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US-China shale gas rivalry bad news for poor countries

China's plans to establish a shale industry to rival the U.S.'s could see Beijing slash its energy imports—in a blow for some of the world's poorest gas exporters.

Shale gas is drilled out of rocks in a process known as fracking or hydraulic fracturing, and has been hailed as revolutionary way of getting cheap energy by some.

Chris Pugh
Bloomberg via Getty Images
Chris Pugh

However, the U.S. is currently the only country to have fully embraced fracking. Its shale gas production increased to 291.6 billion cubic meters (bcm) in 2012, up from 56.6 bcm in 2007—a shift from 8 percent to 35 percent of the U.S.'s total natural gas production.

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China's own shale gas industry is currently extremely small, but its government hopes to emulate the U.S.'s success by upping production to 6.5 bcm by 2015 and 60-to-100 bcm by 2020.

The huge increase in production will make China more economically independent, cutting its gas imports by up to 40 percent. But it could also a blow for several oil-exporting countries, particularly as they will be having to deal with the declining demand from the U.S.

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"Combined with the increase in shale gas production in the U.S., it will hit the economy of small exporters in the developing world," said the Overseas Development Institute, a leading U.K. think tank on development issues, in a report out on Wednesday.

The institute noted that developing countries had already lost around $1.5 billion in gas export revenue due to U.S. shale gas production.

It named Angola and the Republic of the Congo as particularly susceptible to a fall-off in Chinese demand for their gas, and forecast each would suffer a 13 percent hit to national income.

Meanwhile, Equatorial Guinea could lose 5 percent of its national income, while Yemen could lose 4 percent. Other countries likely to suffer include Mozambique, Ghana, Mauritania and Nigeria.

The institute highlighted Angola as an example of a country that was reliant on oil revenues and imports, leaving it "highly exposed" to external shocks.

"Any reduction in exports which adversely affects gross domestic product (GDP) could result in reductions in employment, with concomitant social impacts. The lack of effective social protection measures…means that negative effects are more likely to be transmitted immediately," wrote the report's authors, who were led by researcher Zhenbo Hou.

Fracking boost to global GDP

However, Hou found an upside from the boost to the energy supply from fracking. Thanks to the increased supply, global oil prices could fall—which in turn could increase global GDP.

Developing countries which import oil, like India, Senegal and Zambia, would be probable beneficiaries.

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"Because low-income countries tend to use more oil to achieve the same output, and tend to have more constraints on their current accounts, they are most likely to benefit from a reduction in global oil prices," said Zou.

"For non-oil exporting developing countries, the economic impacts can be expected to be broadly positive."

Struggling richer economies could also gain from shale exploration. A report from Deloitte in March noted that crisis-hit Spain held hefty natural gas reserves, around 80 percent of which were found in shale rock. The consultancy said that tapping the reserves could open up a 44 billion-euro ($61 billion) industry for the country, which is currently reliant on energy imports.

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Critics of fracking warn however of the risk of water pollution from the process. It has proved controversial in Europe and protests have occurred in countries like Spain and U.K. on potential drilling sites.

In the U.S., Fitch Ratings reported on Tuesday that the risk of contamination, diminished water supply and infrastructure and costs pressures due to fracking could put water utility companies at risk of "severe and precipitous credit deterioration".

"Fracking can be an economic boom for some communities, but its introduction or expansion in unprepared areas could create competition for already-scarce water resources in the case of drought, or place undue stress on the existing water infrastructure in areas that experience rapid population growth," said Fitch Ratings Managing Director Douglas Scott in a research note.

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Hou warned that fracking was also not without hazards for China, due the large volume of water required to force gas out of rock formations.

"It (fracking) is also not without risks within China itself, as it could divert water from agriculture and human consumption. The supply of water is likely to be more constrained in China than in the U.S.," he said in the ODI report.

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