The effect of U.S. shale gas on current world energy flow
Creators: name: Manshoori, Nima
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 380109
subject: Industry economics and industrial organisation

description: The relationship between the prices of crude oil and natural gas as the major commodities in the global energy mix has always been of interest to economists, international energy majors, power producers, industry observers, and policymakers due to its implications on investment decisions, portfolio optimisation, trading strategies, and energy policies. 

Besides, the energy arbitrage between the two fuel sources has been a significant determinant of their long-term relationship. However, in recent years their long-run price relationship has been challenged as these two prices often have shown evidence of decoupling from each other.

 For example, few studies show that the stable long-term relationship between oil and gas prices experienced a shift after 2009, whereby natural gas prices deviated from oil prices shortly after the U.S. shale gas production surge in 2007.

Shale gas is unconventional natural gas. It is called "unconventional" because of its atypical reservoirs, which require new production techniques, in contrast with conventional natural gas, which requires traditional production technics. Since the U.S. shale gas revolution, the role of natural gas in the global economy and international energy markets has become more critical. Major natural gas consumers have increased their demand for natural gas. Japan after the Fukushima Dai Chi nuclear powerplant disaster and China with the growing pressure of air pollution are just two examples. Besides, conflicts between Russia - as a major natural gas supplier- and Ukraine have caused uncertainties to the European market.   

The commercial production of shale gas in the United States began in 2007, has changed the country's role in the international energy market and has contributed significantly to the gas supply. Shale gas production can make the U.S. a net natural gas exporter, affecting the global energy market where gas prices are still indexed to the oil prices. These new developments have increased research interest in the relationship between natural gas and oil prices.  

This research thoroughly evaluates the U.S. shale gas's implication on the oil and gas markets in the U.S. and Europe over 1994-2018. As Japan is a key natural gas importer (in the form of LNG), the cointegration relationship between Japan LNG market and the U.S. and European crude oil is also examined.

Cointegration analysis determines the sources of risks in the market. If cointegration analysis confirms one common trend in the oil and gas prices, it can be interpreted that the market is affected by only a single source of risk; otherwise, it implies that the market is exposed to multiple risk sources.  Cointegration analysis can be used to help oil and gas producers and market players apply methods or transactions to "hedge" or reduce the price risks and transfer some or all of the risks to a party with a better ability for risk management.

 The long-run cointegration analysis of oil and gas prices in markets of U.S., Europe, and Japan LNG vs crude oils, considering U.S. shale gas production surge in 2009, suggest that while shale gas production has helped reduce the natural gas price, the long-run co-movement between oil and natural gas prices have remained unchanged. In other words, there is still one common trend - a source of risk - in the oil and gas market. 

Moreover, this thesis investigates the U.S. shale gas's effects on natural gas supply security in the U.S. and several other nations by introducing a compound index for natural gas supply security. Results show that shale gas can improve the U.S.'s natural gas supply security and countries importing natural gas from the U.S., e.g., Chile and India.

Estimation of the future natural gas consumption of China, the U.S., Argentina, Mexico, South Africa, and Brazil show that by 2030, their consumption will be higher than their currently available natural gas reserves. In other words, if these countries rely only on their conventional natural gas resources, there would not be enough domestic natural gas to satisfy the nations natural gas requirements in 2030. 
Finally, the thesis diverts attention to some of the key shale gas-rich nations and investigates the possibility of repeating the U.S. shale gas success in these countries. Considering the United States experience, several factors such as property rights, shale gas resources concentration, private financing, technology, and the availability of required transportation infrastructure, have played essential roles in making the United States shale gas commercialisation a successful experience.  These factors were evaluated for China, Algeria, and Argentina, the first three countries with the most extensive shale gas resources.  The study outlines that appropriate policy and regulatory re-structure are as important as technology and infrastructure improvement for shale gas development in these countries.