Last updated: 18:37 / Thursday, 28 August 2014
Exports of US Shale Gas

Why the US Sets the Tone on the Global Energy Market

Why the US Sets the Tone on the Global Energy Market
  • Debate on the export of US shale gas is in full swing
  • Shale-gas production will remain a US phenomenon for the time being
  • The door for exports is set to open further

From 2018 on, the US will become a key exporter of liquid natural gas, says Van der Welle, strategist at Robeco. “New export terminals are under construction and president Obama has already issued a number of export permits. What's more, the price of liquid natural gas is high enough to make export profitable.”

Van der Welle thinks that Japan will be the biggest customer. “Specifically exports to Japan are profitable due to the high prices of liquid natural gas. It is a market that just can't wait for US shale gas.”

He does not expect a return to nuclear energy there. “After the Fukushima disaster, Japan has switched from nuclear energy to natural gas. The chance of Japanese nuclear power stations starting up again is small. There is little support among the population, with 95% expressing opposition. Even the Japanese prime minister Abe appears to grasp this, says Van der Welle. “He is traveling around the world talking to potential energy exporters. It's no accident that he has visited 47 countries since he took office.”

There is a lobby for the US domestic industry – specifically the petrochemical industry – that is trying to avert further exports. But he expects this ultimately to be just a stay of execution. “The shale-gas sector has launched a counter lobby.”

“US political groups see the export of liquid natural gas as a useful ‘geopolitical weapon’ to weaken the global hegemony of an energy-rich Russia. Exporting US LNG would make other countries less dependent on Russian imports. Particularly in the wake of the conflict in Crimea and Eastern Ukraine, tensions between Russia and the West have intensified and this geopolitical argument has gained ground in Washington.”

“The West's sanctions against the Russian energy sector will not have any impact on Russian gas production in the short run. What's more, the West is also keen to keep the gas flowing from Russia. However, sanctions are delaying the development of new gas fields in the North of the country. For its development of new fields, Russia is dependent on Western companies like Total and BP that are now becoming more reticent.

Shale-gas production will remain a US phenomenon for the time being

In the US, shale-gas production continues to increase, while it is not really getting off the ground in other countries, says Van der Welle.

“Until now, most production forecasts in the US have been realized and there is no sign of shale-gas production having peaked. “And there doesn't seem to be any end in sight on the demand side either. In addition to exports, domestic demand is also set to keep increasing, he expects. “The huge supply of natural gas is leading to new applications in the transport sector. Trucks powered by natural gas instead of diesel.”

He doesn't expect other countries and regions elsewhere on earth to contribute significantly to shale-gas production over the short term. “China will not become a major producer of shale gas in the next ten years. A key obstacle for them is the volume of water required for production, and what's more, China's geology is more complex than that of the US. And that means technological innovation is required to extract shale gas. China wants to develop new technologies together with Exxon Mobil and Shell to extract shale gas in a more environmentally friendly way.“

And in Europe too, shale gas is gradually taking off. “Trial drilling in the UK and Poland has not yet been successful and there is a great deal of opposition on environmental aspects. The European debate over shale-gas extraction would get a boost from technological innovations from China.”

The door for exports is set to open further

The international trade in natural gas is increasing as the door to exports from the US is opening further and further. Van der Welle expects this to have an effect on gas prices. “Customers will get more choice, as arbitrage between the gas markets in Europe, Asia and the US increases. Parties could for instance buy US shale gas and sell it on immediately in Asia or Europe. This will prevent gas prices from fluctuating too much, but sharp differences will remain due to transport costs. But sharp differences will remain due to transport costs.”

US shale gas is ultimately destined for Japan and not so much China. As a US ally and traditional customer for liquid natural gas, Japan in particular could be a major buyer of US shale gas. Over the longer term, China will develop its own shale gas production and will not become a major importer of US shale gas.”

Shale gas is having a positive impact on the global economy, concludes Van der Welle. “US economic productivity is rising and the rest of the world is benefiting from cheap – or at least cheaper – imports of US coal, natural gas, diesel and chemicals. Over time, (crude) oil may well be added to this list. This week, for the first time since the nineteen seventies, a US tanker carrying a load of crude oil set sail from Texas to South Korea. ”This creates a precedent and signals the shifting balance in the global energy chain".

You may access Robeco's full Insight through this link