Europe: Shale Gas at the Forefront

Shale gas is at the forefront of policy debate, at both EU- and country levels, according to Peter Doran, Senior Policy Analyst at CEPA, a Washington think tank focused on Central & Eastern Europe.

Head of CEPA’s Energy Horizons Program, which looks at a wide spectrum of energy issues important to Central Europe, Mr. Doran said he believed there was a new urgency to producing shale gas in Europe, especially in Poland.

“The winter gas shortage that we saw in February should send a very powerful message, both to European consumers and policymakers, that over reliance on one provider, in this case Russia, is in no one’s interests. It doesn’t benefit anyone to rely almost exclusively on Russian gas, because when there is a market squeeze, consumers are ultimately the ones who are harmed. In terms of options, in addition to LNG, shale gas represents one of the single most viable and actionable alternatives to dependence on Russia.”

But would European shale gas development be a huge game changer for the continent?

He replied: “Without shale, Europe is going to have a very hard time bringing its plans for the Third Energy Package into fruition, specifically regarding market liberalization. With only one upstream source, it’s difficult to create a viable, market-orientated gas network in Central Europe. So, you have to bring alternative supplies into the market place.

“The problem for shale right now, is that it’s a very long-term prospect. It’s unlikely that we will see large quantities of commercial shale gas coming online in the next five years – so we’re talking about a 10-year project.

“In the meantime, Russia has signaled that it is very serious about building South Stream  and in locking downstream European customers into very long term contracts. I believe this is Gazprom’s commercial strategy for dealing with shale competition. It is an issue which policymakers at both the EU- and member state level need to take seriously. If they create an environment that raises the barriers to entry, or bans shale gas altogether, ultimately they could be doing European customers a disservice.”

In terms of Gazprom using price to make shale gas uncompetitive, Mr. Doran noted that there had been pushback from large German consumers trying to renegotiate their prices for Russian gas, and the Polish government had followed suit.

“At the end of the day, these contract negotiations are secondary to the bigger problem: Russia is the largest and, in some countries, the only provider of natural gas. This is the case for Bulgaria and slightly less so in countries like Hungary. Under Russia’s monopolistic pricing structure, consumers don’t have many chips to negotiate with; the chips are all in Gazprom’s corner.

“This is a very difficult situation,” he added, “and it is one of the largest incentives for shale gas development in Central Europe – diversification.”

While some believe Russia to be a fairly reliable and stable provider of natural gas, it all depended on where you stood, according to Mr. Doran.

“Certainly Germany has made a very significant investment in Nord Stream along with Gazprom, so Germany has decided to wager its bets on Russian gas. Other countries such as Bulgaria, farther to the south, are far more vulnerable since they depend on Russia as a single-source provider. While views of Russia vary greatly from country to country, at the end of the day all countries and all consumers should be unnerved by the fact that if something goes wrong upstream they suffer rather quickly downstream.”

For Europe, said Peter Doran, natural gas sourced from Central Asia had a big competitor looming in the background: China.

He explained: “China wants a lot of gas and is able to move very quickly in not only signing agreements but in ultimately building operational pipelines. The ability of China to move in this way far outpaces Europe’s ability to act. When it comes to Central Asian gas European demand is going to come headlong in conflict with Chinese demand.”

Thankfully, he said, there was a lot of gas in Central Asia.

“Getting that gas to market is an entirely different issue. What we’ve seen with the troubled Nabucco pipeline is that it’s not necessarily easy to move that energy to market. This means that Europe is going to have to look closer to home for its own energy alternatives to Russian gas. Certainly LNG is a great option, and we’ve seen a lot of positive movement in that direction in recent years, but it’s not the only solution,” he said. “And I think when Central European countries like Poland look at all the options on the table shale gas has to be at the top of the agenda.”

He named what he considered milestones for shale gas development in Europe.

“I’d like to see a lot more wells drilled in places like Poland, but also elsewhere. Right now, the big question is how much gas is actually available in Poland. We’re not going to have an answer to this question until we have a lot more data available to us.

“So that’s one milestone: more exploration. Some of the early wells have shown positive or encouraging signs, others haven’t,” continued Doran.

He said he also believed the report by Polish officials on the feasibility and environmental safety of unconventional drilling was another important milestone, because it was accurate and fair.

“It sends a message to Polish citizens that this process, if done correctly, is safe and environmentally sound and ultimately the customer would benefit from larger quantities of less expensive Polish gas coming into the marketplace.”

According to him, how things had happened in Bulgaria could not be ignored.

“The Bulgarian government’s reversal on shale gas was important because it happened so quickly,” Doran recalled. “I think that sent a message to a lot of international energy companies operating in Central & Eastern Europe that popular perceptions can change rapidly.

“It should be a learning lesson for many companies operating in Poland now. They need to think more holistically about upcoming regulatory decisions and engage a wider domestic audience. This includes a better dialogue with public stakeholders, consumers, and local residents who will live  next to hydraulic fracturing sites – everyone has to be involved in the process. At the end of the day, there has to be a more active discussion about how the safety lessons developed in the United States could be applied to Poland, since everyone will benefit from if done correctly.”

In terms of shale gas regulation in Poland, Mr. Doran contended that this was clearly an issue that the government there needed to decide.

“Unlike say the Marcellus or other shale plays in the US, Polish shale is still an unproven quantity. We do not know exactly what the cost structure is going to be for producing Polish gas in commercial quantities. What we do know is that extracting Polish shale gas is going to be more expensive than in the US.”

“When you have an environment of potentially higher costs, and you have companies who have to determine where they’re going to allocate their finite investment capital, the challenge for the Polish government is going to be to create an investment climate that incentivizes financial risk and encourages international energy companies to roll the dice on Polish shale. Because the benefits are so high that this seems like a ‘no brainer’.”

Peter Doran concluded: “But if Poland adopts a tax and licensing structure that creates high barriers to investment, ultimately energy companies could decide their investments are better placed elsewhere – and that would be a net negative for both Poland, the European Union and ultimately supporters of Central European energy security.”