Could fracking make the Persian Gulf irrelevant?

BRUSSELS, Belgium — America's fracking revolution is changing the dynamics of world energy.

Since November, the United States has replaced Saudi Arabia as the world's biggest producer of crude oil. It had already overtaken Russia as the leading producer of natural gas.

The emergence of the United States as a global energy superpower has a profound strategic impact that is raising expectations and concerns among America's allies.

“This is something that is going to change not only the energy market in the world, but everything else,” said Jeppe Kofod, a Danish lawmaker who is drafting a report on the oil and gas revolution for NATO's Parliamentary Assembly.

“It has huge political and geo-strategic implications,” Kofod told a recent meeting of legislators from the 28 alliance nations.

The lawmakers expressed concern America's shift toward self-sufficiency in energy will weaken its strategic interest in the Middle East, North Africa and the Persian Gulf, while Europe remains dependent on oil and gas supplies from the region.

"This could have implications for NATO over the longer term," Kofod's draft report says. "The alliance is premised on the notion of shared security interests … a significant divergence in energy security perspectives could begin to erode this foundation."

US oil imports fell below domestic production this year for the first time since the 1990s and now represent just 40 percent of demand. In addition, most of the imports come from other Western hemisphere producers. The United States imports over three-times more oil from Canada than it does from Saudi Arabia.

However, energy experts downplay concerns of a US exit from the Middle East. The United States still gets 28 percent of its imports from the Persian Gulf and the region's strategic importance for global fuel markets means Washington is likely to stay engaged.

"It would be a major mistake from a political and security perspective to see this as a blank check to disengage from there," said an energy expert at an international organization who spoke on condition of anonymity due to the sensitive nature of his work.

He added that the shale bonanza was already having an impact for the Middle East — for example, by diminishing the risk of disruption on world markets after the imposition of sanctions on Iran's oil and gas industry by the United States and Europe last year.

European officials are also concerned about the economic impact of America's shale revolution.

While US companies have seen energy prices tumble in a decade of shale production, their European competitors are paying up to five times more for gas. That's holding back hopes of Europe climbing out of recession and regaining competitiveness on world markets.

"Soon Europe could be the only continent to still depend on imported energy. Households feel the weight of high prices, industry finds it hard to compete with foreign firms," Herman Van Rompuy, the president of the European Council said last week after hosting a summit of EU leaders that focused on energy prices.

The summit agreed to improve energy interconnections between European Union countries and slice through the regulatory barriers that hinder the transfer of fuel and electricity across borders within the 27-nation bloc. But there was no agreement on developing Europe's own shale potential.

Countries such as Britain and Poland are keen to search for shale reserves, but the environmental risks of the fracking process that uses hydraulics to free fuel from rock means others are wary.

France — which is thought to be sitting on Europe's biggest shale gas deposits — has introduced a five-year ban on fracking. Several other European countries have moratoriums or regulations so tight as to make fracking impractical.

British Prime Minister David Cameron warned last week's summit that Europe risks being "left behind in the global race."

Europeans are not the only ones concerned. Japan's energy prices are even higher than Europe's and even China is feeling the heat as cut-price power makes production cheaper in America.

In another sign of the shifting diplomatic impact of the boom in unconventional fuel supplies, Canada this month blocked a bid by the EU to gain a seat on the increasingly influential Arctic Council — while allowing China to join. The Canadians are miffed at Europe's reluctance to allow imports of oil extracted from Alberta's tar sands through an extraction process which the EU claims is too damaging to the environment.

Conversely the shale revolution has inadvertently pushed the United States into the forefront of the fight against global warning, at least in the short term.

The switch from coal to cheap natural gas in American electricity production means the United States has seen carbon emissions hit their lowest level since 1994, meaning it's overtaken most European countries in meeting the goals of the Kyoto protocol, despite never ratifying the climate change agreement.

As Americans turn to gas, US coal producers have sought new markets in Europe — exports rose 23 percent in 2012, including rises of 75 percent to Britain and 50 percent to Italy.

On the positive side, Europeans are hoping the US gas boom can reduce their reliance on imports from Russia.

Europe imports 80 percent of its oil and 60 percent of its natural gas — a third of that comes from Russia. In some countries in Eastern Europe reliance on Russia is much heavier, giving Moscow diplomatic clout.

In the winter of 2009, when Russia turned off the tap during a dispute with Ukraine, millions across eastern Europe were left shivering.

For the moment, the United States is not exporting its gas glut. Investment is needed to develop terminals that will supercool the gas into liquid so it can be transported by ship. The administration also needs to be convinced that authorizing exports of cheap gas is in the US interest.

A first liquid natural gas terminal has been authorized for export at Sabine Pass, La. It's expected to start loading ships destined for Europe and Asia in 2015. The Obama administration this month authorized a second terminal in Quintana Island, Texas, to export 1.4 billion cubic feet of natural gas a day.

There are 26 such terminals around the US coast awaiting export authorization. Most of them were originally built to receive imports of natural gas before fracking technology opened up US domestic reserves.

"There are a lot of companies with their finger on the trigger and ready to make a lot of money," once exports are up and running, said the energy sector expert. Europe currently has 20 terminals able to receive the liquid gas, with over 40 planned or under construction.

If the United States does start shipping gas to Europe it could provide serious competition to Russia and cast doubt on a series of pipeline projects designed to link Europe to the rich Caspian Sea gas fields.

As an alternative, Russia is looking east — after nine years of talks, its energy giant Gazprom signed an agreement in March for a pipeline taking Siberian gas into China from 2018.

In the fast-changing geo-politics of today's energy sector however the impact of that deal could be limited — the world's largest shale gas resources are believed to lay deep below the soil of China.