US Tips Global Power Scales with Fracking
Williston, North Dakota, is a bleak little city in the vast American prairie. It’s dusty in the summer and frigid in the winter. Moose hunting is one of the few sources of entertainment. But despite its drawbacks, Williston has seen its population more than double within a short period of time.
The city is so overcrowded that new arrivals often have no place to stay but in their motor homes, which, at monthly parking fees of $1,200 (€880), isn’t exactly inexpensive. And more people continue to arrive in this nondescript little town. The reason for the influx is simple: Geologists have discovered a layer of shale saturated with natural gas and oil deep beneath the city. The Bakken formation, spanning thousands of square kilometers, has become synonymous with an American economic miracle that the country hasn’t experienced since the oil rush almost 100 years ago.
North Dakota now has virtual full employment, and the state budget showed an estimated surplus of $1.6 billion in 2012. Truck drivers in the state make $100,000 a year, while the strippers being brought in from Las Vegas rake in more than $1,000 a night. President Barack Obama calls the discovery of Bakken and similar shale gas formations in Texas, Colorado, Pennsylvania, Louisiana and Utah a “stroke of luck,” saying: “We have a hundred years’ worth of energy right beneath our feet.”
A Vital Nerve
The future of the American energy supply was looking grim until recently. With its own resources waning, the United States was dependent on Arab oil sheiks and erratic dictators. Rising energy costs were hitting a vital nerve in the country’s industrial sector.
But the situation has fundamentally changed since American drilling experts began using a method called “fracking,” with which oil and gas molecules can be extracted from dense shale rock formations. The International Energy Agency (IEA) estimates that the United States will replace Russia as the world’s largest producer of natural gas in only two years. The Americans could also become the world’s top petroleum producers by 2017.
Low natural gas prices — the price of natural gas in the United States is only a quarter of what it was in 2008 — could fuel a comeback of American industry. “Low-cost natural gas is the elixir, the sweetness, the juice, the Viagra,” an American industry representative told the business magazine Fortune. “What it’s doing is changing the US back into the industrial power of the day.” The government estimates that the boom could generate 600,000 new jobs, and some experts even believe that up to 3 million new jobs could be created in the coming years. “My administration will take every possible action to safely develop this energy,” Obama said during his most recent State of the Union address.
The gas revolution is changing the political balance of power all over the world. Americans and Russians have waged wars, and they have propped up or toppled regimes, over oil and gas. When the flows of energy change, the strategic and military calculations of the major powers do as well.
It is still unclear who the winners and losers will be. The Chinese and the Argentines also have enormous shale gas reserves. Experts believe that Poland, France and Germany have significant resources, although no one knows exactly how significant. Outside the United States, extraction is still in its infancy.
The outlines of a changed world order are already emerging in the simulations of geo-strategists. They show that the United States will benefit the most from the development of shale gas and oil resources. A study by Germany’s foreign intelligence agency, the BND, concludes that Washington’s discretionary power in foreign and security policy will increase substantially as a result of the country’s new energy riches.
According to the BND study, the political threat potential of oil producers like Iran will decline. Optimists assume that, in about 15 years, the United States will no longer have to send any aircraft carriers to the Persian Gulf to guarantee that oil tankers can pass unhindered through the Strait of Hormuz, still the most important energy bottleneck in the world. The Russians could be on the losing end of the stick. The power of President Vladimir Putin is based primarily on oil and gas revenues. If energy prices decline in the long term, bringing down Russian revenues from the energy sector, Putin’s grip on power could begin to falter. The Americans’ sudden oil and gas riches are also not very good news for authoritarian regimes in the Middle East.
European industry is also likely to benefit from falling world market prices for oil and gas. But according to prognoses, without domestic extraction the Europeans’ site-specific advantages deteriorate.
German chemical giant BASF has already invested a lot of money in the United States in the last two years. In Louisiana, for example, it has built new plants for the production of methyl amines and formic acid. “The local natural gas price is a criterion that affects the question of where we invest in new production facilities,” says BASF Executive Board member Harald Schwager. At the moment, the United States has a clear advantage over Europe in this regard.”
So far, the political debate in Germany has been dominated by concerns over adverse environmental effects. Fracking has become a dirty word for citizens’ initiatives and environmental groups.
The concept of pumping water laced with chemicals into the earth at high pressures to crack open layers of rock several thousand meters beneath the surface makes many citizens uneasy, even though the technology has, in principle, already been used for decades in conventional gas extraction in the northern German state of Lower Saxony.
At the same time, Germany’s energy and climate policy would in fact be a reason to use the new gas reserves. Flexible gas power plants would be the best approach to offsetting unpredictable fluctuations in wind and solar electricity, thereby maintaining a reliable power supply. Besides, burning natural gas generates up to 60 percent less climate-damaging CO2 than burning coal.
With the help of natural gas, the Americans have been able to reduce their CO2 emissions associated with energy production to the lowest level in years. This is one of the reasons the country plans to replace one in six coal-fired power plants with gas power plants by 2020.
At the Munich Security Conference this weekend, fracking will be at the top of the agenda for the first time. In fact, one of the agenda items is called “The American Oil and Gas Bonanza.” In past years, nuclear weapons and threats from international terror were discussed at the conference, but this year one of the hot topics is the “Changing Geopolitics of Energy.” This shows how important the issue has become. “It is perhaps a permissible exaggeration to claim a natural gas revolution,” John Deutch, a former undersecretary at the Energy Department and CIA director, and now a professor at the elite Massachusetts Institute of Technology, recently wrote in Foreign Affairsmagazine. Deutch has been monitoring the development for years.
America ‘s Energy Miracle
In the late 1990s, American oil and gas companies used new technologies to advance into previously unexplored layers of the earth. They drill up to 4,000 meters (13,123 feet) into the shale, then make a sharp turn and continue to drill horizontally. Then they inject a mixture of water, chemicals and sand into the drilled well at high pressure. This creates small fractures in the surrounding rock, allowing gas and oil to be released and rise to the surface through pipes.
New technologies are drastically reducing drilling costs. In 2012, shale gas already made up 34 percent of total production, and the technology is constantly improving. The sector is booming, and there are dozens of new companies searching for additional, previously undiscovered deposits.
In the future, the United States could even go from being a net energy importer to a net exporter. But that would require a true policy shift. Since the oil shock of the 1970s, the export of domestic petroleum resources has been banned in the United States. Many companies also have an interest in keeping as much of the cheap natural gas in the country as possible, as it provides them with a competitive advantage over foreign competitors.
According to a study, lower natural gas prices last year created a benefit worth more than $100 billion for US industry. “The country has stumbled into a windfall on the backs of these entrepreneurs,” says study co-author Professor Edward Hirs of the University of Houston.
And perhaps things will indeed improve substantially. The US government has identified a new deposit in Utah, although additional major advances in technology are needed to make extraction economically viable. The Utah deposit contains an estimated 1.5 trillion barrels of extractable oil, or as much as the world’s entire proven oil reserves to date.
Russia on the Losing End
A building in the southwestern section of Moscow juts into the sky like a rocket. The architectural message of the headquarters of energy giant Gazprom, which towers over everything else around it, is clear: The only way is up. Until recently, there was still an overwhelming consensus that nuclear weapons and energy commodities like oil and gas are the two currencies that gave a country its superpower status. Russia, the world’s largest exporter of natural resources, has both in abundance.
President Putin built his dominance at home and his foreign policy on Russia’s wealth of natural resources. Oil and gas revenues make up about 50 percent of the national budget. The president needs Gazprom’s billions in revenues to keep his supporters, mostly government employees, retirees, blue-collar workers and farmers, happy with expensive social benefits. Gas also plays a central role in the plan to expand Russia’s sphere of influence into the former Soviet republics. But now the American natural resources boom threatens Putin’s dreams of an imperial resurrection of his country. It is already struggling with falling gas prices. Gazprom’s operating profit shrank by more than 25 percent in the first nine months of 2012.
The Russians are now forced to give their customers, like Germany’s E.on and Italian energy company Eni, discounts in the billions. Still, the Europeans are reorienting themselves. In the first three quarters of 2912, Gazprom sales fell by 43 percent in the Netherlands, 30 percent in Slovakia and 20 percent in France.
No one in Moscow can rattle off these statistics as quickly as Vladimir Milov. He was deputy energy minister after the turn of the millennium, and today he heads a small opposition party. Milov believes Gazprom is a giant with clay feet. “America is announcing the shale gas revolution, while Gazprom and Russia remain in hibernation,” he says.
If liquefied natural gas from the United States lands at the ports of Rotterdam, Hamburg or Odessa in the future, it will further increase the pressure on prices. And if Moscow remains intransigent in the discussion of an Iran resolution in the UN Security Council, Washington could threaten to flood the market with natural gas.
If that happened, Russia’s attempt to influence the world market price through a natural gas group similar to OPEC would also be off the table once and for all. Last July, Russia invited the world’s large gas exporters to discuss improved cooperation, but to no avail. If the United States exports a portion of its enormous resources, price and production agreements will likely become impossible once and for all.
The Kremlin is alarmed, despite Gazprom CEO Alexey Miller’s dismissive characterization of the revolution as an exaggeration in the style of “American Hollywood films.” Shale gas will play only a secondary role in the market, says Miller, citing the billions Western energy companies are investing in pipelines and the traditional exploration of Siberian gas fields.
But new pipelines are expensive, and it is completely unclear whether the South Stream pipeline, which is to transport Russian gas from the Black Sea to Italy, across a distance of 2,380 kilometers (1,490 miles), and will cost an estimated €16 billion to build, will ever pay off. Miller’s spokesman Sergey Kupriyanov admits that the new technologies work in America’s favor.
But another trend is being overlooked, says Kupriyanov. “The demand for gas will increase worldwide,” he explains, “because the economies of the rapidly growing emerging countries need energy and, in the future, more automobiles and soon more ships will be operated with environmentally friendly natural gas.”
It seems certain that Russia will remain an important supplier of commodities. But its political threat potential will shrink if the countries of Western Europe and Ukraine have more alternatives to Russian natural resources. Moscow will likely become the biggest political loser of the America natural resource boom. But what does it look like at other key points in the business?
No Blood for Oil
The Middle East, for example, is a dangerous region, repeatedly racked by war in the last few decades. The Americans attacked Iraq twice to secure their oil supply.
More than 20 US warships are stationed in Bahrain, including an aircraft carrier, as well as several destroyers and submarines. The US Navy’s Fifth Fleet is intended to secure the Strait of Hormuz, which connects the Persian Gulf with the Gulf of Oman. Some 35 percent of the global oil trade involving ships passes through the Strait.
With its efforts in the Gulf, the American military is not only protecting trade routes, but also the monarchies in the region. In return the Saudis, still the world’s largest oil producer today, have ensured that OPEC pursues a moderate price policy. But the tradeoff of security against oil is costly for the Americans.
Washington pays billions for its military presence in the Middle East. And the costs are not just material. The fact that American troops were deployed to the war in Kuwait from Saudi soil was the catalyst that triggered former al-Qaida leader Osama bin Laden’s fight against the United States.
According to BND estimates, the Americans could soon dispense with energy shipments from the Middle East altogether. It is conceivable that the United States could then no longer have a direct interest in protecting the flow of oil out of the Gulf region, London-based energy expert Alan Riley recently wrote in the New York Times.
Nevertheless, it is unlikely that the United States will withdraw from the region in the foreseeable future. “The United States will remain dependent on international energy markets for a long time to come,” says Joseph Braml of the German Council on Foreign Relations.
Besides, US interests in the Middle East are not limited to oil. They also include both containing Iran and fighting Islamist terror. Finally, protecting Israel also plays a central role in American foreign policy.
“Anyone who thinks that the Americans could withdraw from the Middle East understands neither the dynamics of the oil markets nor the geopolitical relationships,” says Braml. One reason that America will maintain a presence at the Strait of Hormuz, he explains, is to be able to shut off the energy tap to the Chinese if necessary.
Still, the Europeans, in particular, could face new political challenges. “It ought to become easier for America in the future to demand more help from others in securing the energy supply,” says security expert Michael O’Hanlon of the Washington-based Brookings Institution. This applies to Washington’s NATO allies, he adds, and to Japan, South Korea and even India.
For Germany, this would probably not mean sending its own troops to the Gulf. But it would have to make a stronger contribution to the costs of the US mission.
According to the BND’s assessment, the Chinese will be significantly on the losing end of American oil wealth. The country will become even more dependent on the Gulf region than it is now, and yet it is still not in a position to protect the transport routes on its own. This makes it vulnerable, the BND argues, and gives the United States more room for maneuver with its global political rivals. But what does all of this mean for Germany?
‘Typical German Behavior’
In a study conducted last year, the Federal Institute for Geosciences and Natural Resources in the northern German city of Hanover concluded that even Germany has substantial untapped natural resources beneath its soil: between 700 and 2,300 billion cubic meters of extractable shale gas, or 200 times the country’s current natural gas production. “This means that shale gas from domestic reserves, if used extensively, could contribute significantly to Germany’s natural gas supply,” say the institute’s experts. Representatives of energy companies ExxonMobil and Wintershall estimate the marketable value of this treasure at up to €1 trillion.
The Hanover study makes it seem as if Germany could immediately start drilling. It also states that environmental concerns are unfounded, because the method in question has been around for a long time, although it has only been used so far in other types of rock.
“The risks of fracking activities in the geological subsoil are low compared with potential accidents in above-ground activities,” the study reads. In other words, if an oil truck tips over on the road, the risk of groundwater contamination is much greater than with fracking. But the study also points out that it would be best to stay away from regions vulnerable to earthquakes.
But the concerns about fracking prevail in politics. The government of the western state of North Rhine-Westphalia, a coalition of center-left Social Democrats and the Greens, imposed a moratorium of sorts, and it has even refused to issue a permit for an exploratory well requested by ExxonMobil. And in Lower Saxony, where the fracking process has already been widely used in conventional gas deposits, the mood has shifted after the recent SPD-Green Party win in state parliamentary elections.
The critics base their arguments in part on a position taken by the Federal Environment Agency, which is of course particularly sensitive when it comes to environmental matters. According to the agency’s position, fracking should only be allowed under the strictest of conditions, which in turn displeases proponents.
“It’s typical German behavior,” says BASF board member Schwager, “to initially see only the risks with every new technology, instead of thinking about the opportunities.
Environment Minister Peter Altmaier and Economics Minister Philipp Rösler have learned their own lessons from the dispute among experts. Fracking, they state in their position papers, is technically complex and environmentally controversial. In other words: Let’s not touch it with a 10-foot pole, at least until after the national parliamentary election in the fall.
REPORTED BY ALEXANDER NEUBACHER, RALF NEUKIRCH, MATTHIAS SCHEPP, THOMAS SCHULZ