FinalDissertation

Energy Security and Shale Gas:
U.S. Domestic Gas Policy Issues and Foreign Perspectives
Myles A. Walsh V
This dissertation is submitted in part requirement for the
Degree of M.A. (Honours with International Relations)
At the University of St Andrews, Scotland,
And is solely the work of the above named candidate.
April 24, 2015

Contents
Acronyms iii
Abstract iv
1. Introduction 1
1.1 Essential Perspectives
1.2 The Novelty of Shale Gas
1.3 Topics for Discussion
2. Energy: Land, Wealth, and Capital 6
2.1 The Wealth of Nations
2.2 Harnessing Energy
2.3 Energy and Economic Growth
3. Energy Security and Natural Gas 12
3.1 Defining Energy Security
3.2 Dependence to Interdependence
3.3 Specific Issues for Natural Gas in the U.S.
3.4 Environmental Security and Gas
3.5 The Shale Gas Revolution
4. Challenges and Opportunities for U.S. Gas Policy 24
4.1 Tempered Optimism for Shale Gas
4.2 Natural Gas Value Chain
4.3 The Role of Government
4.4 Regulating Natural Gas
4.5 Analysis of Regulatory Approaches
5. Foreign Perspectives 36
6. Conclusions 40
Appendix A: Industry Terms 42
Appendix B: Graphical Representation 43
References 47

iii
Acronyms
AEO (Annual Energy Outlook from the EIA)
BP (British Petroleum)
Btu (British thermal units)
B/d (Barrels per day)
Bcf/d (Billion cubic feet per day)
CCS (Carbon Capture Systems)
E&P (Exploration and production)
EIA (U.S. Energy Information Administration)
EPA (U.S. Environmental Protection Agency)
EROI (Energy Returned on Energy Invested)
FERC (U.S. Federal Energy Regulatory Commission)
GDP (Gross domestic product)
GHG (Greenhouse gas)
IEA (International Energy Association)
LNG (Liquid natural gas)
LTO (Light tight oil)
MENA (Middle East and North Africa)
NG (Natural gas)
NGL (Natural gas liquids)
OECD (Organization of Economic Co-operation and Development)
OPEC (Organization of the Petroleum Exporting Countries)
R/P (Reserves to production ratio)
Tcm (Trillion cubic meters)

iv
Abstract
This dissertation has been produced to research how shale gas fits
into wider energy security perspectives for the United States, with a concise
global perspective in respect to the U.S.. The focus in this paper on policy
issues faced by the U.S. is in light of the recent ‘shale revolution’ in North
America, which has been made possible by technological advancements,
namely in ‘fracking.’ Energy security provides a necessary lens, through
which to view government’s approach to the political, economic, and
physical implications of shale gas and energy in general. A nuanced view of
the policy issues presented by shale gas, in tandem with those faced in the
broader energy spectrum is therefore constructed. The macro implications
for the production of exhaustible resources are expressed in brief following
the introduction to illuminate issues of economic growth and sustainability
that constitute the current economic system. Increasingly limited returns to
capital invested in production demonstrates how wider economic and
environmental issues surface when unbridled ‘resource accumulation’ is the
norm. Natural gas is no different than any other hydrocarbon in terms of its
inevitable exhaustibility, but economic and environmental benefits in the
mid-term may open a larger window for greater technological efficiency in
energy to capital substitution. Regulation and policy can seek to make more
efficient industry processes standard through competition and incentives, but
they can also be disruptive forces. Yet, despite the hope that a resurgent gas
industry brings, this paper concludes that at the macro level, countries can
never have austerity in supply security policies as long as countries and
companies continue to vie for access to global resources, and so long as
exhaustible resources remain the main inputs of economic production.

1
1. Introduction
1.1 Essential Perspectives
The most important figures to have at hand when trying to grasp the challenges
faced in maintaining energy security of supply in the global economy are those that
drive energy consumption levels, or rather those that deplete energy supply. The global
population is sitting at around 7.1 billion today and is climbing, where by 2030 global
populations is expected to reach 8.3 billion. Meanwhile, of that number the middle class
is set to grow by 1-2 billion in 2030 (BP Energy Outlook 2030, 2013). These 1-2 billion
people entering the middle class will demand more energy, as they are more likely to
drive and own cars, and eat meat (both energy intensive, and greenhouse gas (GHG)
emitting), in line with the status quo.
In light of growing demand, energy security has become an issue of increasing
importance for policymakers; the hazards inherent in relying too heavily on one fuel
type and on one region for supply require unique and flexible policy approaches.
Outside of the political reasons for resource diversification, environmental and
sustainability issues of fossil fuel reliance, make the search for alternative resources a
more necessary policy goal. This paper will not delve into the growing need for
alternative resources, but will touch on issues of environment and resource
exhaustibility in respect to shale gas production and broader energy security discourse.
The end for hydrocarbons may not be as close, or as sudden, as M. King Hubbert’s peak
oil predictions once suggested. Hubbert predicted oil productions decline in the U.S. in
the 1970’s, but he of course could not have predicted the technology developments that
have caused production in liquids and gas to increase once again (Hubbert, 1956). Even
though gas production has dramatically increased in the United States in the past

2
decade, most of production fuels domestic demand, and the global market for oil
regulates price.
Predictions from the U.S. Energy Information Administration’s (EIA) Annual
Energy Outlook (AEO) 2014 demonstrate that oil continues to be a substantial part of
the energy base for years to come, declining slightly to just above one third of U.S.
domestic consumption.1
Natural gas production is predicted to continue to grow in real
terms, and as a share of consumption, but this increase only serves to offset rising
demand. Analysis from the EIA demonstrates that increases in U.S. domestic
production of liquids have reduced net imports from 60% (2005) of total consumption
to 40% (2012), and by 2040 expectations are for just over 30%.2
Despite this abundance
in both liquids and gas, the costs of production continue to increase as a result of
exploitation of more capital-intensive plays. Limits to returns on capital investment are
a reality that must be dealt with by policy in order to incentivize production at higher
costs. The dramatic increase in production in shale gas has been made possible by
favorable regulatory policies that deregulated prices and incentivized upstream
investments.3
For natural gas, reserves are higher than ever thought before, but
resources are limited and a number of factors must coalesce to make continued
production viable.
1.2 The Novelty of Shale Gas
The shale gas revolution’s novelty is in its unpredicted abundance, and in
technological advances, which have enabled the exploitation of unconventional
hydrocarbons in the United States that were previously inaccessible and uneconomical
1
See Appendix B: Figure 1. “U.S. primary energy consumption by fuel, 1980-2040 (quadrillion
Btu)”
2
See Appendix B: Figure 2. “U.S petroleum and other liquid fuels supply, 1970-2040 (million
barrels per day)”
3
See Appendix A: ‘Upstream’

3
to produce. There is still variance in economic feasibility between shale gas plays, and
‘tight gas’ plays require far more stimulation from fracturing than shale, due to the
relative impermeability of the reservoir rock from which it is sourced. This research will
be centered on shale gas production, because of the scale of operations in shale
formations. More permeable shale has enabled production of natural gas to increase by
approximately 50% from 2008-2012. Shale gas as a percentage of U.S. gas production
rose from just 5% of total production in 2007 to 39% in 2012, and is still climbing
(Blackwill & O’Sullivan, 2014). That said, unconventional plays vary in viability and
locale, and this can create very local and specific issues for policy. Energy policies in
the hydrocarbon era face the same systemic challenges that are embedded in all
exhaustible resources.
Such a boom in gas production may be extremely difficult to replicate globally,
because of the specific convergence of conditions in the United States that has made
production viable. One of the most unique aspects of the United States’ extractive
industries is the country’s private land ownership, whereby landowners conceivably
own all mineral resources beneath their properties and therefore have an incentive to
make their land economically productive. This alone generates incentives for a range of
economic activity involved in exploration and production (E&P). Furthermore, the
advancements in hydraulic fracturing (fracking) and horizontal drilling technology,
have demonstrated the impact that technological advances have in creating new
opportunities and concerns for policymakers.4
This technology combination,
implemented first in 1986 by George Mitchell for use in the Barnett shale, has only
become viable in the past decade (Warner & Shapiro, 2013). Advances in the
technological capabilities and efficiencies of drilling and well stimulation, coupled with
high oil prices, have made extraction of gas from previously inaccessible plays of low
4
See Appendix A: ‘Hydraulic fracturing (Fracking)’ and ‘Horizontal drilling’

4
permeability viable. For shale gas in the U.S., pre-existing distribution networks, and a
number of established wellbores enabled quick returns on new technology investments.
Despite the considerable investments in upstream businesses for natural gas, the
industry has at times been bottlenecked by a lack of investment and commitment in
midstream and downstream processes.5
Pricing instability, government controls, and
uncertainty deters large long-term investments in distribution, services, and utilities.
Wider usage of gas requires more robust markets and incentives in mid and downstream
gas infrastructure.
1.3 Topics for Discussion
Energy security provides an essential lens through which to view international and
domestic affairs. Focusing on natural gas will demonstrate issues that are faced in
attempting to manage the production and supply of a specific source of energy, and the
importance of technological advances in increasing efficiency. A detailed look at the
natural gas industry in the United States in light of the shale gas revolution will
demonstrate the dynamic role that government plays in developing policies to promote
reliable sources of energy. In terms of shale gas, the government faces the challenge of
balancing state and federal controls, in order to ensure that the risks involved in
upstream and downstream businesses are recognized and dealt with, and that the
management of essential value chain operations are not left unchecked.6
The following
chapter will seek to provide a theoretical insight into how and why hydrocarbon usage
is embedded into the global political economy, in an attempt to establish the crux of
energy security. This will touch on issues of growth, and the historical economic
progression of energy. The paper will proceed to address the importance of energy
security, centering on current energy security literature, and then the dimensions of
5
See Appendix A: ‘Midstream’ and ‘Downstream’
6
For a flowchart of the natural gas business physical value chain see “Appendix B: Figure 3.
Natural Gas Physical Value Chain.”

5
shale gas from an energy security perspective. The more efficient policies (from an
industry standpoint) that have enabled the resurgence of U.S. domestic production will
then be reviewed with a look at U.S. policies surrounding fracking and their
implications. The final chapter will address international issues of energy security and
shale gas with deference to the United States. A better understanding of energy security
and of the ‘shale revolution’ from a U.S. energy security policy perspective is the
primary goal of this research.

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2. Energy: Land, Wealth, and Capital
2.1 The Wealth of Nations
The major sources of energy throughout history have defined and driven the
level and nature of wealth in the global economy. Energy from hydrocarbons has not
always taken such a grand stage in global affairs, or in human affairs for that matter.
Where land was once the primary source of wealth, now capital, which is a means of
using energy from hydrocarbons for the production of goods, determines wealth (Hall &
Klitgaard, 2012). The theoretical underpinning in economic history will provide a better
understanding of why energy sources like gas are so essential throughout the global
political economy and therefore take precedent domestic governance. The role of
energy in the global political economy can be traced back to the foundations of
economic study. From the physiocrats, to classical economists, and now in neo-classical
and neo-liberal economics, the major energy sources of the time have been the
economic drivers for asset accumulation. They are the physical sources imperative for
economic production and wealth accumulation. In the 18th
century French physiocrat
tradition the fundamental origins of wealth came from the use of land in the form of
agriculture, husbandry, and timber (Cleveland, 1999). Mercantilist governments
implemented controls and tariffs on imports and exports in order to create an
advantageous balance of trade, thereby constricting growth in the global economy. In
mercantilism, colonialism was the tool through which states accumulated the resources
needed to literally fuel the economy; further controls were placed on domestic
production of goods as well as on the export of gold and silver bullion (Ravenhill,
2010). This was the constrictive manner in which states sought to secure the factors of
production and accumulate wealth. With the physiocrats, and then classical economists,
the idea of more efficient natural and ‘laissez-faire’ economies took shape.

7
For classical economists, increased efficiency was recognized in the divisions of
labor, and the creation of industrial technology. Labor is the process by which human
and machine energy work is put into raw materials to generate wealth. This realization
led Adam Smith to surmise towards the end of the 18th
century that the wealth of a
nation originated in labor (Gilpin, 2001). Following the industrial revolution, the
division of labor became more pronounced, and as efficiency increased, the benefits of
specification in the labor force and in industrial production are recognized in economic
study. Classical economist David Ricardo’s theory of comparative advantage
demonstrates the issues inherent in mercantilism, and the need for optimal efficiency in
the global economy. The economic roles for states in the global economy are based on
their material capabilities according to Ricardo, and in market economies production
efficiency is dictated by costs of production as a result of the raw materials present
(Gilpin, 2001). Therefore, placing restrictions on economic liberalization in the form of
barriers to trade is counterproductive to wealth creation in the global economy.
Efficiency at the systemic level is fostered by economic liberalization between states
and the advancement of free trade dictated by comparative advantage. Indeed self-
regulating economies distribute wealth more efficiently, and more wealth is created as a
result of this efficiency. The point remains, however, that underpinning historical
economic progression is not individual utility maximization, the accumulation of
material capabilities by states, or solely technological advances. Instead it is in increases
in the efficiency of transforming the factors of production: natural capital (goods and
resources), physical capital, and labor, into higher quality goods (Murphy & Hall,
2011).

8
2.2 Harnessing Energy
Modern forms of energy have facilitated vast population growth, and are the
primary factors of production for the global economy. From a thermodynamics
standpoint, the law of conservation dictates that mass input must be output, meaning
that energy is required in all transformation of matter. Energy cannot be created
(because matter cannot be created), and can only be used more or less efficiently (Stern,
2004). For humans, survival has always been dependent on harnessing energy from the
biophysical sphere, first as hunter-gatherers, then subsistence farmers, as traders, and so
on. At the macro level, technology has proven far more efficient than biophysical, or
trophic processes, in terms of energy transfer, and to a degree survival has become less
of concern for humanity collectively (Hall & Klitgaard, 2012). Today’s energy
landscape is made possible by efficient transferring mechanisms for turning primary
energy sources such as solar radiation and fossil fuels into more useful energy carriers
such as radiant heat and electricity (Murphy & Hall, 2011). Inefficiency translates to a
loss in capital and gross domestic product (GDP) in the current global political
economy, and this is the plane on which states operate in the neoclassical economic era.
An essential way to look at energy production is in terms of energy returned on energy
invested (EROI), a numerical figure that demonstrates the net value of an energy source
and determines viability of production (Murphy & Hall, 2010). Increases in energy
returns are determined by human and technological capabilities, and physical realities.
In EROI considerations, an important aspect missing from most calculations are the
energy implications of negative externalities. These include energy costs of
environmental destruction, and the opportunity cost of not investing in green
technologies. Still, for photovoltaic cells for example, the reason for limited application
is the technology’s inability to compete without subsidies. The reason for higher costs

9
is the inefficiency of the technology due to intermittent sun, limited energy storage
capabilities, and interface inefficiency (Denholm & Margolis, 2006).
2.3 Energy and Economic Growth
The production of hydrocarbons allows for the transfer of matter via energy into
capital. Capital is defined by both monetary value, and the value of physical assets.
Energy consumption literally fuels the states’ push for capital accumulation, and
therefore economic growth (Murphy & Hall, 2011). Indeed, in order to ensure energy
security of supply, states must acquire the wealth of resources to match domestic energy
consumption levels. More often than not this has led to a focus on quantity of resources,
rather than efficiency of use. As demand grows, states look abroad to countries that
possess reserves of primary energy sources. Indeed, states are motivated at least in part
by self-interest, and don’t always possess the materials they need or want to feel secure,
which can lead to conflict and inequitable distribution of resources. The policies of
energy security have largely been driven by resource accumulation, from which the
foundations of social economics have arguably never departed. The continued influence
of neo-classical economics on state economic policies fuels Realist foreign policy
considerations, in which relations revolve around material capabilities. The work of
ecological economists however has sought to demonstrate how growth and even
sustainability at current levels of material consumption is problematic given the lack of
attention given to resource exhaustion and technological limits on substitution of energy
inputs for capital.
In typical economic growth applications which generally rely on Robert Solow’s
growth model the focus of neo-classical economics on capital accumulation neglects the
importance of physical inputs and outputs, and imagines a world in which potential
consumption has no ceiling (Stern, 2004). Solow’s model does not include resources

10
whatsoever, and the ratio between capital and employment determines efficiency of
output. Economic growth theories generally hold that because capital can be used to
make more efficient technologies, for more valuable uses and products, then there is in
effect no limit to the rate of return on reinvested capital in the long run. This then leads
to higher and higher economic equilibriums (Solow, 1956). Solow was not blind to the
issues with his growth theory though, and put forward the caveat to his initial work that
production of finite resources can only increase unrestrained if there are no costs of
producing the resources (oil, coal, gas) that produce energy (Solow, 1974). Under
neoclassical economics technological transformation cannot be explained and progress
conceivably has no limits. The laws of thermodynamics clearly place limitations on the
substitution of energy for capital, and even the most efficient technology imaginable
would require energy inputs (Stern, 2004). Current economic goals of capital
accumulation and the notion of linear trending economic growth are indicative of
flawed ontological assumptions in modern economic thinking, which neglect the reality
that there are limits to substitution between energy resources and capital. Efficiency of
energy substitution for capital does not create wealth, but simply transfers it to a more
serviceable social form.
Growth, via technological change, has resulted in more resource use, rather than
less, because there has not been economic incentive enough to reduce energy use (Stern,
2004). The danger in relying on neoclassical economic theory to understand energy
supply security is that the underlying assumptions in free market economics further
engender self-interested and unsustainable consumption practices. These assumptions
implicit in neo-classical economics are based in principles of self-interest. Viewing
consumers, and for that matter states, solely as utility maximizers, and equating
financial profit to utility, creates a self-fulfilling domain in which capital becomes more

11
important than value (or quality of living), and for that matter survival in the long-term.
Indeed, as David Stern writes:
“The fear is that excessive substitution of human-made capitals for
natural capital will cause the system to approach a threshold beyond
which natural systems will lose resilience and suffer catastrophic
collapse” (Stern, 2004, 43).
The reason for maintaining the status quo is found in the realization that “in the long run
we are dead,” as economist John Maynard Keynes has recognized. As a result there is a
generational amnesia endemic to economics and by extension government policies.
Self-interest becomes the norm in the short term as a result of the tumult of boom and
bust cycles (Miller, 1999). The reality remains that the supply of energy currently
fuelling the modern economic machine is finite, and states still struggle for position in a
zero-sum game. Proponents of economic liberalism may prescribe free trade, and
international institutions as a way of managing scarce resources, but in reality there is
no clear path, no theory, for ensuring the survival of billions and their progeny. This is
especially the case in light of the rise of neoliberal economic practice in which private
entities control the factors of production, and therefore energy. It is important to realize
that neoclassical economic principles are the foundation for current economies, but that
energy concerns question the integrity of the entire system. The role of policy is limited
by economic systemic realities. In terms of energy security, policy alone cannot hope to
alter the status quo of the economic system, but instead policy’s role is increasingly to
manage risk.

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3. Energy Security and Natural Gas
3.1 Defining Energy Security
Before addressing how natural gas factors into energy security considerations, it
should be noted that there is no single definition of energy security. Energy
requirements and capacities are diverse and vary from country to country. Equally the
concept of security is just as variable (though there is scant discussion of varying
security paradigms in literature), but it is portrayed as an aspect of national security
considerations in most readings. Energy security literature widely holds that in the
absence of a unifying energy policy governance body, governments ultimately dictate
energy policy priorities. Fear of further shocks to international oil markets has
motivated a vast and continued effort for political action and the development of
economic buffering mechanisms to price and supply shocks. Studies do not delve into
how policymakers, regulators, etc. should attempt to predict possible future shocks and
disturbances, but rather focus on crises management. They present strategies to evaluate
current and past policy situations, towards mitigating risk. The need for long-term
policy strategies, in tandem with the inevitable need to respond to developments is
problematic, and there is no clear-cut answer for how to manage this risk. In his
working paper that gathers and analyses multiple definitions of energy security,
Christian Winzer assesses definitional parities and commonalities, concluding that
energy security is endemic to the entire supply chain. He asserts that energy security is
characterized primarily by prevalence of threats, and a state’s ability to mitigate or
respond to threats to the supply chain. Winzer also notes that a side effect of energy
security’s increasing relevance, and lack of definition, is its frequent invocation as a
tool to justify a variety of policy goals (Winzer, 2013).

13
On this subject, Joskow writes:
“There is one thing that has not changed since the early 1970s. If
you cannot think of a reasoned rationale for some policy based on
standard economic reasoning then argue that the policy is necessary
to promote ‘energy security’” (Joskow, 2009, 11)
Energy security policies and concerns are emotive because they involve the very factors
of production on which the current status quo of economic growth is dependent. The
linking between state security and energy security elevates energy policy.
3.2 Dependence and Interdependence
Discussions of threat are typically centered on dependence and finding ways to
mitigate it. This can entail reducing dependence on a single fuel source or a single
exporting country or region, in an effort to minimize shocks. Particularly prevalent
problem areas that are identified in literature are reliance on resources from
geopolitically unstable areas, specifically oil from MENA, and gas from Russia.
Additionally, regional dependence of consumers on limited sources for pipeline natural
gas gives monopoly-pricing power to suppliers (Kalicki, & Goldwyn, 2013, 6). The
growing interdependence between countries, and growing integration in energy
industries calls for global energy markets. Bordoff writes that the biggest problem with
oil is not that it is imported, instead it is the macroeconomic and national security
constraints of heavily relying on a single commodity (especially in transportation which
directly effects household budgets) (Bordoff et. al, 2010, 212). In this sense, it does not
matter where the oil originates, but rather it matters that the U.S. relies on a commodity
that is globally priced.
Research on energy policy issues with an international security focus was
proliferated by the oil crises in 1973, and in 1979. Daniel Yergin has been a leading
thinker in energy security policy, and his 1973 article in Time magazine, brought energy

14
security issues to the attention of policymakers. Security of oil supply remains at the
forefront of energy security concerns, but increasingly, the breadth of policy discussion
incorporates concerns of non-oil sources, and perspectives that reflect globalization and
interdependence. The 1973 OPEC Oil Embargo demonstrated the widespread impact
that geopolitical events, manifested in price shocks, could have on security of domestic
oil supply and oil market confidence. The need for national energy policies to
incorporate international security concerns quickly became evident in light of this
(Yergin, 1973). Awareness of the critical nature of energy supply security, have led
every U.S. president from President Richard Nixon to President Barack Obama to
espouse ‘energy independence’ as an economic security goal, even as import
dependence has continued to increase. Current literature widely debunks ideas of energy
independence as unrealistic (Deutsch, 2010a; Yergin, 2006). Indeed, in his inaugural
address in 2008, President Obama outlined energy independence as one of the main
policy goals for his presidency. President Obama though has tempered his rhetoric, and
has moved away from the idea of independence in energy. Now with increases in
domestic production having little impact on buffering global volatility, the realization
follows that the economic fates of nations are more or less tied together in the
globalization of world markets. In June 2014, speaking about shale-gas production in
relation to climate, President Obama acknowledged: “We should strengthen our
position as the top natural gas producer because, in the medium term at least, it not only
can provide safe, cheap power, but it can also help reduce our carbon emissions”
(Yergin, 2013b). Gas will be discussed in the next section, but President Obama’s
statement is emblematic of the growing shift in energy security policy towards the
recognition that supply diversification can only do so much when exhaustible resources
are the primary energy inputs.

15
According to Yergin in his 2006 Foreign Affairs article, titled “Ensuring Energy
Security,” the guiding principles of energy security policies can be compressed into four
sub categories, first and foremost being ‘diversification,’ then ‘resilience’, integration of
systems, and quality and presence of information (Yergin, 2006). The call for integrated
best practices throughout the supply chain, and the importance of making informed
decisions given long-term horizons, requires transparency between governments and
companies across supply chains. This harkens back to the point that because energy
form constitutes the economic system, all those who rely on it are thereby
interdependent both on the supply side and the demand side. The juxtaposition between
Yergin’s analyses of the initial oil shocks in the 1970’s, which was born out of crisis, to
today’s proactive scenario based policy considerations, reflects the progression of
energy security. Yergin also asserts that the importance of recognizing the impact of
globalization and of complete security across the supply chain has increased in
importance. Across all energy security literature diversification of supply is presented as
the primary method of enhancing security of supply. Fear of severe economic
consequences, inhibits government to change the way in which society uses energy, and
therefore policies are set around management of growing demand, and supply
uncertainty. To diversify energy portfolios, and limit the negative effects of oil supply
shocks (and increasingly other commodities), policies can be aimed at diversifying
energy sources (importing from numerous countries) as well as diversifying energy type
to gas, hydro, coal, nuclear, etc.. Not far removed from principles of ‘diversification,’
‘resilience,’ Yergin proposes— can come in the form of “spare production capacity,
strategic reserves…as well as carefully conceived plans for responding to disruptions
that may affect large regions” (Yergin, 2006, 76). These disruptions may result from
natural disasters, geopolitical events, or other unexpected events. Supply dependence is

16
more a function of systemic realities, and is better characterized as a wider
interdependence between the consumers and producers of exhaustible resources in the
global political economy, rather than by the nature of a single fuel source or region.
3.3 Specific Issues for Natural Gas in the U.S.
For the development of a more global and integrated natural gas market that is
both secure and less constrained by oil prices, the United States must lead the way in its
efforts to balance state security with the requirements of industry. That said, there are
specific constraints for each country, as will be made evident in further chapters.
Adoptions and transferals of policies are difficult because of varying energy security
realities across states. The ‘shale revolution’ in North America has been made possible
by high and stable global oil prices, and a favorable regulatory climate. Still, oil price
manipulation vis-à-vis changes in production by exporting countries can have adverse
effects on natural gas and liquid natural gas industries—sidelining projects, and
reducing investments. This presents a particular obstacle to security of supply for
natural gas. For countries like China, with abundant reserves and an emerging economy,
domestic natural gas production could help meet growing national energy demand.
However, appropriate policies and aboveground investments (both upstream and
downstream), must be made to support and encourage continued investments in E&P.
The primary questions at present are: What is the role of the United States in managing
natural gas production? Are the concerns of natural gas far removed from those of
broader energy security?
Following the first oil shock in the 1970’s, regulations aimed at stemming
supply shortages across the United States combined with further shocks exacerbated
industry ailments. Energy security discourse has been centered on oil, but now is
producing more discussion on emerging economies, natural gas, and sustainability.

17
Discussions surrounding abundant unconventional shale gas development in the United
States more recently deal with regulatory issues, economic prospects and environmental
externalities. The section addressing previous periods of natural gas scarcity in
Joskow’s 2013 article displays the susceptibility of the gas industry to price
manipulations, and the deleterious effects of regulation. Joskow’s study demonstrates
the need for flexible regulations to create lasting and robust natural gas markets and
infrastructure. Basing regulations on short-term fluctuations between scarcity and
abundance leads to ineffective policy, which further exacerbates market volatility.
Research cannot hope to pin down all future hazards to energy security;
nevertheless, the role of gauging the impact, and severity of events/risks in unison with
efficacy of policies is managed through the creation of predictions and future scenarios.
Authors have pointed at availability, reliability, and affordability as the keys to
determining future elements of security (Yergin, 2006; Elkind, 2010). From Energy
Security, Ann Florini writes in her chapter “Global Governance and Energy,”— energy
security may be defined as “reliable and affordable access to energy supplies” (Florini,
2010, 151). It is through this lens that predictions are analyzed and created. Predictions
and scenarios play a large role in shaping policies, and a heavy reliance on predictions
can entrap countries, and companies in detrimental behaviors. The majority of these
scenarios and predictions come from the OECD’s International Energy Agency (IEA),
the (EIA) and organizations such as ExxonMobil, which produces an annual Outlook
for Energy (Newell & Iler, 2013, 28-29). Victor compares AEO predictions from the
EIA for gas wellhead prices with real prices, and finds that the speculations grounding
contracts (often long-term) from 1993-2010 have been largely ineffective at making
accurate predictions. Victor writes that the EIA’s predictions are widely relied on for
many contracts, but that in light of shale gas these predictions have proven largely

18
reference based and have lacked the capacity to predict market changes (Victor, 2013,
94). Dependence on one source for scenarios can leave policy-makers more vulnerable
to unforeseen developments, or less willing to accept conflicting information as it is
presented, and therefore less capable of adapting. This serves as a clear caution that
organizations are just as ill equipped as states are in dealing with global governance
issues in energy. There is no institution equipped to manage and secure the multifarious
arms of the energy industry. The general sentiment is that policies should not be built
around energy outlooks, but rather these predictions should be used to understand how
underlying critical assumptions might change energy security policy realities.
3.4 Environmental Security and Gas
A further development in energy security literature is increasing concern over
anthropogenic climate change and the negative externalities of fossil fuel use. As a
result environmental sustainability has become a topic of discussion for energy security.
Jonathan Elkind proposes that in addition to the traditional three elements of energy
security, a “contemporary definition” must include a sustainability element of energy
security (Elkind, 2010, 128). Deutch develops a whole chapter on how to address the
need for “transition from an economy based on fossil fuels to an economy on nuclear
and renewable energy sources,” as he cites dependence issues with oil imports and
‘burning fossil fuels’ as imperative to national security (Deutch, 2010a, 79). Reference
to energy security is useful in motivating environmental reform, which is in line with
Joskow’s 2009 comments on the effectiveness of utilizing energy security concerns in
promoting other policy issues. Increasingly more deference is being given to energy
concerns in security policy and additionally environmental issues are factoring more
heavily into policy considerations than they ever have before. Elkind cites the need for
long term considerations when building infrastructure as a main reason for growing

19
focus on energy systems impact on the environment. Indeed, concerns over
environmental impact are increasingly prevalent in building infrastructure for natural
gas. Pipelines are required to span across the country, and as increasingly remote wells
are tapped at greater frequency, the options of rail or freight movement appear less
economic than pipelines (Elkind, 2010, 129).
Concerns about natural gas’ environmental impact could stand to hobble the
industry if regulations are not put in place and public fears quelled. Still as President
Obama remarked, there are mid-term benefits for the use of gas. In fact, “natural gas is
still the cleanest source among fossil fuels” says the IMFs World Outlook report from
October 2014 (Rabh, et al., 2014, 26). To further promote the industry of gas and the
boom of shale production, natural gas is being labeled by many in policy circles as a
‘bridge’ fuel rather than as a long-term energy solution as some in the industry believe
it to be.7
As a ‘bridge’ to lower carbon fuels, natural gas is viewed as a means of
sustaining demand until alternative sources are more efficient and able to be produced
at scale for lower cost (Kerr, 2010). For natural gas, environmental concerns revolve
around methane gas leaks and fracking fluids causing air and groundwater
contamination. Still there is contention in science and in industry over the causality of
polluted aquifers, with companies generally denying responsibility. Though the jury is
still out on the magnitude of fracking’s environmental effects, anecdotal evidence
suggests that water supply, GHG production, and seismic activity are among the top
concerns. States like Colorado though, are leading the way in identifying economically
viable safeguards to stimulate environmentally friendly best practices in fracking.
Further argument for federal legislation and regulation, cites the need for more
transparency in the disclosure of the chemicals used for fracking and in establishing
7
In policy circles natural gas has been termed as a ‘bridge’ to a cleaner more efficient future of
energy, rather than a long-term solution.

20
best practices, which are currently protected by proprietary rights (Beebeejaun, 2013;
Davis and Hoffer, 2012). Throughout his works, Yergin presents environmental issues
as being up for “debate,” leaning on extractive industry capabilities and expertise to
deal with environmental concerns. In regards to fracking for natural gas, Yergin
recognizes and acknowledges the problems with chemical and methane laced “flow
back” fluids, as well as the need for proper handling and management of waste. Still, he
advocates state based regulations (which are highly motivated by individual companies
and interest groups) rather than wider federal ones for the United States (Yergin, 2011,
330-332). This will be discussed more at length in Chapter 4, but Congress relinquished
control over fracking regulations to be dealt with by individual states in 2005 (Davis
and Hoffer, 2012).
In his 2013 article, Joskow writes that there is little evidence and documentation
that shale gas development has caused the release of methane into ground water, but
rather it is more likely that the issue has arisen from “shallow conventional gas deposits
that are disturbed during the vertical drilling process” or some other such malfunction
closer to the wellhead (Joskow, 2013, 342). It is clear that more study needs to be done
on the environmental impacts of shale gas, especially if these technologies are to be
implemented across the world in areas where water resources are more scarce (i.e.
Northern China). Specific state based regulations make sense because of the variability
in the United States of natural gas distribution and production. Yergin’s preference for
localized authority however still reflects his industry-oriented view that responsibility
should lie with industry rather than the Federal government, because less restriction
motivate quicker development (which is not always prudent). For government and
industry, environmental issues have not been until recently, a motivator for energy
security policy but rather an inhibitor to security of supply-based concerns. Though

21
Yergin is less keen on broader Federal regulations, both Yergin (2013b) and Joskow
(2013) advocate that best practices are necessary to reduce risk of impact to the
environment regardless of causality. Despite a lack of scientific proof, political activist
groups do not hesitate in denouncing fracking as an environmental evil, and the benefits
of the fuel as a mid-term alternative become overshadowed.
3.5 The Shale Gas Revolution
Before the “Shale Revolution” in which natural gas production from shale rose
by 471% between 2007 and 2012 (CME Group, 2014), the focus of energy policy
literature on natural gas in relation to North America was on scarcity and the potential
for development of LNG imports. Increased production was unexpected (Yergin, 2013;
Victor, 2013). A rise of investment in regasification facilities along the East Coast
predated the boom, and given the fixed costs involved, these are now forced to run at
diminished capacity (Foss, 2005). The rise in LNG import prospects had seemed to
indicate a trend towards global gas markets, and more standard consistent pricing
mechanisms. Today global gas prospects are being stimulated by abundance, and hope
for significant production in the United States and elsewhere. In competition with oil,
analysts point at the ‘BTU per $1’ output to value ratio that has tipped in the favor of
natural gas post-2008 (Deutsch, 2010b). This speaks as an indicator of the favorability
of natural gas as a substitute for oil (CME Group, 2014). Prior to the dramatic increase
in domestic production, natural gas was projected to slump in North America because of
“rising demand and constrained supplies” (Yergin, 2006, 70). The regasification plants
that had been largely unused along the U.S. East Coast are now being retrofitted for
liquefaction, and are gradually being granted status as LNG exporting terminals. Lack
of foresight might have slowed the ‘shale revolution’ if it were not for the hospitable
regulatory climate, and advances in technology.

22
Scholars and analysts point at technology developments in unconventional plays
as having the largest part in turning energy supply outlooks from scarcity to abundance
in the United States. In 2013 Yergin identified the transformative nature of natural gas
to energy security policy considerations:
“The very concept of energy security is taking on a wider meaning. No
longer does it mainly encompass just the flow of oil, as central as that is
and as has been for four decades. Natural Gas was formerly a national or
regional fuel. But the development of long-distance pipelines and the
growth of liquefied natural gas have turned natural gas into much more of
a global business” (Yergin, 2013, 70-71).
Yergin, who has a clear stake in the proliferation of hydrocarbon based energy markets,
exaggerates the true global reach of oil here, when in fact most of business remains
primarily regional. Under the right circumstances, novel natural gas extraction methods
(fracking) are poised to contribute to economic growth in countries with shale gas
reserves. Fracking is a relatively new and embroiled issue for policymakers, because of
the nuances in its domestic and international energy security implications. A focus in
the literature has been on how natural gas as an industry is becoming more global in
nature, but there remain clear obstacles to a global market. The oil industry’s advantage
lies in its monopoly over the transportation sector in the US, the existence and ease of
use of pre-existing distribution infrastructure, and its competitiveness with LNG. Gas
electricity plants have a leg up in terms of energy production because of their
advantages over those running on nuclear and coal. Gas is cleaner than coal, and does
not polarize consumers the way nuclear does. Indeed coal is being displaced at a fast
pace in the U.S. by natural gas in electricity production, and will continue to do so.8
Coal maintains its advocates in those seeking to develop efficient carbon capture
systems (CCS). But this research has wasted billions of government dollars, on a
8
See Appendix B: Figure 4. “Electricity generation from natural gas and coal, 2005-2040
(billion kilowatt-hours)”

23
technology that is energy inefficient, and such funds would be better allocated towards
research in sustainable efficient technology (Kenderdine & Moniz, 389). As a result of
reduced domestic consumption, more coal than ever before is being exported, but this
provokes a quandary, seemingly counterintuitive to environmental aspects of energy
security, as carbon emissions are exported to poorer developing countries.
Even with high expectations for gas resource levels there is uncertainty
surrounding how exogenous factors will affect domestic markets. There are no analysts
that claim that natural gas is the best thing out there for the environment or the
economy, but it is available now. Additionally an article in Science on shale gas
advancements presents the argument that more production will only serve to lower costs
and increase consumption levels (Kerr, 2010). However there are real benefits to
increases in production, and lower costs, including job creation across the entire supply
chain and in countries where gas is currently relatively expensive—in turn helping to
unify markets and prices (Victor, 2013). Still it is important to temper expectations, and
remain wary of the many factors that can potentially affect the security of energy
supply.

24
4. Challenges and Opportunities for U.S. Gas Policy
4.1 Tempered Optimism for Shale Gas
The natural gas boom has been touted as a saving grace for the American
economy and there is indeed much reason for optimism. Manufacturing jobs are
returning because of reduced costs of energy and of raw materials. Simultaneous light
tight oil (LTO) drilling from shale allows for increased profit and makes more plays
economically viable. From the refining of natural gas liquids (NGL) from shale,
chemical companies are able produce cheap monomers such as ethylene, which are
needed to produce plastics, and add significant value to manufacturing capabilities in
the U.S. by simultaneously reducing material costs and increasing supply (Gellrich,
PWC, 2011). As a result of abundant shale, more jobs are being created in energy
businesses and indirectly from reduced operating costs. Yet, as has already been
expressed, the benefits of increased production of natural gas, and of hydrocarbons in
general are full of caveats. In unconventional resources outside of natural gas for
example, although LTO is bountiful in shale formations, the United States has limited
refining capacity for this fuel grade, while refineries are instead built around heavy
crude refining. This presents policy issues surrounding the export of LTO from the
United States and import of heavy crude, in order to increase efficiency and optimize
the downstream industry in line with comparative advantage. Natural gas can help
reduce costs and make LTO refining possible on the US Gulf Coast, but prices must still
fall for LTO to displace crude in refining. Government subsidies would decrease value,
and increase the price of heavy crude, which would have a negative impact on the
balance of trade. On the other hand if the ban on exports were lifted greater capacity
efficiency for refineries, would be the result (Inglesby et. al, 2012).

25
4.2 Natural Gas Value Chain Foundations
The extraction and distribution of natural gas is capital intensive, and requires
long-term commitments by industry and government. In the United States private
companies carry out production, and it is in the interest of the government to ensure that
these companies have incentives to operate. For production to occur in a market-based
economy, it must be profitable. Thus, present values of revenue must be proven to be
greater than that of the total cost of production. The extent to which costs are equitably
apportioned throughout the value chain, and through to the consumer is dependent on
both regulatory framework and market conditions, and has direct effects on price
volatility and consumer confidence. Reducing market volatility is an inherent policy
aim of democratic governments with high levels of domestic gas production, because it
provides more security for investors at all levels of the value chain. Volatility is often a
result of exogenous factors to production capabilities and domestic supply, such as
political and economic disruptions in major hydrocarbon producing countries. By
limiting margins on earnings and facilitating corrective pricing mechanisms to support
the market, regulations can help to dampen price volatility (Weijermars, 2010, 93). It is
also extremely important that government manages the social and environmental risks
of production of unconventional gas – but it is important to note that no amount of rules
or regulations can reduce the impact of production to zero (World Energy Outlook,
IEA, 2012).
The industry is further constrained by geological and geographical realities. In
the United States this means that state laws play a key role in development, and that
more localized reactions to the practices of industry are influential in shaping policy.
Proponents of renewable energies point to environmental issues with fracking and
natural gas production, including methane leakage (and flaring), waste-water
mishandling, seismic activity, and carbon emissions. Still, as a cleaner and more

26
efficient alternative to oil and coal, there are distinct advantages for natural gas use,
especially in electricity, transportation, and heating. Natural gas is not the long-term
fuel of the future, but it may be an essential step, a means of buying time for
advancements in other more efficient forms of energy. Whether or not this can be
carried out effectively remains to be seen.
A primary determinant of industry sustainability in market economies is the
ability of companies to secure financing. The grounds for financing in the
unconventional gas industry are tenuously based on the promise for future economic
viability. In the U.S. natural gas business as of 2010, major investors in North American
shale gas, such as Kepis & Pobe (over 12 billion USD market capitalization in
extractive industries) claim that global trends in natural gas and shale support the idea
that “gas is not only a ‘bridge’ but truly a ‘destination’ fuel in a lower carbon world”
(Kepis & Pobe, Report, 2014). The firm’s report titled “Natural Gas to 2030” was
prepared for potential investors and cites figures from the EIA and BP Statistical
Review demonstrating that growth in global unconventional gas to 2030 will increase
by 220%, making it especially attractive for institutional investors. These numbers have
increased even more in recent reports. Nonetheless, it is clear that much of the firm’s
optimism hinges on the continued economic viability of shale production, while also
relying heavily on figures for ‘technically recoverable’ rather than those that are
‘proven.’ The productivity of shale plays has been decreasing even as more wells are
being drilled. A report from the Oxford Institute of Energy Studies demonstrates that
despite capital investment in the Bakken, there is a limited return to average well
production.9
. Though the capabilities of businesses vary, there is a threshold at which
production becomes too expensive to be viable; especially as low gas and liquids prices
due to production growth reduces revenues (Sandrea, 2014). For natural gas depletion,
9
See Appendix B: Figure 5. Average production (b/d) in Bakken (2013)

27
and resource distribution, particularly telling are the rates at which consumption
outpaces production, as illustrated in gas-reserves-to production (R/P) ratios by year
(BP Statistical Review, 2014). The figure demonstrates the fragmentation of global gas
reserves, with a disproportionate reserve-to-production capacity, upwards of 150 years,
in the Middle East.10
Ultimately the economic value of investments in natural gas by
firms is predicated on speculation on future growth, and the forces of government
policy, but no policy can increase domestic natural resource realities.
4.3 The Role of Government
The idea that government should support and foster institutions of industry,
rather than seek to control them is indicative of the evolving role of the state in natural
gas markets as discussed in Mark Hayes and David G. Victor’s chapter in the book
‘Natural Gas and Geopolitics.’ Hayes and Victor imagine an ‘old world’ and a ‘new
world’ of gas trade, a division that plays a part in preventing a truly global marketplace.
The ‘new world’ idea embodies a shift to more market based, and less state dominated
economies. Where states still dominate production and arrange trade at the inter-state
level the ‘old world’ is more predominant (Hayes & Victor, 2005). Foss offers that the
US embodies the perfect case study for a state in a transitional phase, where regulations
are used to address the challenges of young competitive markets (Foss, 2005, 116). The
role of the state in the case of the United States has been increasingly to be the
“provider of market institutions that create the context for private firms to take risks and
reap rewards from investment in costly gas infrastructure projects” (Hayes & Victor,
2005, 10). The shift to market organization reduces the burden on the state, and
incentivizes investment and competition. The study ultimately finds that risk still
abounds and is largely a factor of government energy policy, even despite the
10
See Appendix B: Figure 6. Historical global reserves-to-production (R/P) ratios for NG in
trillion cubic meters (tcm) per year

28
availability of financing for infrastructure projects that are slow to realize returns. In
short, the marketization of natural gas has been part of larger economic liberalization
policies, demonstrating the power of competitive markets and pricing.
Government must also consider how to levy corporate taxes and royalties
efficiently to regulate the industry. The optimal method of royalty design for extractive
industries is in the collection of economic rents. Royalties vary primarily because of the
uneven geographic distribution of supply, and pre-existing state legislature. Rent based
royalties are uncommon in the United States, in part because of the already high
corporate income taxes. Corporate taxes on income and investment can also help to
regulate investment and production. Stimulus in investment can lead the development of
new technologies, but ultimately it is business that decides whether or not to pursue new
development opportunities (Weijermars, 2010). The primary source of government
revenue from gas is from corporate income tax rates in the US, and at a net corporate
tax rate of 40% in 2014 the rate was among the highest in the world (Corporate Tax
Rate Tables, KPMG). For Colorado, severance taxes are at a reduced rate but gradually
increasing, to an eventually fixed rate for shale production, in order to encourage
production. A 2012 research paper from the University of Calgary’s School of Public
Policy examines “Capturing Economic Rents from Resources through Royalties and
Taxes” outlining the important relationship between government and business. In
Pennsylvania as of 2012, no royalties or severance tax existed for extractive industries
(Mintz & Chin, 2012). Squeeze business too hard and they’ll reduce output and
government revenues will be lost, give too much leeway and important government
revenues will be lost. At either end of the spectrum, energy security from a
governmental standpoint is at risk. A contract between industry and the public is neither
efficient nor sufficient in ensuring energy security of supply; government involvement
is essential.

29
4.4 Regulating Natural Gas
Natural gas is a publicly traded commodity in the U.S., and as a result has
private and public features. The fuel accounts for nearly a quarter of U.S. domestic
energy consumption, so the industry is necessarily subject to regulation (BP Statistical
Review of World Energy, 2014). The asymmetrical, often remote, distribution of
natural gas reservoirs means that regulations must be especially tactile. The challenges
for effective legislation of extractive industries are both physical and political in nature.
Federal regulations must consider environmental impact, industry sustainability
(financially and materially), international trade and distribution, and ultimately how best
to allocate the benefits of production throughout society. Production and trade of shale
gas and other unconventional NG sources present particular challenges, as well as
opportunities for regulatory policy. The United States has demonstrated how
governmental agencies, and courts can build incrementally upon pre-existing regulation
to improve practices and efficiency (IEA, World Economic Outlook, 2012). The
emergence of more competitive upstream, midstream, and downstream businesses, vis-
à-vis trading hubs, and transit improvements in pipeline and LNG market integration in
the U.S. are a direct result of liquidity in the market that has been fostered by both state
and federal regulations (Weijermars, 2010, 92). A competitive market breeds domestic
market unification and is beneficial to regulators, as it allows for broader and more
effective regulation, thus furthering energy security of supply goals. Additionally, the
synchronization of local and global markets creates opportunities and cost reductions
for energy consumers from the wholesale down to the household level. This section will
examine the extent to which investment growth and developmental opportunities in the
gas value chain in North American unconventional gas production have been cultivated
by government.

30
Because natural gas is a finite resource, the average production cost in the long
run increases as more costly plays are pursued to meet demand growth. It is easy to see
how legislation aimed at limiting the depletion of natural gas reserves, by introducing
efficiency standards, and restricting development of high cost unconventional plays,
would help to lower prices, but it is difficult to conceive of such controls having net
positive outcomes. For one, external pressures to domestic production, such as import
supply insecurity may drive up demand and increase prices; this can lead to lower
demand and may discourage further investment in infrastructure and development
(Dale, 2006). Even before fracking was introduced for natural gas, Foss (2005)
proposed the need for the “incorporation of best practices to manage to mitigate soft
issues [read environmental and political] in order to protect and maximize, benefits
from energy investment, especially for affected local host communities” (Foss, 2005,
120, inserted). Indeed the scope of energy regulatory policy, as has been put forward, is
distinctly local. It is primarily for this reason that state regulation has won out over
federal in fracking. Foss recognizes that standardization, or regulating business
practices with sweeping policy, is a “popular concept but one that also is very
complicated in reality” (Foss, 2005, 124). The boundaries to standardization are indeed
in the divergence of cost of production based on resources available and efficiency of
production methods.
The role of regulation is in part to dilute the impact of supply and demand
shocks, and to reduce the negative externalities of production on the economy. Supply
gluts can lead producers to scale back demand in an effort to raise prices, and therefore
profit. However, this can lead to insufficient storage of fuels for peak-usage periods. In
the United States, demand in the form of end user consumption volumes is directly
impacted by the severity of winter temperatures, because gas is predominantly used in
heating, though increasingly in electricity generation. Under growing market

31
liberalization, commodity price risk is divided between consumers, retailers, producers
and government (Foss, 2005). Yet, only so much can be done domestically to reduce
risk in the face of international and unpredictable factors. Regulations cannot hope to
account for all exogenous factors affecting consumption trends domestically, because
the business operations that produce, process, transport, and retail gas are carried out by
thousands of different companies, and capabilities vary.
Regulations cannot be seen as economic austerity measures, but they can work
to make markets for gas more efficient. Regulatory policies have increased the
economic power, as well as the integration, of pricing hubs, which makes for a more
robust market. Natural gas wholesale prices are set at the Henry Hub price where the
highest level of centralized trading occurs in the spot and futures markets.11
This
convergence in price, and the use of derivative markets further helps to distribute risk.
Low natural gas prices, as a result of unconventional development have demonstrated
the positive externalities that the growth of the industry engenders. The Platts Special
report on implications for the natural gas value chain, from 2012 indicates that a supply
surplus of natural gas, and reduced natural gas prices, has encouraged investment in
coal-to-gas switching among electricity generators. Similarly lower energy prices have
allowed legislators to pursue environmental policy goals. Today coal is being phased
out by tighter regulatory control as part of new provisions for the EPA’s Clean Air Act
(1970), which places limits on carbon emissions from coal-fired plants and makes coal
less viable economically. The process of moving away from coal and towards natural
gas forces American coal to compete on the international market and therefore adapt, or
die, if CCS technology is not advanced (Kenderdine & Moniz, 390). In 2012 Wells
Fargo Securities analysts noted a median rate of 6 Bcf/d across the U.S., which was 6
11
See Appendix A: ‘Spot market’ and ‘Futures market’

32
times as great as the demand increases expected in 2020 for Ontario where coal
retirements are legally mandated (Platts, 2012).
4.5 Analysis of Regulatory Approaches
The United States Federal Energy Regulatory Commission (FERC) has had an
especially strong effect on the U.S. natural gas market. Regulations from FERC, the
court system, and U.S. Congress have helped to liberalize the market, but also played a
part in prolonging its infancy. Regulations on wellhead gas prices by the Federal Energy
Regulatory Commission (FERC) in the 1950’s were crippling to the industry even
before geopolitical events brought energy prices crashing in the 1970’s. In 1954 the
Phillips Decision, set a precedent of governmental control for the industry, by ensuring
that the then Federal Power Commission placed controls on wellhead prices and
stretched its jurisdiction to exploration and production regulation. These price controls
were initially positive in that they fostered low prices, stability, and growth. Following
the 1973 OPEC embargo, however, wellhead prices soared, and consumption declined.
Price volatility due to “stringent government price controls” was revealed and a
“complex process of deregulation” was undergone (Hefner, 2014, 13). In effect these
early controls led to the high ceiling prices of ‘take or pay’ contracts in the 1980’s, and
a bubble in bundled pipeline contracts for local distribution companies formed when
customers chose alternatives when oil prices dropped. Joskow’s 2013 study
demonstrates the need for flexible regulations to create lasting and robust natural gas
markets and infrastructure.
The Natural Gas Wellhead Decontrol Act of 1989 allowed for further
normalization of prices and reductions of shortages. It was only after this that the
market for gas “matured,” and with the development of spot and derivative markets,
trading hubs, etc. an atmosphere conducive to production was created. Favorable
circumstances and technological breakthroughs for E&P allowed for the shale

33
‘revolution’ to occur (Joskow, 2013). Furthermore it is made clear that contract terms,
and the dynamics between supplier, distributor and customer in tandem with
governmental controls are of unique importance to the natural gas industry because of
the vulnerability to geopolitical and international events vis-à-vis price variations in oil.
The Decontrol Act coupled with FERC orders 497 (1988) and 500 (1987) redistributed
costs to shippers and traders, reduced monopolization by pipeline companies, which
created more market competition in distribution. This unbundling reduces the burden on
retail consumers who absorb a significant portion of the value added costs that are
accumulated through the value chain (Foss, 2005). The implications of FERC orders
and state regulation can be seen throughout the development of both the physical and
financial natural gas value chains to increase E&P. As E&P becomes more profitable,
control on essential distribution services decline, primarily because of the inability of
states to regulate interstate pipelines without significantly increasing costs for local
consumers. FERC and state regulations, despite having enabled the shale revolution by
reducing costs for end consumers and increasing incentives for upstream production,
squeeze mid- to downstream practices which are essential to efficiently adding value to
nature gas production (Weijermars, 2010).
Furthermore, the lack of stringent control on upstream business is evident in the
absence of federal regulation in fracking for natural gas, which has allowed the
neoliberal economics of big businesses in extractive industries to thrive. The
implementation of fracking is present in more than 90% of new wells for oil and gas has
had mixed public reception in the United States (Warner & Shapiro, 2013). Fracking
has been freed from governmental controls by multiple exemptions, which may either
prove critical to industry growth and could possibly be detrimental to public trust and
environmental security. Congress has allowed for fracking’s exemption from multiple
EPA regulations including: Resource Conservation and Recovery Act (1976), the

34
Emergency Planning and Community Right to Know Act (1986), the Clean Water Act
(1948), and the Hazardous Materials Transportation Act, and more recently from the
Clean Air Act (1970). This sizable list of regulatory exemptions limits the government’s
role in monitoring wastewater from fracking, and it keeps secret the cocktail of
chemicals used in the fracking process. Regulation at the state level for upstream
operations is prohibitive to swiftly implementing best practices at the wellhead, where
the majority of environmental concerns take place.
Successful lobbying on behalf of Halliburton led to the modified definition of
“underground injection” in the Energy Policy Act of 2005 to exclude fracking fluids
(Warner & Shapiro, 2013). This demonstrates the elevated nature of energy policy in
government, and the importance of a successful energy industry for successful
economies. The close tie between government and industry is in part because of the
significant revenues from shale and taxes that can be levied from production, thus the
status quo of industry-based standards persists in most U.S. states. In terms of scientific
proof of harm done by fracking, the industry has essentially been operating on ‘innocent
until proven guilty’ terms. Only recently in December 2014, when New York State
banned fracking altogether due to health risks, has the lack of scientific proof been seen
as a reason to stop fracking indefinitely, rather than as a reason to continue potentially
harmful practices (Kaplan, 2014). Given the size of the Utica shale in New York, the
decision is significant for state and federal regulations, U.S. domestic supply reserve,
and the future of fracking practices.
Without significant controls on production practices, self-interest is allowed to
remain the norm. Energy supply concerns seem to frequently outweigh the worries over
the negative externalities of production at the Federal level in the United States. The
danger of environmental destruction, and displacing whole communities, presents
greater potential energy security risks for the state (and the country) than solely losses

35
in capital from revenues. The potential costs of limited federal regulation in increasing
negative externalities could outweigh the benefits of domestic supply, and undermine
energy security goals. Nevertheless, state policy has advantages to federal, because
public reaction is more salient in state legislature. This would be more effectively
discussed using empirical evidence, yet determining how to best measure this cost
benefit relationship though is problematic with little understanding of the full effects of
fracking at present and for the future.

36
5. Foreign Perspectives
Because of the energy industry’s reliance on fossil fuels, the U.S. and the global
community is extremely susceptible to the uncertainty and volatility caused by conflict
and political unrest in supplier countries. Internationally, the affairs of major players in
energy, such as Russia, the Middle East and North Africa (MENA), and China, must be
monitored because of interdependence for energy security in the global economy. To
illustrate the imbalance in supply reserves: approximately one third of the world’s oil
supply transport goes through the narrow Strait of Hormuz at the mouth of the Persian
Gulf in the MENA region (International Security Advisory Board, 2014). This has led
to a constant presence of U.S. Naval carrier ships in the region, and indicates the ties
between national security, global security and the security of energy supply. Additional
factors such as foreign regulatory settings, reserve potentials, foreign domestic politics
and industry capabilities all impact a nation’s energy policy considerations. However,
despite the difficulties in anticipating fluctuating economic circumstances
internationally, the U.S. government still faces the task of ensuring to its greatest ability
that citizens have cheap and reliable sources of energy.
Tapping unconventional resources globally could help satiate demand in
developing countries, but even as energy supply grows, the total supply available
declines. The lack of pre-existing infrastructure and diverse energy capabilities abroad
are just a few of the serious barriers to creating a more global industry.12
Investments by
private companies in shale gas infrastructure are more risky in countries that have not
developed the infrastructure to facilitate demand growth. For shale gas globally, as
British Petroleum’s (BP) Energy Outlook 2035 demonstrates, the majority of
technically recoverable reserves are located in Asia, and in particularly arid areas of
China, where the water needed to frack is scarce and the government controls energy
12
See Appendix A: ‘Unconventional Resources’

37
production and distribution (BP Energy Outlook 2035, 2014). That said it is
increasingly important to view energy from a regional perspective, because of the
regional nature of natural gas trade that reduces costs in getting supply from the
wellhead to the burner tip.13
Where increasing demand and scarcity once defined U.S. policy concerns, now
growing domestic production and abundance provide new opportunities for U.S. policy
(Verrastro and Book, 2013). Despite this the acknowledged abundance of U.S. domestic
gas supply should not skew policy judgments given that the United States only controls
a portion of global gas resources. Diversification domestically in the U.S. can be seen as
a positive transition towards advances in technological efficiency and greater potential
for international influence, but not as a panacea. Whereas in 2013 natural gas trade in
North America was primarily regional, the growing development of LNG capabilities,
and the approval of export terminals are expected to make the U.S. a net exporter of
LNG by 2015 (Azreki, 2014, 31).14
The practical development of a more robust LNG
trade market would allow LNG producers to equip supplies to countries in trade
agreements with the U.S. under duress from regionally dominant producers, thereby
strengthening U.S. economic influence (Shaffer, 2012).
In foreign policy, the increase in natural gas regional pipelines has demonstrated
the necessity in enacting economic sanctions to counteract the use of energy supply as a
weapon of statecraft by individual countries. Natural gas pipelines must cross multiple
state borders for export in some cases, and this can create situations where consumer
states are cut off from supply by conflict between producer and transit states over
pipeline rents (Shaffer, 2012, 5). Russia’s (supplier state) annexations of Crimea from
Ukraine (transit state) are a prime example of the use of energy as an economic and
13
See Appendix A: ‘Wellhead’ and ‘Burner tip’
14
For a clearer view of the level of regional distribution in natural gas see Appendix B: Figure
7. Global Major Trade Movements of Natural Gas (bcm)

38
political weapon, in disrupting supply to Europe (consumer state). Sanctions against
Russia have allowed the U.S. to aid Europe in attempting to ensure supply security, but
Russia’s persistence in the Ukraine, and threats to turn off the pipeline, further indicate
the need for a robust LNG market, diversification and investment in renewable fuels.
U.S. supply increases are being viewed as a crucial transitional step towards
more efficient technologies, and cleaner energy (Kalicki and Goldwyn, 2013).
Nevertheless, until green technologies are price competitive, global dependence on
fossil fuels will persist. Barriers to a global market for gas exist due to the continued
dependence on oil pricing globally, and the ability of countries with highly centralized
internal production to leverage their supply. This dependence and centralization
prohibits competition on the global level, and gas markets are more regional as a result.
Global energy security challenges in respect to the U.S. hinge on the roles that major
energy suppliers take in the global marketplace. In the global gas network, state owned
companies, in the absence of competition, are able to monopolize production and
control the value chain upstream and downstream (Mintz & Chin, 2012). In China,
government control has led to gas prices in long-term contracts pegged to those of crude
oil, which proliferates the role of oil producers. Furthermore, the reality faced by China
of limited water supply in shale rich regions may lead to foolhardy governmental
production of shale by fracking that could displace entire communities.
State owned ventures often lack the financial resources to develop cost-effective
distribution networks in line and novel production methods. Additionally, in the
absence of private landowners, the value of economic rents is evaluated by the state,
which skews global expectations and provides further barriers to a global market. The
lack of competition, and the absence of a dynamic value chain limits the potential return
on production investments, and decreases the ability of experienced E&P companies to
introduce more efficient technologies and practices in unconventional plays. This is

39
endemic to restrictive land usage and mineral resource policies in countries such as
China and Russia where energy production is state managed, and economic potential
and development is therefore limited (Foss, 2005). The monopolization of resource
wealth by state-run business stunts efficiency in terms of capital return.
For OPEC countries, limits to new investments have led to fragmentation based
on resource wealth. Investments in new production have been limited by price and
competition from shale, and cheaper liquids (Jaffe and Morse, 2013). As a result,
individual OPEC member countries with greater reserves such as Saudi Arabia become
more important in global market pricing than the cartel itself. Indeed, OPEC member
Venezuela’s economic collapse, as a result of the inability of its state owned energy
business to diversify and invest in unconventional plays demonstrates the dangers of
inequities between state and business in managing energy security. Inefficient
production of world resources is just one further challenge to managing energy security.

40
6. Conclusions
No single overarching policy for energy security exists, because the goals for
security in terms of national political economy are so broadly realized as reliability and
affordability of energy supply. In reality, the requirements for energy security are
constantly in flux. The issues of sustainability, environmental impact, and limited
returns to capital investment, are rooted in in the modern economic system as described
in Chapter 2. There is no clear path to achieving energy security, but on a global scale
policy strategy more broadly needs “to create a more interdependent, stable, and
climate-friendly system” (Kalicki and Goldwyn, 2013, 548). This increasingly entails
creating flexible scenario based policy at the domestic level, and physically decreasing
dependence on single fuel sources through diversification. The unexpected abundance
and production of shale gas has proven essential and timely towards these goals.
Nevertheless, the ability of policymakers to navigate the energy system is difficult
given its vast reaching expanses and diversity.
The primary focus of this dissertation was to demonstrate the relationship
between energy security, and shale gas in the U.S., given developments in technology
and reserve potential. This has further led to a distinct focus on domestic developments
with insight into the possibilities that can be created for policy through technological
change and proper management of industry. It is clear that monitoring self-interest in
government and in industry is important to reduce inequity within essential value chain
operations. The role of the United States government in developing its domestic shale
gas potential and efficiently extracting value therefrom has proven pivotal thus far in
increasing domestic supply security, and increasing the potential for influence abroad
given reduced dependence. Its broader success in terms of energy security is better
judged in the long-term, because of the unknown effects of negative externalities of

41
fracking. A reliance on industry knowledge in policy further points to the need for a
balance between industry-based policy, and wider energy security goals. More can be
done by Congress to support research and development to attempt to implement the
more efficient wellhead practices that are present in big E&P business in smaller
businesses that are more likely to cut costs. There will always be a level of
environmental energy security concerns, so long as exhaustible fossil fuels are the main
sources of energy and by extension economic growth. Whether or not further increases
in efficiency and technology can help meet rising global demand remains to be seen.
This research has just scratched the surface in attempting to grapple with the
issues of energy security, and shale gas alike. Developments occur daily, and effect
relationship dynamics between industries and states. The most recent price shock to oil,
unexpected by those in the industry and in policy, demonstrates the continued level of
unpredictability that is so difficult to manage. A more in-depth examination of the link
between oil and gas pricing dynamics would be an imperative next step in
understanding policy considerations. This would require extensive empirical work, and
would have to draw on a more in depth understanding of both the oil and gas industries.
Furthermore, an examination of the diverse policies that are being undertaken
domestically and in foreign politics to reduce the negative externalities of fossil fuel use
would also provide a valuable dimension to this study. Further study could carry out
similar structured analysis on the role of foreign governments in developing shale gas.
The literature on regulatory regimes in relation to unconventional production globally is
sparse, but a comparison of the U.S. with other regulatory regimes would compound the
unique nature of U.S. extractive policies, but would ultimately underline the common
reality that policy is subject to unpredictability and the inevitable depletion of
exhaustible resources.

42
Appendix A: Industry Terms
Burner tip
Phrase used to describe the end point of consumption for natural gas
Derivative market
A marketplace established for distributing the burden of price risk in energy
industries in the form of futures, and contracts
Downstream
The refining and distribution operations of petroleum or gas products
Futures market
A marketplace in which prices and quantities of specific commodities are
fixed for exchange in the future
Horizontal Drilling
Novel form of drilling used primarily in shale deposits that enables multiple
extraction points from a single wellbore rather than from many vertical wells
Hydraulic Fracturing (Fracking)
Form of stimulating well flow by injecting pressurized fluid, a combination of
chemicals, sand and water, into the wellbore to fracture source rock
Midstream
The business operations of pipeline, truck, and other transportation
methods from the wellhead to downstream processes
Spot market
The market in which prices of a commodity are settled in cash for
immediate distribution
Unconventional Resources
For natural gas, these include shale gas, as well as tight gas, and coal bed
methane. In North America, shale gas is found most notably in the
Marcellus, Bakken, Eagle Ford, Utica, and Barnett shale formations
Upstream
The business operations of E&P of gas and oil products
Wellhead
The physical pressurized components in place at the wellbore for drilling
and producing resources

43
Appendix B: Graphical Representation
Figure 1. “U.S. primary energy consumption by fuel,
1980-2040 (quadrillion Btu)”
(EIA AEO 2014)
Figure 2. “U.S petroleum and other liquid fuels supply,
1970-2040 (million barrels per day)”
(EIA AEO, 2014)

44
Figure 3. Natural Gas Physical Value Chain
(Weijermars, 2010, 88)
Figure 4. “Electricity generation from natural gas and coal,
2005-2040 (billion kilowatt-hours)”
(EIA AEO, 2014)

45
Figure 5. Average shale gas production (b/d) in Bakken (2013)
(Sandrea, 2014, 8)
Figure 6. Historical global reserves-to-production (R/P) ratios
for natural gas in trillion cubic meters (tcm) per year
(BP Statistical Review, 2014)

46
Figure 7. Global Major Trade Movements of Natural Gas (bcm)
(BP Statistical Review, 2014)

47
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