|Undoubtedly shale gas exploitation marks a significant development in the energy industry, but the US shale success story is unlikely to be repeated in Europe Source: Shell|
The arrival of shale gas presents both opportunities and challenges for European governments and energy companies operating in the European Economic Area (EEA). For decision-makers operating in both spheres, the potential extraction of shale gas raises many questions, including:
- Could its availability help break the link between oil and gas prices?
- What impact could it have on current indigenous energy sources?
- Could plentiful cheap shale gas secure Europe’s energy security and for how long?
- What impact could it have on gas imports from outside the EEA from liquefied natural gas (LNG) and pipeline sources?
Moreover, the availability, competitiveness and popularity of shale gas will also largely depend on the degree of environmental protection imposed by individual European countries and the European Union (EU), while its successful extraction and use could also affect future investment and research into renewables.
In terms of its impact on other fuel sources and technologies, the UK’s former energy secretary Chris Huhne viewed shale gas as likely to be complementary to – rather than competitive with – existing fuel sources. He argued that renewables, fossil fuels and nuclear were not mutually exclusive, as some environmentalists contend.
Indeed, it is very likely that shale gas fuelled power plants could operate as backup for wind farms and also provide a useful additional source of domestic gas. This view would make power companies less susceptible to the vagaries of the international gas market.
In the US, shale gas already provides 25 per cent of the country’s gas needs, up from just 1 per cent in 2000. Indeed, this explosion of shale gas extraction has turned the US from a net importer of gas into a net exporter, and has seriously suppressed wholesale gas prices – US Henry Hub gas wholesale prices have fallen to their lowest winter levels this century. Meanwhile in Poland – home to considerable shale reserves – the government has already awarded more than 70 exploration licences.
Nevertheless, there are concerns that the arrival of shale gas could tip the balance against future investment in nuclear, coal and renewables, as well as depress research in associated technologies. “Shale gas could encourage more countries to switch from coal to gas, which in some cases could halve power station emissions,” suggests Tim Yeo, chairman of the UK parliament’s Energy & Climate Change Committee. As a consequence, emissions trading permit prices are likely to collapse, making it more difficult for renewables to compete with gas.
Already, as Business Monitor International points out in its report Changing the Economics of Nuclear Power: Impact of Shale Gas E&P 2011, prevailing economic conditions are making it difficult for many EU Member States to get various nuclear power projects off the ground. If shale gas production were to take off in Europe as it already has in the US, many European nuclear plant projects could be delayed and might not even see the light of day.
However, Lucy Field, senior consultant at Poyry Management Consulting, suggests that the US shale success story is unlikely to be repeated in Europe for various reasons.
Certainly, renewable industry groups and the environmental lobby share the fear that shale gas could have a negative impact on their interests. For instance, Chris Sherlock, environment manager of the Co-operative Group, has expressed concerns that the rise of shale gas could divert investment away from renewables, while Jeff Currie, global head of commodities research at Goldman Sachs, notes that: “The economic viability of a lot of renewables is being killed because we have too much gas in the world right now. It’s made a lot of these projects like solar and wind struggle in terms of their economic viability.”
But Richard Harper, director of Tethra Energy, suggests shale gas exploitation will be more uneven in Europe than it has been in the US. For instance, while Western Europe presents considerable political and environment opposition to exploiting shale gas, many states in the East of the EU strongly support shale gas exploration and production (E&P) for geopolitical reasons.
Last year, France called a halt to shale gas exploration through hydrofracking over fears that water could be contaminated by the chemicals used. In January of this year Bulgaria followed suit. In the UK, the Tyndall Centre for Climate Change Research has called for a moratorium on shale gas operations until the environmental implications are fully understood.
In the UK, public support for shale gas has felt the repercussions of minor earth tremors measuring 2.3 on the Richter Scale near the seaside resort of Blackpool. Cuadrilla Resources admits these may have been caused by its shale gas exploration activities nearby.
But, unsurprisingly, Central and Eastern European countries such as Poland are unreservedly eager to exploit their shale gas reserves as an opportunity to reduce their heavy dependency on supplies of pipeline gas from their sometimes troublesome neighbour, Russia. For these nations, anything that encourages a dash to gas using domestically sourced supplies is not only politically expedient but could also help in meeting EU 2020 carbon emission goals through the replacement of ageing coal power plants with gas ones.
Poland has awarded E&P licences to international energy companies such as Chevron, Marathon Oil, ExxonMobil, Conoco Phillips and Eni. As Dr Daniel Fine of MIT puts it, Europe’s shale gas quest essentially means that “Russia is shut out” and will no longer be able to act as a near monopoly supplier of gas in Eastern Europe. It is therefore not surprising that Gazprom views shale gas as a commercial threat to its interests, notes Dr Fine.
Market Potential in Europe
At present, the European gas market is expected to grow by at least 0.6 per cent annually, and at current rates Europe will have to seek additional deliveries from 2014 onwards. Industry analyst Frost & Sullivan has suggested the current slow growth in demand for gas is likely to pick up in the near future for several reasons.
|The US now meets 25 per cent of its gas needs with shale gas Source: Marathon Oil|
Most notable is the trend for many operators to replace life-expired coal and nuclear power plants with gas power plants, which are cheaper and faster to construct. In addition, the recent decisions by Germany and Italy, two of Europe’s largest economies, to pull the plug on their nuclear programmes means that both will be relying on natural and shale gas, whether imported or not, as a quick-fix solution to their energy headaches.
Europe could contain technically recoverable shale gas reserves of at least 18 trillion cubic metres (m3), compared with America’s 24.4 trillion m3, reports the US Energy Information Administration (EIA). Meanwhile, investment bank JP Morgan forecasts European annual shale gas production will reach 30 billion m3 by 2015, and up to four times that figure by 2020. But it is too early to say whether such expectations are realistic, let alone realisable.
Take Cuadrilla Resources’ interesting results in the UK. Cuadrilla will need at least one month’s gas production from its test well and to be able to conduct many more test wells elsewhere in the area to prove its discovery’s economic viability. On a European scale, another two years will be required to see whether viable shale gas reserves could meet Europe’s needs, say industry analysts.
As part of a Europe-wide exploration effort, Statoil, ExxonMobil, GDF SUEZ, Wintershall, Vermillion, Marathon Oil, Total, Repsol, Schlumberger and Bayerngas have set up Gas Shales in Europe (GASH), led by Brian Horsfield. He argues that the quantities involved will not transform the whole of the energy landscape, nor take it over. Instead, European shale gas would act as a bargaining chip. “It’s a component of the energy mix and it’s good to have some energy under your own feet,” he said.
As a rule of thumb, shale gas deposits are likely to be found anywhere there are coal fields in Europe. The countries where test drilling is underway and E&P units are searching for commercial quantities of natural gas in shale rock include Austria, the UK, Bulgaria, Denmark, Germany, Hungary, Poland, Rumania and Sweden.
There are also proposals for E&P shale gas exploration in France, Italy and in the west of Ireland. All these E&P operators are eager to imitate the American experience that has reduced gas prices significantly for power generators.
The UK could have about 5.6 trillion m3 of shale gas reserves, Cuadrilla Resources has tentatively suggested, based on its independently unverified results from test drilling that took place in the northwest of England. Frost & Sullivan has suggested that Cuadrilla’s findings could mean that the region holds some 1.1 trillion m3 of commercially viable shale gas reserves.
Germany’s shale gas reserves are enough to meet its current gas needs for the next 175 years, according to Wood Mackenzie’s estimates. At present, reports the US EIA, Germany could have 0.23 trillion m3 of recoverable shale gas reserves, compared with its 0.17 trillion m3 of conventional natural gas. Germany devours around 81 billion m3 of natural gas a year, 90 per cent of which is imported, of which 40 per cent comes from Russia. ExxonMobil, BNK Petroleum and Wintershall are currently conducting shale gas exploration in the states of Lower Saxony, North Rhine-Westphalia and Saxony-Anhalt.
Poland, with its estimated shale gas reserves approaching an impressive 5.3 trillion m3, could have sufficient indigenous supplies for perhaps three centuries, noted the US Department of Energy in April 2011. In that year, Poland consumed 0.4 billion m3 of gas, of which 64 per cent was imported from Russia, reports Eurostat. Polish policymakers are aiming to create a framework that will encourage domestic shale gas production to sell below the 2011 price of $336 per 1000 m3 of Russian gas.
Many Challenges to be Overcome
For shale gas in Europe to be a success, “many hurdles have to be overcome, making progress slow”, says Tethra Energy’s Harper. The enabling factors behind the US shale gas revolution include the infrastructure being already largely in place, along with local knowledge and skills, as well as the legal and political environment to encourage shale gas’s development.
While the US has a long tradition of onshore exploration and development, because most of its oil and gas comes from land-based wells, Europe’s domestic oil and gas has tended to come from offshore locations like the North Sea. The Polish Institute of International Affairs observes quite bluntly that there is “a lack of reliable data about the economic feasibility of shale gas extraction in Europe”.
Europe’s geological knowledge as it applies to shale gas is patchy at best. European geology is also much more complex and harder to exploit than the geology of the US, making Europe’s drilling costs much higher. In addition, European shale gas tends to be at greater depths than in the US – at about 5000 to 6000 metres, compared with the American experience of 3000 to 4000 metres.
Furthermore, Europe has fewer land-based drilling rigs than the US, says Harper. Only 100 land-based rigs are currently operating in Europe, reports Dr Paul Stevens at Chatham House. And these rigs are mostly crewed by American teams. A global shortage of skilled and experienced energy engineers is already delaying projects and pushing up costs worldwide.
Then there are the legal, regulatory, planning and land rights issues. Unlike in the US, mineral rights in Europe belong to the government, and not to the owners of the land the minerals lie under. Worse still, Europe lacks a unified legal, regulatory or planning system. Each EU Member State tends to operate its own unique system for deciding E&P licences, determining planning permission and giving regulatory approval.
While in Germany and Switzerland this is the job of the regional government or local agencies, in the UK and France the national government is responsible, says Kenneth Culotta, a partner at energy lawyers King and Spalding. Another issue is the sheer number of wells needed to exploit shale gas reserves. Dr Stevens estimates that to produce 283 billion m3 of shale gas, Europe would have to drill 800 wells every year over the next decade.
Harper considers that several drilling sites would be need to exploit Europe’s shale gas resources. “That is a lot of planning permissions that have to be obtained – a challenge in crowded Western Europe,” he says.
Nor does it help that many EU states’ laws are not designed to cope with the development of shale gas. Some EU policymakers are already trying to create a common framework for dealing with shale gas. But it is proving a challenge. Poland, for instance, will veto any proposals that might harm shale gas development, said Maciej Olex-Szczytowski, an adviser to the Polish foreign minister.
Impact on Fuel Mix and Gas Price
One question decision-makers are asking is will the arrival of shale gas displace planned imports of pipeline gas or even LNG? On a Europe-wide scale, this is definitely seen as an unlikely prospect.
For the UK, writing in an article in the December 2011 edition of New Power, Lucy Field describes Cuadrilla Resources’ tentative forecast of an extra 25 billion m3 a year as “extremely optimistic”, given that 25 billion m3 per year is Poyry’s current view about the boom in Poland, where conditions are much more favourable.
Independent evidence to back up such tentative estimates is also lacking. Field argues that if such estimates prove correct, the UK will continue to import half its gas supplies, as pipeline gas from Norway and LNG from the rest of the world. The US experience is extremely unlikely to be repeated in the UK, in her view.
In Poland, the arrival of a successful domestic shale business is seen by policymakers as an important energy bridge towards nuclear power. Unfortunately, with the power market growing at 4 per cent per year, it is expected to be at least a decade before Poland’s first nuclear power plant is built.
As Warsaw want to avoid increasing its dependency on Russian gas, policymakers see a dash for shale gas as an urgent geopolitical, economic and environmental priority. But the main difficulty for Poland, as for other countries, is a lack of adequate infrastructure to move the gas from where it is extracted to power plants located all over the country, let alone to neighbouring countries.
Germany’s renewable energy lobby fears the rise of large-scale domestic shale gas production could lead to the power market being saturated by shale gas fuelled plants, which in turn could reduce renewables’ market share, notes the Centre for Eastern Studies in Warsaw. Nevertheless, if Poland can realise its dream of becoming a shale gas exporter by connecting with the European pipeline network, German power stations could import Polish shale gas. Pipelines crossing Poland from Russia to Germany have spare capacity since the Nordstream underwater pipeline came onstream, with capacity to carry 55 billion m3 of natural gas a year from the Russian Baltic port of Vyborg to the northern German port town of Lubmin.
France’s geopolitical, economic and environmental factors set it on a different track from Poland. With nearly 80 per cent of its power derived from nuclear power, France can afford, for now at least, to maintain the ban on hydrofracking it imposed last year. But budget minister Valerie Pecresse said last October that “research must continue” even if France had to cancel exploration permits.
Harper suggests the arrival of shale gas will only make a slight impact on European wholesale gas prices. Rather, it will add to Europe’s already diversified gas sources, although it will alleviate energy security concerns by making the EU less dependent on gas from distant locations such as Northern Siberia, Central Asia and the Middle East. “We do not think the role of unconventional gas in Europe will be as important as in the US – as long as we have affordable conventional gas supplies from our trading partners,” says Jean-François Cirelli, president of Eurogas.
Ironically, the US may export shale gas to Europe via LNG tankers, if it shows the leadership to convert its existing largely redundant import LNG terminals into export facilities. Guy Broggi, senior adviser to the director of LNG at Total, has recently suggested that American LNG exports could help steady gas prices and act as a standby in case of disruptions to Qatar’s Ras-Laffan LNG production, for example. The real issue for power utilities is the implications of shale gas for delinking the price of gas from oil indexation in gas contracts.
Much of the opposition to shale gas has stemmed from environmental concerns. Energy companies promoting shale gas as a green solution argue that electricity generated with the gas would produce 50 per cent fewer carbon emissions than electricity generated from coal. Countries that opt for shale gas could therefore achieve their EU 2020 emissions targets at a fraction of the expense of investing in wind, solar and other renewables.
But research by the Tyndall Centre for Climate Research, sponsored by green lobby groups, contradicts this. In the case of the UK, exploiting even one fifth of Lancashire’s estimated shale gas reserves would produce about 15 per cent of all the carbon dioxide (CO2) that the UK would be expected to produce between now and 2050 if the government target of cutting CO2 emissions by 80 per cent by 2050 were adhered to.
“Unlike the US, where the infrastructure, knowledge and skills were largely in place, there is a lack of reliable data about the economic feasibility of shale gas extraction in Europe”
As for water safety and purity, environmentalists across Europe are concerned about the still-unknown implications of shale gas exploration on this vital resource. The polemical US anti-shale gas documentary Gasland purports to show how extensive shale gas exploration has destroyed landscapes, raising concerns about the extraction process’s potential for water contamination, gas leaks and the release of heavy metals and other harmful substances, as well as increased greenhouse gas emissions.
Such concerns have already helped to establish an anti-shale gas protest movement in the historic city of Bath in the UK, where fracking could harm the deep thermal springs that supply this ancient spa town.
Another controversial issue is the industrial usage of water in the fracking process in areas experiencing drought – although it should be pointed out that the amount of water consumed is said to be less than that used to keep the grass on a golf course green, and most of the water used for fracking is recycled.
Evolution not Revolution
Current evidence suggests that shale gas will not bring a revolution in the European energy mix by the end of the decade. Instead it is likely to play an increasingly significant role in the third decade of this century, when Europe has had time to solve the hard issues of geology, knowledge gaps, E&P infrastructure, legislation, leadership and environmental issues.
But shale gas’s impact on individual markets will vary in line with differences in geology and geopolitics as well as Member States’ varying priorities for their environment, economic development and energy security – a balance that could be expected to shift in favour of developing domestic shale gas for power production if economic crisis were to bite.
Overall, the emergence of shale gas should strengthen the EU bargaining position on world markets when dealing with countries such as Russia. But shale gas fired power plants are likely to have a smaller footprint than many current gas fired plants, reflecting their role as backup facilities for renewables as well as changes in the EU electricity market.
Across Europe, the future looks brightest for power generation from shale gas in Central and Eastern European nations such as Poland and the Ukraine and in some West European countries such as Austria and the UK. All are eager to improve their energy security and at the same time meet the EU’s emission targets in the quickest and most affordable manner.
In contrast, the political leadership in France and Germany remains set against shale gas E&P, in the face of what appears to be the wishes of their respective domestic power sectors.
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