The past few years have been a period of breath taking change for global energy markets and for the United States' own energy story. We have experienced a series of trends that we never could have predicted and our global energy future is going to be equally hard to determine. Several emerging trends are now at play and while the outlook seems more positive than negative, there are still fundamental risks and uncertainties looming in the horizon.
Gas and technology: game-changers
The emergence of natural gas supplies on a widespread basis, and growth of much deeper and more developed natural gas markets have significantly changed our energy prospects and offers alternatives in all consuming sectors, including transportation.
Advances in technology, especially horizontal drilling and hydraulic fracturing, have allowed the US and North America to access enormous supplies of natural gas and oil in shale formations. This has radically changed the perception of the United States - from one of ever-increasing dependency to one of growing self-sufficiency, with the potential of significant LNG exports to Asia and other regions.
In South and East Africa, giant gas fields have been discovered. These reserves could have a meaningful impact on global natural gas supply and also on development in the region. The region's physical and government infrastructure, however, will pose challenges which could delay approvals and increase the costs of projects.
In Asia, the Fukushima nuclear incident has spurred the Japanese to accelerate their efforts to move methane hydrates - gas locked into deep-ocean and Arctic ice formations - to a level of commercial development. We can only speculate as to when methane hydrates will come to market but it could be transformative and change the landscape.
The mix of technology, innovation, and energy security concerns has opened up new paths to explore and develop resources that were thought to be inaccessible. One key question is how well these technologies will travel to other countries with similar resources. China, for instance, is believed to have very large shale gas resources but its geology, environment, and industrial structure is different from the US. Demonstration and acceptance of these technologies in China and elsewhere could further reshape the global oil and gas marketplace.
The risk of protracted volatility
Even with the success of unconventional oil and gas in North America, oil from the Middle East will continue to be critical for the stability of global markets and the global economy. Over time, investment in unconventional North American plays will begin to offset the effects of losses in oil production from the Middle East due to civil unrest and political actions, including sanctions, but it will not remove the market's fears that these losses will disrupt the global market.
Hence, Iran's nuclear ambitions, sectarian violence in Iran and Iraq, and the possibility that civil war in Syria represents a shadow struggle between Saudi Arabia and Iran continue to feed uncertainties in the political landscape. Such volatility is a real risk to maintaining stable and affordable energy supplies, and a counterbalance to other positive developments that are expanding global energy supply. While oil prices have fluctuated only within a relatively narrow band in the last few years, this has disguised the tension between concerns over unrest in the Middle East and the effects of additional supply in the marketplace brought on by the decline in US energy imports.
On a more positive note, current uncertainties are a key impetus to move more technology in the marketplace to access unconventional sources, while diversifying our resource base in order to transition to a cleaner future.
Satisfying emerging Asia's demand
Asia is now the region demonstrating the greatest growth in energy demand. How it manages this demand will impact global prices, supply reserves and the climate.
Ongoing efforts to improve energy security by diversifying the source and mix of energy in Asia will be key to watch. Natural gas from the U.S. and Canada can be expected to play a role in the region's energy diversification. New LNG terminals are being built in North America, and gas will be flowing from these terminals on less restrictive pricing and destination terms. The potential for LNG imports from the U.S. could be particularly interesting for Southeast Asia as that region begins to look to outside sources for new natural gas supplies to meet rapidly growing demand.
As for nuclear energy, the jury is still out on its eventual contribution to the Asian energy mix. Japan will clearly rely less on nuclear energy but China and India, and other ASEAN countries, may act on their known interest to continue developing nuclear as an energy source.
Domestic environmental awareness is also on the rise - China's policies to encourage greater independence from coal, for instance, are direct moves to address localised environmental problems, more than an affirmation of international environmental frameworks.
A key challenge for Asia is whether it will be able to manage growth of energy demand in the most efficient way possible. Asia's emerging economies have an opportunity to build-in the best and most efficient technologies to support long-term low-carbon growth, unlike in developed economies, where lower growth levels require that old facilities must be closed or retrofitted. .
In this respect, China, once again, has shown its ability to exercise centralised control on how energy demand develops. It has taken important steps to improve the overall energy intensity of its economy without disruptive price increases.
Whither the US?
As the US observes these global trends unfolding, it is experiencing an unexpected trend of its own - rapidly declining energy imports due to increasing energy production and stable energy consumption. Innovation and new technology are allowing it access to unconventional oil and gas resources. Domestically, gas is increasingly preferred as a 'cleaner' fuel and viable alternative to oil, to cushion against spikes in oil prices.
There have been concerns that energy independence would alter the nature of US engagement with the world. From my perspective, this only makes a stronger case for the US to stay engaged in global events and in issues of regional energy security, to encourage stability and keep the global economy healthy. Working with key regions of the globe, including in Southeast Asia, to manage growing energy demand and facilitate investment in cleaner energy is key to meeting energy security and environmental concerns while sustaining economic growth.
David Pumphrey is a senior fellow and co-director of the Energy and National Security Program at the Center for Strategic and International Studies. He was most recently deputy assistant secretary for international energy cooperation at the U.S. Department of Energy. Mr Pumphrey will be speaking on shifting global energy geopolitics at the upcoming Singapore International Energy Week (SIEW) 2013.
This article was first published in The Business Times Singapore.
By: David Pumphrey