How Shale Energy Reshapes American Security

May 3, 2013 Topic: EnergyGrand StrategySecurity Region: United States

How Shale Energy Reshapes American Security

The United States will be less vulnerable to foreign crises, but it will gain new liabilities.

The shale revolution hit America and the world with such speed and suddenness that it surprised almost everyone—investors, businessmen, economists and politicians. Soon the implications of this dramatic development seeped into the national consciousness and spread optimism that the United States could ride it to a wave of prosperity. And the new techniques for extracting "unconventional" oil and gas from shale rock, which America possesses in such abundance, do indeed pose prospects for an economic boom.

They also pose prospects for changes in the defense posture of many nations. Anything of value that a nation possesses must be protected, and that includes its capacity to produce energy. America's leaders and defense chiefs will have to recognize and respond to the new strategic imperatives of shale, just as their potential adversaries undoubtedly will. Together, these new imperatives will have repercussions for sea-lane protection, domestic security, the importance of water, and international competition for diminishing foreign markets.

While these may not be major challenges to Washington yet, they will grow in significance as the shale revolution, currently in its relative infancy, continues to expand. As Maria van der Hoeven, executive director of the International Energy Agency (IEA), puts it, “The global oil map will be redrawn over the next five years.” The revolution is the product of new, cost-effective methods of drilling to extract natural gas trapped in shale rock. In the United States, which has taken the lead in such development, this has brought a glut of cheap energy onto the domestic market. By 2015, the IEA estimates, the United States will overtake Russia as the world's biggest gas producer and by 2035 will become “all but (energy) self-sufficient.” Shale oil also can be extracted from shale rock, and the IEA estimates that within a decade the United States will overtake Saudi Arabia as the world's biggest oil producer. As recently as October 2005, America was importing more than 13 million barrels of oil every day, around two-thirds of its consumption.

Exactly where and when other shale producers will emerge is difficult to tell. Other countries, notably European states, possess large deposits of shale rock but lack the key ingredients of America's own energy revolution. Western Europe's shale deposits, for example, have a higher clay content that makes them much harder to exploit, while Eastern Europe lags behind the United States in technology. Its governments also may not be able to subsidize their energy companies with the generous tax breaks and incentives that have fuelled America's shale boom. But China could eventually become a major player, since it is moving fast to exploit its very large resources of shale gas: some leading analysts think that, by 2020, domestic production could significantly reduce its demand for imported gas. Other countries with high hopes of shale production include Argentina, Poland, Ukraine and, in the longer term, India.

Despite many uncertainties about its scope and duration, the shale revolution will continue to insulate the United States from market shocks affecting the global price of both crude oil and liquefied (shipped) natural gas. Oil exporters such as Saudi Arabia have previously wielded a hugely powerful "energy weapon," exerted with devastating effect after the Arab-Israeli war of 1973. And gas producers, most notably Russia, have sometimes exercised a comparable grip over the recipients of their piped supplies. But as the United States becomes increasingly self-sufficient in energy, it is acquiring, in equal proportion, more immunity from such actions, putting it in a position to exploit this to its own advantage. For example, until the advent of commercial shale in the United States around 2008-9, the adverse effects on the price of crude dictated heavily against tough measures on Iran. But since 2012 the United States has successfully supported EU sanctions on the flow of Iranian oil: these measures have drastically reduced Iran's exports, slashing its revenues and punishing its economy without pushing global oil prices over $100 a barrel.

America’s breakout position in the shale revolution raises a number of strategic possibilities. For example, the United States could manipulate the price of energy for its political rather than narrowly commercial benefit. Future U.S. shale output could depress the market price of crude oil and liquefied natural gas and undermine the viability of other countries’ shale- (and conventional-) energy industries, which require well-defined break-even costs and clear margins. By doing so, the United States could maintain its clear strategic advantage as a virtually self-sufficient producer. Comparisons can be drawn to the Cold War in the 1980s, when Saudi overproduction depressed the price of crude oil and thereby depleted the Soviet Union's revenues; or to Moscow's decision, in 2010, to abandon the massive Shtokman gas field, the viability of which was undermined by sharply lower market prices. Of course, such an approach could damage America's own shale industry, whose profits and margins would also come under pressure.

In the more foreseeable future, the importance of protecting existing sea lanes will fall as domestic production of oil and gas increases. Hitherto, the United States has purchased large quantities of oil from abroad, particularly the Middle East, and until 2009 also bought large amounts of liquefied natural gas, mainly from Qatar and Russia. As a result, the U.S. military has prioritized the protection of the sea lanes used by supertankers and LNG carriers moving from these suppliers: the protection of the Persian Gulf consumes at least 15 percent of the U.S. defense budget. It also maintains the capability to patrol chokepoints that are vital to the wider global market: any interruption to the oil that flows through the Strait of Malacca, for example, would spike the global price of oil even though it directly supplies only Asian consumers, notably China and Japan.

As the United States becomes more energy self-sufficient, its defense priorities will change. Of course, it still would want to preserve the steady flow of crude oil to the wider global market, as any sudden price hike can unsettle allies and feed into the American economy. Thus, it will continue to need a large and powerful navy for that function and to protect its own natural gas exports. But there likely will be reassessments of which sea-lanes matter most.

Crude oil is categorized by different varieties and grades, and American shale deposits are currently producing "light, sweet" crude. This is highly prized because it has a low sulfur content and is easily refined into gasoline. Until 2010, the United States was importing this type of oil at around a million barrels per day, mainly from Nigeria and Angola. At the beginning of 2013 this figure had fallen by about half, and this trend will continue. “By 2014,” a spokesman for Totsa, the trading arm of France's Total, told one British newspaper, these imports “will be (at) very, very low levels.” Thus, the sea-lanes that run from Western Africa are diminishing in significance.

Defense officials also will need to monitor the conversion of domestic refinements to process sweet oil into gasoline. Most U.S. refineries are configured to deal with heavier oil, mainly from Venezuela and the Middle East, which have always constituted most of America's imports. But as these refineries switch to dealing with the lighter, sweeter variety, then the intake of heavier oil is also likely to dwindle. This could affect the magnitude of the U.S. military presence in and around the Middle East or other heavy oil producers.

U.S. security officials also will likely place more emphasis on protecting the infrastructure of domestic oil and gas, which could become enemy targets in any future conflict. And the advent of shale will prompt national-security officials to focus on water supplies, the need to defend America's domestic production and also perhaps to disrupt the production of shale energy in adversary nations. The extraction of shale energy for both oil and gas requires huge quantities of water. During the initial drilling the water is used to float broken rock and debris to the surface and also to cool and lubricate the drill bit. More water is then injected into the horizontal borehole of the well at a very high pressure to "hydraulically fracture" the rock (hence the term "fracking") and then release the petroleum within. Drilling and fracking each well typically requires between two million and four million gallons of water, sometimes within one week, and during their lifetime (usually five to twenty years) wells are often refractured to release further deposits.

America's own shale industry currently draws from both local and regional sources: for example, there are thousands of wells in the Marcellus basin, which covers a region of around 124,000 square kilometers from New York to West Virginia. These wells draw largely upon the Susquehanna and Delaware rivers, and drilling consumes a very large amount of water—around twenty-eight million gallons—every day. Although this figure is less than a fifth of the total consumed by electric-power generation, this does not detract from the strategic importance of water, which will become central to the energy security of every major shale producer.