Shale opportunity Europe almost lost

The shale revolution has driven down US energy bills, freed up household income and made North American businesses more competitive. Has cautious Europe already missed the boat?

Has this ship already sailed? (c) Digitaldreams
You’d have to have been hiding in a cave with a candle not to have heard something about The Shale Revolution these past twelve months. One headline calls it the future of affordable energy. Another says fracking is the embodiment of environmental evil. Battalions of activists, lobbyists and journalists have mobilised for and against.

That’s because shale gas is turning out be as disruptive as the internet – with potentially game-changing benefits for European governments, businesses, society at large and anyone with a household utility bill to pay. Look at what’s happened in North America in just three short years: natural gas prices have plummeted, coal has been pushed aside as an electricity source, a rejuvenated manufacturing sector is humming along on the back of low energy costs, and now abundant natural gas looks to make the continent a net exporter of fuel in the next five or six years.

If that happens, Europe could find itself awash in cheap LNG imports – dampening enthusiasm for investments in any homegrown shale production industry. But we won’t have to wait that long to see the risks in letting America extend its lead. With so much gas available, coal has been discarded for power generation and European utility companies have been eagerly buying it up – even building new coal plants to take advantage of the low price. Perversely given the EU’s environmental commitments, the result has been an uptick in our carbon emissions whilst US emissions go down.

On almost every level Europe is missing the boat on shale. The question is, can we ever catch up?

What we’re missing

With the invention of reliable hydraulic fracturing technologies in the 1990s, unconventional gas and light, tight oil has utterly transformed America’s energy outlook. By 2010, shale production in the US had soared to ten billion cubic feet per day with the potential to quadruple by 2040. Low estimates of the amount of shale gas technically recoverable in Europe suggest at least 2.3 trillion cubic metres (tcm). A smaller opportunity than the US (13 tcm est.), but the potential impact it could have on European jobs and manufacturing is more than tantalising:

  • Looking at the US experience for guidance, shale has brought a drastic reduction in gas prices and a corresponding reduction in electricity and production costs in manufacturing , making the sector more competitive
  • Estimates from the International Association of Oil & Gas Producers suggest a domestic shale production industry could generate upwards of one million jobs in Europe, many of them in areas hard hit by the recession and Eurozone woes
  • With our current reliance on Russian gas, Europeans will take note of shale’s geopolitical dimension. The US is reducing its imports of Middle East oil, making political relationships there less driven by energy dependency

Shale gas could also deliver a social dividend by helping mitigate the worst effects of fuel poverty – an issue of such magnitude that the Church of England felt it necessary to intervene in the shale debate recently, warning opponents against taking a narrow view and advancing the possibility that Shale production could minimise fuel poverty.

The environmental arguments in favour of European shale production are more compelling than mainstream media coverage would lead you to believe. Shifting to a higher proportion of gas use in energy production will help curb our carbon dioxide emissions. Limiting gas production or consumption, on the other hand, pushes us inevitably back to coal.

With the amount of coal-generated electricity rising in some European countries at an annualised rate of 50 percent, we are already seeing a ‘new golden age of coal’. The result? Despite decades of political and industrial effort to move the renewables agenda forward, the IEA reckons coal will account for 25-30 percent of the global energy mix in 25 years’ time – exactly what it was 25 years ago.

What’s holding us back

There are a number of factors holding back domestic shale production here. Some are political, some are related to the structure and operational realities of the European energy industry, and some are down to simple geology. Politics and green concerns – particularly at the local level – may be the biggest hurdles to overcome if any of shale’s North American benefits are going to be replicated here.

Environmental worries around fracking have so dominated European debate that very little discussion about economic prospects has been able to surface. Governments meanwhile have struggled to counter or properly address people’s concerns.

Public outcry in the Netherlands for example has a practical dimension that anyone can understand – namely householders in the vicinity of fracking rigs whose property values look set to plummet (see last Summer’s gas-related earthquakes near Groningen). The powerful green strain in German politics has made the Bundestag hesitant to exploit potential reserves, and France has banned fracking altogether. The overall response to shale from European industry, meanwhile, has been muted or at best ambiguous. We are only now seeing signs that it is waking up.

Has the penny finally dropped?

The UK government has just, belatedly, launched a licensing regime for shale exploration alongside tax incentives for local councils to speed up approvals. Total is the first major to jump behind that opportunity and there have been other positive signs, notably Chevron’s deal with Ukraine in November. A good start – but more needs to be done.

Shale gas has the potential to move Europe off the current path to more and more coal consumption, reduce energy prices and help minimise fuel poverty, boost employment, and create investment opportunities. If we don’t act quickly – arguably with the EU in the lead – the prospect of cheap US fuel exports threatens to smother the development of any nascent European shale industry.

As an energy sector stakeholder I have a five-point proposal:

  1. Reassure European voters that shale gas points us in a greener direction, even if it isn’t a perfect solution in and of itself. An industry consensus on codes of conduct for exploration such as those outlined in the IEA’s ‘Golden Rules for a Golden Age of Gas’ would go a long way to seeding public confidence
  2. Respond to local concerns. Fracking raises legitimate worries in the communities where drilling takes place and these need to be addressed with facts and hard evidence. The industry must make a concerted and patient communications effort to debunk myths where they occur, but also help people balance worries against likely benefits.
  3. Remember our competitive advantage: in Europe, mineral rights belong to the state, so exploration here won’t be hindered by the hugely expensive land grab that preceded the US shale boom. That also gives governments leverage to negotiate licenses in the broader national interest, or stipulate how people are to be compensated should fracking-related seismic activity cause damage to property.
  4. Unleash shale gas exploration - now. The rest of Western Europe needs to follow the UK’s lead in directly supporting shale exploration. It’s the only way to cut through hyperbole on both sides of the debate and let each country accurately assess the scale of both risk and opportunity.
  5. To energy companies, utility companies, energy-intensive businesses and derivatives traders, the next five years will be a chaotic time in the market so understanding and managing the risks of shale investments in your portfolios needs to be a top priority.

Whether or not Europe is on the verge of its own ‘shale boom’ is simply unknown. Exploration needs to happen now if we’re going to find out.

Steven Ferrigno is Managing Director, EMEA for Allegro Development Corporation, www.allegrodev.com. He is based in London.