Path to Prosperity or Road to Ruin? Shale Gas Under Political Scrutiny

Report of the Polish Institute of International Affairs

POLSKI INSTYTUT SPRAW MIĘDZYNARODOWYCH PISMTHE POLISH INSTITUTE OF INTERNATIONAL AFFAIRS

WARSAW OCTOBER 2011

ISBN 978-83-62453-25-2

9 788362 453252 POLSKI INSTYTUT SPRAW MIĘDZYNARODOWYCH PISMTHE POLISH INSTITUTE OF INTERNATIONAL AFFAIRS

THE POLISH INSTITUTE OF INTERNATIONAL AFFAIRS

PATH TO PROSPERITY OR ROAD TO RUIN? SHALE GAS UNDER POLITICAL SCRUTINY

Ernest Wyciszkiewicz (ed.), Agata Gostyñska, Dorota Liszczyk, Lidia Puka, Bartosz Wiœniewski, Bart³omiej Znojek

Warsaw, October 2011 Cover photo: A wellhead “christmas tree” at a shale gas completions site, British Columbia, Canada, May 2011 © Bartosz Wiœniewski

© Polski Instytut Spraw Miêdzynarodowych, 2011

ISBN 978-83-62453-25-2

Polski Instytut Spraw Miêdzynarodowych ul. Warecka 1a, 00-950 Warszawa phone (+48) 22 556 80 00, fax (+48) 22 556 80 99 [email protected], www.pism.pl CONTENTS

Executive summary ...... 5

Introduction...... 7

From Revolution to Evolution—Looking Into the North American Experience ...... 8 In the Wake of the U.S. Revolution ...... 8 Canada’s Shale Gas Experience ...... 12

Golden Era of (Shale) Gas? ...... 15

The Involvement of European Union Institutions ...... 19 European Council ...... 19 Council of the European Union...... 19 European Commission ...... 20 The European Parliament ...... 22

Shale Gas—Public Debate in Select EU member States ...... 25 Germany ...... 26 France ...... 30 United Kingdom ...... 35 The Netherlands ...... 40 Denmark ...... 42 Sweden ...... 43 Norway ...... 44

Instead of a Conclusion—Poland as a Shale Gas Lab ...... 46

Path to Prosperity or Road to Ruin? Shale Gas Under Political Scrutiny 5

Executive summary

– Uncertainty reigned in last year’s debates about the future of gas markets. There was uncertainty about prices, a sufficient level of investments, the implementation of climate policies and the post-crisis economic recovery, thus, about demand, but not about the availability of new sources of supply. This year, the uncertainty seemed to be narrowed down to the European market, while elsewhere a new “dash-for-gas” is predicted, with new centres of consumption and new sources of supply on the horizon. – Unconventional gas is at the heart of the current debates. The European shale-gas debate is peculiar for its polarization between euphoria (“game-changer”) and total rejection (“environmental disaster”). The fiercest critics are prone to more ideological and, thus, categorical judgments despite a general lack of sufficient scientific studies, credible geological data and environmental impact assessments. However, even if many of the potential risks associated with shale-gas production are just a part of “scare game”, all public concerns should be addressed and the myths exposed and explained. – Available estimates of unconventional-gas reserves outside North America are rarely accompanied by reliable data about the economic feasibility of production. Opponents of shale gas refer to this lack of knowledge about reserves or the environmental footprint of its extraction as a sufficient cause to prematurely halt all such activities in Europe. Supporters tend to overestimate the U.S. breakthrough and underestimate local nuances, and thus run the risk of overlooking the need to put proper preventive measures in place. The debate about shale gas in Europe is therefore focused on the extremes rather than on acceptable trade-offs. – A simple replication of the U.S. scenario in Europe is unfeasible. Sceptics take this claim as proof that the development of shale gas in Europe is highly unlikely. But such a thesis is based on the wrong assumption that success requires reaching the same scale of production as in the U.S. In the EU, which is still divided into separate national markets with growing regional cooperation but a common market still beyond the horizon, what indeed matters most are the implications for individual member states. So, shale gas should be seen as a potential “local or regional game-changer”, in particular with respect to Central Europe. – Shale gas might become a sort of mental game-changer as well. For supporters of renewables, natural gas becomes a direct competitor, not just a supplementary source. For shale-gas promoters, mainly from heavily import-dependent countries, natural gas may go from a necessary evil to a long-awaited solution to their current security of supply concerns. – The mounting controversies about shale-gas exploration and production in Europe reveal political and ideological differences. Meeting geological, technical and economic challenges might not be enough to develop this new industry in Europe. Debates about energy in the EU are pursued in a very complex legal and political environment. The future energy landscape will be decided by both national governments responsible under EU primary law for their own energy mix and EU institutions that will pave the way for a low-emission economy and, thus, are certain to have an impact on the national energy mixes. – Shale gas caught the attention of the EU institutions only last year. At first, the debate was focused on energy security, but now environmental dimensions have started to prevail. Two different approaches can be distinguished: A) the Commission opts for legal and regulatory adjustments to address the potential risks of shale-gas exploration and production, which would be introduced by the member states themselves; and, B) some MEPs insist on EU-wide legislation to impose strict environmental rules and limit these activities. 6 The Polish Institute of International Affairs

– In 2010, European discussions about unconventional gas were limited to energy experts and the industry, but this year they were translated into political decisions, public campaigns and legal measures, such as a ban on hydraulic fracturing in France. This clearly shows that political and public concerns will play almost as equally as important a role as will confirming reserves and finding economically efficient ways of production. – However, emphasizing the potential risks and threats as well as repeating calls for a radical implementation of the precautionary principle (a total ban until the full record of threats is known) might turn into a self-fulfilling prophecy. With the existing uncertainty, a more pragmatic approach is recommended, one based on in-depth analysis of the trade-offs and their public acceptance, which might replace the current oscillation between rejection and enthusiasm. – The debate over shale gas reveals the shakiness of the EU’s energy goals, in particular constant efforts to balance competitiveness, security of supply and sustainability, and underscores the need for flexibility rather than one-size-fits-all policies. What seems obvious from the EU level, becomes less so from the perspective of an individual member state. Shale gas as a new fossil fuel does not fit into the grand strategy of the almost totally decarbonised EU energy system proclaimed by the 2050 Road Map. Yet, it fits perfectly into the energy strategy of Poland given its security of supply concerns and its need for the diversification of its coal-dominated power-generation sector. At this point, precisely because of the complexity and breadth of the debate, it seems unfeasible to consider introducing a comprehensive legal or regulatory framework within the EU. Path to Prosperity or Road to Ruin? Shale Gas Under Political Scrutiny 7

Introduction

Natural gas raises ambivalent feelings amongst EU members. For some of them, it is still the most convenient bridge between a carbon-intensive past and a decarbonised future, while for others it is rather a source of security concerns. Nonetheless, Europe’s demand for gas and its reliance on imports will be growing in the coming years and decades, but at a slower pace than was expected a couple of years ago. In its World Energy Outlook 2010, the IEA announced that “unprecedented uncertainty” best characterizes the development of gas markets. Under such circumstances, categorical judgments should be replaced by cautious assessments. This recommendation comes only a year after the same institution introduced new assumptions into its analysis and drew a picture of a forthcoming “golden era of gas”. It only proves that volatility is the name of the game. It is enough to mention the Fukushima accident, with its immediate implications embodied by the German decision to phase-out nuclear power plants. Natural gas has been announced as the major beneficiary of this step even though in the German energy strategy released not even a year ago it almost did not exist. Although this change adds new arguments to the IEA’s “golden era of gas” scenario, it also allows for a question about the sustainability and the very existence of a common EU gas policy. Even if one accepts the IEA’s new, optimistic global scenario, it does not mean that it would have identical implications all over the world. The European Union seems to face the risk of becoming just an onlooker, reaping some benefits from this process as a free-rider and not as an active participant, as evidenced by the debate on shale gas in which opportunities are being increasingly overshadowed by fears (real and imagined). What is interesting is that shale gas might become a sort of mental game-changer, altering current energy “love-hate” relationships. On one hand, for supporters of renewables, natural gas emerges now not only as a supplementary source of base-load capacity but as a direct competitor in the power-generation sector, in particular if prices were to remain low. On the other hand, it happens that the most promising geological structures are located in countries that are heavily dependent on a single supplier and looking for new sources. For them, natural gas has ceased to be a necessary evil and has started to be treated as a durable solution to their security-of-supply concerns. It is the main goal of this report to look at the shale-gas debate in Europe through political and institutional lenses, to track down the interests of member states and other agents and to compare an existing map of the most-promising shale gas areas with a map of interests revealed through the course of discussions with European institutions and member states. Numerous reports already have covered the origins of the U.S. shale-gas revolution, the possibilities for its replication in other parts of the world, including Europe, and the potential geopolitical implications of unconventional gas for the largest gas producers and consumers. In practice, all major challenges already have been identified: geological, technical, economic, regulatory, environmental and social. All but one, political circumstances, because relatively little attention has been devoted so far to its analysis. Since the central goal of this report is to focus on the political discourse in Europe, it will show how this aspect is going to have a profound impact on the future of shale-gas exploration and development. The debate already has spilled across the continent, reaching various groups and institutions. Political parties, advocacy groups and the business community are becoming increasingly involved in the debate, with camps of supporters and opponents already formed and the first battles fought. It seems clear that the scale of challenges in Europe mean that previous political decisions or expected changes would matter most for the business, which is interested chiefly in the stability and predictability of the rules, both at the European and national levels. 8 The Polish Institute of International Affairs

From Revolution to Evolution —Looking Into the North American Experience

Specific market, legal and political circumstances make the automatic transfer of the North American experience to Eu