When Russia cut off natural gas supplies to Ukraine in a disagreement over unpaid energy bills in the winter of 2009, many countries in eastern Europe were plunged into freezing cold. At the time, 80% of Europe’s gas flowed from Russia through Ukraine and the supply interruption left Bulgaria, Croatia, Greece, Romania and others without their primary source of heating. While Moscow and Kiev played a blame game for the crisis, people had to find an alternative solution and went back to wood burning fires to keep warm.
The current Ukrainian deja vu reminds us just how vulnerable Europe remains to a Russia-dominated energy market. Russia still supplies 30% of Europe’s oil and gas. That’s better than the 38% it supplied in 2009, but a third of Russia’s natural gas exports to Europe still have to transit Ukraine. Gazprom supplies more than half of the gas Ukraine uses each year, whilst Finland, Estonia, Lithuania, Slovenia and Bulgaria continue to rely on Russia for close to 100% of their gas imports.
Gazprom’s long-term contracts with Lithuania, Estonia, Hungary and Bosnia-Herzegovina will all expire next year. With a new pipeline through the Baltics and more interconnects between individual countries, Moscow’s hand is somewhat weaker today than in 2009. The ongoing instability in Ukraine however means Europe needs to strengthen its negotiating position on future gas prices by further diversifying its sources of supply. Shale gas could be the answer.
Look at the impact shale production has had on 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 export faucets. The US Congress has been slow to approve export licenses for natural gas and the new LNG terminals currently under construction in the US will be serving Asian as well as European customers.
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.
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.
DIVERSIFICATION INSTEAD OF DEPENDENCE
With the invention of reliable hydraulic fracturing technology in the 1990s, unconventional gas gone on to utterly transform America’s energy outlook. By 2010, shale production in the US had soared to ten billion cubic feet per day.
The 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.
Europe, of course, is different. 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 is also very different from North America’s. Our 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—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.
According to the US Energy Information Administration, Europe is sitting on ca. 470 trillion cubic feet of recoverable shale gas resources – smaller than America’s holdings but not insignificant given that our demand for gas runs at around 18 trillion cubic feet per year.
Politics and energy policy, however, are serious 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 worries around fracking, with very little discussion about the economic prospects for unconventional gas and oil.
That’s a shame, because 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 annualised rate of 50 percent. 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 percent 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 subsidies under the Energiewende. The same policies have simultaneously made gas unprofitable for German utility companies by favouring renewables on the grid.
Fracking has proven 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.
IS EUROPE READY FOR CHANGE?
Speaking in March at an EU-U.S. 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 re-negotiate 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 minimise 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.
All EU member states must come to a unison agreement to start drilling wells. We do not know whether European shale gas production can ever have the same impact as in North America and make us less dependent on Russia. If we want to find out, exploration needs to start now.
Michael Hinton is the chief customer officer and senior vice president of products and solutions for Allegro Development.
