European Shale: Will The Last Energy Commissioner Standing Turn Out The Lights?

The iron law of politics is if you have nothing sensible to say, it’s best not to say anything. European Energy Commissioner, Günther Oettinger has never been particularly good at that, but managed to come out with his ‘best line’ ever last week in Ireland: Europe shouldn’t do anything on shale for at least five to ten years until local environmental risks are fully understood. Circa 2022, Europe can finally get fracking.

Although the Commissioner has since claimed that his comments weren’t quite that categorical, the point here isn’t to trivialise local environmental concerns from shale gas that should (and indeed are) being taken increasingly seriously, but to highlight that ‘banning shale’ for a decade is the worst policy option Europe could ever take on energy security grounds. That’s not because European shale can provide ‘energy sovereignty’, or ‘energy independence’ that’s transfixed the American debate - the European Commission’s own Joint Research Centre has shown that shale could only ever clip gas import dependency to 60% under a ‘best case’ European shale scenario - but because it can create serious supply side optionality and far greater global gas liquidity. These are the two vital policy gains for Europe. Nothing more, nothing less; both would hold enormous value for European politicians, industry and day to day consumers.

First up, the optionality issue clearly applies to Russia as the mainstay of European gas supplies, in part to Algeria and Libya feeding Southern European markets, less so to Norwegian production that remains a stable provider, but categorically to new pipeline players such as Azerbaijan that’s becoming increasingly vocal about how much influence 10bcm of Azeri gas should afford then in Europe’s ‘Southern Corridor’. Keeping shale on the table as a serious prospect will not just help to keep Russia (et al) on the straight and narrow, but plays into the second policy gain, increasing overall global gas volumes that will eventually put expensive oil indexed gas contracts to bed. America has led the way on shale, Asia is rapidly following, which means Europe has to fulfil its international shale responsibilities to complete the global trinity. If Europe does shale properly, it’s almost certain that gas price convergence will play out across the U.S., Asia and European hubs to ensure that gas prices are based on gas fundamentals across the world. Couple that to major LNG gains being made in Australasia, Canada, East Africa and the Gulf, and gas would finally become a cost reflective commodity. The volumes involved and spot market maturity entailed, would allow for little else.

Unfortunately, this is not where Europe’s at. Going around the Member States, France has vested nuclear interests, Germany a heavily protected solar (and coal sector), the British coalition is hamstrung by renewables green-wash. The Netherlands are happy sitting on pre-existing Groningen rents, Southern Europe retains close ties with North African gas production, and even where the desire to develop shale is far more serious in CEE and South East European states, Russia continue to cast a very long shadow stymieing production. The same argument applies to Baltic States. And that’s before we consider general problems of poor corporate credit ratings for mid-cap utilities, a lack of shale expertise, modest rig counts, heavily contested mineral rights or ‘nimbymania’ across Europe.

Parse all that together, and it hardly needed Mr. Oettinger adding his voice to propose a ten year moratorium on shale. Rehashing tedious local environmental debates that everyone else had five years ago might play well to certain audiences, but it’s verging on ridiculous when you consider what’s happening elsewhere in the gas world. Do shale, and Europe gets serious optionality, enhanced liquidity and eventually cost reflective prices. Turn its back on shale, then Europe’s energy future - mirroring most other issues of global importance - will be determined entirely by what takes place beyond Charlemagne’s borders and indeed, control.

Matthew Hulbert, Lead Analyst, EER