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Report Says Despite Shale, U.S. Unlikely to Disengage From Persian Gulf

Despite the shale revolution in North America transforming global energy dynamics, the United States is unlikely to disengage completely from the Persian Gulf because other nations still depend on the region and it will still affect the world's oil prices, according to a draft report presented to the North Atlantic Treaty Organization (NATO).

In an 18-page report, Jeppe Kofod, a Danish lawmaker and that country's general rapporteur to NATO's Parliamentary Assembly, told the alliance's Economics and Security Committee that shale development also provides an opportunity for the West to improve its ties with Russia.

"The United States is beginning to generate a tremendous competitive advantage because the shale glut has driven down energy input prices in manufacturing, conferring very important benefits upon firms positioned to exploit price falls," Kofod said. "In essence the fall in gas prices has been an enormous positive stimulus to the economy and this is likely to persist as long as energy price differentials do.

"If this price differential persists over time, even greater levels of inward investment would be likely. European manufacturers would then face the twin challenges of competing against low-cost labor in Asia and low cost energy in the United States."

Kofod said the U.S. was certain to change the way it views the Middle East, and particularly the Persian Gulf, as shale development continues.

"This could have implications for NATO over the longer term," Kofod said, adding that NATO "is premised on the notion of shared security interests and outlooks. One can imagine that a significant divergence in energy security perspectives could begin to erode this foundation.

"That said, oil markets are fungible and what happens in one market will have an impact on the global market. For this reason, the United States will likely continue to have a strong interest in the Persian Gulf both for reasons of energy security and for general security. But [NATO] will need to conduct a sustained dialogue on these matters in the future."

NATO may also need to consider cooperation with India and China to keep the sea lanes open in the Persian Gulf, especially if the two emerging economies increase their reliance on the region's oil.

Kofod said the Organization of Petroleum Exporting Countries (OPEC) was likely to lose some of its leverage on global oil prices thanks to North American shale and a revolution of a different sort: the region's Arab Spring uprisings. But he said the effects on Russia were a mixed bag.

"On the one hand [Russia] likely has very large reserves of shale gas, tight gas and oil and has not even begun in earnest to develop this potential," Kofod said. "That is not surprising given its extraordinary supplies of conventionally produced natural gas and large infrastructure investments in it.

"On the other hand, Russia has reason to be concerned about some of the changes underway...it may have to worry about the United States and other shale gas producing countries as an LNG (liquefied natural gas) competitor in markets where it has enjoyed a near monopoly. American LNG gas or simply the effect of American production could weaken Russia's grip on gas markets throughout Europe...what is happening in the United States has encouraged a number of European countries to renegotiate long-term contracts with [OAO] Gazprom and this could also be a harbinger of things to come."

Kofod said it was unclear if shale development would catch on in Europe as it has in North America. He cited Europe's lack of drilling infrastructure, uncertain regulatory and tax frameworks, insufficient drilling capital and a lack of skilled workers as roadblocks to the industry growing quickly.

"These social, structural, institutional and environmental challenges, for the moment, are slowing down the development of unconventional gas and oil industries in Europe," Kofod said. "This could ultimately result in a serious competitive disadvantage for those parts of Europe wedded to long-term gas contracts and thus compelled to pay structurally higher electricity prices than in the United States. These complex developments are adding a high degree of uncertainty to the global energy picture and this uncertainty could begin to impinge on long-term investment decisions including investment in critical pipelines."

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