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US Shale Boom, Europe’s Gas Glut To Alter Alter Energy Markets & Geopolitics

A boom in North American shale gas production in the past five years has resulted in sharp falls in domestic power and gas prices there and could turn North America from a gas importer into a large exporter, and a similar development is seen as under way in the oil sector.

“What happened in gas is happening in oil as we speak. The US will become a net exporter of oil and gas in the next decade and the global repercussions of this are unbelievable,” Daniel Jaeggi, the co-founder and head of global trading of Geneva-based commodities trading house Mercuria, said during the Reuters Global Energy and Environment Summit.

“It fundamentally modifies the geopolitical landscape, and this is bullish US,” he said.

“They will have the cheapest power, gas and oil and that could lead to an industrial revival as its industry becomes globally competitive again because of cheap energy,” he added.

Marco Dunand, Mercuria’s chairman and its other co-founder, said at the same summit that “the US and Canada are becoming energy independent and this will turn upside down” and that the geopolitical dynamics of such a shift would be huge.

“Unconventional resources will be flattening the role of energy super powers with major geopolitical implications,” said Fatih Birol, the chief economist of the International Energy Association (IEA) said at the same summit.

When asked which new technology he expected to contribute to significant change in the energy markets, he said hydraulic fracturing, or fracking was the one which would change the geopolitics of energy.

Christopher Wheaton, the manager of the Allianz Energy Fund, also said that the boom in shale gas could give North America a competitive edge.

“What it does is give US manufacturers a big energy cost advantage,” he said.

Europe also stands to gain from a booming gas industry in the coming years, industry analysts and investors said, but from new conventional resources rather than in the shale sector.

“I think the outlook for gas has never been more promising. There’s going to be a lot of development in global gas in five to 10 years from now, and within the context of energy you have this long-term juggernaut of gas,” said Michael Hulme, the energy fund manager at Lombard Odie Asset Management.

In Europe, hopes are set on recently discovered gas reserves in the eastern Mediterranean Sea, which some analysts say could exceed 100 trillion cubic feet, enough to supply Britain – the euro zone’s biggest gas consumer – for almost 30 years.

While there are several ongoing maritime border disputes in the region of the largest Mediterranean gas finds, Mercuria’s Jaeggi said that the gas fields in Israeli and Cypriot waters were “extremely relevant” and that they would impact Europe’s gas markets.

The European Commission, keen to reduce its reliance on Russian gas imports, has also taken notice.

“We are in contact with our partners in Israel, Cyprus and also Turkey, and perhaps in one to two years we can decide on the infrastructure required to get the gas to Europe,” European energy commissioner Guenther Oettinger said during the summit.

“It is my interest to get as much gas as feasible into Europe from new regions,” he added.

The wash of the Mediterranean gas finds would challenge the need to develop an expensive unconventional gas sector in Europe, Andrew Moorfield, the managing director and head of EMEA Energy at Canada’s Scotiabank, said.

“Europe has such significant conventional gas resources that the entire European shale argument is challenged,” he said, adding that all that was needed to get the unconventional gas to Europe were pipelines, a tested and mature technology.

Moorfield also said that the glut in conventional gas supplies meant that Europe’s reliance on gas would increase while its dependency on oil would fall.

“The glut will shift Europe from an oil to a gas-driven economy, and this also plays into the hands of countries like Germany with its nuclear exit and renewables expansion plans,” Moorfield said.

The view is echoed by the EU’s Oettinger.

“Oil consumption in Europe is decreasing while oil consumption globally is increasing,” he said and added that gas would be “the winner” of Germany’s nuclear exit and that Europe as a whole would increase its gas imports from new supply sources in the future.

As a result of the prospective shifts in supply and demand in North America and Europe, analysts said that there would be three main gas price zones in the world, with some opportunity for arbitrage trading.

“The spread between North American natural gas prices and Asian LNG (liquified natural gas) prices has been propelled to record levels of more than $13 (R108) per million British thermal units to Japan,” Barclays Capital said on Wednesday in a research note.

Barclays said the high spread was a result of new lows for North American gas prices following the shale gas boom and strong global oil prices, to which LNG is often linked.

With Europe’s gas prices in between those of North America and Asia, Barclays said it saw $1 billion per day in LNG arbitrage opportunities. Mercuria, meanwhile, said it was looking to invest in LNG terminal assets in order to benefit from this opportunity.

The IEA’s Birol said that he expected the imbalance of gas prices between the US, Europe and Asia to narrow once North America started to export gas on a large scale.

Others, however, said that the US would not open its gas market up for export in sufficiently large volumes to make massive global LNG arbitrage possible.

“The US regulator will only ever allow a certain amount of natural gas to be exported” in order to protect its low domestic prices, Allianz Energy Fund’s Wheaton said, adding that this meant that US shale gas would probably not have an impact on gas prices elsewhere in the world.

Reuters, 20 May 2012