Shale gas: New issues on the trade and sustainable development agendas

22 March 2013

The emergence of the "Shale Gas Revolution" in the United States and the prospect of major shale gas production in other countries pose a wide range of new issues concerning trade and sustainable development. The issues have become more salient in recent months in the US as key members of Congress have called for restrictions on exports of liquefied natural gas (LNG) and as studies and other commentaries about shale gas exports have entered public discourse.

Concerns over the implications of the Shale Gas Revolution have also arisen in other countries that deal in shale gas. Notable countries include importers China, India, and Japan, exporters Australia and Qatar, and countries with shale gas reserves, including Argentina, France, Poland, and the UK. For each of these countries, however, there are inevitable uncertainties regarding magnitudes, locations and costs of access, particularly since exploration has barely begun in some countries.

For instance, Poland's reserves were estimated to be nearly 200 trillion cubic feet in a widely cited study funded by the US Energy Information Agency [1] , but after subsequent on-site exploration in only two sites, Polish officials reduced the estimate by about 90 percent [2] . On the other hand, some early estimates in other countries have been revised upward. Despite such uncertainties and changing estimates, there is little doubt that there are many large shale gas deposits in several countries.

Health and safety concerns

Exploration, production, and trade of natural gas from these deposits have become highly controversial issues around the world. Primary concerns include the health effects of chemical additives that seep into aquifers and ground water, the potential for triggering small earthquakes, and the disruption of daily life in local communities within close proximity to extraction sites.

These and other concerns - whether based on real or imagined risks - may impose significant constraints on the long-term exploitation of shale gas, particularly in some countries in Europe, and perhaps in some states within the US because of the opposition of local communities and/or various governmental entities on health, safety, and environmental grounds. Although these concerns are not directly linked to climate change, they could substantially reduce production of shale gas and thus affect greenhouse gas emissions.

Such concerns have led to moratoria and other limitations on exploration and recovery of shale gas in parts of the US and in other countries. Some countries, such as France, have imposed prohibitions, while others, such as Denmark, are allowing carefully controlled exploration but without any decisions yet on extraction. Finally, countries including China have embarked on ambitious exploration operations with the hope of subsequent large-scale extraction operations.

Methane and climate change

An attractive feature of shale gas from the standpoint of climate change mitigation is that, like natural gas in general, greenhouse gas emissions from shale gas consumption are much lower than those from coal - for instance, in electric power plants emissions are about 40-50 percent lower. However, there are serious questions about greenhouse gas emissions, especially methane, during exploration and extraction.

There can be significant emissions of methane during the exploration and production phases of shale gas. Methane is a much more potent greenhouse gas than carbon dioxide - with a global warming potential about 23 times greater than CO2 at 100 years and 78 times greater at 20 years [3] . Methane thus has particularly strong short-term effects. There are, however, technological fixes available, but their effective implementation will require government regulation and industry cooperation. The large-scale flaring of gas from shale oil deposits in the US in the same areas where there are also shale gas deposits is a related issue because there are methane release concerns in both shale gas and shale oil sites [4].

Effects on investment in renewable energy sources

Over the longer term, a key issue is whether cheap, abundant shale gas will undermine investment in renewable energy sources. One of the effects of shale gas exploitation in the US has already been a significant decrease in the price of natural gas - from about US$13 per million BTU in 2008 to as low as about US$3 in 2012.

With a consequent decline in electricity prices produced by natural gas fired power plants, the competitive position of wind, solar, and other renewable energy sources has been weakened and the future shares of those technologies in the energy mix are thus also undermined. Therefore, in some scenarios, while the substitution of shale gas for coal to produce electricity may yield a net reduction in greenhouse gas emissions in the short-run, the increasing share of shale gas and concomitant smaller share of renewables may yield a net increase in emissions over the longer term [5].

Trade potential

Significant potential for international trade in liquefied natural gas (LNG) derived from shale gas has emerged in recent years because of variation in patterns of production and prices depending on geography. Already, there is much interest, for instance, in US exports to Europe and Australian exports to Japan, among many other possible trading relationships. Of course there are a variety of constraints on the potential trade, including transport costs and the costs of establishing LNG export and import processing facilities. Nevertheless, the largest Japanese electric utility, Tokyo Electric Power, has already signed a long term contract for shipments of LNG from a Louisiana port in the US, subject to US government approval.

As for import/export facilities, in the US there has been a surprising shift away from expectations that the US would become an increasingly important LNG importer toward expectations that it will become an increasingly important exporter. This prospective switch, however, will be expensive for investors that have already invested billions of dollars in import facilities, which must now be changed into export facilities or remain largely idle as they have been.

US government policy concerning LNG exports is now under intense scrutiny. The current policy allows LNG exports to a select small group of countries and considers others on an ad hoc basis. A country must have a free trade agreement (FTA) with the US in order to engage in natural gas trade with it on a reliable, on-going basis, without the uncertainties of an ad hoc application process that is outside an FTA. Of course, FTAs are separate from WTO agreements, and they are different from trade and investment framework agreements and from bilateral investment treaties. Only 20 countries have FTAs with the US - including countries in NAFTA and the Caribbean Basin Initiative (CBI), plus a few countries with bilateral agreements such as those with Bahrain, Oman and South Korea. However, there are two countries - Costa Rica and Israel - of the 20, whose FTAs do not include provisions concerning natural gas. Thus, as of October 31, 2012 there were 18 countries that qualified for more or less automatic natural gas trading rights.

Domestic chemical firms in the US and other manufacturers that use natural gas have put pressure on the government to limit exports in order to maintain the current relatively low price of natural gas, which is an important feedstock in their production processes. A recent large-scale study commissioned by the US Department of Energy concluded that although there would be some price increases for a few industries such as chemicals, there would be no significant macro-economic effects on the national economy [6]. The results, however, are being disputed by chemical industry representatives, and there are likely to be additional studies. Some key members of the Congress - including Ron Wyden, Chairman of the Senate Energy Committee - have also called for restrictions on exports. In the midst of such policy controversy, potential investments in many LNG export processing facilities are on hold.

These developments in the US, of course, reflect only part of the wider global interest in shale gas exploration, production and trade issues. Although it is assumed that Europe's key foreign natural gas suppliers - Russia and Qatar - both have significant shale gas reserves, it remains to be seen more precisely how large they are. In any case, the possibility of increasing LNG imports from the US might substantially diminish Europe's reliance on Russia and Qatar.


Regardless of the uncertainties about the magnitudes of shale gas deposits in individual countries, as well as the production prospects and potential trade patterns, there is little doubt that shale gas issues will be looming large for many years in international sustainable development and trade dialogues. There are several possible formal international diplomatic venues where such meetings could take place - among them the UN Framework Convention on Climate Change (UNFCCC) and its annual Conference of the Parties (COP), the G-20 annual heads of state meetings, the Major Economies Forum and its related Clean Energy Ministerial.

In addition, the work of multilateral and regional development agencies will surely have to address many shale gas issues, as will trade organisations at all levels. In the meantime, dialogue has begun in earnest in many countries in all regions of the world as government policies evolve in response to changing technological, economic, and political circumstances. In short, the analytic and policy agendas are rapidly evolving.

[1] US Energy Information Agency, World Shale Gas Resources, 2011; the report was prepared by Advanced Resources International.

[2] Corey Johnson and Tim Boersma, Energy (in) security in Poland: the case of shale gas. Energy Policy, vol. 53, February 2013, Pages 389-399.

[3] Robert W. Howarth, Renee Santoro, and Anthony Ingraffea, Methane and the Greenhouse-Gas Imprint of Natural Gas from Shale Formations, Climatic Change, vol. 106, 2011, and Tom M.L. Wigley, Coal to Gas: The Influence of Methane Leakage, Climatic Change vol. 108, 2011.

[4] Ajay Makan and Ed Crooks, Shale gas boom now visible from space, Financial Times, January 27, 2013.

[5] The Future of Natural Gas, as reported in Henry D. Jacoby, Francis M. O'Sullivan, and Sergey Paltsev, The Influence of Shale Gas on U.S. Energy and Environmental Policy, Economics of Energy & Environmental Policy, Vol. 1, No. 1, 2012.

[6] The study of the effects of US exports on US domestic prices is in US Department of Energy, Macroeconomic Impacts of LNG: Exports from the United States, 2012; the study was conducted by NERA Economic Consulting.

Thomas L. Brewer, Senior Fellow, International Centre for Trade and Sustainable Development

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