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Baker Institute: U.S. Shale Erodes Foreign 'Petro-Power'

North America's abundant natural gas resources have begun to weaken Russia's influence on Europe's energy supplies and could counter Iran's influence as an energy supplier, according to research by the Baker Institute Energy Forum at Rice University.

However, to tap the full benefits that unconventional gas can bring to the United States, a "stable investment climate with regulatory certainty" is essential, according to "Shale Gas and U.S. National Security."

"In particular, the United States will need to adopt policies that ensure shale gas exploitation can proceed steadily and predictably with sound environmental oversight," said energy experts Kenneth B. Medlock III, Amy Myers Jaffee and Peter R. Hartley. The report was published by the Energy Forum at the James. A. Baker III Institute for Public Policy, which promotes "informed and realistic" policy on energy-related challenges. It was sponsored in part by the U.S. Department of Energy.

The trio assessed the impact of domestic shale gas development on energy security and national security, emphasizing the geopolitical consequences of growing shale gas supplies. "Natural gas -- if not disadvantaged by government policies that protect competing fuels, such as coal -- stands to play a very important role in the U.S. energy mix for decades to come," said the authors.

Growing domestic shale gas supplies already have "played a key role in weakening Russia's ability to wield an 'energy weapon' over its European customers by increasing alternative supplies to Europe in the form of LNG [liquefied natural gas] displaced from the U.S. market."

Abundant supplies also have dropped the price, which in turn "lowers the cost of initiatives to diversify the American automobile fleet to run on non oil-based fuels, such as electricity and compressed natural gas," they said.

Bountiful U.S. gas supplies have caused a "ripple effect around the globe, not only through displacement of supplies in global trade but also by fostering a growing interest in shale resource potential in other parts of the world," wrote Medlock and his colleagues. These impacts "are likely to expand over time."

LNG supply that now is being diverted to European and Asian buyers has "immediately presented consumers in Europe with an alternative to Russian pipeline supplies" and "is exerting pressure on the status quo of indexing gas sales to a premium marker determined by the price of petroleum products."

The authors were able to demonstrate that U.S. shale gas could help abate the geopolitical power now wielded by key "petro-states" as global energy use shifts to natural gas. "Specifically shale gas will play a critical role in diminishing the petro-power of major natural gas producers in the Middle East, Russia and Venezuela and will be a major factor limiting global dependence on natural gas supplies from the same unstable regions that are currently uncertain sources of the global supply of oil."

According to the authors, expanding worldwide shale gas output would:

Shale gas development in the United States has benefited from North America's "unique" market structure, which may not have occurred if such a regulatory structure were not in place, said the trio.

"Unbundling of capacity rights from facility ownership makes it possible for a producer to access markets through a competitive bid for pipeline throughput capacity," said the authors. "Absent this, many of the small producers that first ventured into shale might not have been willing to do so, specifically because access to markets could have been limited. This is inherently a problem in most other markets globally, where pipeline capacity is not unbundled from facility ownership and large incumbent monopolies control much of the transportation infrastructure."

Another issue that may confront U.S. shale gas producers is a change to tax policies in the upstream sector, which could "render investments in shale exploration and production unprofitable at current prices," said the authors.

"The richness of the U.S. shale gas play owes its roots to small, independent energy companies [that] took on the risk to pioneer early entry...in the 1990s." Those producers are "helped" by several tax rules, including the intangible drilling cost, or IDC, expensing rule, which if changed "would greatly constrain smaller risk-taking firms that engage in the kinds of investment programs that brought the shale play to fruition."

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