European Affairs

Europe’s Shale Gas Fiasco Might Come With A Silver Lining     Print Email

BylicaMarcinCDDomestic shale gas was supposed to be a game changer for many Central and Eastern European countries. It presented a potential solution to the region’s two most salient energy problems: import dependency on Russian natural gas and reliance on coal, one of the dirtiest of fossil fuels.

Instead, the expected revolution was quickly renamed an evolution or worse. But in the face of new developments, it is worth considering whether potential shale gas exploration would not become a distraction from the truly revolutionary transition to a clean economy.

First the fiasco. Nowhere were the expectations and excitement higher than in Poland, a country that in 2012 was getting nearly 80% of its natural gas imports from Russia. In 2011, the U.S. Energy Information Administration estimated Polish shale gas reserves to be 5.3 trillion cubic meters. As Bloomberg noted, that was enough for some industry experts to call the country “the next Texas.” ExxonMobil, ConocoPhillips, Chevron, and other international oil companies have since drilled over 70 test wells and invested nearly $2 billion in Poland.

The result? As of 2015, all international companies have pulled out of the country, and no commercial-scale production has taken place.

There are many reasons for the failure of the shale gas revolution in Europe, but geology is considered most important. A 2012 Polish Geological Institute study revealed that the reserves were in the 346 billion-768 billion cubic meters range, nearly ten times less than what the U.S. agency had estimated. On top of that, the geological structure in Central and Eastern Europe is different from the United States, which means that existing technology has to be adapted to be useable in the new region-- a process that might take even longer given the relative lack of experience in drilling techniques.

Public opposition certainly played a role as well, resulting in bans or moratoria in a number of countries. Contrary to the United States, Europe’s higher population density combined with the lack of financial incentives to landowners for allowing extraction due to different rules on mineral rights made building support for shale gas outside of the industry difficult. Local opponents and activist groups effectively communicated the warnings of scientists about potential environmental impacts of hydraulic fracturing, better known as fracking.

Developments in global energy markets decreased the speed of and the urgency for shale gas exploration. Given that between 50%-60% of natural gas in Europe is oil-indexed – and the percentage is even higher in Central and Eastern Europe where most natural gas comes in the form of long-term contracts with Russia – the drastic fall of oil prices over the past years has made many expensive shale gas projects uneconomical. In addition, the construction of liquefied natural gas (LNG) terminals and interconnectors with reverse-flow capabilities have further allowed countries in the region to diversify their supplies. These investments – part of the European Union’s recently launched Energy Union initiative – have also indirectly given historically vulnerable countries bargaining power on future contracts for deliveries from Russia. As Tim Boersma of the Brookings Institution points out, the construction of an LNG terminal in Lithuania allowed the country to renegotiate its contract with Gazprom.

A number of experts and studies, including Ernst & Young’s “Shale gas in Europe: Revolution or evolution?”, suggest that commercial-scale production will not happen for at least 10 years. The initial enthusiasm overlooked that the revolution in the U.S. was preceded by years in which appropriate drilling techniques were developed. (Despite the withdrawal of international oil companies from Poland, the domestic PGNiG and PKN Orlen are conducting further exploratory drills, and their executives express optimism regarding the future.)

But the change in timeframe for shale gas development from short-term to medium-term – and possibly beyond – together with already improving energy security in Central and Eastern Europe has major implications for the sector. Natural gas is only half as carbon-intensive as coal, the fuel that experts agree has to be replaced in order to limit greenhouse gas emissions, especially in the absence of commercial-scale carbon capture and storage. Advocates of natural gas argue that it can therefore serve as a bridge fuel in the transition from our fossil-fuel-based society to a low-carbon one where renewable energies dominate. The problem of intermittency of renewables requires a low-cost generation capacity that could be called upon whenever the sun is not shining and the wind not blowing – and natural gas provides just that, at least until commercial-scale storage technologies can replace it.

Bearing all of this in mind, one must ask, is it wise to invest in the development of shale gas and the surrounding infrastructure knowing that by the time it will be operational, societies are likely to be moving away from all fossil fuels? As governments are expected to increase their commitments to reduce greenhouse gas emissions and implement serious policies to encourage the switch to renewable energies, fossil fuels – even the relatively clean natural gas – will be put at a competitive disadvantage compared to solar, wind, and others. Reforms of the Emissions Trading System, European Union’s carbon pricing mechanism, are expected to significantly raise the price of emissions allowances over the next years.

Natural gas has an important short-term role to play, particularly in heavily coal-dependent countries. The investments in LNG terminals and interconnectors, however, are already helping countries in Central and Eastern Europe to diversify their energy supplies, reduce the natural gas prices, and provide a path for a reduction of coal use. All of this is already happening without domestic shale gas production.

Countries in the region ought to reconsider whether the money and time spent on exploration might not be better used by addressing the legacy costs of coal and by preparing for the future through investments in renewable energy infrastructure. Now this would be a true revolution.

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