Shale gas
Shale gas is turning out to be “as disruptive as the internet”
Credit: Chevron
Steven Ferrigno  
A shale gas boom could give Europe some much-needed leverage in the wake of events in Ukraine, writes Steven Ferrigno

In January 2009, households across southeastern Europe were plunged into freezing cold.

At the height of a long-running dispute with Ukraine over unpaid energy bills, Russia cut off natural gas flow to the country’s transit pipelines. As 80 per cent of Europe’s gas flowed from Russia through Ukraine, the move also denied Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Greece, Montenegro, Romania, Serbia and others their predominant – and in some cases only – source of heating. Many had to revert to wood-burning fires to keep warm during a particularly chilling polar freeze, whilst Moscow and Kiev sparred over blame for the crisis.

Leaving aside judgments about who was most at fault, one fact remains: Europeans paid a high price for relying on a single national supplier for their prime source of energy. They still do.

History’s lessons are hard learned and recent events in Crimea remind us of Europe’s ongoing vulnerability to a Russia-dominated energy market. Despite an EU pledge to address the unreliability of Russia (and Ukraine) as suppliers, five years on Russia still supplies 30 per cent of Europe’s oil and gas. That’s better than the 38 per cent it supplied in 2009 but still out of balance, especially when you look at how exposed individual countries still are:

  • Finland, Estonia, Lithuania, Slovenia and Bulgaria continue to rely on Russia for close to 100 per cent their gas imports;
  • Gazprom controls nearly one-fifth of the world’s gas reserves and supplies more than half of the gas Ukraine uses each year;
  • About a third of Russia’s natural gas exports to Europe still have to transit Ukraine.

Against that backdrop, Gazprom’s long-term contracts with Lithuania, Estonia, Hungary and Bosnia-Herzegovina all expire next year. With some diversification of supply, a new pipeline through the Baltics and interconnects between individual countries, Moscow’s hand is somewhat weaker today than in 2009. The ongoing instability in Ukraine, however, adds urgency to the situation. Europe must strengthen its negotiating position on future gas prices by further diversifying its sources of supply.

That doesn’t have to mean abandoning other policy objectives like increasing competitiveness and fighting climate change. The question is how to balance multiple goals. Shale gas could provide an answer.

That’s because shale gas is turning out be as disruptive as the internet, with potentially game-changing benefits for European governments, businesses, society at large and anyone with a household utility bill to pay. Look at what’s happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next 5-6 years.

That doesn’t mean we can sit back and wait for America to turn on the tap. Congress has been slow to approve export licenses for natural gas and the new liquefied natural gas (LNG) terminals currently under construction in the US will be serving Asian as well as European customers – and Asia pays higher prices.

Europe needs to grasp its own home-grown shale opportunity and take steps now toward greater energy independence. That will take some doing – between 2000 and 2010 we’ve sunk just 50 exploratory shale wells compared to 12,000+ in the US during the same period. The EU needs to learn from and adopt some of the US approach.

There are a number of factors holding shale back in Europe. Some are political, some are related to the structure and operational realities of our energy industry, and some are down to simple geology. Politics and green activism, however, may be the biggest hurdles to overcome if we’re going to use it as a bargaining chip in future negotiations over Russian gas and oil.

What Europe is missing

With the invention of reliable hydraulic fracturing technology in the 1990s, unconventional gas and light, tight oil has utterly transformed America’s energy outlook.

By 2010, shale production in the US had soared to 10 billion cubic feet (283 million m3) per day with the potential to quadruple by 2040. According to the US Energy Information Administration, Europe is sitting on ca. 470 trillion cubic feet of recoverable shale gas resources – not insignificant given that our demand for gas runs at around 18 trillion cubic feet per year.

Shale’s geopolitical impact on the US has been profound. American imports of Middle East oil have been dramatically reduced, making political relationships with the Gulf states and OPEC less driven by energy dependency. There has been a notable reduction in domestic gas prices too, with a corresponding reduction in power costs for manufacturing and other energy-intensive industries.

Not that there haven’t been worries. Fracking has become a divisive issue in the US and elsewhere, associated with contamination of groundwater and even blamed for small earthquakes.

The green credentials of natural gas have taken a hit with concerns about methane release when gas is burned, aggravating the greenhouse effect. It’s this side of the shale story that makes it a much harder sell to Europeans.

Winter pipeline construction
Winter pipeline construction
Credit: Allegro

Europe is different

Typically, shale gas and oil resources in Europe are trapped in rock layers much deeper in the ground, substantially raising the difficulties of exploration and the costs of extracting viable shale deposits when they are found. Without drilling there is no sure way of knowing in advance how much gas can be physically extracted, or how easily it will flow.

The operational reality and structure of fossil fuel production in Europe are also very different from North America’s. In Europe, oil extraction happens mainly offshore. Population density and differing rules about mineral rights mean that there has never been a ‘wildcatting’ exploration culture here. We don’t have the wide open expanses that you find in Alberta or Texas.

By way of comparison, the Marcellus Play in the US encompasses roughly 95,000 square miles (246,000 km2) – equivalent to the size of the whole United Kingdom. The UK’s Bowland Shale formation is 500 square miles or about 200 times smaller than the Marcellus.

Politics and energy policy, however, may be the biggest hurdles shale advocates need to overcome if any of the benefits seen in North America are going to be replicated here. Debate in Europe has been almost exclusively about the environmental concerns around fracking, with very little discussion about the economic prospects for unconventional gas and oil.

Clearly the impact of a domestic shale gas production on manufacturing and business will need to be proven, but looking at the US experience for guidance, shale has brought a drastic reduction in gas prices and a corresponding reduction in electricity and production costs.

Shale could also deliver a social dividend by helping mitigate the worst effects of fuel poverty – an issue of such magnitude that the Church of England felt it necessary to intervene in the shale debate recently, warning opponents against taking a narrow view and considering the possibility that shale could be a way to minimize fuel poverty.

Finally, mineral rights in Europe belong to the state rather than individual landowners, conferring an advantage that the US and Canada don’t have.

There was an initial land grab phase in North America that diverted huge amounts of cash from drilling to acquiring real estate. Mineral concessions In Europe, whilst taking longer to negotiate with national governments, are also much larger, opening up millions of acres at a time for development.

Bearing in mind that mineral rights are amongst the last communally-held national resources, a national conversation surely needs to be had in each country about the potential benefits, lost inflows of cash to the public purse and the overall impact of exploiting shale reserves on society – not to mention the political and diplomatic advantages of not tying ourselves to any one dominant energy supplier.

The environmental arguments in favour of shale, meanwhile, are much more compelling than those against. Despite the hyperbole around fracking, shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas consumption marches us inexorably towards coal. In fact we are already seeing a new golden age of coal, with the amount of coal-generated electricity rising in some European countries at an annualized rate of 50 per cent. The US shale boom has also made plentiful American coal cheaper to export overseas.

The result? Despite decades of political and industrial effort to progress a renewables agenda, the International Energy Agency (IEA) reckons coal will account for 25-30 per cent of the global energy mix in 25 years’ time – exactly what it was 25 years ago.

Germany, with some of the highest household electricity bills in Europe, is even building new coal-fired power stations following the post-Fukushima decision to close its nuclear plants. In a farce of unintended consequences, some German farmers have recently started replacing crops with wind turbines, taking advantage of generous renewable energy subsidies under the Energiewende. The same policies have simultaneously made gas unprofitable for German utility companies by favouring renewables on the grid.

Fracking has proved to be such an emotive issue that very little discussion about shale’s economic benefits has been able to surface, with the potential for improved energy independence for Europe only recently moving to the foreground. Public outcry in The Netherlands and Germany has made those governments hesitant to exploit their potential reserves, whilst France and even vulnerable Bulgaria have banned fracking altogether. The overall response to shale opportunities from European industry, meanwhile, has been ambiguous at best. Perhaps it will take a resurgent former superpower to wake us up.

Fracking
Fracking is such an emotive issue that little discussion of shale’s economic benefits has surfaced
Credit: Allegro

Will Ukraine prompt a re-think?

The tide is beginning to turn. Speaking in March at an EU-US summit in Brussels, European Commission president Jose Manuel Barroso said that the growing tension with Russia over Crimea serves as a “very strong wake-up call for Europe”. UK prime minister David Cameron has said as much about the need to intensify shale exploration in the wake of the crisis.

Most important of all was Eni’s announcement in April that it would seek to renegotiate all of its long-term natural gas contracts — the first major signal from the industry that Russian dominance of Europe’s energy supply needs to be challenged.

Shale gas has the potential to diversify Europe’s energy mix and minimize our dependence on dominant suppliers. It also promises to boost employment, create investment opportunities and move us off the current path to more and more coal consumption. Without concerted action by the EU that is supported by national governments, Russia will continue to have its way in future energy negotiations.

As a sector stakeholder I have a four-point proposal:

  • Unleash shale gas and oil exploration in Europe now. We need to develop a more varied energy mix and reap the economic and political gains of an expanded domestic industry;
  • Alongside domestic production we also need to find alternative suppliers for gas: arguably from North America, Africa and the eastern Mediterranean;
  • European voters need to be reassured about fracking. An industry code of conduct for exploration, such as that outlined in the IEA’s Golden Rules for a Golden Age of Gas, should be adopted as standard by all companies;
  • To energy companies, utility companies, energy-intensive businesses and derivatives traders, the next five years will be a chaotic time in the market so understanding and managing the risks of shale investments in your portfolios needs to be a top priority

Despite years of success across the pond, European governments at every level have dithered over or obstructed shale exploration. In the face of a resurgent Russia there must now be a concerted effort by the EU and member states to start drilling wells.

Whether European shale gas production could ever replicate what’s happened in North America and wean us off our Russian reliance is simply unknown, but exploration needs to happen now if we’re going to find out.

Steven Ferrigno is managing director, EMEA, for Allegro Development Corporation. For more information, visit www.allegrodev.com.

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