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Why Europe May Walk Away from Its Shale
by Christina Nagy-McKenna, Enerdynamics Instructor
U.S. producers have enjoyed great success using hydraulic fracturing (fracking) to extract natural gas from shale formations. Fracking is a game changer that has swelled domestic gas supplies and sent U.S. gas prices falling even as they climb in other markets worldwide. The U.S. Energy Information Administration (EIA) forecasts that by 2035 shale gas production will account for 46 percent of U.S. natural gas production.
A logical next question: Who else is ready to join the U.S. as a supplier of natural gas produced through fracking? Surprisingly not Europe, even though the EIA estimates it is sitting on an estimated 639 Tcf of shale gas resources.
The European marketplace – a changing landscape
The need for additional natural gas in Europe is clear. The European natural gas market is growing in demand, in part due to the continent’s preference for a cleaner-burning alternative to coal, and in part due to its changing relationship with nuclear power. Europe has a long history of burning coal for heat and power, but well-documented environmental issues resulting from the use of coal have pushed the continent towards natural gas and nuclear energy.
The three largest gas users have very different philosophies regarding the future of energy resources:
- Germany’s government is bullish on renewable energy;
- the French government continues to be the largest cheerleader for nuclear power;
- and the Italian government is encouraging the use of more natural gas.
Supplies come from a myriad of sources: the U.K., Norway, the Netherlands, Russia, Libya, Algeria, and an ever-increasing amount of imported LNG. Some of these sources are less than perfect, however. Transportation of gas from Libya to Italy was suspended last year during its civil war; Russia has shown a propensity to interrupt deliveries for days at a time to other nations, putting into question its reliability; and U.K. supplies that originally were destined for export to other parts of Europe are now being consumed in the U.K.
Europe is also wrestling with how to adjust its nuclear power industry in the aftermath of the Japanese earthquake and tsunami of March 2011 that caused a large atomic accident at the Fukushima nuclear power plant. Germany has announced that it will exit nuclear power production entirely by 2022. France has taken the opposite tact, and is unwavering in its support of its nuclear industry.
Indirect effects of Fukishima are already hitting the continent. LNG imports were down 34 percent in the first quarter of 2012. Tankers scheduled for Europe were diverted to Japan, where the market for natural gas is more robust and the need very great as a significant amount of nuclear power is simply not returning to the grid.
Why not shale?
So, with growing demand and the uncertainty about domestic and imported gas supplies, why is Europe unwilling to embrace shale gas produced by hydraulic fracturing?
The easy answer is that three large obstacles stand in the way of shale gas production in Europe:
- environmental concerns
- population density
- inadequate pipeline capacity to move the gas to consumers
The more complete answer is that it depends on which part of Europe you are talking about. The UK, France, Germany, Bulgaria, Poland, and the Ukraine house the largest potential shale gas reserves. But:
- Environmental concerns have temporarily shut down production in the U.K. after a series of earthquakes was linked to hydraulic fracturing.
- France outlawed fracking in July 2012 after wine makers and other environmentalists strongly protested the practice
due to concerns over possible ground water contamination.
- In Germany, ExxonMobile is eager to proceed with test drilling in the states of North Rhine-Westphalia and Lower Saxony, however residents are opposed. According to German news magazine der Spiegel, German Economic Minister Philipp Rosler and Environmental Minister Norbert Rottgen, both oppose hydraulic fracturing. It would not surprise anyone if Germany also banned fracking.
- In Bulgaria, citizens replied with a curt “no thank you.” In January of this year, the Bulgarian parliament withdrew the permit they had issued in 2011 to Chevron to begin development of a shale gas reserve. Later the parliament went a step further and banned exploration of shale-gas reverses using hydraulic fracturing.
Shale’s European players
This scenario leaves Poland and Ukraine, two countries that have been hit harder by the global recession than their Western European cousins and are thus very motivated to find new revenue streams. Both countries are also interested in gaining energy independence from their neighbor, Russia, from whom they import large amounts of natural gas, but with whom they share a historically tenuous relationship.
Poland is taking a very proactive stance, telling the E.U. that shale gas development will create jobs and spur the economic recovery that the Eurozone so desperately needs. Poland’s government has publicly stated that in its testing there were no environmental issues with fracking. And although ExxonMobile returned their development licenses because they do not believe the Polish gas fields to be robust enough, Chevron, Conoco Phillips, Talisman Energy, and Marathon Oil are still active in the market. Poland’s challenge will be to have sufficient pipeline capacity to export gas to markets in the West.
The Ukraine is several years behind Poland and is just now getting ready to drill exploratory wells. In May 2012 Royal Dutch Shell, Plc. won a license to produce shale gas in the Yuzivska field in eastern Ukraine, and the company is very bullish on its potential. Shell has stated that it believes it will be able to double or triple production in the Ukraine in a decade. Ukraine also holds a strategic advantage regarding pipeline capacity as it owns the natural gas pipeline that Gazprom, the natural gas supplier half owned by the Russian government, uses to transport natural gas to Western Europe.
An uncertain future
So, clearly the question of European participation in shale gas production is not easily or fully answered at this time. If Poland and the Ukraine enjoy the type of success that U.S. producers have enjoyed, it’s hard to imagine the rest of Europe sitting by and watching. If ground water contamination is suspected, then environmentalists will call for the shuttering of the projects. At this point it is too early to accurately predict what will happen, but one thing is for certain: In Europe as in the U.S., shale gas has the potential to be a game changer.
"Ukraine Looks to Texas for an Energy Path," Andrew E. Kramer, The New York Times, May 4, 2011.
"Ukraine to Potentially Triple Shale Output in Decade, Shell Says," Kateryna Choursina and Daryna Krasnolurska, Bloomberg News, September 19, 2012.
"Polish Environment Minister: EU Needs Shale Gas," Reuters, September 22, 2012.
"Polish Shale Gas Has a Future Despite Exxon Exit," Jon Mainwaring, E&P News, August 9, 2012.
"The War Against European Fracking Gets Dirty," Wolf Richter, Business Insider, September 1, 2012.
"German Government to Oppose Fracking," Der Spiegel, Spiegel Online International, May 7, 2012.
"Bulgaria Becomes Second State to Impose Ban on Shale-Gas Exploration," Mirel Braun, The Guardian UK, February 14, 2012.
"World Shale Gas Resources: An Initial Assessment of 14 Regions Outside the United States," U.S. Energy Information Administration, April 5, 2011.