Four Questions on Shale Gas Development in Europe and the U.S.
Can the U.S. shale gas boom happen in Europe?
The short answer to that question, is no. A combination of factors have contributed to the U.S. shale gas and oil boom, namely favorable geological conditions, (access to) infrastructure, substantial public support (amongst others spurred by attractive mineral rights legislation), available service industry, broad political support, a large market, and a favorable fiscal climate. Corey Johnson (University of North Carolina) and I came to that conclusion roughly two years ago, as have other scholars, such as Paul Stevens of Chatham House.
In Europe, put bluntly, the only correspondence with the U.S. is that there is a large market. For instance, test drilling operations in Sweden and Poland have shown that the geological conditions in those parts of Europe are not as favorable as those in parts of the U.S. where the bulk of shale gas and tight oil extraction is currently taking place. Typically, resources in Europe are trapped in shale rock layers that are much deeper into the subsurface, substantially raising the costs of extraction. Our earlier work, some of which was published in Energy Policy, regarding the case of Poland, shows that in this part of Europe infrastructure availability is a problem that deserves attention. Historically, Poland has built its economy on domestic coal and imported oil, and thus substantial investments in infrastructure are required, either to facilitate domestic consumption of natural gas or exports. Both are long-term projects, and although the Polish TSO has stepped up its activities, arguably much work remains to be done, such as the construction of distribution grids or improving the interconnectors with neighboring countries. It is worth noting that the lack of successful initial drilling results and the departure of several private companies from Poland do not help to justify these investments. In Europe in general, unlike the U.S., there is not a concept called ‘unbundling in the pipeline’. Kenneth Medlock (Rice University) has made interesting contributions on this topic. In short, the owner of a pipeline in the U.S. cannot own the commodity flowing through it. As a result, the pipeline owner does not favor one commercial actor over another in the use of the pipeline to transport its natural gas, making the entrance barrier for market players typically low. In the U.S., this has facilitated the emergence of smaller independent producers — with the help of access to venture capital — to invest in unconventional energy resources. In Europe, this is unlikely to happen.
Although concerns regarding shale gas and tight oil extraction in the U.S. have been rising, public support is high as economic arguments in favor of extraction prevail in the handful of states where extraction takes place. In Europe, to the contrary, the public debate is almost exclusively about the environmental concerns that have been linked to shale gas extraction, and there is not much debate about unconventional oil prospects. In Germany, the Netherland and the Czech Republic, the public has demanded that their administrations conduct further studies, while in France, Bulgaria and Spain, there have been calls for a ban on the currently preferred technology. In the United Kingdom, Lithuania and Romania, where the governments have cautiously moved ahead, public opposition has been substantial. In Poland, where public support has been large, there is a wide range of other issues to deal with that currently make commercial extraction of shale gas uncertain. Therefore, to an extent comparable to the U.S., the political landscape regarding shale gas has been fragmented, with Poland being a fervent proponent, the U.K., Lithuania and Romania moving cautiously ahead and others being hesitant or not interested. The European Commission thus far has publicly claimed to be ‘neutral’ on the matter, and typically the environment (ENVI) committee in the European Parliament has more concerns than the industry (ITRE) committee about shale gas extraction in the European member states. Consequently, unlike the U.S., in Europe there is a large offshore industry, but no onshore industry. As an illustration, in early 2012 it was estimated that in the U.S. over 2,000 rigs were available to the industry, compared to a paltry 72 in Europe.
Finally, federal government support in the U.S. has been substantial — first in the form of funding for research in the early 1970s to develop hydraulic fracturing technologies, and subsequently in the 1980s by favorable fiscal terms to stimulate the exploration of unconventional gas under the Natural Gas Policy Act, which deregulated wellhead sales prices of natural gas from Devonian gas shales.
What is the most likely course of future shale gas or tight oil development in Europe?
Europe is not going to see a revolution, as some have labeled the events in the U.S., but more of a bumpy evolution. First, resource estimates in other parts of the world are just more promising than those in Europe. Typically, recent U.S. EIA estimates suggest that there are large basins of shale gas and /or tight oil in the European periphery, in countries such as Algeria, Russia and Ukraine. If confirmed and extracted, that would not significantly alter European import dependence as it has evolved over the last decades. In fact, if all the potential resources in the region would be developed and forecasts that European demand would remain flat prove to be correct, there may even be a situation of oversupply. Second, geological conditions in parts of Europe where test drilling has taken place are more challenging than in the U.S., and perchance in other parts of the world. It may be that further development of hydraulic fracturing, or perhaps the development of new technologies, makes extraction in Europe less costly. At the moment, some estimates suggest that extraction of shale gas in, for instance, the United Kingdom may be twice as expensive as it is in the U.S., as seen in the difference of $7–$12 per MMBtu in the U.K. instead of $5 – $6 in the U.S. Third, the only country that has fully embraced shale gas extraction so far (Poland) has substantial infrastructural, market development and regulatory hurdles to overcome. During the past year, three private companies — Exxon Mobil, Marathon and Talisman — have left the country, after disappointing initial drilling results. However, several reports suggest that a lack of consistent government policy has also contributed to the exodus. As a result, currently one of the concerns of the European Commission is that the Polish government — under public pressure to develop the alleged resources — may actively support its national energy company PGNiG, something that is not allowed under European competition rules. In a comparable case, Chevron in September 2013 gave up its concession to explore hydrocarbon resources in Lithuania because of the ‘unstable political environment’.
The United Kingdom may be the first member state where commercial extraction of shale gas takes place. The government has been struggling with its energy mix for many years, as it wants to move away from carbon intensive coal and has been reluctant to embrace nuclear energy, though on October 21, 2013 the government agreed with the construction of the first nuclear plant in 20 years. As domestic natural gas production has been in steady decline, it increasingly depends on imports, both by pipeline and in the form of LNG (in some years including U.S. LNG). Exploration of unconventional natural gas potential in the United Kingdom was stalled some years ago, after a series of small earthquakes near Blackpool, where test drilling took place. Despite the results of a major study that concluded that the risks of induced seismicity were ‘small’, shale gas extraction has been the topic of heated debate in the country, and public opposition is substantial. Also, in the U.K. government there is no unified position, with the Treasury in favor of shale gas extraction, while the Department of Energy and Climate Change are in doubt. Thus the U.K. moves cautiously ahead.
It is important to consider the position of European institutions. In early October, the European Parliament voted to make an environmental impact assessment compulsory for unconventional gas and oil production and for exploration when hydraulic fracturing is used. It is important to note that this position is not necessarily what the amended Environmental Impact Assessment Directive is going to look like. The European Commission has not yet taken a position on this matter. This directive should not be confused with the proposal on unconventional hydrocarbon extraction that the European Commission is currently working on and that may include a legislative proposal, mostly likely in the form of a directive. Although energy resources extraction is essentially a prerequisite of the member states, it is worth noting that European institutions have a substantial mandate when it comes to environmental concerns. As these concerns are closely linked to shale gas extraction, continued evaluations and maneuvering around these issues cast uncertainty over the market, making it difficult for investors to predict what the future investment climate in Europe is going to look like.
As a result of all this the consequences of events in the U.S. for the short and medium term are mostly indirect for Europe. The changing position of the U.S. from a net importer to a potential net exporter of natural gas has had major displacements effects. Since 2009 this has had a downward effect on spot-market prices for natural gas in Northwestern Europe, and it has contributed to the natural gas oversupply that revoked the renegotiation of some of the existing oil-indexed long-term contracts with external suppliers from Norway, Russia and Algeria. New contract formulas are increasingly based on hub-prices. Moreover, the shift in the U.S. from coal-fired to gas-fired electricity has made large amounts of U.S. coal available for global markets. In the short term, and in the absence of a functioning EU carbon pricing scheme, markets have dictated that the coal is partly shipped to Europe. As a result, carbon emissions in Northwestern Europe have been on the rise for several years now. Finally, European industries that compete with companies from the U.S. have suffered, as their counterparts profit from substantially lower energy costs.
What are largest sources of uncertainty regarding future development in Europe, and over what time frame might we expect any major uncertainties to be resolved?
There are many uncertain factors that are of importance, and I find it difficult to label them. So here are some thoughts, which I categorize in three groups.
Technology. Though resources may be too expensive to extract today, this may change in the future due to technological development. Also, one of the important continued environmental concerns that is linked to shale gas extraction is methane emissions. As so-called green completions technology may become more of a common practice, this particular argument to oppose extraction may lose its salience. In addition, increased use of saline waters, as currently observed in parts of Texas, could similarly take away concerns about the usage of freshwater by the industry.
Regulation and legislation. There are several examples of member states that have been hesitant over how to deal with unconventional natural gas extraction. France, Bulgaria and parts of Spain have installed outright bans, but the majority of member states have embarked on studies examining the often-quoted dangerous environmental impacts. Within the member states, there is rarely a univocal stance on the matter. While European institutions claim to remain ‘neutral’ on the matter, policymakers in Brussels have been occupied with the question of whether existing regulatory frameworks are sufficient or not, and subsequently whether more stringent regulations are required. Next to these discussions that focus specifically on unconventional energy, the outcomes of other debates are relevant as well, for example, discussions about the currently dysfunctional European emissions trading scheme or talks about post 2020 carbon and renewable targets for European member states. Finally, the outcome of policy debates in the U.S., particularly regarding exports of LNG to non-Free Trade Agreement countries, is currently uncertain. It remains to be seen whether U.S. LNG can compete effectively with pipeline gas in Europe or with LNG from the Middle East, or whether the majority of U.S. LNG will find its way to more profitable Asian markets. This debate may be of influence, not in the least because pending legislative proposals hinder unrestricted market functioning and would actively encourage LNG exports to NATO members and Japan.
Market functioning. Parts of the European gas system are currently not functioning properly because of the lack of investment in infrastructure — be it pipelines, interconnection facilities, reverse flow options or storage facilities — and a lack of implementation of existing legislation. The case of Poland provides an example how these factors can have a negative influence on the possibility to extract unconventional energy resources. As internal debates in Europe continue about how to attract sufficient capital to make the necessary investments in infrastructure, and whether member states or EU institutions should coordinate this process, market functioning is expected to remain suboptimal for the foreseeable future. For investors, this is another area of uncertainty that may make them reluctant to invest in Europe. It is also worth considering that the future extraction of energy resources in the European periphery — most notably in Russia, Algeria and Ukraine — is uncertain due to a variety of factors.
What is the state of analytical debate in Europe over the likely course of shale gas or tight oil developments?
The debate within Europe mainly focuses on environmental concerns that have been linked to shale gas extraction, though increasingly industrial competitiveness has risen on the political agenda. In parts of Europe, energy security is also often cited as a major concern as are the lack of benefits for local communities and the challenge of population density. In general, it is my sense that the European debate is completely polarized, with both proponents and opponents grossly exaggerating their arguments.
Environmental concerns that are mostly linked to shale gas extraction are water pollution, methane leakage and induced seismicity. Admittedly, in the U.S. there have been reports of cases where mistakes were made. Opponents of shale gas extraction in Europe like to hint at those incidents and forget about the thousands of wells that have successfully been drilled, while proponents in Europe tend to dismiss those incidents and at times seem unwilling to learn from the U.S. and discuss how to design effective regulations to address these issues. It is worth noting that in the U.S. states where hydraulic fracturing mostly takes place, environmental regulations often deserve improvement, and federal attempts to regulate some of the environmental concerns have so far mostly failed.
Cheap energy resources in the U.S. have not only spurred energy markets, but also an “industrial renaissance” in heavy industry and manufacturing. These often compete on a global scale. Their European counterparts are increasingly vocal, because cheap feedstock is giving U.S. industries an enormous competitive advantage. The European Commission recently announced that industrial gas prices in the U.S. were about one quarter of those in Europe. If this price difference proves structural, it is hard to imagine that there will be a future for heavy industry in Europe, as several industry representatives have warned. According to some analysts, the currently ongoing trade talks between the U.S. and EU could prove disastrous for European industries, if this price difference is not taken into account as trade barriers are taken away.
Particularly in Eastern Europe, the argument of energy security is never far away in debates about energy resources. During the course of our research, all policy makers have stressed that this is the most important argument in favor of extracting shale gas, especially in Poland. Though understandable given the history of war and mistrust in this part of the continent, it is worth taking these claims with a grain of salt. Most of the countries in Eastern Europe have a modest share of natural gas in their energy mix, and thus dependence on Russia is mostly not as substantial as policymakers will have you believe. In the case of Poland, it is unclear why, if moving away from Russia is so critical, in the past there have been no attempts to invest in infrastructure with Denmark, or better interconnections with Germany, to connect with alternative supplies of natural gas. The answer is simple: because there was no substantial gas market in Poland to justify such an investment. Currently, some of these investments are being made with European financial assistance since Europe would like to support Poland in moving away from its old coal-fired electricity production facilities.
Population density is mentioned by some as an important factor limiting the options for large scale unconventional energy resource extraction, and for some member states in Northwestern Europe, such as the Netherlands and parts of Germany, this may be a valid argument. However, countries with the largest recoverable reserves in Europe, mainly France and Poland, have a population density comparable to Pennsylvania, where shale gas extraction is well under way.
Former Brookings Expert
Senior Research Scholar, Director of Global Natural Gas Markets , Columbia University, SIPA Center on Global Energy Policy
Finally, as mineral rights have been important in enabling the U.S. energy boom, the lack of tangible benefits for local communities is used as one of the core arguments in the French ban on hydraulic fracturing, which was recently reconfirmed by the French supreme court.
Many uncertainties make it difficult to predict what the future of unconventional energy resources in Europe is going to be. What does seem certain is that an energy boom comparable to the one that has unfolded in the United States is not going to happen on the other side of the Atlantic Ocean.