow of gas to Europe through preexisting pipelines in retaliation for the Western imposition of financial sanctions related to the Ukraine crisis, Russia would be unable to threaten the United States in the same way, nor could the United States use its new gas abundance to reduce Europe’s vulnerability to such a Russian threat. Consequently, through the diversification of energy sources and the prospect for domestic development, natural gas has the potential to reduce security vulnerabilities by decreasing energy dependence at home while not immediately making others more or less secure. Transit countries are not so lucky. While pipelines and LNG ports take time to build, they can be destroyed quickly and are highly vulnerable targets.23 Transit countries have strong incentives to protect gas infrastructure, while transit fees provide the funding to do so. The capabilities needed to build a strong defensive structure around pipelines, ports, or rail systems may provide the state with an offensive military capacity it would not otherwise possess. Such developments could appear threatening to neighbors, thus generating a security dilemma dynamic.
For a set of critically strategic pipelines see: http://www.businessinsider.com/the-15-oil-and-gaspipelines-changing-the-worlds-strategic-map-2010-3#us-influence-tapi-pipeline-1. 23
Figure 3: Salient Energy States in the 21st Century24 Source Country
Recipient
Transit Country
Algeria
China
Algeria
Australia
France
Belarus
Azerbaijan
Germany
Bulgaria
Indonesia (lesser in future)
India (future)
Georgia
Iran (future, sanctions
Italy
Niger
pending)
Japan
Turkey
Libya
Kazakhstan (future)
Ukraine
Malaysia (lesser in future)
Malaysia (future)
Nigeria (increasing in
South Korea
future)
Spain
Norway
Turkey
Qatar
United Kingdom
Russia Turkmenistan (future) Countries like Japan and Korea and those in the Baltic who are building LNG facilities are in even more dire straits because of their dependence on maritime shipping rather than pipelines. Robert Jervis argued that security dilemma dynamics can be reduced if defensive weapons can be differentiated from offensive weapons clearly.25 This suggests that transit countries could potentially decrease the risk of a security dilemma by designing pipeline protection systems that have relatively limited offensive capabilities (such as redoubts or other immovable fortifications). While risk-averse neighbors may view such activities with suspicion, they will likely to be far more distrustful of an expanding blue-
Sources: U.S. Energy Information Administration, “Countries Analysis Briefs,” http://www.eia.gov/countries/#cabs; BP, “BP Statistical Review of World Energy June 2014,” http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-worldenergy.html 25 Robert Jervis, “Cooperation Under the Security Dilemma,” World Politics, Volume 30, Issue 2 (January 1978), 167-214. 24
water navy with the purported mission of unilaterally protecting energy-laden ships. International relations scholars have argued, for example, that the ability of the United States and others to interdict oil tankers on route to China could generate a security dilemma that could spark a naval arms race between the PRC and others in the Pacific.26 Additionally, high levels of vulnerability by Japan, Korea, Taiwan and others to disruptions of LNG shipping could prompt increased aggression as a defensive or preemptive mechanism. This framework may provide an alternative viewpoint for the increasing tensions between Japan, South Korea, and China, particularly in maritime- and islandrelated issues. While the development of domestic shale reserves and an expansion of pipelines from Russia will likely reduce the PRC’s vulnerability in this instance, the potential for security dilemmas exists for countries lacking native shale gas reserves who continue to rely on maritime imports of energy without access to alternative sources. Source and recipient countries are likely to be drawn into conflicts with transit pipeline countries and those who can interdict maritime shipping. Though the initial lack of infrastructure (pipelines and LNG shipping of sufficient capacity) will delay the effect of the energy glut in the United States and elsewhere on global market prices, the prospect that future export income will decline may motivate existing energy exporters to vertically integrate – that is, to take control of the distribution network (i.e. the transit countries) – before their economic and military power decline. At the same time, the ability of transit countries to turn off the tap may also motivate fearful recipient countries to intervene in transit countries to prevent supply line manipulation or to bolster transit country efforts to protect their infrastructure from potential threats. In this way, the energy revolution is increasing the vulnerability and security dilemma dynamics associated with transit countries. The dynamics between Russia and proximate transit countries provide a regional dilemma of this type. Russia’s active intervention in Ukraine and the annexation of Crimea indicate a bold attempt to secure Russian interests in the region, including the large networks of pipelines and the sizeable amounts of natural gas that flow through them from Russia to Europe. While Russia might be tempted to intervene in transit countries, such as Charles Glaser, “How Oil Influences National Security,” International Security, Volume 38, Number 2, Fall 2013, pp. 112-146. 26
Ukraine, to guarantee continued market access for Russian gas, it would be ill-advised to take actions that would cut it off from its western consumers as doing so will redouble their efforts to find alternatives and promote efficiency (much like the 1973 oil embargo did for the United States), thus decreasing long-term demand for Russian gas in Europe. However, this situation may provoke much more immediate action if Russian actions in Ukraine make others nervous and generate security dilemma dynamics. As such, Russian expansionism in the Near Abroad and competition between other states for to build alternative gas transportation networks may elevate tensions – or, in the case of Ukraine – escalate the conflict in the region between NATO and Russia. Security dilemma dynamics also exist in LNG shipping lanes. LNG shipping differs from transit pipelines in terms of mobility and capacity. LNG ships have a much greater degree of mobility, but are more limited in capacity. While the flexibility of LNG shipping is constrained by the location of LNG terminals, ships can avoid troubled waters when necessary. On the other hand, the limited number and limited capacity of LNG shipping means that they cannot provide the sustained volume of gas that can be shipped through a pipeline. This added capacity comes with the trade-off of immobility -- pipelines must remain where they are even when the local security environment deteriorates. LNG shipping might be protected with naval convoys similar to those currently used in antipiracy operations; pipelines and LNG ports might be defended by mechanized military units and other land and air operations. As these defensive forces grow, the energy revolution will shifting the focus of security concerns away from traditional source and recipient countries like Saudi Arabia, China, and the United States towards energy exporters and transit states which must protect their pipelines and LNG infrastructure, and energy consuming states that remain highly dependent on external supplies through specific transit venues. III.
Evolving Hotspots and the Geopolitics of Shale Oil and Gas The exploitation of shale oil and gas is reshaping the geopolitics of energy. The U.S.
Energy Agency Information Agency’s map of the global distribution of shale reserves provides a use basis for considering how this might unfold. See Figure 4.
Regionally, the development of shale deposits suggests the potential for increased energy independence in the Western Hemisphere and the possibility of creating a robust and mutually profitable energy trade across North, Central, and South America. In Europe, Russia, and Africa new sources of shale oil and gas is already leading to the construction of new pipelines which will reduce the vulnerability of European energy importers to Russian tap-power. Russia is expanding its pipeline networks to bypass Ukraine and link itself to Chinese consumers. It is also investing in energy storage facilities and local pipeline construction in Europe to better control energy distribution within the European energy network. African pipelines flowing north to Europe, such as the planned Trans-Saharan Pipeline from Nigeria to Algeria, could provide additional pipeline redundancy to the European energy network and a source of revenue for the African states involved. In short, while the politically and environmentally controversial nature of shale gas and the higher costs of fracking in some areas may inhibit the expansion of fracking in some countries, others in the Americas, Europe, Russia, China and Africa will likely move expand the development of shale reserves with important regional consequences.
Figure 4: Map of basins with assessed shale oil and gas formations, May 2013
Declining demand for LNG and oil imports from the United States is already having a significant impact on the revenues of traditional energy exporters. Qatar is a prime example.27 With large fiscal surpluses every year since 2000, Qatar has been able to follow a no-expenses-spared policy, increasing government expenditure levels rapidly over the past decade and a half.28 However, a precipitous drop in energy prices and, therefore, Qatari revenues, led to a new era of subsidy cuts and fiscal austerity measures in Qatar in 2015. Reductions in spending permeated the Qatar Foundation, which manages vast portions of the economy, including Western universities and think tanks locate in Gulf Times, “No crisis yet for Qatar but fiscal discipline is vital,” January 20, 2015. Online: http://www.gulftimes.com/opinion/189/details/424022/no-crisis-yet-for-qatar-but-fiscal-discipline-is-vital 28 Economist Intelligence Unit, “Oil price fall will accelerate cost-cutting in Qatar,” HSBC Global Connections (February 25, 2015). Online: https://globalconnections.hsbc.com/uae/en/articles/oil-price-fall-willaccelerate-cost-cutting-qatar 27
University City, Doha.29 As a large buyer of foreign banks, investor in overseas real-estate, and lender on the international market, the Qatari budget cuts may have important implications for the international economy through a ripple effect of restricted investment and spending. In the Asia-Pacific region, China has the largest deposits of shale gas in the world, and therefore the potential to slow the growth in its reliance on foreign sources of energy.30 On the opposite extreme, Japan has immense energy needs but almost no domestic resources. This disparity could trigger conflict over energy supplies in the region. Traditionally, many think of China as a sort of energy hungry monster. On the other hand, taking shale reserves into account, it could actually be Japan who is, and will remain, energy starved. In light of the disparity in energy sources between these two competitors, fracking may reduce the likelihood of Chinese aggression. On the other hand, Japan may either be unwilling or unable to compromise precisely because it has no energy sources of its own. In this context, it might hypothetically be the case that Japan builds up militarily out of necessity, while China’s buildup becomes increasingly reactive to Japan rather than motivated by belligerence itself. In sum, the transportation constraints and time lags between local production and global markets associated with natural gas are creating opportunities and challenges in the economic, political and security dimensions of international politics. As pipeline and LNG shipping capacities increase, the effects of natural gas along these dimensions will converge with those associated with oil. Until that time, there is a window of time during which some will win (especially energy importers with newfound reserves), some will lose (especially energy exporters), and some will become far less secure (especially transit states and energy importers without newfound reserves). Thus, the energy revolution is changing the hotspots in geopolitics: Cave Hic Dragones!
Bill Law, “Qatar scales back ambitions amid financial constraints,” BBC News (February 12, 2014). Online: http://www.bbc.com/news/world-middle-east-26140986 30 U.S. Energy Information Administration. 29
