Environmental concerns hold up the development of shale gas in Europe. Dependence on Russia for gas supplies is expected to continue.
At the height of winter, in January 2009, Russia cut off natural gas supplies to Ukraine, and therefore much of Europe, as tensions mounted between the two nations over gas prices.
Supplies were resumed around a fortnight later after Ukraine, a transit country for Russian gas to Europe, agreed to up the subsidised rates it was paying — and overall disruption was kept to a minimum (thanks to previous disruptions, stockpiles were high and only a handful of nations reported that supplies had run low).
Still, the crisis underscored just how dependent Europe was on the volatile relationship between Russia and the former Soviet States.
This dependence continues to date — around 40 per cent of Europe’s gas imports come from Russia.
Meanwhile, a standoff between the European Commission’s Competition Commission and Russia has commenced, following the former’s decision to launch an antitrust investigation into Gazprom.
Russia has responded with a decree that will limit Gazprom’s (and any state-controlled firms) ability to cooperate in any such investigation.
While Europe has, perhaps unsurprisingly, been attempting to cut its dependence on Russian gas, it has had limited success so far: grand plans for the “Nabucco pipeline” from Central Asia through Turkey to Europe have been slow to move forward, and now appear to be doing so on a much reduced scale to what was originally envisaged.
By contrast, Russia’s own plans to bypass neighbours such as Ukraine and Poland have moved steadily ahead with the opening of the Nord Stream pipeline, providing a direct route to Germany, late last year.
SHALE GAS OPTION
All in all, it’s perhaps unsurprising that Ukraine, and parts of Eastern Europe, have been very eager to tap the potentially vast quantities of natural gas trapped in shale rock formations underground — the controversial source that has transformed the US energy landscape over the past few years, best known as shale gas.
India too is moving forward, with plans for bids for shale gas licensing, including those from foreign suppliers, to commence in late 2013.
According to the estimates of the US Energy Information Administration, Europe has around 639 trillion cubic ft of recoverable shale gas resources, around three quarters of the US’ reserves.
A recent report by KPMG dubbed the development of shale gas “inevitable” in central and eastern Europe, arguing that while production was unlikely to be able to take place at such a low cost base as in the US, eagerness to achieve better energy security would drive growth in the industry.
Ukraine, estimated to have the fifth largest reserves in Europe, with an estimated 42 trillion cubic ft of recoverable resources, has been moving forward the fastest, striking deals with Royal Dutch Shell and Chevron, with extraction set to commence in 2018.
Poland, which gets around 85 per cent of its gas imports from Russia, has been pushing forward rapidly too — though results so far have been mixed: earlier this summer ExxonMobil said it was ending exploration work in the country following tests on two gas wells, casting a shadow over the nation’s shale hopes.
However, elsewhere in Europe, the situation has proved even more complex, with fears about the environmental impact of hydraulic fracturing, or fracking, the most common process for extracting shale gas, trumping energy security concerns, and the reduction in energy costs as well as economic gains trumpeted by its proponents.
This has been the case even in countries dependent on Russian supplies.
Following large public protests, Bulgaria withdrew a drilling permit issued to Chevron, and banned fracking outright earlier this year, while now the Czech Republic is considering a moratorium on exploration work until further regulatory protections are in place.
In much of Western Europe the situation remains unclear: France, estimated to have the second largest reserves within Europe (around 180 trillion cubic ft) imposed an outright ban on fracking under the previous government, and seems unlikely to change its stance under Francois Hollande.
Germany, which may have seemed like an obvious candidate for shale exploration given that it must find alternatives to nuclear energy following its decision to phase out all nuclear plants by 2022, has also moved with caution.
Britain, which turned from being a net exporter of gas to a significant importer in 2004 due to its own dwindling supplies from the North Sea, has allowed operations to commence, though the industry suffered a major setback after two earth tremors on the north-west coast were shown to have been triggered by the extraction work by a firm called Cuadrilla Resource. Vocal protests continue.
While European Union authorities are yet to rule on whether or not existing regulations and monitoring regimes are adequate for the environmental challenges that shale gas exploration could pose, reception to it could, at most, be described as tepid.
In a report published earlier this year, the Commission’s Joint Research Council expressed reservations about some of the more optimistic estimates of the potential for shale gas, concluding that it would not make Europe self-sufficient in natural gas.
“The best case scenario for shale gas development in Europe is one in which declining conventional production can be replaced and imported dependence maintained at a level around 60,” it argued, while noting some of the benefits it had the potential to bring, including lower gas prices.
A separate study conducted on behalf of the commission pointed to a “number of issues” presenting a “high risk for people and the environment,” including to ground water and surface water contamination, as well as moderate risks to a host of other factors including water resources, biodiversity, and noise levels.
All in all, a world away from the shale gas boom witnessed across the Atlantic. “Shale gas won’t be the overnight revolution in Europe that it was in the US,” says Sana Abid, an analyst at consultancy KBC Process Technology.
She points to other obstacles in Europe, including higher costs (reserves have typically been found deeper underground), as well as regulatory and legal complexities.
There are, for example, questions about how compatible fracking is with the EU’s Water Framework Directive, governing water quality in the region, while high levels of urbanisation across Europe will make it harder for firms to gain access rights.
For these and other reasons, the Oxford Institute for Energy Studies concluded in a report published two years ago that unconventional gas sources, including shale, were unlikely to provide more than 5 per cent of European gas demand before the early 2020s.
Unsurprisingly, therefore, the developments in Europe haven’t perturbed Russia too much, all too aware of the big hurdles the industry will face in Europe before shale gas becomes anything close to a threat, says Andrew Neff, senior energy analyst at IHS Global Insight.
Adds Neff, “Russia is the greatest threat and guarantor of EU energy security and that’s unlikely to change any time soon.”