European Commission on Shale Gas: Cautiously Optimistic

With all of the new sources of natural gas coming online in Europe, and new potential resources emerging, do European policy makers take unconventional gas seriously?

Yes, according to Ivan Pearson, Scientific Officer in the Energy Security Unit at the European Commission’s consultancy for energy issues.

He explained, “The great thing about having the American example is that European policy makers are fully aware of how much the unconventional gas revolution in the US not only caught the companies off guard, as evidenced by all of the regasification facilities that are now in danger of not having a very good business case, but also in terms of the regulators.

“I think they were caught off guard by the success of unconventional gas.  European policymakers see that, so I think that we’re certainly more aware of the fact that this could potentially be very significant for Europe,” he said.

Significant, but at what scale?

“One thing that we talk about in the Energy Security Unit is trying to define what energy security is and I think you can break it down into the physical availability and the price,” said Mr. Pearson, who said that with regards to prices, Europe had already seen the benefits to prices because of the unconventional gas revolution in the US.

“In the period 2009-10, that destroyed a lot of LNG import demand from the US,” he recalled, “because you had so much indigenous production and that meant there was a lot more LNG on the market, and because Europe and the U.S. share a lot of the same swing suppliers in the Atlantic basin, it meant that we had a lot more LNG on the market at that time and that led to lower spot gas prices in Europe in 2009-2010.

“I think that in light of that and the fact that Europe is energy dependent, we import most of our energy products, if you’re talking about the impact of unconventional gas in Europe, you’ve got to put that into the global setting. So that means not only do we have to look at the prospects for the production of indigenous unconventional gas, but we also need to think about the ways in which unconventional gas development in other parts of the world could impact exporters to Europe,” said Pearson.

He gave an example.

“If we see a situation whereby another gas consumer has a lot of its import demand destroyed by unconventional gas production, because we have a more globalizing gas market, that could be beneficial for Europe as a major consumer of gas.”

Mr. Pearson said his Unit would shortly be releasing a study on the various potential market impacts of unconventional gas in Europe.

“The first thing we deal with is actually the resource estimates. There are huge gas in place resource estimates, however there are several different studies that look at that, and what we see is that there is a lot of divergence between those studies. We’ve looked at the methodologies of those studies and concluded that there’s actually a lot of uncertainty as to how much gas could be technically recoverable, not only in Europe but also worldwide. Unfortunately, there’s no easy solution to that, no one better methodology, it’s just the case that we need to progress further with our actual development of our resources to empirically validate a lot of the models that are out there right now.”

He continued: “Not all studies are going to be correct and anyone who sees an unconventional resource estimate or reserve estimate giving a discreet figure would be advised to take that with a pinch of salt because there are many different studies out there and they diverge significantly.”

In terms of European attitudes towards North American technology and drilling culture, Mr. Pearson provided an interesting parallel between offshore drilling legislation in Europe in the wake of BP’s Macondo well catastrophe in the Gulf of Mexico.

“Another one of the areas I have dealt with is offshore safety,” he reported. “So that’s the EC’s response to Macondo and legislation that we’re introducing. So I’m aware of the big regulatory differences between the U.S. and Europe.”

In that context, Mr. Pearson offered what he said was purely his own personal opinion: “I do think that Europeans are aware there’s a big difference in regulatory philosophy in the US and Europe when it comes to hydrocarbon extraction. There’s also a huge difference in the scale; the U.S. produces a lot more hydrocarbons than Europe does.

“I think that we’re aware there’s got to be a good creative tension between a regulator and the actual operator for the development of hydrocarbon resources to be really done safely, and I think there’s a feeling that if unconventional gas is developed in Europe it’s going to be much more cautiously regulated. Certainly were going to look at things more closely in Europe.”

He contrasted standards in the Gulf of Mexico versus in the North Sea.

Mr. Pearson said, “You have things like a quantitative risk assessment which are much more stringent in the North Sea and has been for many years. Companies seem to respond to that if you look at the actual statistics in the North Sea which are better, that is to say operations are safer in terms of human health there than they are in the Gulf of Mexico, using different statistics.

“If you can apply that analogy to unconventional gas, you can expect the regulators to pay more attention to unconventional gas and perhaps for there to be a different type of creative tension between the regulators and the operator in Europe than exists in the U.S.”

Because unconventional gas extraction had a much lower rate of recovery than for conventional natural gas production, Mr. Pearson said it was important to consider how much technological learning could reduce the costs of producing unconventional gas in Europe and increase recovery.

“Basically what technology does is it allows you to access more of the resource so you get a higher recovery factor and also it drives the development costs down,” he explained. “Technological learning is dealt with in different ways in different studies, but that’s definitely a wildcard in terms of an upside, that is to say we could still have huge technological breakthroughs that could increase reserve estimates even more than the studies up to now have been stating. So that’s a wildcard that makes it even harder to get a really good grasp on how much recoverable resource there is out there.”

Mr. Pearson offered what he believed to be the EC stance on unconventional gas.

“At this point in time, the EC is adopting a cautiously optimistic approach,” he began. “I think that in terms of energy policy, it’s allowing the market to decide to what extent unconventional gas will be successful in the EU27. However, it is closely monitoring some of the potential negative externalities, both as regards to climate and also particularly with regards to the environment,” he said.

He named what he thought would be the drivers for creating more enthusiasm towards unconventional gas in the EC.

“I think that as time goes on and we see that unconventional gas can be developed in a way that satisfies all of the environmental standards that European citizens have come to expect – if we can see that over time - and we grow to trust more an industry, I think that’s certainly going to make European officials much more confident in that and much more optimistic about the contribution of unconventional gas.”

Pearson said he thought Poland was an interesting test case for unconventional gas.

“One thing that European officials are always aware of is the fact that there are regulatory differences even between countries in Europe and that’s especially true in hydrocarbon development. So we’re not just concentrating on Poland but also paying attention to the unconventional gas development and test drilling in other places like the U.K., Germany and looking at the public reaction in places like France and Bulgaria as well,” he explained.

“People are most optimistic about Poland because it’s got significant resources in place, you have strong government backing there and it seems that’s the first place where we’re going to see widespread unconventional gas development in the EU, so we are following the country closely, but that doesn’t mean we’re ignoring other jurisdictions.”

But would European policymakers be more positive about the contribution of natural gas going forward?

Mr. Pearson said, “Energy policymakers in general have been aware of the fact that gradually over the past five or six years, several authoritative industry representatives have been highlighting the increasing contribution that natural gas will make in the coming years. This goes hand in hand with things like balancing renewable energy generation.

“Also underpinning these developments is the fact that conventional gas reserve estimates had been gradually going up even before the discovery of unconventional gas, so I think European policymakers have been aware of that for some time and I think that’s what’s driven the concern around the disruption of natural gas through Ukraine,” he explained.

“They did realize that gas would assume an ever more important role in the European energy mix, so I don’t think that there’s a strong change in that direction, however I do think that unconventional gas is raising a few eyebrows,” said Ivan Pearson.