A wave of excited chatter has overtaken energy watchers in Europe. There is talk of a “game-changer” and a “revolution” unfolding on the continent. In the last year large shale gas deposits have been discovered in both Poland and Ukraine. One estimate puts Poland’s reserves of unconventional gas at 1.36 trillion cubic meters, an amount that would increase the European Union’s proven reserves by 47 percent.
Polish Foreign Minister Radoslaw Sikorski has forcefully backed shale gas development for his country, arguing that “production of shale gas in Europe can change its energy paradigm” and “additional gas deposits could make the [European] Union independent from external suppliers,”, namely Russia.
Russia supplies about 29 percent of European natural gas, a figure that increases as one heads east. Over 50 percent of Poland’s annual natural gas consumption is imported from Russia; 95 percent for oil. This sort of dependence is understandably unacceptable for countries with lingering fear of Soviet aggression.
Shale gas development has achieved great success in North America over the past decade, due in large part to developments in the technology of hydraulic fracturing, or “fracking.” In 2009, aided by advances in shale gas production, the U.S. overtook Russia as the world’s leading producer of natural gas.
Observing the rapid achievements in North America, some commentators have concluded that Europe will soon wean itself off dependence on Russia. In a March 2010 article, The Economist warned that “Gazprom, Russia’s gas giant, is the company most exposed to this threat,” while the Financial Times suggested the same month that unconventional gas may offer a “reprieve from dependence on Gazprom.”
One Lithuanian observer in the Baltic Times accused Prime Minister Vladimir Putin of controlling a “kleptocratic and criminal regime…used to watching the outside world via his Gazprom pipeline.” With glee he imagined the surprise for Putin “that some big amounts of shale gas can be found in Poland and probably in Lithuania and Ukraine.”
Even more optimistic – some would say quixotic – is the claim of John Harpole, president of Colorado-based Mercator Energy, who has declared: “It may sound overly dramatic, but I think [shale gas development] will do more for freedom than anyone today can imagine.”
As exciting as the discovery may be for proponents of Europe’s energy independence, reasonable observers should wrestle with four obstacles to further development:
(1) Rigs and wells: An analysis done by Oswald Clint of Bernstein Research, notes that while the U.S. has almost 1500 land-based rigs of all kinds, Europe has only 74, seven of which are in Poland. Extrapolating from this, Clint argues that even if all European rigs were to be relocated to Poland and drilled 10-11 wells per year, peak production would only be 4.5 percent of annual consumption. Further, European gas-bearing rock generally lies deeper in the ground than American shale.
(2) Industry Structure: The U.S. has a large number of small and medium sized companies willing to tackle challenging, new fields; the European industry is less diverse. And while the U.S. has a market for natural gas with exchanges and free-floating prices, the European system is far less flexible, constrained by the absence of a unified market and cross-country ventures.
(3) Institutional Environment: Unlike the U.S., most European countries have subsoil laws whereby reserves belong to the state, not the owner of the land. This may make locals unwilling to surrender land to environmentally questionable projects. Instead it may produce cumbersome, bureaucratic government leases or sharing agreements for exploration.
(4) Prices and Investment: The biggest unknown involves gas price forecasts in Europe. Given the scale of investment, many argue shale gas is only profitable to develop when gas prices are high. John Dizard, a writer for the Financial Times who has consistently criticized the exuberance of shale gas proponents, argues that the “shale gas industry really needs a price of $7.50 to $8 [per thousand cubic feet] to break even on its all-in costs of finding and producing the stuff.” The trading price in the U.S. is currently around $4.50.
These are just a few of the obstacles to shale gas development in Europe. An even more fundamental problem for supporters will be the sheer size and availability of cheap Russian gas. Russia’s undeveloped Shtokman field, for example, is estimated to hold 3.8 trillion cubic meters of conventional gas, three times the amount that Poland possesses in shale. Conventional gas is much easier to tap into, and that’s just one field of many.
Shale gas advocates will need to reckon with some basic impediments to development before predicting an energy-independent Europe or the demise of Gazprom.
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