Considering Shale Gas in Europe
By Morgan Bazilian International Institute for Applied Systems Analysis, Laxenburg, Austria Ascha Pedersen* United Nations Industrial Development Organization, Vienna, Austria Edmond Baranes University Montpellier I, Montpellier, France
1. Introduction The principal areas of the ongoing dialogue in The natural gas landscape has seen dramatic the area of unconventional gas2 in the US changes within the last few years – especially include: environmental and social impacts, the in the United States (US). The production of price of gas (economic feasibility/competitive- shale gas in the US has contributed significant- ness), and energy security (IEA, 2011b; Wy- ly to shifts in perception, prices, and invest- ciszkiewicz et al., 2011). Not surprisingly, ment decisions. The US shale gas market these issues likewise dominate the energy experienced what popularly has been denoted debate in most European countries that are a “perfect storm” due to a combination of exploring, or planning to explore, unconven- relatively low regulation of the shale gas tional gas resources. The environmental industry overall, well-aimed subsidies, strong controversies are primarily attributable to the property rights of land and minerals, and exploration process of hydraulic fracturing or abundant drill-rigs and other infrastructure “fracking”, often combined with horizontal (The Economist, 2012). Such a conducive drilling techniques, in which gas is extracted framework is not currently found elsewhere. from hard shale several kilometers beneath the Even though estimates predict Europe to have surface by injecting a mixture of water, sand, nearly as much technically recoverable shale and chemical into the rock at high pressure. gas as the US (EIA, 2011a), exploration is Once the shale is fractured, the sand fills the proceeding at a much slower rate due in part to open fissures and prevents them from collaps- environmental concerns. As a result, even ing, hereby allowing the gas to travel to the though companies such as Chevron, Exxon surface for collection via a drilled well (Clark, Mobil, and ConocoPhillips are ramping up 2012; European Dialogue, 2011). One concern operations (CNA, 2012), only test drillings is that the methane and drilling chemicals used have taken place across the continent to date1. in the process will risk contaminating water supply aquifers. In several European countries,
2 In line with Giles et al. (2012), unconventional resources are here defined as hydrocarbons not confined in conventional structural or stratigraphic traps, which are generally found * Corresponding author: E-mail: [email protected]; United in low permeability rocks. Such rocks usually require fracture Nations Industrial Development Organization, Wagramer stimulation to produce at economic flow rates. Unconven- Strasse 5, P.O. Box 300, A-1400 Vienna, Austria. tional resources include basin centre gas, tight gas, shale gas, 1 That is, as of the writing of this article – completed in Q3, 2011. and coal bed methane.
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public opposition or pressure from environ- of the shale gas industry in the US, and will mental groups has forced governments to ban likely be just as important a factor in growth of fracking and set moratoriums – some indefi- future gas demand in Europe (Ernst and nite – for drilling activities (The Economist, Young, 2012). 2011). In the US, where fracking has been allowed to develop under an evolving set of Faced with decreasing indigenous gas produc- regulations, public concern has forced indi- tion, Europe is likely to face a substantial gap vidual states, including New York, Pennsylva- between supply and demand in the near future nia, and Texas (ERCB, 2011; Freeman, 2012) to (Eurogas, 2010), mostly due to a significant shape their regulatory frameworks to manage increase in installed capacity of gas-fired power the environmental risks associated with shale generation. New gas import arrangements are gas production. In addition, specific localities needed from 2015 as currently contracted gas (e.g. Longmont, Colorado) are passing local supply is insufficient to meet the increased legislation (Healy, 2012). Consequently, a demand (Eurogas, 2010; Honoré, 2011; Timera patchwork of state regulatory processes has Energy, 2011). This will pressure European emerged instead of a nation-wide one. regulation to solve the security of supply issues (Regulation EU 994/2010). It also provides a Unconventional gas has changed the energy strong impetus to reduce reliance of foreign security landscape of the US. In particular, supplied gas, especially from Russia, and shale gas has significantly contributed to US increase the diversification of the European energy supply by decreasing its dependence on energy mix (Natural Gas Europe, 2012c; energy imports and displacing coal as the Umbach and Kuhn, 2011a). Finally, there are dominant power generation fuel. Significant closely related issues in the development of influences on the shale gas development trans-national pipelines including North outside the US, especially in Europe, is the Stream and Nabucco. Such new gas infrastruc- possibility for new LNG trading across the tures have already impacted decisions ranging Atlantic and the demonstration effects on a from contract terms to politics. number of European countries eager to start shale gas development, in particular in Eastern It appears that the shale gas revolution wit- Europe. For example, the recent downward nessed in the US is not likely to occur in spiral of prices has allowed European custom- Europe (at least in the short-term) due to a ers to force through re-negotiations of tradi- number of geographical, market, and regula- tional long-term take-off contracts with tory constraints, as well as the unresolved Norway and Russia in terms of both volume balance questions between energy security and and price (Goldthau and Hoxtell, 2012). This climate change (CEU, GPPi and Brookings has opened up possibilities for short-term Institution, 2011). Moreover, the development arrangements and spot market transactions. of shale gas in Europe is unlikely to be uniform Consequently, even with no shale gas produc- as the treatment of these issues differs dra- tion of its own, Europe has seen reductions in matically across the continent. The future for average gas prices. The average German import shale gas in Europe will depend on how well price fell from USD11.6 per million British these challenges are approached and to what thermal units (MMBtu) in 2008 to USD8 extent industrial and political actors can apply MMBtu in 2010, and the UK Heren NBP Index the technical, commercial, and regulatory fell from USD10.8 MMBtu to USD6.6 MMBtu lessons from the US shale experience in the in the same period (BP, 2012).3 ‘Higher gas European context. This paper seeks to high- prices in the early- to mid-2000s in the US light aspects of the links between the US and were an important driver in the development European shale gas markets, and to distill lessons on regulation, public perception, 3 In comparison, the US Henry Hub fell from USD8.9 in 2008 markets, and the hype that surrounds the MMBtu to USD4.4 in 2010 MMBtu (BP, 2011). Today’s price shale gas business. (Bloomberg, 11 September 2012) is USD2.6 MMBtu.
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Section 2 provides an overview of the global to 670 bcm in 2035 with most of the growth trends in gas markets and the role of unconven- stemming from power generation, which is tional gas, primarily focusing on shale gas. expected grow by a moderate 2 percentage Section 3 explores the main elements of the US points to 22% in 2035. In 2011, European shale gas experience and the drivers of the natural gas consumption declined at a record current boom. Section 4 focuses on the current amount of 9.9% (BP, 2012a). This decline was stage of development in the European shale gas due to cyclical and structural limits such as the industry and delves into the environmental, ongoing Eurozone crisis, decreased competitive- regulatory, and security challenges in Europe. ness of gas versus coal due to oil indexation, Section 5 concludes. continued growth in renewable power genera- tion, and finally, somewhat mild weather 2. Global Trends in Gas Markets and the throughout 2011 (Corbeau, 2012). Role of Unconventional Energy The future global energy system is generally To meet global demand, the IEA (2011b) pro- believed to entail a mix of resources and tech- jects that the supply of natural gas will need to nologies in which natural gas plays a greater role increase by more than 50% by 2035. This (IEA, 2012; MIT, 2011). We provide some estimate is also supported by the US Energy context for that assertion. Information Agency’s (EIA) International Energy Outlook for 2011. Even though globally 2.1 Projections of Natural Gas Supply and conventional gas will likely continue to domi- Demand nate in 2035, a large portion share of the According to the International Energy Agency’s demand will be met by production of unconven- (IEA) Golden Age of Gas Scenario (GAS Scenar- tional gas4, which will grow rapidly on a global io) (IEA, 2011b), global primary gas demand will level in the forecast period. Shale gas will total reach 5.1 trillion cubic meters (tcm) in 2035, 11% of global gas production in 2035 (IEA, corresponding with a 62% increase compared to 2011b), with the US being the biggest producer the 2008 level. Overall, the share of natural gas (unconventional gas, including shale gas, represents 60% of marketed gas in the US). Between 2006 and 2011 total US natural gas production increased from 524 bcm to 651.3 The shale gas revolution bcm, corresponding to an increase of 24,3% (BP, 2012). According to EIA’s (2011b) assessments witnessed in the US is not shale gas could increase the world’s technically recoverable gas resources by more than 40%. In likely to occur in Europe, at Europe, a growing gap will likely emerge be- tween production and consumption. According to the GAS Scenario, natural gas production in least in the short term all of Europe will reach 213 bcm in 2035, and the average annual rate is expected to decline with 1.4% over the forecast period (IEA, 2011b). in the global energy mix is predicted to increase However, the production of unconventional gas from 21% to 25% in 2035, overtaking the share may slow the rate of the overall decline. Of of coal in 2030. Although oil is expected still to course, there is considerable uncertainty inher- be the dominant fuel in the primary energy mix, ent in these projections, and their past perfor- the demand-gap between natural gas and oil is mance in understanding the role of unconven- expected to decrease significantly. Growth is tional gas has not been inspiring. expected to occur in all regions of the world, albeit the largest part in non-OECD countries. In Europe, natural gas demand is expected to 4 Unconventional gas as measured by both the IEA (2011b) rise from 555 billion cubic meters (bcm) in 2008 and the EIA (2011a) includes tight gas, shale gas, and coalbed methane.
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Figure 1: Major trade flows worldwide, 2011 (billion cubic metres). Source: BP, 2012a
The EIA (2011b) estimates the current world coal. Only close to a third of globally produced reserves of technically recoverable shale gas to gas was traded across borders in 2010, whereas accumulate to 187.5 tcm5 (assessment of 32 two-thirds of all produced oil was traded on the countries) - approximately the same scale as international market (European Dialogue, the world’s economically recoverable reserves 2012). However, indicators point in the direc- of conventional gas. Among the 12 countries tion of an evolving global market as many of with the highest estimated technically recover- the major oil companies are restructuring to able reserves, the two most promising appear build up positions in gas (Quinlan, 2012). For to be Poland (5.3 tcm) and France (5.1 tcm). these major companies, gas already accounts Overall, European reserve estimates are for half of the production, and it is expected relatively modest as seen in Norway (2.3 tcm), that worldwide gas supplies by 2040 will be Ukraine (1.2 tcm), Sweden (1.2 tcm), Denmark comprised of 30% unconventional gas, particu- (0.7 tcm), UK (0.6 tcm), Netherlands (0.5 tcm), larly shale gas, and 15% LNG (ExxonMobil, Turkey (0.4 tcm) and Germany (0.2 tcm) In 2012). Europe overall, technically recoverable shale gas reserves are estimated to reach 18.1 tcm. Figure 1 illustrates the worldwide flow of In comparison, the EIA estimates China’s pipeline natural gas and LNG. In 2011, global reserves to be as high as 36.1 tcm, the largest natural gas trade increased by just 4% due to in the world, followed by the US with 24.4 tcm. an overall weak growth in gas demand (BP, 2012a). Still, in the same year, LNG shipments 2.2 Changes in the Global Gas Market had a strong growth of 10% with Qatar ac- Geography counting for most (87.7%) of the increase. Today, regional markets dominate trade in Today, LNG accounts for 32.3% of global gas natural gas (a global market does not exist) in trade (BP, 2012). Notable is how US LNG contrast to other commodities such as oil and imports declined by approximately 18% between 2010 and 2011, while European (2.5%) and Asian (15.2%) LNG imports in- 5 The EIA’s Unit Converter has been used for conversion. 1 cubic creased in the same period (BP, 2012). Figure 1 feet = 0.028316758 cubic metres.
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reflects the major trade dependencies: China 2012), although full permits for LNG export and Japan mostly get gas from the Middle are projected not to be passed before late 2013 East; Europe depends on Russia (through or 2014 (Reuters, 2012b). At the receiving end, pipeline); and the US is more or less self-suffi- Europe, for whom LNG took up 24% of overall cient. While LNG is a major energy source in gas import in 2011 (CNA, 2012; GlobalData, the Asia Pacific region, in Europe it adds to 2012), stands ready with new terminals to supply source diversification. According to the receive gas tankers in the UK, Poland, Italy, IEA’s GAS Scenario, trade between the main and Lithuania. As of 2011, the EU LNG capac- world regions will have more than doubled by ity included 20 LNG terminals (with a total 2035, with the increase split roughly evenly re-gasification capacity of 186 bcm a year). In between pipeline gas and LNG. addition six terminals are currently under construction and 32 are in the planning or The shale gas “revolution” in the US has caused study process (CNA, 2012). Based on the wide-reaching shifts in energy dynamics across widening gap between European production the gas markets of the world (Apte et al., 2011; and consumption of gas, BP predicts an in- Yergin and Inieson, 2009). US import depend- crease in import of more than 60% between ence dropped from 60% in 2005 to 46% in 2010 and 2030 (BP, 2012b). The European 2011 (Luft, 2011). In 2007, LNG imports were market is very attractive to US gas producers at a high with 60 mcb per day, whereas today, especially because of the high price differen- imports have dropped to mere 20 mcb per day tials (European natural gas prices averaged 11.41 USD/MMBtu between January and October 2012, while the US prices averaged 2.61 USD/MMBtu in the same period [World The shale gas “revolution” Bank, 2012]). The Asian market is even more lucrative for international gas sales as gas in the US has caused wide- prices are higher. Currently, the economic disadvantage compared to the Asian market reaching shifts in energy has redirected a substantial share of the supplies from the Middle East. In 2011, exports from Qatar to the EU fell 22% (CNA, dynamics across the gas 2012). However, the US still needs to address a number of issues before it can become an markets of the world international gas supplier. In addition to the need for sufficient high-capital cost liquefica- tion capacity, the historical volatility of the (Policy Exchange, 2012). ‘By around 2020 it is natural gas markets makes it difficult to find estimated that the US will have moved from investors willing to take on the risk of financ- being a net importer of natural gas to a net ing the building of costly but much-need exporter; net export of LNG is expected from infrastructure (CNA, 2012). Time will show 2016 (EIA, 2012c). In 2011, US LNG marketers whether large-scale export given these con- like Sabine Pass LNG signed new long-term straints will materialize. However, a compre- deals for up to 16 million tons a year (t/y), hensive study by NERA finds that only low thereby outrunning Qatar, who signed deals levels of export will occur and this given for 13.4 million t/y (Chan and Leonard, 2012). extreme international demand in so far US gas Currently, US LNG terminal owners including resources turns out scarcer than what is Cheniere Energy Inc. and Dominion Resources suggested by estimates from EIA and its like Inc. are preparing fuel-export permits (Klima- (NERA, 2012). sinska, 2012). The former has already lined up two customers in Europe: BG Group of the UK This US supply shift has effectively released and Gas Natural Fenosa of Spain (Crooks, LNG otherwise intended for the US to be
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Figure 2: Select prices of natural gas, LNG and Brent Crude, 1993-2011. Source: Levi, 2012 Note: cif is an aggregate measure of costs, insurance and freight (average)
redirected elsewhere (Chan and Leonard, 2012; Bock and Gijon, 2011).6 Between December Tzavela, 2012b; IEA, 2011a). Prior to the 2008 and February 2012, US gas prices escalation of US shale gas production, major dropped by 25% while oil prices rose by up to gas producing countries, especially Qatar, 175% at their peak (Policy Exchange, 2012). made large investments into LNG capacities in Just from 2010 to 2011 the Henry Hub aver- preparation for an anticipated increase in US age price fell by 9% (Quinlan, 2012). In early gas import needs (Goldthau and Hoxtell, 2012, US spot gas prices bottomed out at as 2012). In total, more than 44 million t/y of low as USD2.3 MMBtu (Chan and Leonard, LNG deals were signed by Australia and Qatar 2012). Still, it is too early to say what the full in 2011 and early 2012, compared to around consequences will be on the regional gas 38 million t/y between 2006 and 2010 (Chan markets outside the US. and Leonard, 2012). Figure 2 demonstrates how spot prices in US, 2.3 Price impacts European, and Asian natural gas markets, Natural gas is a relatively high-volume, low- despite significant differences in these mar- value commodity. Consequently, it requires kets, more or less have followed each other for sufficiently large price differentials between some 20 years. Also noticeable is that all three regional markets before it makes commercial have been tracking the price of oil. The price sense to move supplies from one market to setting on the European and Asian natural gas another (Stevens, 2010). Shell (2011a) reports markets differ from the US Henry Hub spot how the selling-price of gas varies significantly prices. It should be noted that, in contrast to from region to region. A significant impact of Asia, the European market since the 1990s has the revitalization of the US gas industry is the undergone a liberalization process leading to apparent decoupling of gas and oil prices (De the emergence of several trading hubs. The
6 “US natural gas prices are determined largely by supply and demand conditions in North American markets” (EIA, 2012b).
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European legislation to achieve the integrated 2012, participants agreed that the prospects of gas market was set out in the “Third Package” one global price is unlikely to materialize (Directive of 13th July 2009) and recently, the anytime soon as the US shale gas boom has Council of European Energy Regulators (CEER) caused a “re-regionalisation” of the interna- expressed its vision of the future gas market in tional LNG market. In 2011 and for the very the Gas Target Model (CEER, 2011). Currently, first time, average oil prices exceeded USD100 there are gas hubs in Britain (National Balanc- in money-of-the-day terms (BP, 2012a). ing Point, NBP), The Netherlands (Title Natural gas prices in Europe and Asia (both Transfer Facility, TTF), Belgium (Zeebrugge, spot market prices and those indexed to oil) ZEE), and Germany (NetConnect Germany, followed broadly the upward trend in oil prices. NCG). Other hubs are emerging in Europe. The This can be explained by the way natural gas European gas market is characterized by contracts to European and Asian customers are long-term take-off contracts (LTCs) that drawn; such contracts are largely indexed to dictate volume levels independent of market spot oil prices, while only a small part of the conditions (The Economist, 2011). Beside the price, if any, is indexed to spot natural gas impact on contractual arrangements, the prices. The lack of highly liquid spot markets common indexation to oil is also being scruti- for natural gas in these regions is the main nized and could potentially be replaced with explanation for this. In the case of Europe this lower spot prices (Goldthau and Hoxtell, is largely due to the constraints in transnation- 2012). At this point, these contracts are still al pipeline networks (Levi, 2012). The recent mainly indexed against the price of oil regard- implementation of the Gaz Target Model less of the emergence of a number of Conti- should increase market liquidity by inducing nental wholesale trading hubs. For the time mergers between entry and exit zones and being, this means that European gas prices are allowing for market coupling, the combination relatively less affected from the possible of which should then push price convergence build-up of shale gas production on the conti- on European gas markets. In the meantime, nent compared to the US (Brogan, 2012). several new upstream network investments are However, according to a press release from expected; this will certainly help market Société Générale in September 2012, spot liquidity by reducing cross border congestion market-based gas trading could come close to between balancing zones. overtaking oil-indexed supplies in 2012 and overtake it by 2014 (Gloystein, 2012). Uncertainty in gas markets remains high, in part due to the relatively unforeseen dramatic With the shale gas development in the US, this changes in the US market. As an example, the historical relationship between the close IEA’s 2009 forecast for gas prices in 2030 is tracking of three markets appeared to end in 20% lower than in its previous projections, 2009 (Levi, 2012). While some expect gas which did not take the emergence of uncon- prices to continue to diverge for the indefinite ventional gas into account. Also, at a national future (see Levi 2012 for an examination of level, the UK Department of Energy & Climate different convergence/divergence scenarios of Change (DECC) in 2012 projected gas prices to the prices7), others argue that price conver- be approximately 24% higher by 2030 com- gence could occur as the US increases gas pared to 2011 - but just a year earlier, gas exports to Europe and Asia (CNA, 2012). At prices in 2030 were projected to be 11% higher the International Energy Forum in November than 2011 prices (DECC, 2011) and the year before that 23% higher (DECC, 2010). A recent
7 Levi (2012) highlights three possible (not mutually exclusive) study by the MIT (Jacoby et al., 2012) demon- ways for prices in the three major natural gas markets to strates the uncertainties associated with converge back to similar levels: 1) through US LNG exports; 2) predictions of natural gas prices. The study through a return of the historically tight link between oil and approximates prices with and without shale natural gas prices in the US market; and 3) for the three major gas recourses under various policy scenarios; markets to become linked to some new index rather than oil.
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Figure 3: The development of gas prices in the US under regulatory policy with and without shale Figure 4: Share of shale gas in US natural gas resources. production (trillion cubic feet), 1990-2035. Source: Jacoby et al. (2012) Source: EIA (2012b)
figure 3 below illustrates the great price-gap US resource of 62.4 tcm. By 2035, shale gas will when applying various regulatory constraints account for 49% compared to 23% in 2010. to the production of shale gas. Although many factors have influenced shale 3. The US Shale Gas Experience gas growth in the US, Deloitte (2011) has The US is the only country to date that has highlighted seven factors as being the most managed to commercially produce shale gas in significant. 1) Increasing US import depend- large scale.8 The technical developments have ence between the 1970s and the 1990s was a unleashed what has been termed a “revolution”9 central driver to the search for alternative of the shale gas industry in the US, successfully exploration methods, which eventually enabled transforming its unconventional gas market the rapid growth in shale gas development (Policy Exchange, 2012). From being the starting in the late 1990s and escalating in the world’s largest importer of natural gas in 2007, 2000s; 2) Improvements in applied technology, the US today is a self-sustaining gas producer especially horizontal drilling and fracking (GlobalData, 2012). According to the EIA techniques, have made the development of (2012a,b, c), the continued development of shale gas economical feasible as it has enabled shale gas in the US will be the primary driver operators to shorten drilling and completion behind increasing natural gas production from times, while reducing costs and raising initial 2010 to 2040, while little change occurs in the production levels; 3)The US gas market has production of tight formations, coalbed meth- been characterized by numerous independent ane deposits, and offshore fields. Figure 4 exploration and production companies that has illustrates the EIA (2012b) projections of the benefitted from quick and resourceful service share of shale gas in terms of total US natural providers and a decentralized corporate struc- gas production. In the reference year 2010, ture (Deloitte, 2011). Moreover, a well-estab- proved and unproved US shale gas resources lished, transparent supplier market as well as have been estimated to 15.4 tcm out of a total the volume of both buyers and sellers makes gas-trade relatively easy in the US (Natural Gas Europe, 2012b); 4) The availability of capital 8 The first serious commercial flows of shale gas began in 1981 via cheap credits, joint venture partnerships, (Stevens, 2010). and different funding schemes has allowed the 9 Still, none of the technologies needed were new; horizontal industry to advance; 5) Easy access for land- drilling had been around since the 1980s and fracking started in 1946. Hence, the US shale gas boom reflects an evolution of enabled drilling companies to acquire large historical technologies but is considered to be a revolution due adjoining pieces of land for the purpose of to the highly exponential growth in shale gas production. development (Deloitte, 2011); 6) A generous
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tax subsidy was realized with the US Energy Act independents to keep drilling, even without a in 1980 (Natural Gas Europe, 2012b); 7) The valid business case. These funding sources are growth of the industry has benefited from US now drying up, which is the case for Chesa- lease regulations, which require a leaseholder to peake Energy, the largest independent gas begin operations within a defined time period explorer in the US. Standard and Poor’s or otherwise lose the lease (RS and RAE, 2012). downgraded the company to “junk” as of May 2012 because its ability to pay off its debt as The development of the US shale gas industry natural prices plunged was questioned has resulted in the drilling of 20,000 wells (The (Bloomberg Businessweek, 2012a). Wiejer- Economist, 2012), and hundreds of thousands mars (2012) concludes that the risk associ- of jobs, directly and indirectly. In 2010 alone, ated with shale gas business, “is becoming too the Marcellus natural gas development has high for any further debt and equity financ- supported nearly 140,000 jobs (Considine et al., ing to be feasible.” In the years to come, 2011). Citigroup (2012) estimates that up to 3.6 market analysts expect consolidation to take million net new jobs could be created in effect of place in the US shale gas industry due to, inter the transformative impacts of US shale gas alia, higher capital requirements (Watson, production on the US and global economics. The 2012). industry also finds support from the US govern- ment; at the 2012 State of the Union, President Large Exploration and Production companies Barack Obama stated that natural gas was one of (E&Ps) such as Exxon Mobil, Shell, and BHP the foundations for US energy security (the Billiton have begun moving their drilling rigs White House, 2012). He has also proposed out of natural (including shale) gas basins and major energy policy initiatives to develop the into shale oil or LNG liquids plays (Bloomberg natural gas sector further (Koebler, 2012). Businessweek, 2012b; Marcellus Drilling News, 2012; Evans, 2012). Independents such as Some commentators still question the impacts Chesapeake and EOG moved first (Chesapeake, of the shale gas revolution. As an example, 2012; Brown, 2012). Another factor complicat- Russia’s Gazprom, the world’s biggest supplier ing the issue is the significant and increasing of gas, rejects shale gas as nothing more than a environmental attention given to shale gas in “well-organized PR-campaign” in line with the US (EPA Ireland, 2012). The Environmen- biofuels (Orlov, 2012). It is the case that US tal Protection Agency (EPA) has signaled that estimates of the reserve size of shale gas is additional regulation around fracking may be continuously adjusted – a fact stated in the introduced in 2012 (Natural Gas Europe, latest International Energy Outlook of the EIA, 2012f).10 On the other hand, new EPA regula- which as of late as in January 2012, cut its own tion on coal and meeting standards for carbon estimates of unproved shale gas reserves by emissions tends to favour natural gas develop- more than 60% (Magyar, 2012). Such factors ment. Public concern has, however, forced have left investors with uncertainties at all individual states (including New York, Pennsyl- stages of the gas value chain (Stevens, 2010). vania, and Texas) (ERCB, 2011) to develop their regulatory frameworks to keep pace with According to Wiejermars (2012), the shale gas the rapid technological advances and increases industry is fueling a looming energy credit in shale gas production. At this point, the crunch as the increasing price volatility (cou- federal government has only taken small steps pled with the already low prices) of natural gas to coordinate a national stance on this issue in the US is creating an uncertain market for (Freeman, 2012). US shale gas operators. Wiejermars explains that the current oversupply of natural gas on the US market and subsequent drop in natural 10 The federal laws in place are the Clean Water Act, the Clean Air gas prices, along with the access to easy and Act, the Safe Drinking Water Act and the Oil Pollution Act (EPA cheap credit has made it possible for shale-gas Ireland, 2012).
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Even though year-to-year production growth is that is expected to be imported (Eurogas, still expected for 2012, the EIA projects the 2011). A report published by the European growth to be less than that of 2011 due to the Commission (EC) in September 2012 stresses low gas prices (EIA, 2012). The monthly price that an increase in European natural gas for natural gas in the US averaged 3.32 USD/ production due to shale gas production poten- MMBtu in November 2012 (World Bank, 2012). tially could help the EU keep its energy import However, with the US economy showing signs dependency at a level around 60% (EU Joint of recovery, gas demand might rebound (Natu- Research Centre, 2012). Thus, the fact that ral Gas Europe, 2012f). What is clear is that the there are large potential shale gas reserves in largely unexpected and non-linear development Europe demands further consideration as to of unconventional gas makes predicting the how this resource might transform the Euro- future of the industry especially difficult. pean market.
4. The European Shale Gas Experience Figure 5 illustrates, using data from the EIA’s The shale gas debate in Europe varies widely International Energy Outlook 2011, the between countries. Numerous factors influence development of unconventional gas production the direction of the debate on shale gas, includ- in OECD Europe and the development of ing the broad differences across European future European (OECD) total demand for Member State countries in terms of energy natural gas, which is a sum of the region’s own landscapes and energy mixes. Other factors production and what it imports. European include the EU internal gas market in terms of production of unconventional gas, including regulation and policies and a historical prefer- shale gas, is projected to increase rapidly from ence for bilateral policies in interactions with a share of 4% of total natural gas production in third parties - instead of regional cooperation 2020 (8.5 bcm) to 27.7% in 2035 (65.1 bcm). (Wyciszkiewicz et al., 2011). Giving the large By 2035, unconventional gas will meet just discrepancies, different priorities for foreign below 10% of Europe’s gas demand; a conclu- policy emerge when shale gas is on the agenda. sion also drawn in the IEA’s GAS scenario We now consider the current status of the shale although the IEA expects Europe to develop a gas industry in Europe and allude to several much larger share of unconventional gas by issues limiting its development. then (47%). The IEA (2012) projects how increasing production of unconventional gas in 4.1 Shale Gas Reserves in Europe Europe and the rest of the world will help to Energy dependence in the European region, put a lid on European gas prices and hereby particularly in gas, is high and is expected to drive up the demand for gas. Consequently, net increase, especially as production in the three import of gas will continue to increase major gas producers in the EU (the UK, the throughout the IEA’s projection period. The Netherlands, and Denmark) has been declining same picture is captured in figure 5, in which overall since 2004 (CNA, 2012). The IEA EIA data projects an increase in imports share projects the EU dependence on gas imports of total demand from approximately 52 per- will increase from 61% in 2009 to 86% in 2035 cent in 2010 to 65 percent in 2035. (IEA, 2011a). The gas import dependence of some EU countries is higher than 90% (CNA, Shale gas reserves are currently anticipated in 2012).11 According to EU estimates, natural gas at least 16 countries across Europe (Ernst & in the EU will meet no less than 30% of its Young, 2011), and test drilling for shale gas is primary energy needs in 2035 - and 80% of ongoing or underway in many countries including: Denmark, France, Germany, Hun- 11 “At times, dependency on Russian gas can reach 100 percent gary, Netherlands, Poland, Sweden, Ukraine, in countries such as Austria, Bulgaria, Slovakia, Greece, Estonia, and the UK (Assenova, 2012; Ernst & Young, Latvia, Lithuania, and Finland” (CNA, 2012). Meanwhile, other 2011; Skifergas.dk, 2011; Kuhn and Umbach, EU member states (such as Belgium, Ireland, Portugal, Spain, 2011a). Shale gas has attracted the most Sweden, and the UK) hardly import any Russian gas.
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Figure 5: Total natural gas net import and production, and share of unconventional gas in total production, OECD Europe. Source: EIA (2011b) Note: The sum of production and net imports represents total demand. interest in Poland (IEA, 2011b), which sits on chyk and Chazan, 2012). In Germany, BNK estimated reserves large enough to make it Petroleum has been awarded several conces- self-sufficient for the next three decades (EIA, sions across German states, although the 2011b). Poland has granted 109 fracking company needs further approvals as outlined concessions to 20 companies, including inter- by law in order to start exploration (Erhard national energy companies such as ExxonMo- and Miller, 2012). bil, Chevron, ConocoPhillips, Marathon Oil, Eni, and 3Legs Resources (Trudelle, 2012; How realistic are these estimates of shale gas Natural Gas Europe, 2012f); fracking is expect- reserves? Gas Strategies (2010) has argued ed to start commercial production in 2014 that it is too early to say, as reliable European (The Economist, 2011; Rzeczpospolita, 2012). geological shale gas maps will take time to With potential shale gas reserves of approxi- draw. What is uncertain is not the location of mately 5.3 trillion cubic meters, Poland would the shale gas deposits, but how much gas the have enough gas to meet its own demand of shale contains, and more fundamentally, how some 14 billion cubic meters per year for easy it is to produce that gas (depth, the types decades (European Dialogue, 2011). Ukraine is of formations involved, etc.). Compared to most likely sitting on 1,200 bcm of technically mapping conducted in the US, European recoverable shale gas reserves (Olearchyk and reserve estimates will be complicated by a Chazan, 2012), the third largest in Europe; in different geology, which is more fragmented 2011, the country awarded exploration licenses and lacks the larger sedimentary basins. The to ExxonMobil and Shell (The Economist, media coverage reflects the widely diverting 2011). It is currently accepting bids in tenders and frequently changing estimates of shale gas from global energy majors for two potentially reserves. Take, for instance, the UK, where large shale gas fields (Reuters, 2012a; Olear- large fracking companies have claimed that
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national reserves could meet gas demand for nearly a century (Barkham, 2012). Cuadrilla estimates there to be 5.7 tcm of shale gas in the Bowland Basin alone (Oil & Gas Journal, 2011); a number higher than what the EIA (2011b) has estimated for the whole UK. But the British Geological Survey (BGS) believes that the recoverable reserves will barely be enough to meet current UK demand for two years; estimates suggest that just 0.1 tcm is recoverable (Robert, 2011).12 Meanwhile, a recently as April 2012, the British shale gas company IGas doubled its estimates of shale gas in northwest England to 130 mcm (Schaps Figure 6: Potential shale gas basins and active and Gloystein, 2012). These continuously shale gas exploration areas in Europe. changing and often greatly differing estimates Source: Adapted from Helm (2012) of the UK shale gas potential reflect the Note: The basins are: 1 – Baltic shale, Poland; 2 – general uncertainties associated with measur- Alum shale, Sweden; 3 – Molasse basin, Germany, ing the true size of technically recoverable Switzerland, France; 4 – Cantabrian basin, Spain; resources. Figure 6 illustrates the location of 5 – Cevennes basin, France; 6 – Provence basin, potential shale gas basins in Europe and which France; 7 – Pannonian basin, Hungary; 8 – Vienna geographical areas were being explored for basin, Austria; 9 – Posidonia shale, Germany; 10 shale gas in 2010. – Westphalian basin, Germany, The Netherlands; and 11 – Namurian shale, W-Lancashire Sub Basin In Poland, recent estimates of technically (Blackpool area), United Kingdom. recoverable shale gas have been lessened by 85% by the national Geological Institute place, the range of resource assessments (Klimasinska, 2012). Also in Poland, ExxonMo- should narrow (IEA, 2011b). The term “techni- bil announced in February 2012 that drilling cally recoverable” is not an agreed terminology efforts to that point had failed, as two projects and has a range of interpretations (Natural Gas for exploratory wells had proven unsuccessful Europe, 2012b; RS and RAE, 2012).13 How in producing sufficient gas to be profitable large a share of the reserves actually turns out (LeVine, 2012a). After three years of test to be recoverable will depend on economics drilling in supposedly promising basins in the and politics, as well as technology and geogra- southeastern region of Sweden, Shell has phy. The EIA (2012d) acknowledges how concluded that the reserves are not profitable various market uncertainties affect projections to extract (Wittrup, 2011), and hence esti- on natural gas resources including shale gas mates are to be re-evaluated. These changes are and have caused large changes in EIA estimates not unique to Europe. As an example, an over the recent years. independent survey of the Chinese govern- ment finds China’s reserves to be nearly twice In an article that appeared in Bloomberg in No- compared to the EIA (2011b) estimates. vember 2011, Schlumberger, Ltd. asserted that the cost of drilling a shale gas well in Poland The key to the large differences in shale gas was three times the cost in the US. Neverthe- reserve estimates is often methodological. less, the IEA (2012) claims “high oil-indexed However, as more exploratory drilling takes prices for imported gas should make shale developments profitable.” While the average 12 BGS estimates were extrapolated from comparable shale gas areas in the US, whereas Cuadrilla’s figures were based on real 13 See Giles et al. (2012) for a discussion of the methods of deter- UK data from the company’s own small number of drilled wells mining technically and economically recoverable volumes of (Barkham, 2012). shale gas and unconventional gas in general.
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break-even cost for shale gas is USD 4-7 per (Barkham, 2012). The few peer-reviewed MMBtu in the US, some place the break-even scientific reports that do exist, suggest that figure for European shale projects in the range the mechanical fracking jobs themselves do not of 8–16 USD/MMBtu–more than the current pose a significant environmental risk to price in long-term oil linked contracts (Balm- ground water (EPA Ireland, 2012). Instead, forth, 2012; Maroo, 2012). Others argue that risks primarily depend on the design and at a price of around 8 USD/MMBtu, shale gas construction of the wells, including the quality development should be profitable given the and integrity of the borehole casings and higher level of carbon dioxide costs and a more cement jobs (EPA Ireland, 2012).15 Other risks, challenging geology (Maroo, 2012). Some such as the increased seismicity and the postulate that once the “trigger point” of one potential impacts on the atmosphere from or more large-scale developments is reached, methane emissions call for further research market forces will drive down costs as compa- and documentation. nies develop the supply chain necessary to support large developments and competition, Based on the current literature, a report from particularly as service companies not yet the University of Texas (2012) concludes that present in Europe. To Giles et al. (2012), the fracking is no more environmentally hazardous fluctuations of the US gas price over the last for the drinking water than conventional oil years serve as prove that investment in the and gas operations. A study of several alleged shale gas industry requires either a long-term cases of ground water contamination demon- view of gas prices or very aggressive hedging. strates no evidence for contamination from the subsurface fracking jobs themselves (Univer- 4.2 Social and Environmental Opposition to sity of Texas, 2012). However, more innova- Fracking tions may be necessary in fracking technology It is the social and environmental aspects of to reduce negative environmental impacts. shale gas exploitation, which have made Improved fracking techniques have reduced the fracking the bête noir of environmentalists amount of water needed in the operations16 as (Barkham, 2012). One concern is that the well as the frequency of fracking (Natural Gas methane and drilling chemicals used in the Europe, 2012b). Considerable ongoing work process will risk contamination of water supply ranging from impacts on drinking water to aquifers. Alleged cases of ground water con- LCA studies of specific shale plays will be tamination stemming from injected fluid and available in the short-term and will subse- released natural gas have been documented in quently help improve discussion and decision- the US (University of Texas, 2012; Osborn et making. al., 2011). The injection of large volumes of fluid into the subsurface also includes the risk The emission rate of methane into the atmos- of earthquakes and emission of volatile compo- phere from shale gas production is also a topic nents into the atmosphere. These concerns, of debate (Howarth et al., 2011). A study together with the large quantities of water conducted by Cornell University suggests that needed per well for fracturing operations14, greenhouse gas (GHG) emissions from shale have contributed to the environmental contro- gas production might be 20%-100% higher versies (Gas Strategies, 2010; EPA Ireland, than coal GHG emissions in a 20-year time- 2012).
Adding to the local intolerance and polarized 15 For a detailed review of the risks associated with shale gas extraction and the process of fracking as well as recommenda- debate, the scientific understanding of the tions as to how to counter such risks, see RE and RAE (2012). risks of fracking is certainly incomplete 16 According to the EPA Ireland (2012), estimates of water volume needed in fracking operations vary widely, with between 14 “There are concerns that fracking could require volumes of 90,000 and 13,500,000 litres per well, due to “the large variation water that would significantly deplete local water resources of well ‘lifetime’, with operations lasting from a matter of days (Entrekin et al., 2011). through to many years.”
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frame. This assumes that the carbon footprint Clare Basin for recoverable reserves is significantly larger than that from conven- (Douthwaite, 2011; BarentsNova, 2012; SEAI, tional gas extraction due to potential methane 2011). Additionally, Germany, the Nether- leakage (Howarth et al., 2011).17 However, the lands, and Switzerland are witnessing how the general conclusion is that shale gas is likely fracking debate is gaining momentum (Bar- very similar in this regard to conventional gas entsNova, 2012; Boersma, 2012; Der Spiegel, extraction. In addition, lessons from the 2012). Fracking has also already been suspend- American experience so far shows that not ed in parts of Germany for similar reasons only does the burning of gas emit half as much (Olearchyk and Chazan, 2012). carbon dioxide as coal, but the US GHG emis- sion level has fallen by 450 million tons in the However, several countries that have suspend- past five years–more than any other country is ed shale gas exploration and development the same period (The Economist, 2012). A within the last few months and years, have study published by MIT in November 2012 reversed their opinions. This is the case in demonstrates, based on data from approxi- Romania, where an immediate moratorium mately 4000 wells drilled in the five main US was pledged in March 2012 by its newly shale sites during 2010, that the amount of appointed government (Natural Gas Europe, methane emissions has been “largely exagger- 2012i). Yet, in June 2012, the Romanian ated” (O’Sullivan and Paltsev, 2012). MIT Senate rejected the motion to ban shale gas (2011) has previously concluded, “natural gas exploration and exploitation, as well as the provides a cost-effective bridge to such a cancellation of exclusive licenses granted for low-carbon future”. A EU-commissioned report exploration projects that use fracking. Roma- published in September 2012 concludes that nia is now set to start exploring its shale gas shale gas produced in the EU, “causes more reserves and has granted Chevron a license to GHG emissions than conventional natural gas drill for shale gas in three locations (Karasz, produced in the EU, but - if well managed - less 2012; Assenova, 2012).18 The Bulgarian than imported gas from outside the EU” (AEA, parliament modified its May 2012 suspension 2012). of shale gas exploration and production just four months after banning it (Gaydazhieva, In several European countries, after public 2012). Because France is 85% energy depend- opposition governments have banned fracking ent on foreign gas supplies, energy security and set moratoriums–some of them indefi- may well be a key driver for the support of nite–for drilling activities. ‘France, who was government policy in assisting operators expected to be one of the first European dealing with the challenges to shale gas in countries to produce shale gas commercially, Europe.19 Further, the UK has allowed for new instead became the first country in the world developments in unconventional gas resources, to ban fracking in June 2011 after a major despite nationwide environmental campaigns protest movement (Brogan, 2012). This was (Orlowski, 2011) and temporary suspension of mainly due to concerns about water manage- further test drillings due to the linkage be- ment. Recently, US Energy giant Chevron tween tremors in Northern England and suspended its shale gas operations in Romania, Czech Republic, and Bulgaria due to ecological protests, which also have led Bulgaria to ban fracking. Furthermore, there is currently a 18 Nevertheless, Chevron is cautious about the public objections “No-Fracking” campaign in Ireland despite the and has announced that “the company will only conduct seismic research in the first year” (Assenova, 2012). Irish government having given Enegi Oil an 19 Today, building blocks have been put in place for shale gas option to explore the Lough Allen Basin and exploration: several Government issued expert studies have been published favoring shale gas exploration, a Commission 17 The study recognizes the uncertainty related to the quanti- has been set up to evaluate the environmental issues involved fication of the methane leakages and concludes that more in shale gas and the Government is now considering new ap- research is needed. plications for shale gas exploration (Shepherd, 2012).
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hydraulic fracking (The Economist, 2012).20 In report further concluded that if any country a report on shale gas, the UK government wanted to introduce additional regulation (i.e., appears generally supportive of fracking as a to adjust the regulations to the specific nature mean to extract shale gas (House of Commons of extraction or to the specific nature of Energy & Climate Change Committee, 2011). development), then the present European law After a UK Select Committee (2011) report is sufficient and flexible enough. Further argued the safety of fracking, the UK allowed studies have been undertaken, such as the EC suspended fracking activities to continue, even Directorate-General desk study on environ- after an earthquake near Blackpool attributed mental and health risks associated with to well drilling by Cuadrilla (Wynn, 2012). fracking as well as a study focused on gas Significantly, the quick reversals in these emissions associated with shale gas production countries were important: it sends the message (RS and RAE, 2012). For Austria, a recently to international energy companies operating in passed legislation which requires companies to the Central & Eastern Europe that changes in conduct detailed environmental inspection popular perceptions can change rapidly (Natu- before the start of a project, has forced the ral Gas Europe, 2012d). Austrian oil and gas group OMV to give up its shale gas exploration plans (SeeNews, 2012). The IEA notes the public concerns, “have prompted calls for new regulation on aspects To facilitate shale gas development in Europe, of this practice, often based on the ‘precaution- the gas industry is moving to address related ary principle’ that is a statutory requirement in social and environmental concerns. For exam- European Union law” (IEA, 2012). The EU’s ple, Shell (2011b) has released its Onshore lack of clear policy21 in this area has been a Tight Sand/Shale Oil & Gas Operating Principles been one element in the suspension of shale to specifically address the concerns about the gas exploitation in several member state practice of hydraulic fracturing. These princi- countries (Assenova, 2012; Tzavela, 2012). ples focus on safety of wells and facilities, Today, most regulations in the EU dealing with continuous improvement of operation tech- upstream gas are determined at the national niques, and collaboration with regulators and level (IEA, 2011b). engagement with local residents (Shell, 2011b). Also notable is the IEA’s (2012) Golden It was not before February 2011 that shale gas Rules, which suggests principles that aim to was officially included in a debate by the allow policymakers, regulators, operators, and European Council (Wyciszkiewicz et al., others to address environmental and social 2011).22 Also, the EC did not express support impacts of the development of unconventional for shale gas development before January gas. Their application is intended to “earn the 2010. It concluded in November 2011, based industry a social license to operate within a on an independent report from Philippe & given jurisdiction” by ensuring a level of Partners (2011), that the existing regulatory environmental performance and public accept- framework is adequate to protect the environ- ance. The Rules include advice to industry on ment in the exploration phase of shale gas, at where to drill, the design of wells, and water least until it reaches commercial scale. The and chemical usage in development. European research on shale gas extraction include Gas 20 The UK has more than 30 years of experience of fracking Shales of Europe, which is sponsored by a for non-shale gas applications. Approximately 200 onshore number of industrial companies and has wells have been drilled (10% of all drillings) using fracking to developed a GIS database of European black enhance recovery. (RS and RAE, 2012). 21 Currently, only four existing EU directives apply to shale gas, shales - including their location, the identifica- none of which are specifically purposed to target the sector tion of sweet spots, and the prediction of shale (Wynn, 2012). formation. Another initiative is the European 22 According to Article 15 Paragraph 1 of the Treaty on the Euro- Sustainable Operating Practices (E-SOP), pean Union, the European Council defines the general political which, “combines Europe-specific research with directions and priorities of the EU.
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relevant US experience to develop best practice concluded in a 2011 inquiry that, “if a signifi- for shale gas extraction” (RS and RAE, 2012). cant amount of shale gas enters the UK mar- ket...it will probably discourage investment in For some countries, shale gas is perceived as an more expensive but lower carbon emission obstacle in achieving climate change goals, renewables”. Moreover, even though the EC whereas others see it as an opportunity to has communicated that renewable sources meet them faster. Even though the European shall have a dominating presence in the Euro- Parliament (EP) encourages Member States to pean energy supply in 2050 (EC, 2012) , a new diversify their energy mixes away from an energy policy called Horizon 2020 has recently exclusive reliance on fossil fuels and encour- been approved which reclassifies gas a green ages the pursuit of renewable energy sources, source of power. “The European Union (EU) is likely to divert €80 billion of funds earmarked specifically for development of innovative renewable energy sources to the development The popularity and of natural gas power plants” (Clean Technica, 2012). The complex interactions and potential availability of cheap natural synergies between natural gas and renewable energy are complex, and they are the subject of gas in Europe could considerable ongoing analyses (see e.g., Lee et al., 2012).
discourage investment in 4.3 Foreign Policy and Information for Policy Makers renewable energy sources US and European interests in shale gas stem part from its contribution to allaying energy which are more expensive security concerns (Rachman, 2010; IEA, 2012). For both regions the energy reliance on foreign suppliers had increased steadily over the last few decades. In the EU, the attention on energy the EP also acknowledges natural gas (includ- security was sharpened by the Russia-Ukraine ing shale) as an essential element to meeting gas crisis in January 2009, which took many the EU’s ambitious carbon-reduction targets countries by surprise and evidenced how some (ITRE, 2012a; ITRE, 2012b). While nuclear States were unfit to handle the disruption power is still unpopular in the EU following the (Nöel, 2009). The CNA (2012) concludes that Fukushima disaster, gas is considered an ideal because of, “the lack of coordination and back-up for variable renewable energy genera- cooperation, EU member states are dramati- tion (Eurogas, 2011). Hence, fossil fuels will cally more vulnerable to supply disruptions likely remain the backbone of European energy than they might be otherwise”. supply to at least 2030 (Tzimas et al., 2009). With shale gas, “energy security has assumed However, there is a growing concern that newfound geopolitical importance” (Stone, increasing popularity of natural gas in Europe 2010). This mirrors an equation between will “crowd out” renewable and low-carbon import dependence and insecurity, which has energy forms at a time when government caused a “securitization” of the energy policy support is a necessary to ensure their growth discourse (Nöel, 2012). While aiming to (OilPrice.com, 2012). The availability of cheap balance the risks associated with import natural gas could discourage investment in such energies which are more expensive (Ernst & Young, 2011). The UK House of Commons Energy and Climate Change Committee
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dependence23, energy security is not solely uncertain (Mäkinen, 2010).25 The incident about minimizing such dependence; nor is it encouraged the EU to look for alternative about maximizing energy self-sufficiency suppliers, dedicate massive investments in (European Union, 2000 via SEAI, 2011). It is building a number of gas interconnectors, and rather highly dependent on context, differing construct new pipelines to diversify Europe’s across energy markets and their stakeholders, gas imports. With the release of the European and the merits by which they measure it (SEAI, 3rd Energy Package, the European Network of 2011). Transmission System Operators for Gas (ENTSOG), an association of Europe’s trans- For Europe, the US shale gas boom has had mission system operators, has been required to repercussions that are sometimes difficult to formulate a Ten-Year Network Development interpret and apply concerning its position in Plan, which is to frame a Union-wide non- energy relations with its main suppliers - Rus- binding plan of infrastructure development. In sia, Norway, and Algeria (together accounting 2011, the EC set down new infrastructure for 50% of European gas supply), the former priorities for Europe, including the sources of being the dominant supplier at 34% (CNA, new pipelines, where especially the importance 2012; Goldthau and Hoxtell, 2012; Nanay, of the Nabucco pipeline is highlighted.26 2011). However, it is uncertain if the gas available will be sufficient to fill the pipeline (Mäkinen, Russia-EU Energy Relations 2010). Estimates suggest that volumes from The Russian gas company Gazprom has been new pipelines add up to: 50 bcm/Nordstream, forced to delink 15% of its supplies from the 8 bcm/Medgas and 31 bcm/Nabucco. Alterna- price of oil (Kuhn and Umbach, 2011), and has tively, shale gas and additional LNG imports accepted partial indexation to spot gas prices could close the gap in 2020. (Kenderdine, for a period of three years (IEA, 2011b). One 2012) example of growing bargaining power is reflected by the efforts of E.ON Ruhrgas, Alternative gas suppliers with significant Germany’s biggest natural gas importer, to reserves include several Middle Eastern coun- renegotiate its gas contracts with Gazprom – a tries, but due to the uncertain political envi- relationship which is very politically charged ronment in the area (for example, Iran and (Powell 2011).24 Hence, before the drilling of Kurdistan), import reliability has been called any wells has taken place, shale gas is changing into question (LeVine, 2012b). On the other the European gas market. With local produc- hand, the increases in gas prices following the tion of shale gas in Europe, gas-to-gas competi- political upheaval in the Middle East might tion will add further negotiating power to have created sentiments among European buyers. governments that Russia could be a more reliable supplier of gas than North African Following the 2009 Russia-Ukraine gas crisis, countries, such as Algeria and Libya (Blas, Russia’s position as a reliable gas supplier was 2012; European Dialogue, 2012). Israel, which sits on top of the Levant Basin together with Lebanon, Cyprus, and Syria with an estimated 3.5 tcm of natural gas. Gas from this basin 23 “The risks to energy security are strongly related to the avail- would thus need to traverse Syria before ability of fuel supply and trends in energy demand. On the sup- reaching Greece and the rest of Europe (LeV- ply side, key variables include the size of the physical resources, robustness of infrastructure (gas pipelines), the feasibility (including political), the costs of extraction, geopolitical, and 25 The crisis left Europe without Ukrainian gas for two weeks; weather events” (SEAI, 2011). consequently, people in several Eastern European countries 24 Moreover, “Gazprom has agreed to offer discounts to some struggled without heating in midwinter. customers, such as GDF Suez (GSZ) SA and Eni SpA, while pur- 26 The Regulation concerning guidelines for the implementa- suing arbitration and talks with EON AG and RWE AG (RWE)’s tion of European Energy infrastructure priorities is expected to units and Poland’s PGNiG earlier this year” (Bloomberg, 2012). come into effect on 1 January 2013.
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ine, 2012b). This would be politically difficult European Shale Gas Regulation in current (2012) conditions. The EP has paid increasing attention to unconventional resources, especially shale gas “One may observe an interesting evolution of (Wyciszkiewicz et al., 2011). In a draft report the attitude of Gazprom to shale gas: from dated 4 April 2012, the Committee on Indus- complete dismissal, through skepticism, to a try, Research and Energy (ITRE Committee) more moderate stance” (Natural Gas Europe, recommended the EU to support the assess- 2012h). However, the impact of the shale gas ment, exploring and development of shale gas boom appears to be becoming increasingly reserves in Europe so as to pursue greater clear to the Kremlin (Blas, 2012). By 2009, the security of supply from third countries (ITRE, US overtook Russia as the largest producer of 2012a). The report is the first comprehensive natural gas due to its extraction of shale gas attempt of the European legislative body to (Bloomberg, 2010). By June 2012, Gazprom’s push through an EP Resolution on the issues shipments have fallen about 14%, and its of safety standards and inspections at safety- shares have fallen 57% compared to a histori- critical stages of well construction and frack- cal high point in 2008 (Bloomberg, 2012). ing. Similarly, other EP Committees have Putin stated (11 April 2012) that the, “US stressed the need for appropriate laws to shale gas production may seriously restruc- regulate shale gas exploration. In January ture supply and demand in the global hydro- 2012, the first meeting of an Ad Hoc Techni- carbons market” (EurActiv, 2012). cal Working Group on Unconventional Fossil Fuels took place with representatives from Russia realizes that, “if shale gas takes off in approximately two-thirds of all EU member Europe and other regions, it will affect compe- countries. No results are available from the tition and force Russian companies to rethink meeting yet, which aimed for EU member their own pricing strategies” (Tzavela, 2012). states “to exchange information, identify best Indeed, Smith (2012) contends, “any large practices, assess the adequacy of regulation increase in the European gas supply would and legislation, and provide clarity to opera- have serious implications for the Russian tors” (RS and RAE, 2012). The chances of the economy”. Gazprom has reacted to the pres- EU undertaking tough new action to regulate sure by speeding up its plans for the South shale gas projects increased significantly in Stream pipeline which is expected to supply September 2012 as three EU-commissioned southern Europe with gas from Russia – a reports assessing the environmental and project that would directly compete with the social risks posed by shale gas development, EU’s Nabucco pipeline (Herron, 2012). as well as its effect on gas markets and energy security, were published by the EU Joint Especially for the countries in Eastern Europe, Research Centre and environmental consul- unconventional gas represents a way to tancy AEA. The reports highlight how shale establish greater foreign policy independence gas exploration and production would need to from Russia (Medlock et al., 2011). From a comply with 19 differing pieces of existing EU European perspective, a lessening in Russian legislation and how neglecting to fill current gas dependence would reduce Russia’s politi- legislative gaps could leave the shale gas cal leverage, and have a positive impact on the sector badly under-regulated (EU Joint balance of power between Russia and the EU Research Centre, 2012). The reports will add (Medlock et al., 2011). Hence, as concluded at content to the intense debate within the EP the European Unconventional Gas Summit in on shale gas regulation. Paris 2011, “shale gas and LNG together have A positive side effect of full-scale shale gas the potential to support the development of a production in Europe is the generation of a much more competitive and interconnected substantial number of new jobs in both high European gas market” (The Energy Exchange, and low skill sectors (KPGM, 2011). The EP 2011). acknowledges the stimulating impact shale
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gas production might have on job creation in In France, Scandinavia, and elsewhere in its Member States as well as the impact on Western Europe, reserves tend to be close to competitiveness and innovation (ITRE, densely populated areas. Compared to the US, 2012a; ITRE, 2012b). An economic study the density is three times as high (Deloitte, conducted in the UK shows that a scenario, in 2012) and creates more environmental con- which 50 well pads are in place over the next cerns on the impact of fracking on water nine years, will have an employment impact of safety. There are those who see this as an 5.600 full-time equivalent jobs (Cuadrilla advantage though, such as Elixir Petroleum Resources, 2011). who would expect developments to take place The economic implications of a truly global gas market, or more likely expanded regional markets, and a European market with gas-to- gas competition and a new pricing formula, In Western Europe shale are significant for both producers and con- sumers (CEU and GPPi, 2011). It is argued gas reserves tend to be that Europe’s real political problem with Russian gas can best be addressed by building close to densely populated a competitive, integrated market (Nöel, 2010). Currently, the environmental concerns and the climate change dimension appear to areas and create more be dominating the European political focus, which in turns affects the pace of shale gas environmental concerns development in Europe. However, once the European economic fundamentals start to on the impact of fracking improve, focus is likely to turn back to the energy security dimension (Chan and Leon- on water safety ard, 2012).
5. Concluding Remarks Since the first exploration authorizations were close to a large existing gas infrastructure granted in Sweden in 2010 (Philippe & Part- (Elixir Petroleum, 2010; The Energy Exchange, ners, 2011), the debate on shale gas in Europe 2011). has escalated, uncovering a complex combina- Second, from a geological perspective, the plays tion of economic, environmental, geological, of shale in Europe have been found to be regulatory, and social challenges. In the US, deeper underground than in the US, more where the shale gas sector is currently boom- fragmented, thinner28, and more likely to be ing, the sector has been supported by a rela- rich in clay (Natural Gas Europe, 2012b; tively liberal regulatory framework, an estab- Balmforth, 2012). These factors together lished industrial environment, skilled increase the cost of gas treatment and process- manpower, and an experienced and well- ing. Having conducted test drillings in Poland, equipped service industry (Gas Strategies, ExxonMobil realized that the drilling tech- 2010; Tzavela, 2012; Corbeau, 2012). For niques applied in Texas were not performing Europe, the reality is different and the Euro- as well on the formations in Europe (Natural pean shale gas sector faces a number of Gas Europe, 2012b; Natural Gas Europe, specific drivers and concerns.27
First, Europe has a much higher population 28 According to Smith (2012), what characterizes a good shale density than the US (Lee, 2012, KPMG, 2011). gas reservoir is a shale thickness between 90 and 180 metres. While the is the case for the major US shale sites, a large part of the European shale sites have far thinner reservoirs (for 27 Kuhn and Umbach (2011) offers an excellent comparison of dif- example, the reservoirs discovered so far in the UK are at most ferences between the US and European shale gas possibilities. 49 metres).
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2012j) and that new R&D had to take place. significant regulatory risks. Deloitte (2012) highlights, “the challenge of For the individual European countries to drilling fewer and more precise wells will likely create an attractive investment climate that be exacerbated by the deeper and more geo- allows companies to predict returns over the logically complex shale basins”. Finally, little is life of long-term projects, they will have to known about the fracture pattern attributes of consider issues such as pricing mechanisms, the European subsurface, which means that it royalty rates, corporate tax rates, lengths of is necessary to thoroughly test geo-mechanical lease terms, etc. (The Energy Exchange, models applied elsewhere. Such models need 2011). In addition, the implementation of a also to be subject to ongoing future develop- new regulatory framework on unconventional ments. gas, especially shale gas, could push compa- Related to this is the third issue of a relative nies to improve the fracking technology lack of expertise in shale gas extraction, and toward fewer impacts on environment. the fact that much of the technology and According to the Energy Security Unit at the know-how currently is concentrated solely in EC’s consultancy for energy issues, “the great the US. Even if the many US drilling compa- thing about having the American example is nies currently being granted drilling licenses that European policy makers are fully aware in Europe bring with them technology and of how much the unconventional gas revolu- proficiency, additional efforts are likely to be tion in the US not only caught the companies needed to adjust knowledge to the European off guard by the success of unconventional environment. In some cases, the US shale gas gas but also in terms of the regulators” business and E&P majors trying to find their (Natural Gas Europe, 2012e). place in Europe suffer from “bad headlines” Another difference comes from the scale of (Natural Gas Europe, 2012g; Natural Gas the companies involved. The drivers in the US Europe, 2012k). There is a necessity for were small gas companies.29 The dominance operators to integrate their operations into of energy majors in Europe and their heavy local communities including direct, accessible, focus on R&D may cause a lower volume of and transparent education and knowledge- well-drillings, which could possibly have a sharing on scientific and technical processes, flattening effect on the European shale as well as the benefits of shale gas at the learning curve (Deloitte, 2012). Unlike major social, economic, environmental, and nation- oil companies, the return to investment in al energy policy levels (Natural Gas Europe, smaller companies does not need to be of a 2012k). Moreover, the necessary service massive volume for them to be able to afford sector is currently not present to provide to support the operation. In the US, new adequate capacity for the shale industry and opportunity de-risking is carried out by allow for a reconfiguration of the European multiple companies, often small independ- gas market (Tzavela, 2012; ITRE, 2012a). ents that rapidly learn, innovate, and share Fourth, landowners in Europe do not own successful practices. Thus the cost burden of underground mineral resources, and conse- de-risking a new play is spread over multiple quently do not benefit directly from extrac- players, making the entry threshold low. tion, as in the US, “where developers can buy an exploration lease from private owners of 29 According to Honoré (2010), there has been a series of mergers land and mineral rights” (Wynn, 2012). In and acquisitions in the European gas sector since the Liberaliza- Europe, the state generally owns the resource tion Directives came into force. This has reduced the number of and private owners, “who maintain only companies in the sector and left the remaining companies big- ger. “If the European utility company landscape remains highly surface rights, have little incentive to cooper- concentrated, it is very likely that single large companies could ate in the face of reduced financial incentives” influence wholesale energy prices, Fabini (2012) claims. Further, (Deloitte, 2012). These issues raise uncer- “the size of these companies might prevent new entrants to ac- tainty about the access to exploration permits cess the European market…[and] the presence of big players in and development licenses, which causes the wholesale market may as well prevent an effective competi- tion and therefore reduce market liquidity” (Fabini, 2012).
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Fifth, shale gas will need to compete with new timelines” (Deloitte, 2012). An important LNG supplies and existing energy supplies in difference between today’s Europe and 1990s Europe which benefit from sunk capital costs, US is the current gas price environment. While existing infrastructure, and a geographical the US experienced increasing prices over the favorable location to import LNG (especially period, European prices have reacted to the from the Mediterranean and West Africa). current global gas glut and low demand due to According to Ernst & Young (2011), “the the recession, and have consequently dropped. projected increase in future LNG supplies With the gas glut estimated to come to an end could reduce the need for significant volumes in 2015, a reversal in the price trend could of additional gas from shale deposits in many come around and hereby add more pressure to European countries”. Nevertheless, the develop the shale gas sector in Europe (De- geography of the LNG sector is also changing loitte, 2012). and the expectation that LNG will be a game So far only test drillings have taken place in the changer in Europe is also dangerous as the EU. Before shale gas exploitation is fully Asian market has a clear economic advantage allowed in Europe, governments will have to relative to Europe.30 weigh their concerns about environment, The future of shale gas in Europe is largely a security of energy supply, and price and create matter of its production cost, which is likely to a fiscal and regulatory framework that will be compared to the US given the challenges have citizens confidently back shale as a supply present. The changing structure of interna- form (The Economist, 2012). But this will take tional gas markets entails new risks including, time. Finally, publicly funded research on “increased price fluctuations stemming from fracking may be necessary to ensure confi- more volatile spot markets, emerging possibili- dence that decision-making is informed by ties to at least partially cartelize globalizing gas independent, evidence-based research (RS and markets and incentive problems for invest- RAE, 2012). ment in new supplies in key producer coun- tries” (Goldthau and Hoxtell, 2012). In addi- Acknowledgements tion, financial constraints in the aftermath of the global recession, as well as warning signs of We would like to thank Melvyn Giles and Susan a new downfall in the European economy, are Shannon of Shell. not serving the investment climate well (European Dialogue, 2012; Corbeau, 2012). References It is the general view that the term “game AEA, 2012. Climate Impact of Potential Shale Gas Production in the changer” should not be attached to the future EU. Available at:
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Barkham, P., 2012. What’s the truth about fracking? The Guardian. Available at:
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Fossil Fuel and Retail Price Assumptions. Documentation for the Knowledge and Potential Environmental Impacts. Co. Wexford. ‘Updated Energy and Emissions Projections’. London. Available at:
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Freeman, J., 2012. The Wise Way to Regulate Gas Drilling. The New York House of Commons Energy & Climate Change Committee, 2011. Times. Available at:
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Italy. Available at:
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Available at: 62 European Energy Journal | Volume 3 | Issue 1 | January 2013 Considering Shale Gas in Europe default/files/public/Research/Energy,%20Environment%20 Watson, N.J, 2012. A Two-Track Energy Business. Fired Up. Petroleum and%20Development/r_0910stevens.pdf>. Economist, June 2012, pp. 6-8. The Economist, 2011. Fracking Here, Fracking There. Europe Will Have Wiejermars, R., 2012. Shale Fuelling a Looming Energy Credit Crunch. Trouble Replicating America’s Shale-Gas Bonanza. Available at: Fired Up. Petroleum Economist, June 2012, pp. 29. European Energy Journal | Volume 3 | Issue 1 | January 2013 63