Unconventionals in Europe: A Change in Attitude?

In preview of his appearance at theUnconventional Gas & Oil Summit scheduled for 3-6 June in London, Mr. Philip Lowe, Director General, Energy DG, European Commission, offered his perspectives on how Europe might take advantage of shale gas to potentially alleviate some of the economic malaise on the continent.

Speaking with Natural Gas Europe just hours before the European Council meeting scheduled for 22 May, Mr. Lowe said it would take place in the context of the changes that have taken place on world energy markets, like the Fukushima disaster and the US shale gas revolution, in the midst of which Europe had found itself at a disadvantage because of high energy prices. Such a backdrop, he said, was prompting Europe to reevaluate where it stood on the potential of its unconventional resources.

Mr. Lowe, since last fall the attitude in Brussels towards that potential appears much more upbeat and less antagonistic. To what would you attribute this change?

On the basis of current technologies there will be some fossil fuels in the final mix. If you can develop them here in Europe then that's clearly going to be an advantage as  pipeline gas dominates the price of gas in Europe.

I think where the mood has changed vis a vis shale gas is, that instead of starting out by saying "fracking and shale gas exploitation should be prohibited unless some strict environmental conditions have been met," the question has been turned around: "Wouldn't it be a good thing if we could discover a low-cost, competitive source of gas in Europe, as long as we can exploit it commercially and in an environmentally sustainable way?" 

We really have not got much experience with it yet, because apart from in Poland and in the UK, there's been hardly any exploratory drilling, and in some countries there isn't even the possibility of getting licenses at the moment, so in Europe it takes a long time to get things going. That may be an advantage in the sense that the industry was not able to gallop ahead without looking at the consequences that would have probably lead to some negative aspects of exploitation of shale gas, but I think the mood has changed to looking to see whether we've got a framework which could actually facilitate shale gas exploration and extraction of shale gas where it's environmentally sustainable.

We're in a stage now where we're still just exploring the possibilities—the companies—some of them went in very enthusiastically in Poland and withdrew. 

Other possibilities exist to exploit conventional gas off the coast of Romania and Bulgaria, and to a certain extent, some of the existing reserves in the North Sea could be more efficiently exploited. In the Mediterranean the discovery of gas off of Cyprus is also offering some opportunity, so we're not simply talking about a straightforward on-land European alternative of shale gas which is equivalent to what is happening in the Midwest.

Has the economic climate in Europe forced the continent to reconsider the prospects for unconventional gas?

Whether it's shale gas or any other form of making best use of the resources we have and improving our use of energy, even when you're in a recession prices are going up in any case. The underlying demand for energy in the world is moving ahead strongly because of Asian growth. That puts pressure on EU countries and EU companies.

That being said, the incentive to invest in anything at the moment in Europe is relatively low, because of slow growth. What Europe is in fact looking for as well—and that's where the heads of state will certainly also be thinking about is—what are the sectors which could help us recover?

Investment in grids, in new sources of shale gas and other indigenous sources of energy in Europe would be a contributor to growth and, of course, investors should be they're looking for things which don't require even more public money. For the moment, investments in the two most important sources of low carbon energy - renewables and nuclear - do require public support, which puts pressure on national budgets. In both instances you've got very high CAPEX and very low operational costs, which puts off a lot of investors who really don't want to go in to the market without some sort of certainty as to the price they receive. 

So the recessionary conditions as a whole are squeezing margins, but they're also discouraging these investments and maybe those investments which could go ahead because there's some certainty about them—either smarter grids, transmission and distribution, or exploration of unconventional or conventional fossil fuel resources in Europe—those are two sources that don't require public money.

 Which countries do you see as offering the greatest potential for shale gas extraction?

There are at least 11 countries in Europe that have issued licenses or have them under consideration, but there has only been limited exploratory drilling, mainly in Poland where there have been 43 drillings, including 13 test fracks; in the UK four exploratory drillings, including one test frack. In France and Bulgaria there are moratoriums at the moment.

Given population density, the ideal conditions to exploit shale gas effectively, I think Poland and the UK remain in the lead, although Germany and France could arguably have significant resources, the conditions under which they could be exploited are much more problematic from environmental and population points of view, and of course public acceptance.

Ukraine is certainly the country where people have most hopes for substantial reserves. Indeed, as you move further east, Kazakhstan, too. The challenge in Ukraine is to get an effective, stable framework of policy and regulation which gives some comfort to investors, who are rather alarmed by some of the developments there in the past.

Where do you stand in terms of industry transparency, e.g. E&P enterprises disclosing the contents of their hydraulic fracturing fluid?

The Commission as a whole has been insisting for some years that there should be full transparency on these issues. People want to know if any toxic material is pumped into the ground due to fear of water contamination and also, in some regions, due to fear of depletion of water sources. The industry has indicated that so far the amount of water used is infinitesimal compared with the exploitation of other sources of energy. It also claims that the use of water can be drastically reduced.

The industry itself has every interest in being transparent, because if it explains things clearly then public acceptance will be much greater. If they see that there is no fundamentally clean source of energy in the sense of some environmental impacts, whether it's CO2 or the effect of turbines on the countryside, bird life, etc. there are always disadvantages to everything. For that reason, industry must lay all the facts out, including possible seismological effects.

We've heard that the Commission will be proposing a regulatory framework for unconventional gas. Are you able to provide us with any update as to how that's progressing?

We're carrying out a joint and comprehensive impact assessment the aim of which is to provide as much predictability as possible to all those who are investigating the case for development of unconventional sources of gas. We are not prejudging the issue of whether we need a new regulatory framework. We will see when the impact assessment is completed. On the environmental side, and as far as exploration of hydrocarbons is concerned, some regulation exists already; at a national level and at a European level. The exploration of indigenous sources of energy is a national competence.

If Europe were to become more resolute in its support for unconventionals extraction, what do you think the approach should look like?

We've already published three main studies across the Commission on the potential impacts of shale gas: the environmental side, the climate side and also as regards impacts on energy markets. And we're now carrying out a joint impact assessment led by my colleagues in the Environment Directorate General, on an objective basis, not slanted towards environment, market prospects or whatever.

The issue is the extent to which volumes of shale gas could substantially change the energy mix and balance in Europe. A Joint Research Center study on this said that possibly it could help replace the depletion of North Sea and other conventional sources of gas and maybe keep the level of import dependency down to 60%.

As far as technical reserves are concerned, they look substantial, but commercially exploitable reserves seem to be less than what was originally thought when for example Poland first opened up licensing for exploration. There are some prospects in the UK. In other countries it's going to be a lot slower.

In the Ukraine, which is not an EU country, it would be a fantastic trump card for the country to develop a shale gas industry and move away from dependence on Siberian gas, and also become a source of gas for the EU. 

So I think people are fairly sober about this: the contribution of shale gas is going to help, but it's not going to be the only answer. In the mix the pursuit of renewables, pursuit of energy efficiency, getting smarter grids right, keeping the market open for the most competitive sources of pipeline gas coming in, developing the Southern Corridor—all these things are in the mix.

How strong do you find the argument that natural gas-fired generation is the best way of complementing renewable power?

In terms of power generation, certainly a gas-fired power plant has exactly the flexibility you need to complement the variability of power supplied by renewables. Of course it's less efficient, from an energy point of view, than if you ran it all the time, but it's energy which can be switched on and off, which you can also increasingly do with coal power plants but coal means much more CO2 emissions.

Nuclear is not a technology which you could describe as providing backup but it provides baseload.

Natural gas is a good complement to a high level of renewables in the system, and as you know, from our Energy Roadmap 2050, when we modelled all the scenarios to move towards a low carbon economy, one thing is absolutely common to all of the scenarios: we must have a higher level of renewables in the system. So then you're faced with the dilemma, "how can companies ensure that the lights stay on at all times?" That can only be done with capacities which can be brought into production relatively quickly.

There has, of course, been much talk of gas-fired plants possibly being mothballed or retired as they're not being utilized, and new investments are not being made. Predictability appears to be one of the points of emphasis at the Council meeting, so we're curious what your thoughts are in connection with that.

There are three reasons for gas-fired power plants being mothballed, not just one. People in the industry seem to keep repeating that it's because of renewables subsidies. The first thing is that there's a recession, therefore demand has gone down; secondly, because of the vast expansion of renewables, capacity which has been supported by subsidy has reduced the incentive to invest in gas and run gas plants; thirdly, there would be more gas being consumed at the moment if coal wasn't so cheap. So these three reasons are putting companies who own CCGT plants into a very difficult position.

So what's the answer? As some people have suggested, "we've subsidized renewables so let's subsidize gas." Chasing subsidy with subsidy is probably not a good idea to develop a competitive energy market; secondly, the aim here is not simply to shore up the balance sheets of companies who've got stranded investments—they made those investments with the certain degree of predictability about what would occur. In 2006-07 there was a strong push toward climate-related energy policies, so anyone who installed gas-fired capacities had to look at it from a long-term point of view. At that time, we had economic conditions which were very favorable.

It could be that a lot of the coal-fired capacity that is around at the moment will have to be phased out because of environmental regulations in 2016 under the Industrial Emissions Directive. Beyond that, renewable subsidies need to become more cost effective and less distortive, because there's a lot of renewables in the system now and some of the technologies concerned are matured and don't need, beyond 2020, any subsidy, onshore wind and photovoltaic in particular.

Whether those two elements of policy would allow everyone to see a resurgence of gas in the very short term it's difficult to say. Those who've done a lot of sums on this tell us that to move from coal to gas in the next few years you'd need an ETS price of at least EUR 30-40, which is not likely. Certainly a reformed ETS will establish the carbon price on some trajectory which is in line with the climate policy objectives, but is not likely to produce a revolution in the energy mix, but be a long term signal for investments. 

The answer probably is, we have to wait and see a bit and the mothballing is probably the correct economic response to a situation of overcapacity, which is not likely to change the fact that these power stations are probably the most effective complement to renewables as nuclear phases out in some countries, as coal-fired capacities phase out one would expect gas to remain.

Unconventional Gas & Oil Summit will be held in London, UK from June 3rd-6th.  More information HERE