Background Information

The past decade has yielded dramatic change in the natural gas industry. Specifically, there has been rapid development of technology allowing the recovery of natural gas bound up in shale formations. By some estimates, there is as much as 1,000 trillion cubic feet (tcf) of technically recoverable shale gas in North America alone, which is enough to supply the nation’s natural-gas needs for the next 45 years. Shale gas revelations are also occurring elsewhere in the world, with potential in Europe estimated as high as 200 tcf and shale gas discoveries being discussed in China, Australia and elsewhere. To be sure, the enormity of the global shale gas potential will have significant geopolitical ramifications and exert a powerful influence on U.S. energy and foreign policy. Development of large conventional resources from emerging natural gas producing countries such as Iraq, Turkmenistan and Iran will also play a major role in shifting the geopolitical landscape of the global gas market. 

The study will assess the time line for large potential changes in various countries, such as Iraq, Iran, Turkmenistan, and China, with a focus on the regional and global impacts of development of domestic sources of unconventional gas in China and Europe, and large but untapped conventional resources in Iraq, Iran and Central Asia.

Ample shale and other unconventional gas resources will also influence the competition of fuels under emerging global CO2 emissions reduction policies and create new uncertainties for the outlook for global energy markets. Sound policies for global CO2 emissions reduction should favor natural gas and increase its use, but this will only occur if the policies selected promote and allow the benefits provided by natural gas to be realized. Policies that artificially protect coal or mandate hefty renewable energy targets could affect the sectors into which natural gas can compete effectively. Thus, the policy outlook could create uncertainty for natural gas demand.

The Baker Institute proposes to examine the market consequences of rising supplies of natural gas from shale and other unconventional resources and the geopolitical and market implications under a wide range of scenarios. We will examine how variations in shale gas productivity, accessibility to infrastructure, and local regulatory, pricing and marketing environments can alter outcomes, and discuss the new realities that shale production presents to the global market. In addition, we will consider scenarios for different rates of economic growth in key consuming regions, scenarios with different CO2 emission reduction policies, and scenarios around the pace of development of major untapped conventional natural gas resources from emerging producers such as Iraq, Iran and Turkmenistan. The study will include major political case studies on important natural gas producing countries to be conducted jointly by the Baker Institute and Harvard University’s Kennedy School.

Research presentations are available on the following event pages:

Workshop I: The Changing Geopolitics of Natural Gas: The Rise of Unconventional Gas and Its Implications for Global Natural Gas Markets, Geopolitical Relations and U.S. Energy Security, Houston, TX – March 17, 2011

Workshop II: The Changing Geopolitics of Natural Gas: The Rise of Unconventional Gas and Its Implications for Global Natural Gas Markets, Geopolitical Relations and U.S. Energy Security, Houston, TX – May 9, 2011

Research Plan

Utilizing its world gas trade model, the Baker Institute will investigate how development of extensive global unconventional gas resources could influence geopolitical relations over the coming decades and map out the implications for global market trends and U.S. energy security. The study will examine how global LNG export flows, sources of supply, and prices will be affected by emerging energy policies, trends in unconventional gas production, and the evolving role of contracts in regional pricing for natural gas. The modeling will examine the potential for the continuance of the recent trend toward increased use of spot market indexation for contracted deliveries of natural gas from major suppliers, such as Russia and Norway. In particular, the extent and pace at which contracted flows under oil-indexed terms may or may not become the most effective means of delivering natural gas to large consumers will be modeled by allowing swaps to occur where profitable arbitrage opportunities present themselves. This will allow rational economic agents to determine whether or not the historical natural gas pricing regime persists.

For this study, the Baker Institute will create a custom “status quo” reference case that is different from the conceptual unconstrained, competitive market reference case used in past studies. The new status quo reference case will be designed to capture geopolitical, contractual and regulatory constraints that currently exist in the global natural gas market and could be anticipated to be sustained over a five year period.

Topics of Research

Issues to be explored include:

a)    The impact of shale gas on the duration of the current global supply surplus
b)    Implications of an unconventional gas boom for U.S. energy security and for the prospects for the development of frontier natural gas resources, such as those in North Alaska and Mackenzie Delta
c)    The impact of unconventional gas on the pace of supply developments in Russia, Australia, the Middle East, and Central Asia.
d)    The impact of unconventional gas on the competition of fuels and the relationship between energy commodity gas prices
e)    The impact of unconventional gas and development of major untapped conventional natural resources from producers such as Iraq, Iran and Turkmenistan on demand for LNG and geopolitical trends that might alter the development and flow of natural gas supplies globally
f)    The impact of geopolitical constraints on the effect of unconventional gas developments and world natural gas market trends
g)    The prospects for a fully globalized commodity market for natural gas and the implications for regional pricing, supply trends and early indicators of a market that is moving in that direction
h)    The impact of global CO2 emissions reduction policies on global natural gas markets under different scenarios for unconventional natural gas supplies
i)     The effect of unconventional natural gas production in China on global LNG markets, natural gas pricing, and Russian pipeline trends

This study is generously supported by Baker Institute Energy Forum Sponsors and ConocoPhillips.

Associated Research

The Status of World Oil Reserves: Conventional and Unconventional Resources in the Future Supply Mix
Faculty Working Paper, October 2011, Amy Myers Jaffe, Kenneth B. Medlock III, and Ronald Soligo

New Alignments? The Geopolitics of Gas and Oil Cartels and the Changing Middle East
Faculty Working Paper, Songying Fang, Amy Myers Jaffe, and Ted Temzelides

Shale Gas and U.S. National Security
U.S. Department of Energy

Impact of Shale Gas Development on Global Gas Markets
Natural Gas & Electricity Journal, April 2011, Kenneth B. Medlock III