FREE

Shale gas policies in Europe

The US shale gas developments took everyone by surprise in 2009 and spurred global optimism only to be shadowed by skepticism over environmental concerns two years later. Compared to the US, the European unconventional gas industry is at its dawn. National shale gas policies range from attractive (Poland) to restrictive (France), while a EU perspective on the issue is still to be formulated.

A recent OECD special report projects that 80% of the growth in demand for natural gas in the next 25 years will come from non-OECD countries, driven especially by China (8% compound annual avg. growth rate), India (7%), and Brazil (5%). By comparison, the annual demand growth rate in EU, as in the US, is just 0.6%. As far as gas production is concerned, growth will be lead by India (6%), China, Nigeria, and Qatar (5% each). In contrast, the US features a 1% annual growth over the period while the EU is expected to experience negative growth (-3%). Against such expectations, IEA projects the share of unconventional gas in global output to double by 2035 reaching 24%, of which 11% will be accounted by shale gas, 7% by CBM (Coal Bed Methane), and 6% by tight gas. Preliminary estimates indicate that unconventional gas resources may be just as rich as conventional ones, if not bigger. Research conducted by Advanced Resources International for US Energy Information Administration, suggest the following European countries to be rich in shale gas: Poland (5.3 Tcm recoverable), France (5.1 Tcm), Norway (2.4 Tcm), Ukraine (1.2 Tcm), Sweden (1.2 Tcm), Denmark (652 Bcm), UK (567 Bcm), Netherlands (482 Bcm), Turkey (425 Bcm), Germany (227 Bcm), Lithuania (113 Bcm). Romania, Hungary and Bulgaria are thought to hold together some 538 Bcm worth of recoverable gas. Despite these numbers, the total European shale gas endowment (17.7 Tcm) is less generous than in North America (54.7 Tcm) or China (36 Tcm), while the commitment to its development varies across Europe. The economic and technical success of shale gas in the US is broadly known, as is the current open question surrounding the environmental impact of hydrofracking, which still is to be clarified by an EPA report in 2012. No clear answer exists yet on the question of GHG footprint of shale gas production. However, the phenomenon, dubbed by Daniel Yergin “the biggest energy innovation of the decade”, is already producing effects on the global energy markets. Take for instance China. The IEA analysis shows that, by 2035 its demand for natural gas will equal that of the entire EU and the country will become the worlds’ third natural gas producer. In support of this statement, IEA points to the country’s next Five Year Plan (2011-2015), which focuses primarily on promoting natural gas, nuclear and renewables. Current underutilization of natural gas (a mere 3.8% in the 2008 energy mix) and the potential for growth in powergen and residential sectors motivates the development of domestic unconventional gas. To this extent, Chinese companies are present in US shale gas plays and Australian CBM projects, acquiring technical know how. China is a member of the Global Shale Gas Initiative, has established a Shale Gas Research Center and is auctioning off exploration rights for shale gas acreage.

In Europe, national policies for shale gas development vary widely. In Western Europe, UK and Germany are pursuing it, while France banned the use of hydrofracking. In Central and Eastern Europe (CEE), Poland, Bulgaria, Romania, Hungary, Ukraine and recently Lithuania have said “yes” to shale gas development or, at least, to the possibility of it. Despite having countries like Poland pushing the topic on the EU agenda, development of shale gas resources is surrounded by many open questions, most of them concerning two aspects: economic and environment costs. Contrary to the findings of the OECD report (stating that the cost of shale gas production outside the US can fall in a similar US range of $3-7/MBtu), other research claims the opposite. According to a study authored by Florence Gény of the Oxford Institute of Energy Studies, “drilling costs are expected to be 2 to 3 times higher than in the US” and water costs will be “10 times more expensive in Europe than in the US, with an estimated average cost of EUR 3.4/m³ vs. EUR 0.4/m³ in the US” due to greater depth of shale formations and higher population density. The UN Population Division data confirms the difference in average population density in US (33 people/km²) vs. Western Europe (170 pple/km²). However, in Europe there are significant East-West differences, with the highest ratio in Netherlands (401 people/km²) and a lower value in Eastern Europe (15 people/km²). Individual country situations are again different (255 pple/ km² in UK, 230 in Germany, 184 in Switzerland vs. 118 in Poland, 107 in Hungary, 89 in Romania, 75 in Ukraine, 68 in Bulgaria and so on). The situation is different across Europe also in terms of freshwater water scarcity/availability. Other factors driving up production costs stem from geology, labors costs and tougher environmental regulation. However, it is considered that the higher value European market may offset these higher F&D costs, meaning that it is precisely Russian gas price discrimination towards CEE that could make shale gas development cost competitive in the region.

The speed at which different European countries seem to advance on the issue of shale gas can probably warrant a distinction among early movers (Germany, Poland) and late movers (Bulgaria, Romania, Ukraine, Lithuania). Let’s have a look at France and Poland, the two main outliers in the unfolding European shale gas events. In France a moratorium on shale gas development over public opposition to hydrofracking was imposed in February. Draft legislation initiated by MP Christian Jacob in March proposed annulment of all exploration permits granted for gas and oil shales, which was followed by preparation of two detailed parliamentary reports, presented to the National Assembly in May. Finally, the amended draft was signed into law on July 13. Law nr. 835 (or the “Jacob law” as it is known) banns the use of hydrofracking in France, but not other technologies. Companies that have already been granted exploration licenses have 2 months to indicate in a report (that will be made public) what technologies they use or intend to deploy for shale gas development. If drilling activities involve hydrofracking, the license is to be revoked. Pursuing hydrofracking without declaring it is punishable with one year in prison and a EUR 75,000 fine (Art.3). The door is not closed forever though, as Art. 2 specifies the creation of a national commission whose objective will be “to evaluate the environmental risks related to hydrofracking and other alternative techniques” and to advise on conditions for “experimental” hydrofracking whose sole purpose will be that of ‘scientific research under public control’. There is already talk of such alternatives as propane fracking. In contrast to France where only a few exploratory licenses were granted, Poland granted 86 permits. Seven exploratory wells have been already drilled starting with Markowola-1 in 2010. Like China, Poland too is a member of the Global Shale Gas Initiative. The country offers favorable fiscal terms (19% Corporate Tax Rate and low production royalties) and the political support for shale gas is very strong including in the face of environmental concerns (“we have effective environmental legislation and efficient control institutions, we have no intention to introduce a moratorium on shale gas exploration in Poland” is reported to have said Henryk Jacek Jezierski, chief geologist and deputy environment minister in May). All this plus the extremely favorable geological structure make Poland a “shale gas heaven”. Romania, Bulgaria and Ukraine started granting licenses/signing cooperation agreements in this area later (in 2010). Romania and Ukraine still have significant conventional gas production and do not see shale gas development as an immediate priority. In Romania, several exploration licenses were granted in areas thought to contain shale gas (Pannonian basin and Dobrogea). However, the legislation does not oblige the companies to explore for unconventional gas. It is up to the company whether it decides to explore for conventional or unconventional gas under the permit it holds. Companies that have publicly stated their interest in shale gas are Chevron, MOL, Expert Petroleum, East West Petroleum and NIS. The legislation governing gas activities does not include any separate provisions for unconventional gas. The Law on gas currently in force (No. 351/2004 with subsequent amendments) does not differentiate between conventional and unconventional gas. In the first draft of Romania’s Energy Strategy 2011-2035, submitted for public debate on June 30, there is no mention of shale gas or unconventional gas for that matter, despite the fact that licenses were already granted for such type of exploration. As it currently reads, the priorities of the Romanian energy sector up to 2035 do not include development of unconventional gas, but rather focus on nuclear, renewables, and installing CCS in coal fired plants. However, Ministry of Economy, Trade and Business Environment (METBE) representatives insist that there exists a preoccupation with the unconventional gas topic that is to materialize in an Oil and Gas Addendum to the Strategy. The Government Emergency Ordinance project of February 28, 2011 (re. the natural gas market) transposing the 3^rd EU Energy Package, when approved, will replace the current law (531/2004) on natural gas. Although its provisions are understood to be applicable to both conventional and unconventional gas resources, the bill does not explicitly address development of unconventional gas (despite the existence of a whole range of issues that differ from traditional gas development). It seems that, the incentive for immediate shale gas development is not so strong, since Romania’s proven reserves of conventional gas are projected to last for another 10 to 50 years¹ and are cheaper to extract. This is a very different situation from the one in Bulgaria or Lithuania (100% dependent on gas imports from a single source). For Romania or Ukraine (with present domestic gas production), shale gas is important for reserve replacement, which going forward can compensate for the decline in conventional production. Ukraine made significant steps on this front this year by signing a MoU on unconventional gas cooperation with the US on February 15. The agreement involves assistance from United States Geological Survey (USGS) to assess the potential of this resource and devise a shale gas regulatory and environmental framework. TNK-BP and Naftogaz signed a MoU for shale gas exploration in East Donetsk last year – the first shale gas deal for the BP² affiliate. Earlier this year, another MoU was signed by Naftogaz with Exxon Mobil for E&P cooperation on unconventional gas. Although initially hesitant on this topic, Lithuania has announced in July that it will pursue the development of shale gas. The Lithuanian Seimas passed recently the new National Energy Strategy. Also known as the ‘Energy Independence Strategy’, it features a focus on regional nuclear (Visaginas NPP project), LNG (Klaipėda terminal), shale gas, construction of regional and EU interconnections for electricity and gas, and implementation of the 3^rd EU Energy Package. The document lists support for shale gas exploration as one of the five strategic initiatives in the gas sector. According to the strategy, Lithuania will endorse “economically feasible and environmentally balanced shale gas extraction”. The strategy also says that “If shale gas is discovered in Lithuania by 2020, the country will thoroughly assess options of commercial shale gas extraction”. Thus, Lithuania mentions the support for unconventional gas E&P, even before organizing its first licensing round yet. Compare this to Romania, where licenses have been granted, but a policy framework addressing specifically unconventional gas development is still to be created.

Preliminary comparison reveals different shale gas economics as well as different policies towards shale gas development in various European countries, with a stronger commitment to developing this resource in CEE (where the dependency on gas imports is much higher). Early commercial experience should be encouraged by an adequate energy policy framework for shale gas, which presently is up to the Member States. In Europe, energy policy falls primarily under national jurisdiction, which is why a European stand on shale gas is missing at the moment. At EU level, a shale gas policy could take more time to develop, but at least partially this question should receive an answer in the soon to be released Energy Roadmap 2050.

FOOTNOTES:

1. Data for Romanian proven gas reserves vary widely. According to data from “BP Statistical Review of World Energy 2011”, Romania’s proven gas reserves are 600 Bcm which, at the current level of production, will last for 50 years. The BP publication data are situated towards the optimist side of the estimations’ spectrum. The Energy Strategy 2011-2035 cites 185 Bcm worth of reserves, enough for the next 15 years. While, the World Energy Council has even more conservative estimates: 121 Bcm proven, enough for 10 years (according to the 2007 survey) and 102 Bcm proven that will end in 9 years (according to the 2010 survey).
2. BP, unlike its peer majors, has kept a rather low profile during the shale gas rush.